It's a bird... It's a plane... It's... ... Bank of America!

Notable News:
Bank of America to invest $2 bln in Countrywide: WSJ
"NEW YORK (Reuters) - Bank of America Corp plans to invest $2 billion in Countrywide Financial Corp, the mortgage lender that has faced a liquidity crunch this month, the Wall Street Journal said on Wednesday." Source: www.reuters.com

WaMu leads the pack back in

After speaking with a number of mortgage professionals, I have gained knowledge that WaMu is once again offering stated income loans for W-2 borrowers.

While that may not sound like a dramatic announcement in and of itself, the mere idea that a large national lender is restoring loan products to their menu is a sign of a reversal of the trend of the last three weeks.

It should be considered that WaMu has one of the strongest balance sheets in the industry and this may be indicative of what other financially strong lenders, such as Bank of America and Wells Fargo, might do in the near future. -By: Ron Ojeda, Capital Development, Blue Moon Capital, LLC

Visions of Rollercoasters and "Dead Cats"

By Ron Ojeda, Blue Moon Capital

Debt and equity markets from Chicago to New York to overseas continued to react to the uncertainty created by an illiquid debt market. Last week started with three days of gains that were the best we’ve seen since March of 2003. But the lion’s share of those gains were experienced in a relatively narrow band of the S&P 500; financials, materials and energy markets were the sectors hardest hit since mid July.

With that lack of breadth, most savvy traders had one eye on the door. On Thursday when BNP Paribas, the largest bank in France, barred withdrawals from three of its’ asset backed securities funds, the broad selling started. Nine out of ten sectors in the S&P 500 were down more than 2.5%. By the way…that’s why it’s illegal to yell “Fire!” in a crowded theater. If it were not for the “dead cat bounce” on Friday with the market recovering late in the day from a 213 point drop to finish at down just 31 points, the market would have suffered its’ fastest 1000 point drop since the five days following September 11^th, 2001.

Given these events it is important to remember that the equity markets are simply the tail of a very big dog. That dog being the global debt markets. Friday finished the week off with a manic trading day driven by global central bank activity. The European Central Bank infused more than $130 billion into the markets on August 9^th, the highest amount since September 11^th, 2001, and an additional $84 billion on Friday with The Bank of Japan. The Bank of Canada and The Bank of Australia followed suit.

The Fed added reserves of $38 billion accepting mortgage-backed securities as collateral for overnight loans or repurchase agreements (Repos). The Fed will normally buy a combination of Treasury, Agency and mortgage-backed debt.

Bond investors, home mortgage buyers and jobless mortgage banking industry employees alike, who have been negatively affected by these events of the last month, have been anxiously looking for someone to blame. Unfortunately, this may be a time for them to look inward to see some of the culprits. Home buyers who stretched too far and borrowed against too much of their equity, mortgage brokers who sold inappropriate products to their customers and most importantly, the bond investors who enabled this activity by buying what Wall Street had to sell.

In the early 1990’s Wall Street was faced with a compelling problem. With a large wave of the population moving toward retirement, they needed an even larger amount of investment-grade income producing investments. With several money managers restricted on the quality of debt they could buy by their written investment policy statements, where were they going to find that investment?

Someone had a brilliant idea that would transform speculative paper into investment grade paper, "What if we bundle all these loans together into a pool? We can reduce the risk to the investor by diversifying his risk amongst all these loans.” Collateralized Debt Obligations were born and Large to small investors with mutual funds have been inadvertently feeding the beast ever since.

With the luxury of the big picture and hindsight as its’ benefactor, it appears the herd has had its’ way…again.

By: Ron Ojeda, Capital Development, Blue Moon Capital, LLC

Update: Lenders Tighten Belts

Signs of Change

It shouldn’t be a mystery that the lending industry is carefully rethinking their actions and changing their standards after last week’s crisis. So far, we have seen one of our several national lenders start to tighten their belt a couple notches in hopes of disqualifying more individuals for risky loan types such as the payment option loan, which is often sought after by investors looking to leverage for positive cash flow.

Blue Moon was advised early this week that the payment option loan type was still available to only strong borrowers with 680+ FICO scores, and with an additional 3 points at closing. To be fair, all loans are going to be requiring more “skin in the game” from the borrower, whether it be in the form of more points upfront or higher interest rates. The increased rates on loans across the board are a reflection of the lender’s uncertainty about what will happen over the next 30-60 days. Since they don’t’ have enough information to evaluate the risk at this time, they simply are charring above market rates to cover all contingencies.

Eventually, as it becomes more apparent as to what the real impact of the sub prime foreclosure chapter is, rates and underwriting standards will be brought into line. Today the impact to real estate investors is that they should expect tighter underwriting standards and additional costs, either upfront or over the course of the loan.

As we’ve seen in history, difficult situations in financial markets, being stocks or bonds, have brought opportunity to investors. The corrections in the global debt markets is no different. Experienced investors have made their fortunes during these market corrections. They simply have to know how to take advantage of the market by understanding what they are investing in.

Lending Industry Changes Will Affect Real Estate Investors

Press Release

Lending Industry Changes Will Affect Real Estate Investors

By: Ron Ojeda, Blue Moon Capital, LLC

Given the alarming events of the last two weeks encompassing the stock, bond and housing markets, it comes as no surprise that both investors and industry participants alike are trying to make sense of what has now become one of the most tumultuous periods over the last 20 years for the real estate and mortgage industries.

The past two weeks have fostered a clear contraction of the mortgage banking industry. Some very well known, and some not so well known, mortgage banks have closed their doors in the past 30 days, laying off thousands of employees while seeking protection from creditors within the bankruptcy courts. There is no doubt over the next 30 days we will witness more carnage and the number will swell as the investors who loan these mortgage facilities money to in turn lend to consumers, proceed to either temporarily cease all “warehouse lending” to those mortgage banks or severely reduce the “menu” of loan options they will allow a mortgage bank to underwrite. Negative amortization and other “pay option loans” (the ones which allow the borrower to choose the kind of monthly payment they would prefer and are popular amongst real estate investors) will either be eliminated or reserved for only the strongest of borrowers.

The credit crunch has not been restricted to home owners and small investors however. It is being felt all the way up the top of the borrower food chain with the likes of famed buyout firms such as Kohlberg Kravis Roberts (KKR) and buyout fund Cerberus Capital Management. Both firms were rebuffed by global debt markets in July along with forty-four other leveraged buyout deals in failed attempts to raise some $60 billion . “We are seeing a simple but extremely powerful de-leveraging of the global markets” observed Doug Cliggett, Chief Investment Officer of Dover Management.

Over the last few days, what started as a whisper thoughtout the industry has now become a clamoring for the Fed to step in, lower rates, and save us all. Unfortunately, this is probably not going to happen. The Fed’s responsibility is to provide one of the “one-two punch” that manages the U.S. economy, monetary and fiscal policy. Their use of monetary policy is a double-edged sword. If the overall economy is doing well today, which it is, lower rates will provide too much stimulus and drive long-term interest rates higher, thus killing the patient it sought to cure.

Current data, as of last week, provides us with a picture of a healthy, stable economy. According to Barrons August 6^th, 2007 article by Gene Epstein, Jobs Data: Goldilocks Lives, job trends over the past 12 months show that both overall and private payroll employment is up 1.4% since July of last year with the unemployment rate at 4.6% consistent with the flat trend in the unemployment rate. The recently released advance estimate for second quarter real GDP growth ran at an annual rate of 3.4%. More importantly, performance of the various components indicated that growth could easily run in excess of 3% for the next 2 quarters. Historically, real growth in GDP of 3% or more has been considered healthy and it compares favorably with growth of only .6% in the first quarter of this year.

So what about the stock market? After the correction of the last 2 weeks, some 800 points from its closing high of 14001 on the Dow is up 5.8% year to date. and the S&P is up a paltry 1%. Second-quarter earnings for the S&P 500 seemed on track to rise by 9% according to Thomson Financial. It doesn’t appear to be grossly inflated.

So what will the Fed do? We will have to wait until at least Tuesday when the policy-making committee meets. For as much pain as mortgage and real estate investors have either felt or seen in the past two weeks and for as much as we may see in the coming months, the Fed will almost certainly not act in haste. Based on the analysis of the facts presented here we believe the Fed will not change short-term rates. But hopefully we will see a change of bias that lets everyone know the cavalry is just over the horizon.

In closing, the mortgage and banking industry and Wall Street will bear the brunt of this credit crunch. It will feed on fear and uncertainty. Lenders can compensate for fear by raising rates or tightening underwriting standards. But, uncertainty can never be compensated for. If the loans you write in the future carry an indeterminable amount of loss, how can you hedge that risk? The bottom line… if you are going to borrow money to buy real estate, you better be ready for a much more inquisitive lender.