It seems as though the economy is already beginning to show signs of improvement. A recovery, albeit slow, is already beginning to happen in both the financial and the broader markets. As you saw this week, rates jumped from Tuesday to Friday by almost 38 bps on the 10 year yield, which cost you almost two points in yield. Are you upset? Don’t be, and here is why.

We like low rates, and your clients love them, especially on the rate and term refi side, which is where most of us have been getting our business the last 6 months due to appraisal issues, rate hits from Fannie and Freddie, and MI restrictions. But what about purchases? Supply and demand are what eventually drive the market, and as the markets improve, new jobs are created or rehired, and liquidity increases both on the credit side, the cash side, and on the investment side, which is what will drive new home purchases. As prices drop, and they did, many are seeing this as a chance to buy because home prices seem reasonable. What about the media?

First of all, they thrive on negative information. Reporting is not based on telling on how great your country and your life is, but rather how horrible, dangerous, gloomy, and corrupt it seems. You need to be the new media, or rather the correct messengers of information telling your borrowers that things are better than they seem. Gas prices are high; did anyone you know not take their spring vacation this year? Do people still go out to eat, shop on the weekends, and buy cars? Of course they do!

One major part of the news that has caused headlines is that most financial institutions have lost much less this quarter than originally anticipated. What does that mean for you? Well when a company forecasts a loss, they have to properly capitalize (save) in order to sustain that loss in order to avoid bk, or a bailout form the another company, federal home loan bank, you get the picture. When those losses are much less, that capital raised can be used to rehire, invest back into the market through loans and credit cards, or gives them a greater ability to further capitalize on a potential future downgrade in the economy. They also have to rely less on advances from the federal home loan bank, can portfolio more, need less commercial lines, and have to lay off less people. They also have to leverage less, which tends to trickle down to us. Yes some banks are opting out of wholesale, but that has more to do with the regulations the states are imposing rather than the losses they think they will take by subcontracting out work.

Brokers, be it in wholesale or retail, are paid yield by banks like Indymac because of one major reason: it’s cheaper! You advertise for us, and because of that, my company does not have to hire more people, fire more people when they fail to produce, lease more retail space, and pay for marketing. In a couple of years the banks that turned their back on you will be calling you and begging you for business. This will also open up room for smaller banks and lending institutions to get into the market with less overhead because they do not have to throw a million parties, pay a million reps to sell, less marketing, or undercut themselves into extinction. All they have to do is tell you they are committed to doing business with you in this market and half the battle is over. What else?

These mortgage backed loans no one wants to buy are actually performing at a rate of over 99%. Where else can you find that level of success? Foreclosures, although very high, are tied to two sectors in the market, first time home buyers and speculators. These people make up less than 30% of the total market yet make up over 85% of the foreclosures. What about the other 15%? Well these people lost their jobs, got divorced, got sick, or made some bad financial decisions which happens in every market regardless of rates, type of loans available, who is in office or what laws are in place. What happened in 2000-2007 was we were able to slow and ward off the eventual issue these people would have to face which was this: they could not keep their home and no one could save them this time. No longer could they use their homes as credit cards and home prices are now coming back to the median incomes reflective of those areas. Trust me, at the rate we were going home were going to cost one million dollars everywhere!
We need purchases and these signs of a slowly recovering economy will help, look for a slow recovery beginning this summer and back into full swing by 2009. Many say longer because they invest in real estate, which by its very nature will always give a more conservative estimate. Do not worry, Europe and China are not taking over. Do you remember what people were saying the late 80’s about Japan? Japan is going to buy everything, and they were. Within three years their economy crumbled and ours went into full swing with a couple of bumps in the road, one being late 2007 from a credit-over-leveraged economy. As people have to put more skin in the game, they will be more cautious of what they are getting themselves into. So to will the banks, attorneys, builders, and you!

Inventory is now the issue. As homes begin to sell, and less building is done, it will make the lower supply go up in value, due to the limits on choice. In any product, the less you have to offer, the higher the prices will go. The reverse can be said if there is too much of something. Borrowers must not only show the willingness to pay, but also the ability on paper. They now need to look at a home as a long-term investment, and not a day traded stock they can sell whenever they feel like it. The answer to rebuilding things is to work on building new relationships, as well as cementing the ones you already have. Do not be afraid to work outside your comfort zone. If you only do refis, work on purchases. If you only work with Realtors, try and work with financial advisors. I know it sounds easier than it is, but in fact it actually is! You sell money, and so long as people need money, you will have a job. Good luck!