No, we are not talking about a depression here. We are talking about the more constant use of the word “deflation.” Actually, deflation can be considered a depression of prices. We often say that one of the objectives of the Federal Reserve Board is to fight inflation. We can also say that another objective of the Fed is to protect us against deflation; however the threat of deflation comes up so rarely, there is little discussion of the issue. We all know why higher prices are bad for the economy. When consumers have to spend more of their income on staples, they have less money left over to spend and contribute to economic growth. Inflation is typically accompanied by higher rates which also depress the economy. If money will be worth less in future years, banks that lend money have to charge high rates in order to make a profit.

So why would deflation be bad news? Deflation is not only a symptom of a poor economy; it would contribute to the lack of economic growth as well. Why would a manufacturer produce goods if those goods are likely to fall in price below the replacement value? We have such an example right now where builders have found in some areas that homes are selling for less than the replacement costs. Why build a home if you can’t sell it at a price that is equal to the cost of building? Here is the good news. Natural population growth in the world has put so much pressure on natural resources such as energy; it is not likely that deflation will become a problem. It is more likely that the slow economic growth we are experiencing will be accompanied by low rates of inflation and therefore low rates such as we are experiencing. And this is a good thing, because we need these low rates if we are going to continue to grow out of the slump. A little inflation right now is good news but increased rates of inflation while the economy is not growing would be bad news. Then we would be discussing another bad word: stagflation.

There are many “spreads” between financial instruments. In theory, certain financial indicators act conversely to each other. A prime example is the stock vs. bond markets. In a perfect world, if we get bad economic news, this is bad news for stocks but good news for bonds. In other words, the stock market should fall and rates should go down, as the bond market rises as rates go down. Why? A slow economy hurts corporate profits but takes pressure off of inflation. In the recession we just experienced, the Federal Reserve Board (Fed) lowered rates significantly because we needed as much economic stimulus as possible and there was little danger of igniting inflation. In addition, when the stock market falls, investors tend to take money out of the stock market and are more likely to invest in the “safety” of bonds.

What is happening right now in the markets could be explained by this very situation. As the economy has slowed down, the stock market has fallen and the bond market has improved, or rates have gone down. Yet the relationship is not perfect. On June 18, the Dow closed at 10,451 and the 10-year bond yielded 3.22%. By July 2 the Dow was down to 9,686 and the 10-year bond was now yielding 2.96%. A few weeks later, on July 15, the Dow closed at 10,359, recovering most of the way back to the level of June 18. Yet, the 10 year bond yielded 2.98%. Why did the stock market come back as rates stayed low? There are a few possible explanations. For one, the crisis in Europe has seen investors around the world turning to a safe-haven in Treasuries, independent of what has happened with our economy. We can also surmise that the stock market had moved too quickly and was due for a correction, which was exactly what happened on Friday. Again, it is always hard to predict the future and this means not only the direction of financial instruments, but the relationship between instruments as well. The good news is the fact that rates are very low and that means more help for our economy. Judging by the reports we saw this past week on retail sales, manufacturing and consumer confidence, we need the help.

Appraisal requirements have been updated by Fannie Mae. Among the areas impacted are photograph requirements, lender changes to appraisal values and foreclosure comparables. Fannie also said that appraisers cannot use the Home Valuation Code of Conduct as an excuse not to communicate with parties to a real estate transaction and noted that HVCC does not mandate the use of appraisal management companies. In Announcement SEL-2010-09, Fannie outlined a number of changes to its appraisal policies. The updates are the result of issues identified in post-purchase reviews by secondary lender. Interior photographs will now be required for the kitchen, all bathrooms and the main living area. In addition, photos will be needed for examples of deterioration or recent updates to the property. The update impacts loan applications dated Sept. 1 or later. Source: Mortgage Daily

Recently, HUD announced that brokers don’t need to be approved with HUD anymore and it is the lenders’ responsibility to be their sponsor. I’ve gotten approved with a lender that does loans in 50 states in order to originate FHA with them. My question is: do I have to be W2 broker to do FHA loans? I talked to them since they never asked me if I’m a W2 broker or not and their response was that they have no way to manage that and they don’t care if I’m not. Isn’t this more their responsibility than HUD’s since they approved me as a sponsor or is it mine? I’m so confused please help me I do have few loans for FHA now and don’t know what to do. Shala

Very good question. This was not addressed at all in the mortgagee letter—except to say that lenders are responsible for complying with FHA guidelines. Well, they have not changed the W-2 guideline that originators must be employees, so I assumed it still stood. And if you violate any guideline, it would seem that the wholesaler and you would both be liable. Also—because the lender is approved in 50 states-you still need to be licensed in those state(s).

However, if you read the summary of the conference call given by HUD located in the “Industry News” section, it appears that HUD is saying that you don’t need to be W-2 and that you can have “dual employment” which means you can originate and sell real estate as well. I have to assume FHA will outline the guidelines more specifically in their upcoming letter…but if this information holds, it is indeed big news for brokers.

We have talked about how hard it is to predict the future many times in the past. However, when you pay economists the big bucks, they have to lay it out on the table. Many predicted an economic slowdown for the second half of the year. But how many predicted record low rates? Again and again we published quotes from respected analysts indicating that rates would be rising this year. Obviously, these predictions have not come to bear–yet. Now many are predicting that these rates will stay with us for the foreseeable future based upon the economic crisis in Europe and the flight to safety we are experiencing as investors purchase US Treasuries.

Our advice? Don’t get comfortable. Remember when many predicted that housing prices had to fall based upon the spectacular increases we saw just a few years ago? The housing market kept on going, regardless of these predictions. Then it ended when few were expecting the end. Here is a recent quote from business analyst, Allan Sloan, in the Washington Post: In the long run, markets are rational. In the short run, anything can happen. Far be it for us to add fuel to the fire, so we are not going to make predictions regarding where rates will go in the second half of the year. However, we will say this: there is more room for rates to rise than to fall at this point. So if someone is thinking about financing a home, car or another major purchase, now could be the time.

First-time home buyers will have until Sept. 30 to close on their purchases and land an $8,000 tax credit under a bill passed by the Congress. The deadline had been June 30. The bill doesn’t help anyone currently shopping for a home. Buyers must have signed a contract by April 30 to qualify for the tax break. At issue is when the deal must be finalized. Qualified existing homeowners also have until Sept. 30 to close on new homes and receive a tax credit of up to $6,500. Congress has been trying to pass the extension for the last month, but it got caught up in Washington politics. Only when it was separated from a larger jobs bill did deficit-wary lawmakers sign off on it. The extension will only raise the deficit by $9 million. An estimated 200,000 people would have missed out on the tax credit because they wouldn’t have been able to close by the end of business June 30. Many are trying to take advantage of short sales, which are complicated deals to complete. The Senate approved the stand-alone homebuyers’ tax credit shortly after a failed attempt to advance a bill that combined the credit with an unemployment benefits extension.

We have been watching the markets and there is no doubt that they are speaking loudly. Since peaking this spring, the stock market is down approximately 15.0%. Oil prices have also fallen within the same range. Meanwhile, rates have moved down to the levels seen right after the financial crisis hit the markets some 18 months ago. What are the markets saying? The economy is slowing down. Some are still predicting a “double dip” recession and certainly the market reaction is strong enough for some to draw that conclusion. One thing is for sure, creating private sector jobs at under 100,000 per month is not strong enough to help us recover from the loss of millions of jobs we experienced during the recession. Job growth must be stronger.

Is this possible? Last week we talked about the Fed being out of bullets. There is no doubt that removing the housing tax credit as well as other fiscal stimulus is contributing to the current slowdown. States and local governments are cutting jobs because aid from the Federal Government is waning. However, don’t think that the entire stimulus has disappeared. Many aspects of the stimulus package will be hitting this summer as pointed out in a recent article from CNN/Money: “This summer will be the peak of the $787 billion stimulus program in terms of creating jobs and pumping money into the economy. In fact, the Obama administration is calling it the Summer of Recovery because more than 30,000 miles of highways are being improved, more than 2,800 water projects have been started and 120,000 homes will be weatherized.” We obviously could use the work. In the meantime, record low rates on home loans should continue to stimulate housing in the wake of the tax credit’s expiration.

The Federal Reserve Board met this week and even though the markets were not expecting surprises to emanate from this meeting and none surfaced, an interesting article was released by CNN/Money this past week. The article asks an important question–is the Fed out of bullets? By way of background, we have been recovering from the deepest financial crisis since the Great Depression. The government, led by the Fed, has been firing on all cylinders ever since. In our opinion, they started a bit late and that became part of the problem as we were convinced the markets could survive what was then termed a “sub-prime crisis.” Well, it became much more than that. Since this late start, the Fed has been doing just about everything besides washing America’s dishes.

The next question arises–what if this medicine is not enough? The Fed already moved short-term rates to zero and purchased trillions of dollars of mortgage and Treasury securities while the government took over housing agencies Fannie Mae and Freddie Mac as well as doling out tax stimulus dollars like they were going out of style. What if the economy does move back into recession and more bullets are needed? We say perish the thought. From day one, this has been a crisis of confidence. The public and the markets must be convinced that the economy will recover. We must not think or speak negative thoughts. It may take some time, but employment will grow and as employment grows, Americans will purchase houses and cars. Then our worry will be when will the Fed raise rates and how will we pay for all the bullets we have spent. Meanwhile, today we have an unprecedented opportunity to take advantage of bargains courtesy of the Federal Reserve Board.