Encore! Record Low Rates Return for a Second Show

This article is written by Jay Garvens and Joey Connell

extra-extraFrom spring of 2012 until the fall of 2013, it was difficult to find a mortgage product that wasn’t in the 3% range. This was a period of historically low rates, with some borrowers able to refinance in the high-2% range. Throughout the following winter and spring, however, rates started trending upward. Most industry experts believed the time of 3% mortgage had passed, with 4-5% mortgages as the new normal. Over the last couple weeks, though, rates have been trending back downward, and we are again seeing mortgages in the 3% range. The question is: What happened?
For several years, interest rates have been reacting almost exclusively to the Fed’s bond-buying program, known as QE. The Fed has signaled for several months that they would begin tapering their bond purchases, and as economic indicators improved over the last year, investors believed tapering was imminent. This drove interest rates up. However, the Fed has yet to initiate an aggressive tapering policy, reducing their bond purchases by only 25% a month from $85 billion to $65 billion.
This, coupled with weak and dismal economic news over the last two quarters, has caused rates to trend back down. The Fed has lost confidence that the economy has recovered. They consider the anemic growth in durable goods (.5%), the artificially low unemployment rate, and the housing market losing steam over the last quarter after double-digit gains earlier in the year.
As quickly as the economy stalled, it could easily pick back up. There is no telling how long this period of extraordinarily low rates will persist, so the time to act on this news is now! Recent economic developments, while leaning negative, have offered some positive news; the signals are mixed. Any negative indicators may be aberrations in the data, and future economic news could show a brighter picture, thus driving rates back up. As it stands, though, negative news dominates our economic outlook, particularly in the housing industry.
During the second half of 2013, both rates and home prices increased dramatically. By the end, many buyers—particularly young buyers—were priced out of the market. Real estate investors limited their purchases, causing demand to fall. House prices have remained essentially flat ever since.
These developments have had a severe impact on mortgage rates. But what does this mean to you? Right now, it means record low rates! A conventional 30 year fixed rate at 3.875% with no original points. It means a VA or FHA loan as low as 3.625%. It means a conventional 15 year fixed at 3.125%. With the rapid increase in housing prices throughout 2013, it also means many people who did not have the equity to refinance during the last period of historically low rates may now be able to; their homes may finally have the equity needed. This is especially urgent for anyone who presently has an interest-only or adjustable rate mortgage. These products were very popular in 2004 and 2005, and many are set to either re-adjust or recast in 2014 and 2015 into far more expensive products.
One of the most common regrets I encounter from callers to my radio show is missing the historically low rates of 2013. Many either dragged their feet and missed their opportunity, or didn’t have the equity necessary to refinance. Whatever your excuse, don’t make the same mistake twice. This is a second chance that nobody anticipated. Don’t squander this opportunity! Whether you want to refinance to a lower rate, pay off debt, purchase a new home, or purchase an investment property, now is the time to act.

Wealthy Thinking versus Poor Thinking

Wealthy Thinking versus Poor Thinking


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If you’re reading this, great news: You’re wealthy! Or you’re on your way to being wealthy. At the very least, you have wealthy thinking versus poor thinking, a wealthy person’s temperament, which is the first step toward being wealthy. By virtue of reading this educational—and I might add highly edifying—blog post, you are exhibiting a trait that sharply separates the wealthy from the poor: reading educational material, which 88% of wealthy people do versus just 2% of poor people.

You may remember this statistic from a previous show that explored disparities in habits between the rich and the poor. As a brief recap, here are a few of the previously discussed habits, and a breakdown in the percentages of wealthy people versus poor people that practice them:


  • Focus on accomplishing single goal; 80% of wealthy versus 10% of poor
  • Exercise aerobically 4+ days a week; 75% of wealthy versus 23% of poor
  • Maintain a to-do list: 81% of wealthy versus 19% of poor
  • Believe they create good luck for themselves: 84% of wealthy versus 4% of poor


But there are some categories in which poor people excel:


  • Say what’s on their mind: 6% of wealthy versus 69% of poor
  • Watch reality TV: 6% of wealthy versus 78% of poor


This selection of habits illustrates the temperamental difference between the wealthy and the poor. This is not to suggest that if poor people exercised more and maintained a to-do list they would magically be wealthy. Rather, it suggests that one who is naturally the kind of person who would exercise and watch less reality TV is also the kind of person who would be wealthy. Wealth, along with exercising, efficiently prioritizing time, and being disciplined enough to not always says what’s on one’s mind, are all the result of thinking about the world in a certain way.

On this week’s show, we delved deeper into the thinking patterns of wealthy and poor people. By understanding how these two groups see the world, it is easy to understand why each group adopts different habits, and how these habits ultimately determine their financial fortunes. Consider the below examples of Rich Thinking versus Poor Thinking:

I create my life vs. Life happens to me

I play the money game to win vs. I play to not lose

I am committed to being rich vs. I want to be rich

I focus on opportunities vs. I focus on obstacles

I admire rich and successful people vs. I resent rich and successful people

I am willing to promote myself and my values vs. I think negatively about selling and promoting anything

I am bigger than my problems vs. I am smaller than my problems

I gladly receive constructive criticism vs. I do not accept criticism of any kind

I choose to get paid based on the results of my work vs. I choose to get paid on the time I spend on my work

I focus on my net worth vs. I focus on my working income

I can always learn something new vs. I already know everything I need to know


The differences in these modes of thinking demonstrate key personality differences between rich people and poor people. Primarily, it is the difference between being confident yet humble on one hand and insecure yet stubborn on the other. Rich people are optimistic about their potential to thrive in the world; poor people are pessimistic, and believe outside factors inhibit their potential.

These differences affect not only where these groups are but where they’re going. If your general outlook is that the odds are already against you, and you refuse to learn new things or acquire new skills—like investing skills—because you believe you know all there is to know, you have prevented yourself from not only discovering but pursuing new opportunities. You have lost the game before you even tried playing.

In the second hour of this week’s show, I used the example of renters versus owners to illustrate the differences between rich thinking and poor thinking. The impatient, imprudent, and undisciplined thinking that typically results in deciding to rent an apartment exhibits all the classic traits of a poor thinker. These will be recurring themes over the coming months, and one of the key advantages of Rich Thinking will become starkly apparent: It is able to adapt to changing circumstances, while Poor Thinking is not.

I’m Coming Home

This week’s show is meant to complement last week’s, so if you missed it I recommend checking it out in the archives. Briefly, last week’s show explored the behavioral patterns of three demographic and temperamental dichotomies prevalent in today’s culture: the young vs. the old; the rich vs. the poor; the timid vs. the bold. We saw how the old, the rich, and the bold make certain lifestyle choices that readily lead toward more successful, productive lives. This week, we’re exploring what this means in practice.

The title of this week’s show, “Coming Home,” refers to the notion of leaving the financial and behavioral wilderness. It means the end of whimsical, poorly considered spending habits. Essentially, it means settling down to a life of discipline and well-defined personal and household goals.

As long-time listeners know, I’m convinced that the surest way of ‘coming home’ is to do so literally: By buying a home! Homeownership is easily the best financial decision a person can make. A home is an asset. But if you’re renting, you’re investing in an asset that benefits your landlord—not you and not your family. Owning your home means your monthly housing expense is going toward paying principal and building equity With today’s rental market at historic highs, owning is only marginally more expensive than renting upfront, and the equity you build ensures you’ll have a valuable asset when the mortgage is paid off.

Now, is homeownership for everyone? No! Specifically, it is not for people still wandering the financial wilderness. It is not for those who can’t commit to a marginally—or, sometimes, significantly—higher housing expense versus renting because they would rather spend that extra money on frivolous things today instead of investing in their home. I would even argue it’s not for those who would settle for a 30-year mortgage, whereby the borrower wastes hundreds of thousands of dollars on extra interest to avoid slightly higher monthly payments, versus a 15- or 10-year mortgage.

The decision to sacrifice now for better future returns is, as I explained last week, what separates the rich from the poor—and, increasingly, the old from the young. Different generations espouse different values, and the values of thrift, prudence, and investing are largely the values of older generations. The Baby Boomers especially cast thrift to the wind; and if it weren’t for the equity they built up in their homes, most of them would be flat broke as they make their ways to retirement. And the Gen Xers and Millennials aren’t even buying houses; they’re opting to rent in very large numbers.

While cultural influences are the primary drivers that determine how members of a generation make certain decisions, we should never think that we’re pre-determined to live a certain lifestyle because of our age or generation. Of all the behavioral traits separating the rich from the poor, the one with the largest disparity is in how the two groups view luck in determining success; the rich are far more likely to believe luck plays little to no role in determining success. Similarly, no individual should think their generation determines their personal success. Success is a product of the decisions you make and the behaviors you adopt on a personal level.

When mentoring people on adopting successful habits, I recommend making small changes first to see how these can make a big difference. I’ll usually recommend adopting a strict household budget, paying for everything only in cash, and reserving debit or credit card purchases for the holidays. The most destructive practice to a household budget is casually swiping plastic to make purchases.

From here I’ll recommend larger changes, and the single-biggest change a person can make is to simply start reading. Voraciously. Among the rich and the poor, 63% of wealthy parents make their kids read at least two non-fiction books a year, versus just 3% for the poor.  As any teacher will tell you, “leaders are readers.” Books are an invaluable resource for acquiring information and knowledge that is not otherwise readily available to an individual. And similar to owning versus renting or saving versus spending, reading versus watching television is a sacrifice that has far larger returns than its more-exciting alternatives.

If you can discipline yourself to sit and read and commit to dozens of hours to reading one book, you’ll find it easier to commit to a budget and resist impulse buys. If you can discipline yourself to owning your home, spending more now on the mortgage and less on new televisions or cell phones, you’ll be rewarded down the road with a valuable asset and more available wealth. And you’ll still have a home.

Helicopter Ben the Show

We were fortunate this week to have Bill McAfee of Empire Title on the show to help with a little mortgage and real estate-related housekeeping. As the owner of Colorado Springs’s largest title company, Bill’s well tuned into the local real estate market. On the show, he offered a mixed bag of news.
Consumer confidence is down significantly—a result of the recent uptick in interest rates and generally lackluster economic news that has persisted throughout the summer and fall. Housing inventory is at a 10-year low, suggesting new home construction has not increased significantly. However, because of this, home prices are up 4-5% year-over-year in the Colorado Springs area. This is great news for anyone who had hoped to refinance but whose equity was prohibitively low. It also presents a great investment opportunity, since very few investing instruments offer 4-5% returns at present.
Like me, Bill is concerned with effects next year’s Qualified Mortgage rules will have on the housing industry and the broader economy in general. New rules, such as limiting a borrower’s debt-to-income ratio or restricting the types of products lenders may offer and at what terms, will make borrowing more expensive and will prohibit many individuals from securing financing for their home.
Further complicating the near-term lending environment is the Federal Reserve’s recent spastic behavior. Several times over the last few months, the Treasuries and stock markets have skyrocketed and plummeted within moments of Ben Bernanke giving a speech, despite saying nothing of substance. Investors are trying to decipher Bernanke’s pronouncements and adjust their investing strategies accordingly, but it really has been like interpreting the ravings of a madman for clues about the future. In his most recent speech, Bernanke declared that the Fed’s QE program will soon end, but that the Fed will keep its foot on the gas until the economy improves.
Of the Fed’s two principle concerns—low inflation and full employment—Bernanke focuses far more strongly on inflation. As a student of history, he was and is determined to avoid mistakes made during the Great Depression that led to hyperinflation in Germany and severe deflation in the United States. His nickname, “Helicopter Ben,” derives from a speech he gave in 2002 in which he said that the government should use any means necessary to prevent deflation, even if it means throwing money out of helicopters to get it into the hands of people and, eventually, the broader economy.
The Fed’s QE program, however, was not intended to fight deflation; it was intended to boost aggregate demand in the economy by allowing the federal government to borrower and spend money without driving interest rates higher. Both Bernanke and his soon-to-be replacement, Janet Yellen, are Keynesians, and as Keynesians they believe low economic growth is fundamentally an issue of low consumer demand, and the surest way to boost demand is to spend money. On anything.
Since the QE program began, the Fed has created about $4 trillion and pumped it into the US economy. Of course, printing money doesn’t cause inflation per se. Two factors are necessary for inflation: Too many dollars chasing too few goods, and high velocity of money. Velocity is the frequency at which money in an economy is spent. At present, velocity is low. When the economy improves—whether that’s next year or, as I suspect, not until 2020—velocity will increase, and the economy will have at least $4 trillion extra dollars that must be absorbed by the economy. This will unquestionably create inflationary pressure in the economy.

The safest way to hedge against inflation is to invest in tangible assets, whether that means real estate or precious metals. The 4-5% returns presently being realized in real estate easily outpaces today’s low rates of inflation. This will likely continue as the economy improves and inflation and interest rates ticks up. So start preparing now. If you’re able to invest in real estate, now is the time to buy. If your current mortgage is interest-only or an adjustable rate, you need to seriously consider refinancing into a fixed-rate mortgage to lock in today’s low rates and prevent pricing shock as interest rates, and thus the cost of your loan, starts to increase.

Ben Bernanke a.k.a. “Helicopter Ben” Prepares to Land Circling and circling without a Volcker Moment in sight

“Helicopter Ben” Prepares to Land

Circling and circling without a Volcker Moment in sight


            When Ben Bernanke prays, he must sound like St. Augustine: “Lord, make me prudent—but not yet!” The minutes of the Federal Reserve’s most recent board meeting illustrate this indecisiveness perfectly. The Fed’s QE programs must end, but the US economy is too frail for it to end. The market reacted in its predictably unpredictable way: Bond yields shot up on Wednesday before retreating Thursday. Similar movement earlier this summer, with the Fed hinting that tapering was imminent, before rescinding their comments to soothe investor panic.

Seldom have the collective actions of investors been so far divorced from true market performance as they have these last few years. High volatility in virtually every investment vehicle, from precious metals to stocks to Treasuries to currencies, suggests investors are acting on something beyond concrete market data. In fact, they are consistently reacting to the words of economic policymakers, and attempting to decipher what future events these enigmatic words might portend. The consensus on November 20, 2013, was that the Fed would begin tapering immediately; the consensus on Thursday was that, no, perhaps not; the Fed will continue bond purchases.

It’s unlikely that systemic, pronounced, and enduring economic growth can occur with such economic uncertainty. But this uncertainty is the product of a symbiotic relationship between investors, consumers, and the government. The Fed’s only two directives are: control inflation and encourage full employment. Inflation and employment are, incidentally, the two biggest concerns of consumers, who account for two-thirds of America’s economic activity. Their buying habits directly influence the movement of capital among investors. If consumers are buying certain products, investors will follow. Often, they attempt to arrive first. But if consumers aren’t spending, and consumer products and the companies producing them aren’t growing, capital will park in safer, more-predictable investing instruments like Treasuries.

With unemployment high, incomes stagnant, and household wealth still in recovery, consumers are not as influential in directing capital movement as they have been historically. Instead, government spending is the single most influential factor. Without the government’s excessive spending, GDP would shrink. (This is, after all, tautological. Most GDP calculations factor consumption, investment, and government spending. If government spending increases, GDP must increase, ceteris paribus.)

The government has averaged +$1 trillion deficits for 5 years. It has done so to soften the impact of the Great Recession and to prevent the economy from slipping back into another recession. Normally, this would cause Treasuries—on which countless investing instruments are directly or indirectly tied—to rise; as the government accrues debt, its bonds become more risky, less attractive, and therefore demand higher yields to attract investors. But with the Fed purchasing massive amounts of U.S. debt, they can keep Treasuries artificially depressed.

This is all well and good, except that if capital is tied up in Treasuries, it is not moving through the broader economy. Investors are not investing in businesses, which in turn are not investing in factory upgrades, which in turn are not employing people, who in turn are not spending their incomes.

This is the mechanism by which the government is destroying the economy in order to save it. The QE program is meant to stimulate the economy by allowing for persistent, debt-driven government spending by keeping government debt cheap. But this same program so heavily distorts the normal flows of capital that the broader, consumer-driven economy is suffering. The Fed will not, however, risk another recession, since the temporary pain brought to families in the form of higher unemployment and reduced government spending would be politically disastrous. (The ostensible, quasi-private nature of the Fed is supposed to mitigate this effect.)

For this reason, it seems likely that any hints, whispers, or insinuations that the Fed’s QE program will begin tapering will soon be retracted in further hints, whispers, and insinuations. Ben Bernanke is now the Oracle of Wall Street—a purveyor of self-fulfilling prophecies. His words, no matter how subtle, have substantive and profound effects on the American and global economy. Because of this, he will not even speak of tapering with any authoritative force, let alone actually implement such a policy. The economy will not recover until the Fed tapers, and the Fed won’t taper until the economy recovers.

The American economy is in desperate need of a Volcker Moment. For those unfamiliar, Paul Volcker was confirmed as Federal Reserve chairman in 1979 and immediately pursued a policy that “would seek to hold increases in the monetary base and other reserve aggregates to amounts just sufficient to meet monetary targets and to help restrain growth in bank credit, recognizing that such a procedure could result in wider fluctuations in the shortest term money market rates.”

And fluctuate they did! Bond yields skyrocketing, unemployment shot up, NGDP collapsed, and the deep recession of 1982 followed. The Volcker Moment marked the end of the government and Fed’s policy of incremental, inconsistent, and unpredictable interest rate adjustments. During the 1970s, the Fed had lost all investor credibility due to its erratic behavior. This was largely responsible for that decade’s period of Stagflation.

Rather than pander to investor desires or political expediency, Volcker pursued a radical policy of predictability. Investors were convinced that the Fed would pursue a consistent, predictable course, regardless of economic data or political pressure. As soon as the Fed eased its monetary tightening in the early 1980s, the economy immediately rebounded, employment skyrocketed, and ultimately the US would experience 25 years of nearly uninterrupted growth.

As the saying goes, history may not repeat itself, but it sure as hell rhymes. The Great Recession and subsequently sluggish recovery are nothing new to history. And the government’s reluctance to pursue the right policy over the most comfortable policy is nothing new, either. It is rare that economies recover from deep recessions by waiting them out. Rather, it is typically some massive, disruptive force—whether World War II or Paul Volcker—that sparks a recovery. Unless we have our own Volcker Moment, the next disruptive force will not arrive until the maturation of the Millennial generation in 2020.

The Generational Parade: The Greatest Generation to the Millennials


♫ Doo doo-doo doo doo ♫


That’s, of course, the sound a parade makes, and this week we spent time discussing the Generational Parade. If you’re not familiar with the Generational Parade, you should be: It not only affects every aspect of your life, but you’re marching in it right now. We all are. Normally, I march somewhere near the middle, but today I’ve got my tasseled hat and marching baton, and I’m leading this parade. That’s me: Grand Marshal Garvens. There is a lot to cover, so sit back, settle in, and enjoy the procession.

At the head of the parade marches the Greatest Generation—those born between 1901 and 1924. They were raised during the Great Depression and went on to fight in World War II. Today there are only between 5-8 million members of this generation left, and we lose about 8,000 of them each day.

Immediately behind the Greatest Generation is a smaller generation: the Silent Generation. The uncertainty and insecurity resulting from World War I and the Great Depression caused families to have fewer children. Their impact and influence of America’s culture and economy is minor. They are, seemingly, mere placeholders for the most important generation of the modern world: the Baby Boomers.

The Boomers were, until the Millennials, the largest generation this country had seen. The vast numbers of their parents, the Greatest Generation, and the sense of security brought by the conclusion of World War II, propelled this generation’s numbers up to 76 million. Their entry into the workforce in the mid-1980s, and their subsequent exit beginning in 2006, is the macro-economic reason for the Reagan and Clinton booms and today’s general economic lethargy.

Have you noticed a pattern? Generations alternate between large and small. Once a section of the Generational Parade gets going, its numbers cannot change, and the entire parade cannot stop. The factors shaping today’s economy were, in fact, set in motion decades ago. Today’s economy—its labor force, its supply, its demand—is shaped by the needs, wants, and purchasing power of its population, and its population is composed simply of its generations in aggregate.

The largest generation active in today’s economy, the Baby Boomers, have reached the peak of their earning and productive power and are starting to diminish. Those succeeding the Baby Boomers, Generation X, do not have the numbers necessary to replace the Boomers. This is why we are, at present, in economic purgatory. Wages are stagnant, economic growth is anemic, and the housing market is taking years to recover. There simply are not enough workers and consumers to replace those who are exiting the labor force and reigning in their spending habits as they prepare for retirement.

Following the pattern of the last century, we can expect a marked economic recovery sometime around 2020. This is when members of the Millennial Generation will begin entering their most productive years (ages 40 through 60). Their vast numbers—over 80 million!—will not only sufficiently replace Generation X, but will exceed even the Boomers. This will spark the economic recovery that has remained elusive since 2008.

But 2020 is a long way off. When you’re watching a parade pass by, waiting for a particular section to reach you, it seems to just crawl. Although I anticipate an economic recovery in 2020, I urge everyone to get their financial houses in order now. This includes:


  • Eliminating your debt
  • Hoarding your cash:
  • Living with less
  • Working harder now


Over the coming months, I’ll be talking more about prudent financial planning. It will make a good antidote to the coming holiday season spending splurge and subsequent New Year’s hangover.

Like Obamacare for Mortgages: Consumer Financial Protection Bureau (CFPB) Sets New Rules for 2014

There’s a quote in Tolstoy’s War & Peace that ought to be a modern proverb: “Writing laws is easy; it’s governing that’s difficult.”

Our government seems to conflate these two notions. It may be that our politicians think if one law is good, more laws must be better. It may be they think that, since Congress exists to pass laws, the more they pass the better they must be doing. Last year, the news media reported, quite ominously, that the 2012 Congress was the most “unproductive” in a generation, passing fewer laws than any Congress in memory.

Something compels them to seek quantity over quality. What this something is, I can’t be sure. And though it’s tempting on Halloween to explore, in a cheap-thrill-seeking sort of way, the dark and twisted corridors of the Congressional mind, what we find may just be too unnerving. What ghastly ghouls reside in the depths that produced both the Affordable Care Act and Dodd-Frank?

The Affordable Care Act—colloquially, pejoratively, and henceforth referred to as Obamacare—has been in the news lately, so offers a good illustrative example to which we can compare Dodd-Frank. Like Obamacare, Dodd-Frank is a massive, complex, convoluted piece of legislation; it creates its own rules and regulations, then establishes new agencies and bureaus to write their own new rules and regulations ad infinitum; and it uses legislative fiat to distort the market to achieve government-desired goals that are fiscally and economically unsustainable.

This past week’s most prominent news story was the deluge of policy cancelation notices being sent out by insurers to their customers. Individuals who were a) already insured, b) happy their insurance, and c) told ‘if they liked their insurance they could keep it’ (stop me if you heard that one), suddenly discovered a) they weren’t, b) too bad, and c) they couldn’t.

Obamacare established minimum policy requirements that their prior plans didn’t satisfy, so they were forced into more comprehensive and drastically more expensive plans. These plans are “more comprehensive” in the same way that a young male’s new policy covering mammograms and maternity care are “more comprehensive.” In fact, that’s precisely how the new policy mechanism works: Forcing young, healthy people to pay premiums on services they’ll never use, to cover the subsidized premiums of older, sicker patients that insurance companies are now forced to cover at the same rates as young, healthy individuals.

In a similar way, Dodd-Frank establishes standards and requirements for everything from checking accounts to mortgage products. If you’re wondering why your free checking account disappeared, why your bank keeps trying to charge $25 just for having a debit card, and why your mortgage application was so much more complex and redundant than the last time you purchased of refinanced—for those and more, Dodd-Frank is responsible.

Two new rules, currently being drafted by the Consumer Financial Protection Bureau, are the Ability-to-Repay and Qualified Mortgage Standard. These rules establish new standards, such as a 3% origination fee cap and maximum 43% DTI ratio, on new mortgages. If an originator is found to violate these rules, they can be held liable if the borrower ends up defaulting on their loan.

Some people may not see the benefit in their mortgage’s origination fee being capped at 3% or their DTI being capped at 43%. Some people don’t mind paying higher origination fees for higher-quality service or more versatile mortgage products. Some people can comfortably tolerate a DTI ratio over 43%. Just as some young men can comfortably tolerate insurance policies that don’t offer maternity care. These are personal considerations that should be handled by individuals—not by computer algorithms aggregating and analyzing nationwide datasets.

The danger here, for both Obamacare and Dodd-Frank, goes far beyond merely inconveniencing individuals. When government policy is imprudently directed toward certain goals, and select agencies and entities are given excessive power and influence over the economy, severe consequences can be expected.

Consider Fannie Mae’s and Freddie Mac’s role in the housing collapse and financial crisis of 2007-2008. Fannie and Freddie were created in the 1930s to facilitate homeownership among Americans. Their directive was expanded in the 2000s to offer mortgage products for lower income Americans by loosening their lending standards. This, in turn, created a base of under-qualified borrowers who ultimately defaulted on their mortgages, turned banks’ holdings of mortgage-backed securities toxic, and contributed to the subsequent financial crisis.

Without Fannie and Freddie, the pool of MBSs could never have grown large enough to put our economy in peril; without the government’s directive that Fannie and Freddie ignore prudent lending practices and begin lending to increasingly risky borrowers, the integrity of those MBSs would never have been compromised.

However, without Freddie and Fannie, homeownership in America would look very different than it presently does. The 30 year, fixed mortgage would not exist; indeed, long-term, fixed financing is virtually non-existent anywhere else in the world. The availability of such financing should be seriously discussed. In Jay’s October 26th show, he called the 30 year mortgage one of the last true government scams. I tend to agree. In honor of Halloween, here is something truly scary: a 30 year amortization schedule for a $200,000 loan at a historically-generous 5%:

The PrincipleThe Scream


Power of a Generation Part 2

There’s a peculiar theory of economics that lives inside the popular imagination of most Americans. It’s a theory that resembles a story. Like most stories, it’s peopled with heroes and villains, and these heroes and villains are invariably presidents. It begins with that villainous President Coolidge, who wrecked the economy, and that heroic President Roosevelt, who saved it. It goes on to Carter, who made the economy comatose, and Reagan, who resuscitated it. Then Bush 41’s economy stumbled, and Clinton stepped in to catch it. Bush 43 destroyed the economy, and Obama…well, Obama could not salvage it, unlike those before him.

It’s a simple theory and a delightful story. Straightforward, neat, with a surprise twist ending. It’s also total bunk. Our economy is the product of billions of people, domestic and foreign, each making thousands of decisions every day. Presidents can affect the economy at the margins, but cannot exert the kind of extraordinary influence commonly attributed to them.

I think there is a better theory, and that theory is demographics. It is a better theory because it is a better story. It’s a story of the American people—a story of generations. It is, in short, a story of life, and a theory of life in aggregate. It illustrates how the micro-economies of individual households affect the macro-economies of America and the world.

America’s economy of the 1970s, popularly associated with the word malaise, was the result not of presidents but of demographics. The Silent Generation produced comparatively few children, and hundreds of thousands of the Greatest Generation were lost to the European and Pacific theaters of war. The boom of the 1950s and 1960s, largely the product of rebuilding Europe and Japan, had concluded. A population to replace that economic engine did not yet exist.

It did not exist until the Baby Boomers arrived. Born between 1946 and 1966, the Boomers were a 76 million-strong influx of labor, creativity, supply, and demand. Their productive maturity at age 40 coincided with the start of the 20-year economic expansion the US experienced between 1986-2006.

During this period, government policy affected the economy only at the margins. It fueled the housing bubble and sparked the subprime meltdown, but softened the landing through TARP and targeted stimulus. Government policy cannot, however, cure our present economic malaise. It’s systemic. The Boomers are exiting the workforce, and there is nobody to replace them.

There is a small silver lining to be found in the Boomer’s present and near-term impact on the housing market. As Millennials enter the housing market, they’re finding supply is seriously constrained. Construction of new homes has not fully recovered from the 2008 housing collapse, and Boomers are not downsizing their homes as expected. Boomers are, instead, using reverse mortgages to cash out the equity of their homes and provide a supplementary source of retirement income.

These two factors are largely responsible for the 8-10% annual increase in house values over the last year. The silver lining is this: As house values increase, more individuals can utilize their home’s equity to strengthen their financial positions by either refinancing to a lower rate or cashing out equity to consolidate debt. Great news, eh?

Unfortunately, this is about the brightest economic news we’ll see for a while. Lately, the news media have focused either on the Fed’s bond purchasing program, the stock market’s recent record highs, or the record profitability of America’s largest corporations. But these stories have not translated into meaningful economic growth or job creation.

This is why experts have been predicting a “Recovery Summer” every summer since 2009. They believe that manipulating the right economic levers in just the right way can create prosperity. As we’ve seen, though, it can’t.

This is also why I believe a meaningful, sustained economic recovery won’t occur until 2020. This is when the Millennials—the single largest generation since the Boomers—will start reaching their productive Golden Years. This is when demand for homes will skyrocket, economic activity will accelerate, and we’ll experience an even greater and longer-lasting economic expansion than the 1986-2006 boom.

Government Shutdown and You

The Government Shutdown and You

The Government Shutdown and You

Have you heard? As of 12:01 a.m. on October 1st, 2013, the U.S. federal government has been shut down. All non-essential employees, activities, and functions have been furloughed, canceled, and suspended—a consequence of Congress failing to pass a spending bill for fiscal year 2014, which began on October 1st.  Each party attached stipulations to their respective spending bills that the other party deemed unacceptable. Neither party would yield; the prior year’s spending authorization expired; and the federal government shut down.

The severity of the shut down depends on its duration. Presently, the effects are muted, with the most obvious being the closing of America’s national parks and the conspicuous, almost ridiculous barricading of every monument in Washington, D.C. If prolonged, the effects will be more noticeable: delayed Social Security and military pay, for example.

However, the effects of the government shutdown have already been deeply felt throughout the mortgage industry. The mere talk of it has been affecting the industry for weeks. And, frankly, it’s to your benefit.

To understand why, first consider the correlative relationship between Treasury yields and mortgage interest rates. Generally, as yields on Treasuries fall, so do mortgage rates. Next, consider the factors that put downward pressure on Treasuries—namely, economic uncertainty, low economic growth, and scarce investment opportunities.

For the last five years, Western economies have suffered through all three. But within the last six months, the specter of a double-dip recession that was haunting our economy vanished. A semblance of certainty has returned. (Which, really, is a sad testament to the state of things. Growth may be anemic, but at least we’re certain it’ll be anemic!) Thus, from May 5th through September 5th, yields on Treasuries steadily rose, nearly doubling in that time. And, in tandem, mortgage rates increased as well.

Then, in mid-September, a combination of weak economic data and Ben Bernanke’s September 18th speech—declaring the Fed’s Quantitative Easing program would continue at least into 2016—conspired to drive Treasury yields lower. The economy, it turned out, was not recovering as robustly as assumed. Immediately, investors fled those investment vehicles that depend on healthy economic growth (such as stocks) and poured into Treasuries. As demand for Treasuries increases, the return necessary to attract investors, and thus the yield, decreases. And as go Treasury yields, so go interest rates.

At present, the government shut down is applying further downward pressure to Treasuries. Our meager economic growth of the last few years is being compromised by the absence of one of its primary contributors: government spending. This, coupled with the possibility of reaching our national debt limit, is causing more short- and mid-term economic uncertainty. Until these issues are resolved, Treasuries will continue their downward trend.

And so, for those in a position to take advantage of attractive lending rates, the economic uncertainty caused by congressional deadlock offers an unexpected opportunity. This is especially true for homeowners whose low home values prevented them from refinancing over the last couple years. Home prices throughout the Colorado Springs and Denver areas have continued to increase, and for many homeowners the equity is finally there to refinance their homes.

Whether you’re purchasing a new home or refinancing an existing property, you may see rates retreat back to the historically low levels seen earlier this year. For those who thought they missed their chance when rates started climbing over the summer, now is the time to start planning for another round of extremely low rates.

Jay-Z or Gen Z: Who Do You Want to Rap with?

Trick question. The market decided for you, and it isn’t Jay-Z.

Right now, the US economy is transitioning between two generations with very different values: the Baby Boomers and Generation X. This is creating tension in the market and anomalies in the economy. For example, why is the stock market at record highs while Treasuries are at record lows?

And there’s no denying: interest rates are at historic lows. The only time rates have been lower than they are today was before Christmas and in the summer of 2012. Presently, the US government wants low rates and is doing what it can—through programs like QE 1, 2, and 3—to keep them low. This dilutes the cost of our national debt and allows the federal government to borrower more.

Further, this tells us that investment in low-risk, low-return vehicles, like Treasuries, is more appealing than higher-risk alternatives—a clear sign that confidence in the broader economy has not returned.

“But Jay,” you’re thinking, “why is the stock market at record highs if investors are parking their money in Treasuries? Isn’t that a sign that confidence in the market is back?”




Low Treasury yields and the current, higher stock market indices are both indicative of a cautious and pessimistic investing class. For one, the stock market, while at historic highs, is only now recovering ground lost in 2008. For another, stocks are attractive lately because most corporations are behaving with extreme caution. They are not investing, hiring, re-tooling factories, or making acquisitions; they’re stock-piling cash. They offer a relatively low-risk, low-return place to park money.

Sound familiar?

The incredible performance of the stock market from 1980 to 2008 was the result of the Baby Boomers growing up and entering the economy. They bought houses, cars, and any number of luxuries for their children, who became Generation X. While large, Generation X wasn’t as numerous as the Boomers.

As the Boomers mature, they are buying fewer homes, cars, and luxuries for their kids. And Generation X isn’t large enough to make up the difference. They are, in fact, the first generation in US history to be poorer than the generation preceding them.

This has made Generation X more price-conscious and practical than their parents. And they are passing these values on to their children, Generation Z.

Gen Z is the first generation in memory to be born into, and grow up in, fiscally austere homes. They have fewer telephone lines and cars. Their world is focused far more on practicality than luxury, using iPads instead of more-expensive laptops, sharing bedrooms with more of their siblings, and being raised in smaller homes than were their parents.

And since Gen Z is the generation expected to pay for the debt racked up by the Boomers and Generation X, their financial prospects aren’t likely to improve.


Company NMLS ID # 1591 (www.nmlsconsumeraccess.org); CO–Mortgage Company Registration, Churchill Mortgage Corporation, 104 S Cascade Ave. Ste. 201A, Colorado Springs CO 80903-5102, Tel 888-562-6200, Regulated by the Division of Real Estate
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