JohnsBlog (articles, news, thoughts, advice)

All along I've been discussing how although the Fed's rate reductions are outstanding in terms of allowing people to obtain low interest rates, it's a dangerous game to be playing...apparently, there's an abundance of people in agreement with me.  Go to http://money.cnn.com/2008/01/24/news/economy/barr_interest.fortune/index.htm?postversion=2008012511

to read an interesting article about what potential backlashes may accompany the rate cuts (another of which is expected on the 30th...we shall see how extreme it is).  Although I expect another refinance boom and Home Equity loan increase, this may put a damper on the long-term economy and lengthen recession.

Fannie Mae has recently fallen victim to the paranoia and knee jerk reactions that we've seen from many major lenders over the past few months by implementing what they refer to ask risk based pricing on all loans.  This pricing model is as follows:

< 620 (or missing) = 2.00% loan-level price adjustment (LLPA)
620 to 639 = 1.75% LLPA
640 to 659 = 1.25% LLPA
660 to 679 = 0.75%

The numbers on the left constitute FICO credit scores and the percentages refer to the price lenders charge borrowers with these scores to obtain a certain rate.  According to Fannie Mae, this new pricing allows "excellent borrowers" to enjoy lower rates, and allows borrowers with troubled credit to still qualify, but at a higher price.  This is supposedly their generous approach to servicing loans in an ailing market.  HOWEVER, to me, this is a pathetic, drastic, greedy attempt to take advantage of the current market.

Guess what?  12 months ago someone with a FICO less than 620 could get a mortgage from a subprime lender at a rate comparable or better than what FNMA is offering.  Now that the market has collapsed  competition has been eliminated, FNMA is poised to make up there recently-made-public losses by taking advantage of borrowers and making a ton of money off of good people.   

In addition, to argue the "borrowers can enjoy low rates" point that Fannie made, please notice where the bar stops--- 679 FICO...if they want to reward people with excellent credit, how about a .25% discount for anyone witha  680-700 FICO?  A .50% discount to those with a 720?  How bout taking 2% off of someones interest rate if they have an 800 score?  No, in that instance FNMA would not be able to reap the interest off of the loans they own.

Can anyone tell me with conviction that a person with a 680 credit score is a better borrower than someone with a 678 score?  I doubt there is any proof or even evidence of this anywhere, and for this reason I see FNMA as a giant corporation taking full advantage of a weakened market.  As my account reps at many lenders have said "its awful, but we're at their mercy".  This giant needs to be taken aback somehow and this new pricing model abolished.  If you think a person with a 620 FICO score is a poor borrower, then don't lend to them....that would be better than lending to them and making a huge profit off of them compared with someone with a FICO 20 points higher...another example of the money hungry companies in the mortgage and real estate market...when will it stop???

While some experts seem to believe the stock market will make a dramatic rally throughout 2008, many also see recession looming.  I have said in the past, and still believe, that we're headed for a bigtime recession.  I have some inflationary concerns, as do some members of the Fed, and because of this rate cuts should come to a halt in the not so distant future.  One good thing that could come out of this is a decrease in mortgage rates.  With the stock market in such turmoil recently, money has been poured into bonds recently and we've seen a steep drop in rates.  Hopefully this will continue and we can see rates in the mid-low 5%'s like we did a few years ago...tomorrow's jobs report may have a big say in the direction we're headed.

Another good thing for investors out there would be gold...gold prices have skyrocketed with the US dollar consistently losing ground to foreign currencies such as the yen and Euro.  As the dollar has gone down, gold has gone up, up, up, and hopefully some of you have reaped the benefits. 

That's all for now...remember, those of you in Chester County...check out my upcoming articles in the Daily Local...I'll have the specific dates available very soon