Fed's Lockhart on Economic Slowdown
by CalculatedRisk
From Atlanta Fed President Dennis Lockhart: Remarks on Economic Slowdown, Market Fallout, and the Path to Financial Recovery. Here is his conclusion:
My base case forecast for the economy involves a stronger-than-expected first half of 2008 with growth of 1 to 2 percent but not much pickup in the second half. The drag of high energy costs, continuing financial market stress, and a still-declining housing sector may continue for a while with gradual improvement of growth in 2009.That seems overly optimistic to me. It appears non-residential investment will be declining in the 2nd half of '08 (and well into '09), and consumer spending will probably decline too as the boost from the stimulus checks fades. That should lead to declining GDP in the 2nd half of '08.
There is much uncertainty surrounding this outlook. More adverse alternative scenarios are entirely possible. Self-reinforcing progressive deterioration could continue in the housing market, in turn affecting the financial markets. And neither the financial markets nor the overall domestic economy is protected from surprise events around the world.
Like many, I believe stabilization of the housing sector is required for recovery to proceed. There are early and tentative signs that a bottom may be forming in some housing markets. Having said that, a sober approach to calling the future must allow for an additional period of house price decline, a slow housing sector recovery, and, as a result, a quite choppy progression to better markets and economy.
TOWSON, Md. -- A Baltimore County police dog is back on duty after he was severely injured while on a suspect's trail a few weeks ago. 
Rob Roblin Reports
Images of Jett Jett, a 2-year-old black German shepard, was injured June 4 while chasing a suspect through razor wire.
"He just stopped and started looking around, and that's when I noticed the blood trail behind him. His whole front left leg was soaked with blood. It was actually dropping out as I was looking at him. Shock kind of set in for me, and I grabbed him up and took him to the truck," said Jett's partner, Officer Chris Strevig, of the Baltimore County police. Strevig said he took the dog to Pet ER in Towson.
Rob Roblin ReportsImages of Jett Jett, a 2-year-old black German shepard, was injured June 4 while chasing a suspect through razor wire.
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Dump your ARM now -- if you can
Fed hint of rate hikes puts homeowners in refinancing bind
BOSTON (MarketWatch) -- While the media and the market scrutinized every word of the Federal Reserve Board's message last week, it seemed to overlook the most important signal, which was there loud and clear for anyone reading between the lines. It went like this: "Refinance your adjustable-rate mortgage now, if you can."
That's the logical interpretation of the Fed's current position; if the days of a falling interest-rate environment are over and the only logical direction over the next 12 to 18 months is up, then anyone looking at a mortgage reset is in line to take a beating. Worse yet, with the real estate bubble still deflating, home prices are shrinking, which will make it tougher for many homeowners to actually get the job done.
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Homeowners who used ARMs to buy their homes -- and some $2.2-plus trillion in variable loans were issued from 2004-2006 -- have thus far managed to dodge the reset bullet thanks to the Fed's rate-cutting actions, which turned a wave of forecast refinancing issues into a non-event in 2007 and thus far in '08.
About $370 billion in ARMs reset in 2007 and another $250 billion-plus is going through the process both this year and next, according to First American, a real estate data firm. Another $700 billion in ARMs will reset in 2010.
Most people don't think about mortgage resets until they get close. By law, lenders must give consumers 25 business days' notice of what rate changes, if any, are scheduled to take place. Typically, notice is sent out about 45 business days ahead of a change, but some loans call for three months' notice.
With the Fed having only hinted at rising rates, there's a temptation to wait and see if something better might come along. According to Bankrate.com, the national average for a 30-year fixed-rate mortgage currently stands at 6.6%, up from a hair above 6% in late May.
While rates tend to move in a narrow band -- so that someone might be able to catch a slight break from current levels as they waver from about 6.4% to 6.7% by most forecasts -- the view is a bit different when you back the lens out to see the long-term rate trends; at that point, it becomes clear that rates stay fairly steady over long stretches, but have short time periods of tremendous volatility.
In other words, miss this train as it leaves the station and you'll pay dearly.
"Your last rate reset may have been a non-event, but your next one won't be," says Greg McBride, senior financial analyst for Bankrate.com. "Start looking now, and be ready to go, because you might win the battle and be able to get a rate that is marginally better than what's out there today, but the way that housing prices are falling -- and that homeowners are losing equity in their home as a result -- you might lose the war and not be able to get that better deal because you can't afford it any more."
All in the timing
Cameron Findlay, chief economist for LendingTree, says that homeowners facing a reset need to work the numbers and their own circumstances. Clearly, falling home prices are one factor which may make any type of refi hard to complete, but he also suggested that a homeowner's time horizon also plays into decisions about any new deal.
"If you are planning to move in the next two or three years, it may not make sense to jump into a refi right now," says Findlay. "The Fed's not going to be able to increase rates in a rapid manner, so you don't have to rush out and get a deal, but you do need to be prepared because the only direction rates are going to go from here is up."
The key for homeowners is that thin line between being able to prolong the good rate they have on the ARM and the point where -- due to falling home prices -- they may not be able to qualify for a better fixed-rate deal and are facing a 1 or 2 percentage point pop in the interest rate on their current deal.
Typically, homeowners facing their first reset can expect a rate and payment hike, with any subsequent changes to follow the market. The initial issue is the payback for getting a discounted teaser rate when the deal first closed; the first reset is when the lender gets to make up for that sweet deal. (If rates have fallen since the loan was originated, the drop would have to be greater than the initial discount to prevent rates and payments from going up.)
"It's a pretty safe bet that if you are able to refinance out of your ARM into a longer-term fixed rate, now is a great time to look and probably a pretty good time to get it done," says Gerri Detweiler, author of "The Ultimate Credit Handbook."
Detweiler noted that so long as rates remain stable, homeowners facing a reset nightmare have time to improve their position. She suggested finding out the deals that are available now, and talking to lenders about what might sweeten or sour the deal; improving a credit score or adding equity -- if there's money available to do it -- might help, but lenders also have an eye on how quickly home values in an area are deteriorating.
Moreover, ARM holders reluctant to make a change need to focus on their payment.
Says Detweiler: "Your payment is most likely going up either way, with a reset or a new mortgage, so don't avoid a new loan because it feels more expensive. Just go get the best deal while you can right now, because while no one knows when these deals are going away, we know that conditions are not getting better from here for a long time." 
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
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