Most will agree that as a society, we cannot spend our way into prosperity. In fact, many even the most ardent bulls will acknowledge that we have some serious issues to address in our current economy. From preliminary reports, this rate freeze will have a very minimal impact on the overall housing market. Keep in mind that we have yet to see the plan in action since the first rate resets to take effect will not occur until 1/1/2008. The proposal at best is an avenue for a cathartic release from the housing doldrums and gives those in the industry a respite to scream “let us gasp for air!” It seems to have worked. Housing related stocks are up and with the prospect of further rate cuts, all seems well until you start facing the brutal reality of what is occurring.

Jim Collins in his book Good to Great examines the successful traits of prosperous companies. His focus wasn’t on high flying companies that made a torrent of money and suddenly crashed. He looked at the attributes of sustainable and successful companies. He offers various characteristics of these companies such as choosing the right people from the beginning, focusing on your core strengths, and also having the ability to confront the brutal facts. The last point seems rather harsh and down right pessimistic. Yet the essence of facing the brutal facts is optimistic because you cannot move on to greater and better things until you first address the underlying issues. In psychology 101 we learn that a prerequisite to having a healthy mental state is being able to confront our demons not with fear but with courage. Once we face up to what is at the root of the problem we can start to progress and live a healthier life.

So what does this have to do with the mortgage crises? It actually has a lot to do with it. We currently live in a society that is repressed on economic issues. The impending credit crises instead of being attacked at the root is being prescribed a valium to numb the current pain. Even the term “rate freeze” gives us the perception that all is well for the moment and we’ll deal with the problem at a later date. Yet this perception circumvents the true culprit and that is we are in a historical credit bubble that needs a severe correction. As a society we have not come to terms that without credit, we have a very hard time functioning. That is why even the mere hint of a rate cut makes the financial markets slap happy because it postpones the inevitable for one more day. But is this really a healthy long term approach?

A Culture of Avoidance

This isn’t only seen in the economics of our consumerist society but also the psychology of other parts of our nation. Think of the avoidance of old age. Plastic surgery and cosmetics play into this desire of the forever young and give the perception that the fountain of youth has been discovered. But again, how appropriate to have plastic cover up the real you. Is this not what is occurring by funneling credit into a market that clearly needs a massive 90210 makeover? There is no drug or surgery that is going to make this market look beautiful. Think of it as a Hollywood wild west stage. All looks real and strong but when you walk behind the saloon, you realize it is held up by a two-by-four.

Take a look at the public debt:

Follow this by taking a look at mortgage debt:

Mortgage debt is at a whopping $13.3 trillion. Couple this with stagnant wages and you realize that people are subsidizing their current lifestyle via credit.

Delaying the Inevitable

As I’ve been reporting at least here in Southern California, short sales have been increasing for the past 22 consecutive weeks. We are now over 12,000 short sales in the Southern California area and this doesn’t show signs of stopping. There was an interesting note that inventory did fall a bit, but looking at actual sales numbers we realize that people are simply pulling their homes off the market. Is this not a way of avoiding the main issue? There was a case on the A&E show Intervention of this woman who was $130,000 in credit card debt and had filed bankruptcy two times. We all realize that this person has some serious issues and the show of course brought this to light. Yet I am astounded that no blame was being assigned to the credit card companies. This is a person that has already demonstrated financial imprudence with not only one bankruptcy, but two and she was still able to spend. Does the dealer not have some sort of responsibility? It is a co-dependent relationship and many in our society seem so addicted to this world view of credit, that the thought of delayed gratification is a foreign concept.

This imbalance is clearly seen when we look at our trade deficit:

Just to offer you a direct example, in the month of October we had 323,131 20-foot containers coming into the port of Long Beach and 144,839 shipping out. A large potion of the items being shipped out are raw materials while we are bringing in boat loads of manufactured goods. Clearly this will not go on forever and these trade deficits will need to be faced. The argument may be that we are wealthier than we were in the past but more and more of disposable income is going to servicing the debt.

Broken Window Theory of Mortgages

Some of you are already familiar with the broken window theory. Here’s a good explanation of the theory:

“Consider a building with a few broken windows. If the windows are not repaired, the tendency is for vandals to break a few more windows. Eventually, they may even break into the building, and if it’s unoccupied, perhaps become squatters or light fires inside.

Or consider a sidewalk. Some litter accumulates. Soon, more litter accumulates. Eventually, people even start leaving bags of trash from take-out restaurants there or breaking into cars.”

How does this apply to the mortgage and credit crises we are facing? It won’t explain the economic reason in numbers but will help to paint the picture of the psychology of what got us to where we are. The problem should have been addressed when a few “broken windows” were appearing in the mortgage industry. The first stated income loans. The early stages of fraud. Rampant speculation. An industry with no barriers to entry. Wall Street greed. These things didn’t appear with the current market but were exacerbated by the credit addiction mentality. Think of superstars who crash and burn with their addictions. When you have money, it magnifies your good attributes (donating to worldly causes) or highlights your demons (drugs and partying every night). Think of the broken window theory and why it occurs. You see someone driving a leased BMW, taking on a $500,000 mortgage, and having 10 different department store credit cards. This is the rule rather than the exception in your neighborhood. So instead of litter, you can interchange easy credit. It is easier to dive into debt when those around you follow suit. This is an observable phenomenon in sociology and goes back to the 1920s with “keeping up with the Joneses.” We can even go further back with the tulip bubble and South Sea Bubble so this is something that spans over time and is inherent in human nature. Now that the reality needs to be faced, instead of tightening up our belts as a society we are simply lowering the credit bar and trying to run on credit fumes.

I’m not sure what will happen in an election year but the real solutions exists in getting our financial house in order, for example with cram downs and stopping the credit addiction cold turkey. Isn’t it ironic that the perpetrators of the housing bubble are the same one’s coming up with solutions? This is like asking a drug dealer what is the best way for a person to recover from an addiction. Politics isn’t about what makes the most economic sense over the long run but politics is the art of the possible.

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Hey Morgan,

Thanks for inviting me to join the Blown Mortgage writers.   I’ve been a reader for quite some time and I’ve learned a lot and look forward to continuing to discuss the issues that are affecting the mortgage industry now and in the future.

 A couple of quick thoughts to introduce me and then I’ll write more and tell more as time goes on.    I got my start in the industry in June of 1988 (at the age of 12!) when I started my career as a Realtor with a local real estate firm.   I spent 3 1/2 years doing that and then there was this little thing called a housing downturn through the Persian Gulf War (the first one) that caused me to look into other lines of work (not selling a house for 6 months tends to do that.)   So, that’s how I got my start in the wonderful world of mortgage lending.   

Since 1991, I’ve worked for 2 large banks and three small ones, always on the retail side and always in originations.    I went from a large bank to a succession of small banks as I searched for the “place” to be.   I’ve found it in a big bank again 2 1/2 years ago and I love my job, even in today’s market. 

I very often feel that I’ve often got a different outlook on what it takes to be successful in this business, but I believe that my record, the success and longevity of my career speak for themselves.   I’m looking forward to sharing my thoughts and ideas about this industry with you as time goes on.

I don’t think it’s an overstatement to say that the mortgage and real estate industries are going through fundemental and seismic shifts right now.  I think that we’re going to see a significantly different lending world 18 to 24 months down the road and I’m looking forward to helping many others walk through it as well.

That’s about it for now. 

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Today we welcome Tom Vanderwell as a new contributor to the growing Blown Mortgage team of writers. I’ll let Tom tell you all about his background; but with more than 20 years in the business I’m looking forward to his insights here.

Welcome aboard Tom!

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Even today they exist, and even today, they illegally spam. Lead brokers. Giant telemarketing operations that sell (and resell) data of dubious quality to mortgage brokers who then pass it down to their originators. Mortgage lead companies are ultra-middlemen–selling stuff to the middlemen mortgage brokers (and yes, bankers) the names of customers that have been bothered at home and basically, haven’t hung up. Lead companies still exist, they are still scum, and they are like the financial equivalent of fast food companies: you can’t argue with their right to exist, but they make the country a worse place.

The lead brokers happened upon a technique that–with minimal skill, care and effort, people’s worthless home equity could be magically transformed into valuable brokerage fees. They could start the boiler room process, paying people very little, and ship loads of “lukewarm” leads to mortgage brokers. Leads really harmed things by transforming the culture of the industry from abundance to scarcity.

Someone starts a business as a mortgage broker to help serve their community, to help fill a need, and to offer their expertise in lending to their customers. Noble, good. They figure if we build it…they will come. But then the fax comes up with faxes offering free mortgage leads. These leads don’t require the same attention to detail, care, or service than local customers that they might bump into at the grocery store. It doesn’t matter if you “slam dunk,” someone that’s a lead, so you learn that you can get ‘em for all you can.

The March to Scarcity

Fees go up, so the broker orders more, and so the meth addiction starts. No longer interested in being part of the local scene, the broker that wanted to do it better is corrupted by the cheap dollars. Local accountability is removed from the process, so it doesn’t matter what you charge. Instead of working with local Realtors, the relationship that brokers have becomes adversarial (Here, the classic: “Why do you care what I make rears,” its familiar head). The shortcut path promotes a mentality that you must wring ALL YOU CAN from the limited supply of leads. You’re not building a business, you’re closing people on deals.

So the race to the bottom continues. Nobody forced the brokers to take the leads, just like nobody forces people to go into a pawn shop. The practice should be legal. But it doesn’t make it any less scummy.

And the beat goes on. A worse variant of these leads exists though. Trigger leads.

Trigger Leads: Credit Repositories are Buckets of Filth.

Any human being that sold, bought, called on or profited from these foul little slips of paper has irrevocably and permanently ceded the moral high ground in every disagreement that they may have at any point in their lives. Trigger leads work like this: A mortgage company pulls credit on a customer with their permission. That same credit file is then resold by the credit bureau to one or many different mortgage companies because the customer didn’t opt out at www.optoutprescreen.com. That the credit bureau have any credibility left after having resold consumer data is unfathomable to me.

Who would think the credit companies would be able to sell information about you–your score, your phone number, and the fact that you’ve applied for a mortgage in 24 hours? Who would opt IN to such a list? This is nothing more than institutionalized identity theft, and another thing that created false urgency, and rewarded perverse behaviors. The credit bureaus sold this again to lead companies (and in some cases mortgage companies directly), and customers complaine about getting 10-20 calls in a day regarding their mortgage.

Brokers with the “everyone’s doin’ it” mentality should immediately and permanently exit the industry. You’ve received stolen information, permitted the credit bureaus to cannibalize our industry by profiting from a scuzzy, repugnant and sick business practice. Please leave the industry now, and go back to selling vinyl products to senior citizens.

Chris Johnson points the finger at someone new each Monday.  When he’s not tilting at windmills he runs the Ten Day Team at First Ohio Home Finance in Columbus Ohio. chris@tendayteam.com for more details.

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Not too long ago Mortgage Lender Implode-O-Meter hit 200. I remember asking Aaron what it felt like to hit 100 in our podcast interview a while ago. Personally I think 100 was more of a surprise than 200. When they hit 100 it was really sinking in what a disaster the mortgage meltdown truly was; now at 200 it’s just another part of a continually darkening horizon.

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Filed under: International markets, Google (GOOG), Apple Inc (AAPL), Cisco Systems (CSCO), Time Warner (TWX), Home Depot (HD), China, Indices, Halliburton (HAL), Altria Group (MO), NYSE Euronext (NYX), Goldman Sachs Group (GS), Duke Energy (DUK), Dow Chemical (DOW), Top Picks 2007, Valero Energy (VLO), PetroChina Co Ltd ADR (PTR), Huaneng Power Intl ADS (HNP), Level 3 Communications (LVLT), Chasing Value, Oil, S and P 500, DJIA, Rite Aid Corp (RAD), Savient Pharmaceuticals (SVNT)

For the most part, this year has portrayed itself as a stock picker’s market. If the stock you happened to pick was Google (NASDAQ: GOOG), which I included for fun because of its popularity, it beat all else as a portfolio of one.

The average of my seven picks fell as dramatically in November as it rose in October, reflecting the ebb and flow of the Chinese market. James Cramer’s average based on his nine picks sank as well, but not as much. While Cramer managed to stay ahead of all the indices, and I beat the benchmark Standard & Poor’s 500 and marginally beat the Dow Jones Industrial Average, I lost out to the NASDAQ and the average of the three.

Last month, after reporting spectacular gains, I remained realistic when posting “Of course, this could easily change given recent market volatility. A sharp downturn in the market could reverse our fortunes. A lot can happen in the remaining two months — I take nothing for granted.”

Yes, Google has done well, but Cramer’s best, Apple (NASDAQ: AAPL) has done much better. It seems to be priced for perfection, as they say, but it also seems to be achieving it so far on the wings of the iPhone, iPod, and growing Mac sales. Warren Buffett voiced his opinion that the Chinese market has gotten bloated, and PetroChina ADR (NYSE: PTR), while still up significantly, dropped back off its all-time highs after becoming the second-largest capitalized company in the world.

The stock market has been volatile this fall, but has been showing signs of life recently amid anticipation of another cut in the interest rates by the Federal Reserve Board tomorrow. Most of what I have read has assumed the Fed will cut another half-point on Tuesday.

The Dow Jones Industrial Average is within striking price of its all-time high above 14,000, reached late last July.

November was somber, taking financials, housing, and construction down and deflating the Chinese markets. December is already retracing some of November’s give-backs. Consumer spending still seems to be tepid, so it must be the holiday spirit of the federal government that has the market bulls in high spirits. Earnings reports have been mixed, and will not begin again in “earnest” until next month. Year-end planning has made me tardy in completing this post. I like to get it done in the first few days of the month.

Summary of Results:

• Google (NASDAQ: GOOG), like most everything, was down in November but started climb back. It is still a favorite on Wall Street. Few investors have even paused to take a breath in October. GOOG closed at $707, for a solid +52.85% gain through the first 10 months of the year, holding the top spot again, and by a widening margin.
• Jim Cramer’s average return on his nine picks was 12.45% over the 11 months, beating the Standard & Poor’s index, the DJIA and the NASDAQ, and changing positions with me this month. Adding the dividend portion of 0.6% (0.66% x 0.916), brings Cramer’s gain to +13.05%. Apple (NASDAQ: AAPL) was his best pick again. All the new products and software launches, plus the continuation of current products and programs, almost assure that 2007 will another one for Apple’s record books.
• All of the indices lost ground in November, with the DJIA, NASDAQ and S&P all dropping. The Nasdaq returns for the YTD are making a respectable showing, with an overall average of +6.9% year-to-date. Adding the portion of the dividend yield of 1.65% (1.8% x 0.916) brings the total gain to +8.55%, a notable return on investment, beating out most fixed income securities. This is a reminder that just by being in the market, the most conservative of investors would do well.
• My picks went down considerably in November, falling from +18.14% to a +4.65% gain year-to-date. Adding the dividend portion of 2.65% (2.89% x 0.916) brings the total return to +7.3%, beating the S&P but falling behind the indices average for the first time this year with only a month to go. Very unimpressive. PetroChina ADR (NYSE: PTR) was the leader for the second month, but it’s down about $50 a share this month, followed by Valero Energy (NYSE: VLO) which has been strong all year. Huaneng Power International ADS (NYSE: HNP), has been up and down but always deep in the black. Time Warner Inc. (NYSE: TWX), continues to be a huge disappointment.

Note that portional dividends have been added to the results. This is one of the criteria I use in my stock picks, and it is having an impact on the results thus far. Only three of Cramer’s picks pay dividends, averaging about 0.66%. The indices pay a higher average of 1.8%, and my picks average still higher at about 2.89%. Google does not pay a dividend. The flatter the market is, the more dividends are a factor in overall returns.

Two of my picks continue to be mentioned as buyout candidates, but the rhetoric has died down considerably: The Dow Chemical Co. (NYSE: DOW) and The Home Depot (NYSE: HD). Home Depot continues to receive the most negative sentiment, and the crushed housing market is keeping it from rebounding despite what many market watchers see as a deeply discounted turnaround play, and I would agree. I am even considering Home Depot again for next year.

The following are the closing prices as of December 28, 2006 and 11 month returns for the seven stocks I recommended, plus the addition of Spectra Energy Corp. (NYSE: SE) that was spun out of Duke Energy (NYSE: DUK). Among Cramer’s picks, Kraft Foods (NYSE: KFT), which was spun out of Altria Group Inc. (NYSE: MO), is included in the calculations.

1. The Dow Chemical Company (NYSE: DOW): $40.02 is Up to $41.94 (+4.8%) 3.54% yield
2. Duke Energy (NYSE: DUK): $33.02 (incl. Spectra Energy (NYSE: SE)) is Down to $32.11 (-2.76%) 4.31% yield
3. The Home Depot Inc. (NYSE: HD): $39.73 is Down to $28.56 (-28.11%) 2.31% yield
4. Huaneng Power International ADS (NYSE: HNP): $36 is Up to $42.90 (+19.17%) 3.62% yield
5. PetroChina ADR (NYSE: PTR): $142.12 is Up to $191.74 (+34.91%) 4.5% yield
6. Time Warner Inc. (NYSE: TWX): $22.00 is Down to $17.26 (-21.55%) 1.1% yield
7. Valero Energy (NYSE: VLO): $51.61 is Up to $65.07 (+26.08%) 0.84% yield 2.89x.916=2.65 6.87%

The following index comparisons are also from December 28, 2006:

• Dow Jones Industrial Average: 12,501.52 is Up to 13,371.72 (+6.96%)
• NASDAQ Composite Index: 2,425.57 is Up to 2,660.96 (+9.78%)
• Standard & Poor’s 500 Index: 1,424.73 is Up to 1,481.14 (+3.96%)

The Cramer Speculative Stocks for 2007: 12.45

1) Level 3 Communications (NASDAQ: LVLT): $5.66 is Down to $3.36 (-40.64%) No dividend
2) Rite Aid (NYSE: RAD): $5.49 is Down to $3.72 (-32.24%) No dividend
3) Savient Pharmaceuticals (NASDAQ: SVNT): $12.01 is Up to $14.06. (+17.07%) No dividend

The Cramer Growth Picks are:
1) New York Stock Exchange Group (NYSE: NYX): $97.51 Down to $86.60 (-11.19%) No dividend
2) Apple Inc. (NASDAQ: AAPL): $80.87 Up to $182.22 (+125.32%) No dividend
3) Cisco Systems (NASDAQ: CSCO): $27.42 Up to $28.82 (+5.12%) No dividend

The Cramer Value Picks are:
1) Altria Group (NYSE: MO): $86.23 Up to $77.56 (+Kraft at .692024 x $34.55 = $23.91) to $101.47 (+18.65%) 4.12% yield
2) Goldman Sachs Group (NYSE: GS): $200.80 Up to $226.64 (+12.87%) 0.72% yield
3) Halliburton Co. (NYSE: HAL): $31.26 Up to $36.61 (+17.11%) .97% yield

The New Powerhouse Google

Google had an amazing month in October, reaching towering heights, only to see lows off about $100 in November, but it finished strong in a volatile market. After eleven months of tracking Google, it has grown to be one of the largest capitalized companies in the world, now exceeding $200 billion, and remains of broad interest to the investing public and internet users alike. Google closed December 28, 2006 at $462.56, rose in January, then traded downward for a few months before rising again following the overall market. But in the last few months it has been hot. Google ended November at $693.00, for a solid YTD gain of $230.44 per share (+49.82%), slightly off last month’s YTD gain. Google does not pay a dividend.

In Closing

What can I say about BloggingStocks’ parent company, which has faltered all year long: Time Warner (TWX): No catalyst or no leadership? Some comparisons. No invitation has yet arrived to a board meeting to share my thoughts, and I guess I should not expect one. Cramer is thinking the same thoughts about Rite Aid, and Level Three, no doubt. I will continue to report during the week following the closing stock prices each month. Only one month to go!

Disclosure: I own shares of BRK.B, DOW, DUK, HNP, PTR, SE, TWX, and VLO.

To find more potential opportunities and verify my track record read Chasing Value or Serious Money.

Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. Check out his other posts for BloggingStocks here.

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Filed under: General Electric (GE), Boeing Co (BA), Options

General Electric (NYSE: GE) CEO Jeffrey Immelt will host GE’s annual performance review and business outlook meeting on December 11. GE overall option implied volatility of 26 is above its 26-week average of 24 according to Track Data, suggesting larger risk.

Boeing (NYSE: BA) will give a mid-quarter update on the 787 Dreamliner program on December 11th. Jeffries says, “We feel comfortable with our $122 price target.” BA overall option implied volatility of 28 is near its 26-week average of 27 according to Track Data, suggesting non-directional risk.

Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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Filed under: Other issues, Politics, Housing, Federal Reserve

The U.S. Federal Reserve is likely to continue to cut benchmark short-term interest rates by another quarter-point Tuesday, but in the view of some economists and analysts, it would not be totally unreasonable for the Fed to implement a half-point cut.

Economist David H. Wang told BloggingStocks that recent Fed data “seems to be indicating a clear risk of a recession, which is the argument for a 50-basis point [half-point] cut.”

Wang noted that while the futures market is pricing in two more 25 basis-point cuts at the Fed’s January and March 2008 meetings, and also pricing in 100% odds of a 25 basis-point cut and 28% odds of a 50-basis point cut Tuesday, recent negative economic news/data points may weigh on the Fed on Tuesday, and perhaps carry the day, producing a half-point cut.

Continue reading Fed may still consider half-point rate cut

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Filed under: Deals, Hewlett-Packard (HPQ)

Hewlett Packard (NYSE: HPQ) announced this morning that it would be purchasing NUR Macroprinters, an Israeli-based maker of inkjet printers, for $117.5 million. As HP marches straightforward into bolstering its hardware assets, this one should make a very good acquisition for the world’s largest PC manufacturer.

The terms of the deal specify that $14.5 million of the purchase price would be held in an indemnity escrow account as well — that’s standard practice in some mergers. No surprise there. HP wants NUR to be folded into its large-format hardware printing business, for which it has a strong slice of market share.

While other companies seem to be making less in hardware, save for Apple (NASDAQ: AAPL), HP is doing the opposite. It’s making money in the PC business (a feat in itself) and in the other hardware businesses it operates in. Not be left behind, HP is making major headway in the software intelligence business as well thanks to Mercury Interactive.

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Filed under: Personal finance, Housing

A couple days ago on our sister site WalletPop, forensic accountant Tracy Coenen asked readers for tips on how to help her lower her credit score. Her reasoning? Part of the White House’s bailout plan involves freezing the interest rate on adjustable rate mortgages for five years, but only for borrowers who meet certain criteria. One of those criteria is having a FICO score below 660.

Apparently other people are thinking like Tracy. According to MarketWatch:

Should we fault people for trying to game the system? Heck no! That’s what systems are for. If multi-billion dollar companies can work out ways to avoid paying any taxes at all, why shouldn’t you lower your credit score to save some money on your mortgage?

The fact that the bailout appears so easy to manipulate is really indicative of how stupid it is. Does it make sense to offer a low interest rate only to people with a poor record of paying back loans? Isn’t that the exact opposite of the entire point of credit ratings?

Zac Bissonnette is an associate editor with WalletPop, AOL Money & Finance’s new personal finance blogsite that covers the financial issues that are important to you in a fun, interesting way.

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