Overall, the economy looks to have stabilized from the crisis situation a couple of years ago. Although we still have global economic and political concerns, particularly regarding the situation in Europe, the U.S. economy appears positioned for continued growth and strengthening. We expect that the U.S. economy will be moderately stronger this year, and will get an additional boost from Quantitative Easing 2 (QE2), as well as the recently passed Tax Package.
Over the past 5 quarters, Gross Domestic Product (GDP) in the U.S. has dramatically improved from where it was in 2008 and held on to those gains.
Looking ahead, we see the United States' GDP finishing 2011 above where it ended last year - growing by as much as 3%. This is inline with other industry experts and friends we spoke to, like Knight Kiplinger, CEO of Kiplinger Publications and one of the most revered financial writers of our time. He agreed that he expects GDP to finish the year around 2.8%. Bob Weidemer, author of the highly acclaimed book "Aftershock", told us he sees slightly more modest growth, perhaps around 2.5%, but still moving positively.
That growth won't happen overnight, however. Instead, it will start out slow in the first half of the year, and pick up steam in the second half.
We see a portion of that growth coming from demand in other countries. Currently, the U.S. only derives about 12% of its Gross Domestic Product (GDP) from exports. As Knight Kiplinger said, "While that equates to a lot of money, it means that the U.S. relies less on exports than many other countries - and it means that there's room to grow."
One of the reasons for a growth in exports during the coming year is the declining value of the U.S. Dollar, as one of the major "non-stated goals" of the Fed's Quantitative Easing program is that the U.S. Dollar will weaken. And we are already seeing U.S. exports tick up as the U.S. Dollar has weakened, because it makes our goods and services relatively less expensive to foreign buyers. The Fed would never outright say that this was a goal of QE2, as they have heavily criticized other countries such as China for acting similarly.
However, the bump in exports is good news for the U.S. economy as a whole, as well as individuals, because it sets the stage for growth while still allowing U.S. consumers to catch their breath. After all, the tough economic climate over the last couple of years has hit U.S. consumers hard, and has forced many Americans to reprioritize their family budgets to focus more on their savings.
Additionally, this will help large multi-national companies, which have a large influence on the economy, and in turn, the major Stock market indices. And stimulating our economy towards continued growth is the Fed's main goal for QE2.
There is a flip side to the weakening Dollar, however, and that is that a weakening Dollar can have some negative impacts. For one thing, the US is an importing nation and a declining US Dollar will make imports more expensive. The softening Dollar will also hurt imports of capital - meaning foreigners investing money in US Dollar denominated securities. And as Bob Weidemer points out, "we need capital imports more than exports of goods." Foreign investment in our Bond market is what has fueled relatively low interest rates, including home loan rates, for a very long time…and should foreigners start to shy away from purchasing our Bonds, rates would climb higher over time. Additionally, Oil is priced in US Dollars and if the "buck" weakens sharply it could cause oil and gas prices to rise.
The stock market had a good year and saw some strong earnings in 2010, continuing its climb out of the financial crisis a couple of years ago.
With the strong finish to last year - fueled by the Fed's QE2 announcement, passage of the Tax Package, and elimination of some uncertainties - the stage is set for another good year - and we expect to see the S&P 500 grow by another 7% to 10% over the next twelve months.
That said, corporate earnings may appear to have slowed. However, that's because of the way that experts compare year-over-year earnings. For example, corporate earnings showed strong improvement coming out of the recession, because they were compared to the extreme lows of the year before. However, after a strong 2010, the increase in earnings won't be nearly as dramatic. So while the year-over-year increase may appear to flatten out, the important thing to focus on is that corporate earnings should show solid, steady improvement.
The segments of the market that can look for a strong showing in 2011 include energy stocks, global companies that specialize in high-tech equipment, and even steel producers which should benefit from global sales. Those segments should benefit from strong business spending around the world as the economy improves and companies start to reinvest and expand. Oil, which didn't partake in much of the commodity rally in 2010, may move higher this year with the price per barrel eclipsing $100 for a brief time…this also being fueled by weakness in the U.S. Dollar.
While the big economic picture is important and the economy is growing, millions of Americans are still out of work and wondering when more jobs will be created. Will they find a job? Will they keep their job? Those are some of the most important questions families face. And the good news is that for many families, the outlook for 2011 is better.
Here's why. The good news for the overall economy and for corporate earnings in 2010 and heading into 2011 should help the labor market improve. Let's look at two of the factors that should influence employment in the coming months.
First, many companies have seen higher earnings over the last year but those earnings haven't translated into more hiring just yet. Instead, companies have been cautiously waiting for signs that the economy was stable - after all, we heard a lot of talk in the past about the possibility of a double-dip recession. In other words, full-time employment was held back by insecurity, uncertainty, and fears of the future. Now that most economic reports show a steady climb out of the recession and confidence is increasing, many companies will be more willing to hire.
Second, during the last couple of years, companies were trying to keep their operations very lean and efficient. That means that manufacturing companies worked hard to get the highest level of production possible out of their current work forces, or by hiring only temporary or part-time employees. While that may have been a good move when the economy was questionable, it means that production has hit a ceiling.
Now that many retail companies are beginning to restock their shelves, manufacturing companies are seeing higher demand for their products. In order to satisfy that demand and increase manufacturing production, companies will need more people on factory floors to satisfy demand, which will lead to an uptick in full-time employment.
Based on those factors, watch for the labor market to continue looking better in the coming months, with more noticeable improvements coming in the latter part of the year.
Unfortunately, we're not completely out of the woods yet in terms of the overall unemployment rate. Although the official Jobs Report for December 2010 showed the lowest reading since May 2009, that number can be deceiving - since fewer jobs were created in December than were expected.
Here's what we need to know about the December's Job Report. The Household Survey or Current Population Survey, which gets their numbers from actual phone calls to 50,000 to 60,000 households, showed that the labor force shrank by 260,000…and it is unclear whether these folks found a job or left the labor force, although we suspect more of the latter. Regardless, the labor market is slowly improving, but don't be surprised to see the Unemployment Rate tick up again as people re-enter the labor force in search of a job.
While hiring will pick up in 2011, we need to see a net growth of 125,000 jobs each month just to absorb all of the new people entering the job market - and that's just to hold the Unemployment Rate steady, so we'll need to see even better numbers for the Unemployment Rate to actually decline.
Based on that, we won't see a noticeable drop in the Unemployment Rate this year, and likely not be beneath 9%. We've said before that we don't see the unemployment rate actually dropping to pre-recession numbers for a handful of years at best.
Helping us get a sense that the labor market is indeed improving is the recent trend of Initial Jobless Claims. This leading indicator on the health of the labor market showed as many as 650,000 weekly first-time unemployment benefit claims in early 2009…and now, those numbers are hovering near 400,000.
The point is the job market is a work in progress and will take some time, but we will see hiring improve in the coming months - and that should help ease the burden for millions of Americans.
One of the ways that a stronger economy can impact rates is through inflation. Remember, at the end of 2010 the Fed initiated its second round of Quantitative Easing (QE2), with one of their stated goals being to avoid deflation, and actually create inflation.
This is an important topic to keep an eye on in the coming year and keep your clients and referral partners educated about, since inflation is the archenemy of home loan rates.
Why? Because home loan rates are tied to Mortgage Backed Securities, which are a type of Bond. So as Bond prices improve, so do home loan rates. But when inflation - or even just fear of inflation - grows, Bond prices fall. That's because lower Bond prices are needed to give Bond investors juicier yields that will help outpace inflation.
Here's an analogy that you can use to help explain this relationship to clients and referral partners. Think of inflation as the ocean and interest rates as a boat. As inflation (or the ocean's tide) rises, interest rates (or the boat floating atop the ocean) have to rise as well. In other words, interest rates (or boats) must always be higher than inflation (or the ocean) in order to compensate investors.
Right now, the headline numbers in the US show little inflation overall…but we already saw significant inflation in particular items like commodities, food, and oil - which were driven by a weak US Dollar and increasing demand from emerging countries like China and India.
But with the Fed's QE2 and the stimulative measures introduced to help strengthen the economy, we could be looking at a 1.5% increase in consumer inflation by the end of 2011 - still within the Fed's comfort zone of 1 - 2%. So inflation should not be a threat this year, however, the unprecedented amount of debt accumulation on the part of the US could spark significant inflation down the road. It's easy to see why Bob Weidemer feels that "the medicine the government has been using to boost the economy (QE2)…will eventually become the poison."
Home prices began to stabilize during 2010, and homes sales showed some signs of encouragement. We expect more of the same in 2011, although there will be some additional headwinds.
After a modestly good start to the year, home prices could actually decline slightly in some areas, particularly depending on the health of the local job market. In the end, however, home prices should eventually and slowly begin to firm up toward the end of the year.
Another headwind that could weigh on home prices is the overhang of several million distressed properties. The moratorium on foreclosures has ended and all of the major lenders have resumed foreclosure procedures. At the end of last year, 3 Million homes were in foreclosure activity, with over 1 Million repossessions. Foreclosure expert Rick Sharga of RealtyTrac said the industry will exceed both of those numbers this year. "Banks are statistically getting better at modifications and short sales, but neither is increasing fast enough to offset foreclosures," said Sharga.
Overall, we expect to see accelerated rates of foreclosures in the 1st Quarter until things settle to normal during the 2nd Quarter and rest of the year. This could extend the housing downturn a couple of months longer.
That said, there are also many potential homebuyers who have been waiting on the sidelines to step in and purchase a home at still affordable rates and home prices. Waiting much longer could prove to be costly for those homebuyers, who will likely see both home prices and home loan rates move higher in the year ahead…and make sure you are messaging that out to your prospects, clients, and referral partners.
Compensation Questions and Concerns
As we move closer to the April date for implementation of the new compensation rules, there are many questions still unanswered. The new rules are very broad, and will require companies to overhaul their long-time compensation practices that were always considered legal, widely accepted and favored.
The new rule prohibits basing compensation to a loan originator on a loan's terms or conditions - so simply put: the ability to set pricing and compensation is somewhat being taken out of LO's hands. This cuts both ways. As Jim Milano - one of the nation's leading legal experts on mortgage industry issues - notes: "LOs will not be able to be compensated because of rates, so they can't upsell to make more compensation. But they also can't take less compensation to save a deal. So a lot of the discretion is being taken out of their hands."
Of course, there may be alternate means by which that compensation can be handled. For example, it has been said that lenders may look to a type of bonus structure, and we are also hearing that some lenders may look to offer extra benefits to help offset any compensation changes.
Another point that may be a real positive, but is still somewhat unclear relates to how often a lender can adjust their compensation. In other words, compensation can be reevaluated and changed "periodically." But the big question in the industry is: "How often does periodically really mean?" Originally, the Fed had suggested every six months…but that's just a suggestion, and there's no official hard and fast rule as to how often it can be done.
Overall, the bottom line is that there's still a lot of uncertainty yet to be worked out. In fact, a recent survey by The Crossings Group asked mortgage industry leaders what their plans are regarding the compensation changes, and almost across the board, the answer was that they are not sure or are waiting to see what others do. The reality is, there's a lot going on behind the scenes but not a lot of specifics are being released. This has been reinforced by many of the MSS Faculty members, who have noted that many of their companies still haven't released details about their compensation plans.
Bottom line: at this point, no one knows exactly what things will look like or how it might change as events unfold in the coming months.
Most importantly, the smart LO will not make any rash decisions based on what they see and hear in the near term. If you are with a great company, have some patience and trust as your company sorts things out.
Stay focused on the things you can control and do, to make your business as strong as possible during 2011, and in the years to follow.
Compensation isn't the only issue you need to keep on your radar. There's a lot to monitor and prepare for in the weeks and months ahead. From Dodd-Frank and Truth-in-Lending Act (TILA) disclosures to the Red Flag Rule, S.A.F.E. Act, and Risk-Based Pricing, the industry is on the verge of a major change in the way we do things. And like the compensation issue, much remains to be seen and clarified.
One thing we are sure about is that regardless of how the mortgage industry changes, people will still be buying houses and they will need to get a mortgage in order to purchase those houses. As Jim Milano put it, in the mid-1990s everyone was saying that there was no way the mortgage industry would survive all the changes that were taking place back then, but in the end those concerns were worked out. "It can seem a bit overwhelming right now," said Milano. "But we've been through this before and the industry has always managed to adapt and survive."
For now, the mantra seems to be: plan and prepare as best you can, but be ok with a little bit of uncertainty as the industry wades through and digests the details. We made a number of legislative webinars available last year on the challenges facing the industry, but here's some insight on the major developments that will undoubtedly impact your business in the near future.
Dodd-Frank : Jim Milano said it best: "In a lot of ways, this looks like healthcare reform with massive changes, but with implementation dates that are actually pushed out further." The point is, the bill can be overwhelming, but it doesn't all have to be done today. It'll be an ongoing process. In fact, with all of the steps that need to be taken yet, it's likely that any changes won't take place until December 2012. And Milano thinks that may even be too aggressive, as he thinks it may not be until 2014 before the rubber meets the road.
One thing to remember is that the fight isn't even over. As Bill Kidwell, President of IMMAAG, says: "The law won't be repealed, but with effort it will be changed for the positive." Look for this to be a big point of discussion during the first part of 2011.
Red Flags Rule: As stated in a recent Legislative Update, there won't be any more extensions on this issue. When President Obama signed the one-page Red Flags Rule Clarification Act in December 2010, the FTC concluded it no longer had to delay its enforcement of the rule. That means this can no longer be ignored, and it's time for companies to get serious about complying - or else risk the possibility of serious fines if anyone encounters and reports an identity theft issue. For more information and to start putting this risky proposition behind you, take a look back at the January 6 LegUp on the MMG site.
Truth-in-Lending Act (TILA): Long story short, there will be more rules for interest-only and negative amortization loans. Unfortunately, the tables and rules can be confusing - which probably isn't a surprise. As Jim Milano puts it, "Sometimes it seems that the more simple the government tries to make it for the consumer, the more convoluted and complex it becomes for originators and even consumers."
Risk-Based Pricing Disclosures: While this issue needs to be addressed by organizations more than individual LO's, it will ultimately involve some extra steps that you need understand and integrate into your process. As Jim Milano warns, "That may initially extend the processing timelines." In other words, you need to be prepared for this to slow down your process a bit - and that means you may want to set reasonable timeline expectations with your clients and referral partners.
So what's the overall impact of all these changes?
Are all these changes making things better for consumers… for the industry… for the economy …or anyone at all? There are really two sides to this answer - and those sides don't really complement each other.
At a high level, the government's actions are designed to protect the consumer, and trying to keep rates low to make home loans affordable. Yet at the very same time, they're making it harder for lenders to make loans with all the increased legislation, guidelines, documentation, disclosure, testing and myriad other requirements. As Jim Milano says, the government is "trying to keep money cheap and flowing on the one hand, while instituting more guidelines and rules on the other hand. It's Washington D.C. at its best."
Now for the big questions: Where will home loan rates go in 2011? And why?
Let's start by looking at where we're at as we enter 2011. Although rates are still near historic lows, a look at the Bond chart over the last few months shows the huge run-up in Bond price and the subsequent price decline at the end of 2010, meaning rates have trended higher since early November.
Indications are that those unbelievably low home loan rates seen during 2010 may be behind us. In fact, there are only a couple things that would bring back the lows that we saw in early November 2010:
1. If the Fed's recent round of Quantitative Easing falls on its face and doesn't meet its mission of creating inflation, boosting Stock prices, lowering unemployment and creating consumer demand. If that happens, Bond prices could make some gains as the threat of deflation reemerges. But this is a long shot. As the saying goes: "Don't fight the Fed" - which means that if the Fed wants to raise inflation, it most likely will.
2. If the financial problems and uncertainties in Europe that we saw in 2010 worsen significantly in 2011. This would drive investors into the safe haven of the U.S. Bo
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