Merrill Lynch is reportedly shutting down its wholesale mortgage unit First Franklin, according to a report by CNBC.
Although it’s unclear how many of the thousands who used to work there are still employed, the report said roughly 400 to 500 could lose their jobs.
First Franklin began as a retail brokerage in San Jose, California in 1981, transitioned to a mortgage lender in 1984, and was later sold to National City in 1999.
In 2003, the company began offering 100% loan-to-value single-lien mortgages and other higher-risk loan programs, reaching $29.6 billion in loan origination volume in 2005, and a year later Merrill Lynch picked it up for $1.3 billion.
However, Merrill acquired First Franklin in December 2006, just when serious problems in the mortgage market began to surface, leading to substantial losses at the brokerage house and the eventual ousting of its CEO Stan O’Neal.
Last September, First Franklin cut an unknown number of jobs so staffing levels would be in line with their volume of business.
Around that same time, there were scores of rumors that First Franklin was actually firing staff that failed to meet performance goals, despite dismal industry loan volume that would be dealt with more appropriately through layoffs.
It’s unclear what operating levels were like recently, but it’s doubtful that the closure will have a significant impact on the industry given separate accounts that claimed the company was running on a severely reduced staff.
After the crisis hit full swing, First Franklin reduced its subprime offerings, and began focusing on Alt-A, although they still had programs for Fico scores below 600.
There is no notice on the First Franklin website at this time, and Merrill Lynch declined to comment when reached by the press.
Check out the latest list of closed lenders, mortgage layoffs and mergers.
Grab some popcorn, find the most comfortable seat in your house, and start counting down—we’ve collected our list of the best classic movies of all time! We’re talking timeless classics that are as relevant today as they were when they first hit theaters decades ago. From love stories to action-packed adventures, these films span a variety of genres that will keep you entertained for hours on end. Whether you want to relive the golden era of film or simply take a trip down memory lane, transport yourself back into an age where storytelling was king!
1. Jurassic Park
The OP opened the topic with, “Jurassic Park only recently, and I think it still works. In fact, it touches more subjects and problems and patches a lot more plot holes than a lot of today’s blockbusters.”
Jurassic Park is Steven Spielberg’s massive blockbuster franchise that revolves around two paleontologists and mathematicians. They are among a select group chosen to tour an island theme park populated by dinosaurs created from prehistoric DNA. They later found out it wasn’t as safe as they thought when various ferocious predators break free and go on the hunt.
2. Inside Out
One Redditor replied to the OP and shared, “F— This post makes me feel old.”
Another user responded, “Personally, I think those old Disney flicks like Inside Out are really timeless. Edited twice for grammar.”
Another agreed, “Same. And I’m not even what you’d consider ‘old.’”
3. Chinatown
“Chinatown…..oooooh, I love me some noir. Also, if the early 90’s is classic, then Glengarry Glen Ross. Edit: the first Dirty Harry movie, also Escape from Alcatraz. Remains of the Day…I still cry a bit when I watch that. The first Superman movie with Christopher Reeve…sure, it’s got ridiculously dated effects, but the joy of Williams’ score and Reeve just being perfect for Clark Kent and Superman is always uplifting to me,” one usershared.
4. City Lights
One user highlighted some movies, “Good list. I’d throw City Lights, The Adventures of Robin Hood, Kind Hearts and Coronets, Rebecca, Rear Window, The Wicker Man, and The Last Picture Show on there.”
Another user replied, “Thank you for that. When I think of classics, I think of that time period; maybe I’m getting old.”
One Redditor commented, “Period films should always hold up… it is in their design.”
5. Citizen Kane
One user also shared another list, “When it comes to classic old movies that still hold up today, opinions may vary. However, here are a few examples that are often regarded as timeless:
“Citizen Kane (1941)—Orson Welles’ masterpiece is widely regarded as one of the greatest films ever made. Its storytelling, compelling characters, and exploration of power and identity continue to captivate viewers.
“Casablanca (1942)—This romantic drama set during World War II is known for its memorable quotes, enduring performances, and timeless themes of love, sacrifice, and political intrigue.
“The Shawshank Redemption (1994)—Though not as old as some other classics, this film has achieved cult status and is considered one of the best movies ever made. Its gripping story, exceptional performances, and messages of hope and redemption have resonated with audiences worldwide.
“Gone with the Wind (1939)—This epic historical romance is still highly regarded for its sweeping scale, memorable characters, and lush cinematography. It remains a classic example of old Hollywood filmmaking.
“Psycho (1960)—Alfred Hitchcock’s psychological thriller continues to be praised for its suspenseful storytelling, iconic shower scene, and groundbreaking techniques. Its impact on the horror genre is still felt today.”
6. The Godfather
One added, “The Godfather.”
This mob drama, based on Mario Puzo’s novel, follows the Italian-American crime family of Don Vito Corleone. Michael, the son, joins the Mafia, leading to violence and betrayal, affecting Michael’s relationship with his wife, Kay.
7. It’s a Wonderful Life
A user shared, “I’d say maybe most of Frank Capra’s films still hold up. Even if the world isn’t the same.”
Some of Frank Capra’s films are It’s a Wonderful Life (1946), It Happened One Night (1934), Mr. Smith Goes to Washington (1939), Mr. Deeds Goes To Town (1936), and Lost Horizon (1937).
8. Twin Peaks: Fire Walk With Me
“Twin peaks fire walk with me. Still scarier than most of the so-called horror movies nowadays.”, posted by a Redditor.
Twin Peaks: Fire Walk with Me is a 1992 American psychological horror film directed by David Lynch and written by Lynch and Engels. It is a prequel to the television series Twin Peaks, which combines detective fiction, horror, supernatural, offbeat humor, and soap opera tropes. The film has a darker tone, with most television cast members reprising their roles, but some notable cast members, such as Lara Flynn Boyle and Richard Beymer, did not return for various reasons.
9. Pinocchio (1940)
One user shared some movie names and posted, “Plenty still hold up in terms of artistic/entertainment value: Citizen Kane, 12 Angry Men, Strangers on a Train, Repulsion, Vertigo, Pinocchio (1940 version), The Great Escape, The 39 Steps, The Magnificent Seven, The Dirty Dozen, The Sting, Jaws, Romeo and Juliet (1968 version), All About Eve, The Grapes of Wrath, Cool Hand Luke, and Hud. Loads more too.”
10. White Heat
Another user commented, “Cagney in White Heat for sure, any of the original James Bond movies w SC of course, Taking of Pelham 123 (original version), 2001, Mr. Roberts, Far From the Madding Crowd, jeezz too many to mention, THAT is why TMC is so important to our continuation of literate culture… Movies are artwork and are the antidote to our mindless modern American culture. Hey, you kids out there, stop watching fascist corporate stuff, Captain Avenger-type stuff; it is destroying your minds!!”
Have you seen the films listed here? Do you agree that they should be given more attention? Let us know your thoughts!
Source: Reddit.
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The movies we love best are a combination of excellent characters, plots, stories and cinematography. But if these factors can make great movies, they can also make terrible movies—the ones that make people cringe, the ones we swear they’ll never watch again.
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People will always have preferences and something to say about celebrities. What you might love may not be the same for others. Whether it’s about their past behaviors, legal issues, or feuds with other celebrities, here is a list of celebrities people just cannot stand.
MILWAUKEE, Sept. 14, 2023 /PRNewswire/ — Northwestern Mutual, a leading financial security company, announced today that Anne F. Ackerley and Andrew J. Harmening have been appointed to serve on its Board of Trustees. As a mutual company with a responsibility to policyowners, Northwestern Mutual has a Board of Trustees elected by its policyowners with responsibility … [Read more…]
Banks are facing substantial risk of losses from commercial real estate loans, according to a new Moody’s survey of lenders, which found that some borrowers are already struggling and others may hit trouble when more of their loans mature.
The survey’s findings also suggest that some banks may not be tracking CRE borrowers’ health as closely as others — since they weren’t able to provide fully up-to-date metrics when asked.
The lack of timeliness in some banks’ disclosures was “eye-opening,” said Stephen Lynch, senior credit officer at Moody’s Investors Service. Up-to-date data about commercial property values and borrowers’ ability to cover their interest payments is critical for spotting potential problems, Lynch said.
“Good underwriting can maybe compensate for subpar portfolio analytics,” Lynch said, but strong analytics give banks the ability to mitigate problems early, rather than the often-costlier option of letting them bubble up.
The survey drew responses from 55 banks — including large, regional and community banks — in June and July. Since banks’ public disclosures are somewhat limited, Moody’s asked the respondents to provide more detail about certain key metrics.
Those measures include the percentage of CRE loans maturing soon; debt service coverage ratios, which show borrowers’ debt obligations relative to their cash flow; and loan-to-value ratios, which quantify the amount of debt outstanding as a percentage of the property’s value.
Some banks provided up-to-date data, while others submitted information from the end of 2022.
The Moody’s survey found that U.S. banks have significant amounts of CRE loans that will mature in the next 18 months. For the median bank that responded, those loans amounted to 46% of their tangible common equity — a percentage that Moody’s said was material. Some banks were substantially above that figure.
Upcoming maturities may pose problems for borrowers because they’ll need to refinance those loans, and they’ll need to do so at much higher interest rates and with banks being more demanding in their underwriting criteria.
Properties whose values have fallen sharply may get some help from providers of private capital, which can kick in additional equity to help property owners meet banks’ more stringent criteria. But the amount of money available likely isn’t going to “move the needle,” given the large amount of loans outstanding, Moody’s Lynch said.
While private equity firms, hedge funds and other sources of private capital may see opportunities to jump in, they are “not going to solve every problem,” said Brendan Browne, an analyst at the ratings firm S&P Global. Private money will help where companies see a chance to make significant returns, but there will also be cases “where the economics probably just don’t work well enough,” Browne said.
Overall, banks will feel “some pain” on CRE loans — particularly banks with larger exposures to the sector, Browne said. Most of the banks that S&P rates don’t have such outsized exposures, he added.
The Moody’s survey pointed to office and construction loans as the riskiest property types, given the shift at some companies toward remote work and the fact that properties that serve as collateral for construction loans don’t earn income while those loans are outstanding.
A loan may be at greater risk now if the borrower is having a tougher time paying its obligations. So Moody’s asked banks about how many of their loans have debt service coverage ratios below 1, an indication that the borrower does not have adequate cash flow.
The median respondent has 13.5% of its tangible common equity in CRE loans where the debt service coverage ratios are below 1, Moody’s survey found.
That figure was higher than Moody’s expected, Lynch said.
With the mortgage industry in the throes of its worst era since the GFC (Great Financial Crisis), comparisons are inevitable. If you didn’t live through the GFC as an originator, now is not like then. The current problems are almost exclusively driven by interest rates and inflation, and there is a strong sense that the housing and mortgage markets will be just fine in the future when rates move a bit lower.
The past problems were broadly driven by just about everything else. And there was a strong doubt as to whether the industry or the economy was going to survive or ever be quite the same.
So about this “everything else,” who’s to blame for the GFC? The following list would grow into a novel if we went into detail on each line item, so for now, we’ll start with single sentence bullet points. PLEASE NOTE: this is not intended to be a thoughtful research piece. Those have been done to death, and in many cases quite well (e.g. even the wiki page on gov policy role in the crisis is outstanding). This is just 27 bullet points off the top of my head on a Friday morning because I’m always telling people there are 27 things to blame for the GFC. In truth, there are many more, but this is a decent start to a list.
The overarching theme is that “it took a village,” and it was more about group-think and brushing risk under the rug than malice. Whether you want to use the word “greed” is up to you. It certainly existed in many cases, but it’s simply on the darker side of a continuum that begins with something as benign as being trusting and uneducated about risks.
1. Borrowers – Some were greedy. Some just wanted to keep up. Many just saw housing as good investment given all the appreciation and the easy loan programs. They wanted the loans. They wanted the house. Many of them wanted to sell the house before it was even built because their friends just made $100k without spending a dime. Many of them didn’t realize that was an unsustainable dynamic.”
2. Originators – In many cases, LOs sold what they were provided with from lenders and what borrowers demanded. In other cases, LOs bordered on or committed outright fraud to slam deals through in a wild west lending environment. This includes asking for “favors” from appraisers, title companies, realtors, and of course, from their investors.
3. Appraisers – You couldn’t hardly survive the pre-GFC era if you weren’t willing to be a bit fast and loose as an appraiser. LOs and realtors wanted the value and if you didn’t provide it, you were replaced. Appraisers definitely got shafted–especially the honorable ones.
4. Realtors – They’d help you buy or sell anything without regard for affordability or the sustainability of price trends. They assured borrowers that prices only go up. They added pressure on appraisers just like LOs. They also pressured LOs to get things done.
5. Non-Retail Bank Multi-Channel Lenders – This is one the layers of money between Wall Street and mortgage originators. Think Countrywide. Multiple channels of lending, but one main entity creating products and guidelines. These lenders got looser and looser with guidelines and underwriting in an attempt to A) keep up with the Jones and B) because there hadn’t been any obvious fallout since prices only ever went up.
6. Retail bank lenders – The history books would have you believe they were innocent, but anyone originating loans at the time knows this is far from true in most cases. Some of the banks were relatively innocent in that they were merely providing a channel to access loan programs determined by Fannie/Freddie, but most also had “Alt-A programs with guidelines and pricing designed to compete with the likes of Countrywide’s Fast and Easy program.”
7. Wholesale Subprime lenders – Not banks. Not multi-channel lenders that allowed mortgage companies to underwrite their own loans. Some of them kept their loans on the books. Many of them sold into larger wall street entities (i.e. there was no “Lehman Brothers Mortgage” subprime rate sheet). They specialized in low credit scores and bankruptcies, but also allowed very high loan-to-value ratios. As high as 100% in many cases.
8. Mortgage brokerages – Companies that existed exclusively to originate loans that were then brokered to wholesale lenders. Took most of the blame for the GFC. Many were greedy, but for most, no more so than the average mortgage company.
9. Mortgage bankers – This is a pretty broad term, but in this case, it refers to companies that existed exclusively to originate loans that COULD be brokered, but more so that could be underwritten in house and then sold to a larger investor. In rarer cases, these lenders may have held a few loans on their books, but we’re talking very rare. They were guilty because they thought they were walking a higher road than other originators, but in many cases, it ended up simply being another avenue to slam deals through with your own in-house underwriter.
10. Underwriters – Poor UWs! Rock and hard place just like appraisers. Some held firm and did the right thing. Some turned a blind eye. All were unknowingly participating in giving people loans that should have had them.
11. Hedge Funds – Loose term here too because many would consider Lehman to be a hedge fund by the time things got out of hand. But this refers specifically to money managers promising their clients big returns. They created demand for riskier and riskier products with higher returns. They helped turn a blind eye to the risk when selling these investments to their clients.
12. Investment banks – Lehman, Bear Stearns, Morgan Stanley, Merrill Lynch, Goldman — all examples of investment banks, but the first two were particularly problematic leading up to the GFC. Lehman, for example, bought several subprime and alt-A lenders either without understanding or caring about the inherent risks in how they were doing business. They then sold the packages of loans/derivatives to hedge funds and others without accounting for said risks.
13. Ratings agencies – rubber stamped the risky investments in question
14. Alt-A lenders – technically not much different than subprime, but for example, Alt-A would let you do some crazy stuff if you didn’t have a bankruptcy, whereas subprime was geared more toward super low credit scores and bankruptcy. These are the lenders that offered programs like 100% loan-to-value with no proof of assets or income, on INVESTMENT PROPERTIES!
15. Title companies/escrow officers – many were not part of the problem. Many were–often taking part in hurrying borrowers along through signings they didn’t understand.
16. Option ARM lenders. Giving this its own line item even though Option ARM lenders were often simply Alt-A lenders. World Savings was the most notable example, but other companies followed suit. Option arms gave borrowers the option to pay less than “interest only” payments with the deficiency added back to the loan balance. What could go wrong?
17. Talking heads – So many people got on the TV and said everything was gonna be just fine even when many of us already understood that wouldn’t be the case. While we could make the list bigger by adding categories, we’ll just include “economists” here too as some of them were cheerleaders for housing policies that arguably backfired.
18. Ma and Pa investors – created demand for stuff they didn’t understand. Arguably innocent in many cases. Arguably greedy in others.
19. Builders – Churn and burn! Builders built as much as they could, as fast as they could, as cheaply as they could because demand was just off the charts. They really didn’t CAUSE the GFC in the same way much of the rest of this list did, but they definitely participated in it–sometimes as simply as by accepting purchase offers with little or no money down, a substantial list of upgrades upfront, often inflating a home’s base price by 20%, and simply trusting the mortgage company could get the loan done.
20. Fannie/Freddie – Their guidelines were loose enough prior to the GFC that you wouldn’t recognize them today. They bought a ton of crap loans ($trilliions)
21. HUD – pressed Fannie/Freddie to buy more crap loans. Also bought crap loans.
22. Legislative government– Where were you guys BEFORE the GFC?! You were making well-intentioned policy changes with unforeseen complications. Granted, it’s debatable, but there’s no question that the push for looser lending standards has at least some influence from affordable housing legislation. Plenty of dead horse beating after the fact. Well done. We will lump regulatory changes under this category as well, e.g. the SEC relaxed capital standards in 2004 (but this is debated as a cause of the GFC).
23. Executive government – Clinton was a popular president. But changes to housing policies are argued by some to have paved the way for the past 3 bullet points. And let’s not forget about the Commodity Furtures Modernization Act of 2000, which de-regulated the derivatives that ended up playing a key role in the meltdown
24. The Fed – Yo Alan! I know “irrational exuberance” didn’t occur to many of the people in the housing/mortgage market, but it would have maybe saved some pain if it had occurred to the Fed. Hindsight is 20/20, but as long as we’re sharing blame, you get some.
25. Mortgage Insurance companies – Not the baddest actors pre-GFC, but their total net risk and risk-to-capital figures were clearly surging in the run up to the GFC
26. Mortgage Servicers – didn’t CAUSE the GFC, but made it much worse and more protracted by acting like just about the worst scum on the planet when it came to lying to people in order to keep the risk of defaulted properties on consumers’ books. It wasn’t uncommon for someone to stop paying their mortgage during the GFC and not be foreclosed on for 4-5 years–all the while being hounded for payment or sent through a fake process that made the consumer think they were participating in some government program to hand over their property with a bit more dignity. The other side of the coin was the “robo-signing” scandal where banks foreclosed on homes TOO quickly and without the proper documentation.
27. MERS – It’s complicated, but another entity that made things worse despite not acting as an initial catalyst.
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode: Get an inside look into strategies and pitfalls of the high-risk, high-reward world of day trading.
Hosts Sean Pyles and Andy Rosen discuss the high-stakes world of day trading and shed some light on your statistical chances of finding success. Then, Andy welcomes seasoned traders Sierra Smith and Michael Sincere to the podcast to share their perspectives. They pull back the curtain on Sierra’s typical trading morning, break down concepts like options trading and highlight the rollercoaster ride of market highs and lows.
They also discuss the profound role of social media in day trading, the importance of discipline and emotional control and the potential pitfalls and real challenges in day trading. Drawing from their personal experiences, they shed light on how they’ve learned to take profits quickly, prevent losses from spiraling and maintain a realistic perspective on potential returns.
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Episode transcript
Sean Pyles: There was a time back, oh, about 30 years ago when headlines were filled with stories about people using newfangled technology to trade stocks minute by minute from the comfort of their couches. Today, you can trade almost second by second, but that doesn’t mean it’s a good idea.
Sierra Smith: In the beginning it’s definitely not all sunshine and rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making. Especially when you’re doing day trading with options, it’s very volatile, so it’s very much high risk, high reward.
Sean Pyles: Welcome to NerdWallet’s Smart Money Podcast. I’m Sean Pyles.
Andy Rosen: And I’m Andy Newfangled Rosen.
Sean Pyles: Today we have episode two of our Nerdy Deep Dive into next level investing. And Andy, let’s just start out with the caution we mentioned last episode, which is that here on Smart Money, we still think the vast majority of people will have more success with very basic investing strategies, like using the buy-and-hold strategy, investing for the long-term, utilizing low cost, lower risk index funds, seeking out safe returns like high yield savings accounts.
Andy Rosen: You’ll get no arguing from me on that, Sean. But as we noted last time, some people do want to do more on the markets. Maybe they have some playing around money, maybe their risk tolerance is higher than the average bear, or bull. Maybe they’re just curious about all these terms that they hear on the nightly news. Does anyone watch the nightly news anymore?
Sean Pyles: Nope.
Andy Rosen: Yeah, and as we also noted, it’s good to be educated about the different ways investors use the stock market and other markets, because all of it has an impact on the overall economy, which affects everybody.
Sean Pyles: Right. Well, frankly, when I hear the phrase day trading, I just think the odds are really against people. There’s research showing that only about 1% of day traders consistently make money, and some kinds of day trading, like trading options, you can actually lose more money than you put up. If you don’t know what you’re doing or your expectations are not aligned with the reality of what you’re doing, you can get into a desperate situation pretty quickly.
Andy Rosen: It is absolutely true that people can get over their heads quickly, and there are a lot of people on social media that make day trading seem like it’s easier or more profitable than it actually is. Think of it this way, if you were losing a lot of money day trading, do you think you’d go on TikTok and brag about it? I doubt it, right?
Sean Pyles: Probably not.
Andy Rosen: Yeah. If people want to try this, they need to be aware of these percentages and aware of the risks and the time and effort that is involved. You really have to be watching moment to moment to see what’s happening. But the fact is that there are a lot of day traders out there and they do help move markets, so let’s hear from a couple of them to try to understand what they do and how it really works.
Sean Pyles: Let’s do it. But before we get to that, a reminder from the lovely folks on the NerdWallet legal team, we Nerds are not financial or investment advisors, we will not tell you what to do with your money. Everything in this episode and this series is to provide you, our dear listener, with the knowledge to make informed decisions with your own money.
And listener, we want to hear what you think, too. To share your thoughts around next-level investing with us, leave us a voicemail or text the Nerd Hotline at 901-730-6373. That’s 901-730-NERD, or email a voice memo to [email protected]. Andy, who are we hearing from today?
Andy Rosen: We’re hearing from two day traders, one former, one current. Sierra Smith is a trader and social media creator who runs a Discord server where she and other traders talk about strategy, trading concepts, etcetera. She’s based in Houston, and you can find her on TikTok or YouTube as well.
Michael Sincere is an author and speaker about investing topics. Among his books is “Understanding Options” and “Start Day Trading Now.” And he’s also a financial columnist for MarketWatch. He’s based in Miami.
Sean Pyles: Hey, Andy, before we go any further, let’s take a second to talk about what a Discord server is and what it means to run one. A lot of folks might not be familiar with this. You said Sierra does this, right?
Andy Rosen: Right. Without getting into too much detail, Discord is basically a chat service organized around a specific topic or interest group. And they’re particularly popular among video gamers, that’s where the service rose to popularity, but they’ve developed a big audience in the online investing world. Content creators like Sierra will often use Discord servers to connect with their audiences. If you haven’t used Discord, think of it as something like a mixture between Slack or Microsoft Teams with a little bit of Reddit mixed in.
Sean Pyles: OK, cool.
Andy Rosen: Sierra, Michael, welcome to Smart Money.
Sierra Smith: Thank you for having me.
Michael Sincere: Thanks for having me, too.
Andy Rosen: The first thing I want to know is, I guess I’ll start with Sierra, did you do any day trading today?
Sierra Smith: I actually did do some day trading today.
Andy Rosen: Tell me, just as an easy example to pull out of your head, what did you do? Just talk to me about what your morning went like.
Sierra Smith: This morning specifically I did live trading with my Discord server. We got on around 8:15, I marked up three different stocks for them, so that way they could have a variety to choose from if they chose to take some trades. I personally took Apple today, I traded Apple. I took calls, which essentially means that I believe the stock is going to go up, for those who don’t understand options terminology or anything.
Yeah, that’s what my morning was today, day trading. And then afterwards we just did some education. We did some trade recap for some people who didn’t win on their trade, we went over why they didn’t. Yeah, that was pretty much my early morning today.
Andy Rosen: And can you tell me what you saw in Apple this morning, in layman’s terms, that made you feel confident about making those short-term trades?
Sierra Smith: I think Apple was the price in the pre-market. There’s pre-market and post-market, and there’s actual market hours. Pre-market with options you cannot trade. But in the pre-market it was sitting within this demand zone, I believe. And so if it’s within a demand zone, that essentially means that the stock most likely will go up from there.
I just facilitate, I’m going to take Apple calls today, because it’s within that zone, which is the whole chart analysis that we did before the market opened. And so that way when the market actually opened, we were able to take that trade based off of that prior analysis.
Andy Rosen: And Michael, I know you’re not really doing day trading anymore. Tell me what your daily thinking about your portfolio looks like.
Michael Sincere: Right. What Sierra was doing was something I did do in the past, mostly when there was a volatile market. And I would jump on some of the hot stocks and ride it higher. And I stopped it because it’s wonderful when you’re on the right side, but if you’re not, it can turn around really quickly.
To answer your specific question, I switched from day trading to a more traditional buy index funds. And I sell covered calls, which is also an option strategy, but to me it’s a lot less risky than day trading.
Andy Rosen: Just for the people out there: When you sell a covered call, basically what you’re doing, if I’m understanding correctly, is you are selling an option for someone else to buy a stock that you already own. So if your trade doesn’t work out, you at least have the stock to back it up. You’re not going to have to buy a stock at a higher price than you might want to pay for it in order to sell it. Is that accurate?
Michael Sincere: It is, and I’ll give you an example. Let’s say I bought Apple, and then what I would do is I would rent out those shares to Sierra, who’s buying calls. I’m selling those calls to her, she’s buying them. I wouldn’t make as much money on it, but I do get an immediate income. And so what I do is I sell them to the speculators, and I’m like the landlord. I get my income and I just want my nice income and I don’t have to go through the stress of watching it all day long, every minute, can’t even go to the bathroom. That lifestyle I decided to walk away from. But by selling the covered calls, basically Sierra or another speculator, they basically own the rights to it, and they can sell it from me at any time. So I just wait a month or whatever timeline that I decide to sell those calls on.
Andy Rosen: Got it. Maybe you folks have met before, even without knowing.
Sierra Smith: Probably.
Michael Sincere: Absolutely. I hope you enjoyed those calls I made and bought today.
Sierra Smith: I did.
Michael Sincere: Thanks.
Andy Rosen: Let’s go back and hear a little bit about each of you with your origin stories. Maybe start with Sierra. How old were you when you started trading? What made you start? Tell me a little bit about how you got into it.
Sierra Smith: I started trading when I was 18 years old. After I had graduated high school, I had a friend, and he had posted on social media, he had bought his dream car at 18. And I’m like, what? We just graduated high school, so it doesn’t make sense for you to be buying your dream car at that age, or so I thought. And so I asked him, I was like, “What do you do? How did you buy that car?” And he told me that he traded options. And I’m like, hmm. I’ve never heard about options trading before, all I knew was I can buy a stock if I so wanted to.
And so he taught me how to trade options. And then from there I just started trading. I spent a lot of time looking at charts. I’ve just fallen in love with trading. I’ve just been trading, I would say I trade at least four out of five days of the week, even now.
And it’s just because now I think my shift with trading has focused from not trying to trade to survive and make a living and provide for myself, but now it’s just trading just to make some income. And just because I love trading, I really do love what I do. I’m really passionate about it. Because I think when people hear trading, they have a whole negative stigma around it. Or when it comes to financial stuff in general, people get leery. No matter what it is, whether it’s trading or investing or whether it’s buying something off the street, people get a little leery when it comes to putting their money in certain places. I just think being able to de-stigmatize trading as a whole is something that I love to be able to do.
Andy Rosen: You talk about how you love it. What makes you love it? And do you love it every day? There can’t be all sunshine and rainbows, can it?
Sierra Smith: In the beginning, it’s definitely not all sunshine or rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making. Especially when you’re doing day trading with options, it’s very volatile, especially the way that I trade. So it’s very much high risk, high reward.
Obviously, the days that I win, I’m having a great day. I love it then. But obviously those losing days are really hard. After you get more comfortable trading, you realize how to take losses with a grain of salt. Those larger losses, those hurt. But when it comes to options trading, you just have to build up a sort of mental fortitude, especially if you trade the way that I do. While I do agree, there are definitely less riskier ways to trade, that’s just how I personally do it. Because like I said, I’m 20 and I like to make risks. It works for me.
Andy Rosen: Got it. I’m 39 and I use a robo-advisor.
Michael, I know you’ve done a lot of research and writing about various aspects of navigating the financial world, but you’ve done some specific research into the world of day trading. I was wondering if you could give a really quick Cliff’s Notes about how this became a normal part of the financial world. It wasn’t too long ago that regular people could not just log onto their computer and trade stocks on their own. You would’ve had to go through a lot more hoops than you can do now. Can you talk just a little bit about the history and maybe you can segue into how you became acquainted with it?
Michael Sincere: Well, the history goes back to the ’90s, when I was beginning as well. All of a sudden I discovered trading. And I think it started with Netscape, which I think went up an unbelievable amount of money in one day because of something called the internet, which was suddenly discovered. Before, if you were day trading or any kind of trading, it would cost you as much as $100 per trade. And once the internet came and these companies started switching to online trading, it went from $100 per trade to maybe $20 a trade. And as you know, now it’s pretty much free. But that’s when I got involved.
And in the ’90s, the day trading was unbelievable. It seemed like any stock you bought related to internet, you could make $20,000, $30,000 a day. And that’s when it really got really popular. Unfortunately, it all came to a screeching halt when the market, I think it was around 2000, when it all crashed. And all the day traders started losing money. All their money.
I was on these websites and I saw them just panicked as they … I’m trying to think of some of the stocks they bought, but many blew up, like Pets.com and all these others. And people got sick of day trading for many years. The majority did.
And then now it’s made a resurgence again, or at least it did over the last few years. And so Sierra, what she’s doing is it’s, as she said, high risk, high reward. It’s intense. You have to sit, be in front of the computer all the time. And day trading options is even more speculative. And I wrote books on options and on day trading. But when you combine day trading with options, the way options work, they can switch in a minute. You could be up and then the next minute you could be down. I have a lot of respect for anyone who can book a profit.
For me, I was trying all types of trading and decided to write books about it. Because I made so many mistakes, lost so much money at first, and so I was trying to help other people. And that’s when I both wrote books on day trading and options. I think I wrote about eight books on both.
Andy Rosen: I did want to ask, both of you in different ways have made part of your living out of talking about trading, and talking about the financial world with people. And I think this is true of a lot of people who get into this world. There is this content aspect to it. Tell me why you think the public-facing aspect of it seems to be important to a lot of traders, from the influencers to the authors.
Sierra Smith: I know from my experience, I can say I recently started utilizing social media to talk about trading. And so I had made a TikTok about it online, and it blew up and it went viral. And so many people were like, “Oh, I’m super interested in trading, and I would love to learn.” And for the first time in two years I was like, you know what? Maybe I will start teaching. Because I’ve never wanted to teach people about trading. I just would do it by myself and go on about my day. But I think when it comes to the social media aspect of trading, I think people have to see that it works for other people. They have to see how it works, why it works, in order to want to get into it. Because everybody knows you can buy and sell stocks, but no one really knows how profitable it could be or what that looks like on a day-to-day basis. I think the social media projection of it really helps bring people into the trading industry, if you want to call it that.
Sean Pyles: I saw on one of your — I think it was a TikTok video that you made — I saw you talking about how there’s a lot of people on social media that will tell you, “Oh, I did these three trades that I made this amount of money,” and you were warning people it’s not that simple.
Sierra Smith: Yeah.
Sean Pyles: What do you think are some of the pitfalls of social media based investing?
Sierra Smith: I think one of the pitfalls of it is everybody wants to make trading seem like it’s perfect. And then people always want to post what they’ve made in their profits, but they won’t talk about their losses or they won’t talk about what they put in.
I know as far as options goes, it’s a lot about percentage. That’s how I see it. For example, if I tell you guys that I’ve made $10,000 in a day, it’s not because I turned $10 into $10,000. It’s usually because, OK, I made a put at 40, it made 25% on that trade.
I think the pitfall, the major pitfall when it comes to trading and social media, is that people don’t advertise the entirety of what it is. And a lot of people end up getting into trading thinking that they’re going to turn $50 into $5,000 in two days, and that’s just not realistic.
Andy Rosen: Michael, obviously you’re maybe not as active on social, but you’ve done quite a lot of content around these kinds of activities. What’s your perspective on it?
Michael Sincere: Well, first of all, by writing these books I was able to speak to some of the best traders and investors in the world, like Peter Lynch, Mark D. Cook, who passed away. But Mark D. Cook was one of the top option traders in the world, and was successful for many, many years. I used to interview him all the time and he became a friend, so I learned a lot from him. And it took him five years to become successful. It was very difficult those first five years, and he wanted to give up many times trading options. But then he found his system.
And what I learned from him, and my own experience, is it’s really the emotion that gets everybody. It’s really the discipline and emotion. Everyone talks about the discipline, but they don’t really know what it means until they start trading. And what I mean is you’re in a losing trade and you’re ready to lose $10,000. And you have to figure out very quickly whether you close the trade, whether you add more to it, whether you hold, and these are lightning-fast decisions that really hurt a lot of people.
I’m sure Sierra’s gone through this many times. I’ve found from my experience, it’s very difficult. Beginners have high expectations about how easy it is to make money, as Sierra said. But it does take a long time to find your own style. And trading’s not for everybody, too.
And some of the pitfalls I’ve found is, one, a lot of people turn from trading to gambling. It’s very easy to do. You think you’re trading, you’re following everything, but you’re betting way too much money on a trade. Which means, yes, you can make $100,000, but you also could lose that exact same amount if you’re not careful. Which is why I tell people the number one rule is to trade small, especially when you’re beginning. Do not try to make $100,000 in one day, try to make a few hundred. If you can do that consistently over a long period of time, then you may have a shot at it. But if you come in there trying to make big, big bucks, nine out of 10 are going to blow up their account, in my opinion.
Sierra Smith: Yeah, I’m definitely seeing more people fail than succeed when it comes to starting out in trading, and that’s just because so many people think trading is going to be so easy. A lot of people don’t exercise proper risk management, which is something that anybody that’s been trading for a while will tell you to exercise.
Or the way somebody with a larger account size trades is entirely different in the way somebody with a smaller account size trades. For me, I have a larger account size, so I can put tens of thousands of dollars into a trade and be OK with it with the way that I trade. But the strategy that I use may not work for somebody who only has $500 in their account. And so I think a lot of people just assume that you can just make all this money overnight, and they end up just getting so discouraged beyond trading. Which sucks, because trading for me obviously has changed my life, and I think there’s so many good and positives to it, but I just don’t think people are really fully educated on what trading really is.
Andy Rosen: I do want to get back to some things that might help those beginner level people who just know this term and want to get a sense of it. Michael, if you would be willing, could you just tell us a little bit more about how you moved off of day trading? You talked a little bit just about the lifestyle and why it didn’t work for you, but just a little more detail on how your views evolved would be awesome.
Michael Sincere: I kept coming back to the fact that the strategy that worked again and again — and I used to have long conversations with John Bogle as well, who was the father of indexing — and I found out that over and over I was making more money on a longer-term basis just by buying and holding these index funds. At the same time, I was trying to make fast money using the strategies Sierra’s using, like momentum trading. And I actually did do option trading with momentum. I found it extremely stressful. I found out I had to devote entire days to it. I tried to get out by noon. That was my goal each day, get in at the open, ride it and then get out. And yes, on the good days, I’d make pretty good money. I’d make $10,000 on good days. Once I made $30,000 and I was riding high. Three days later, I believe, I lost it all.
I found out after about a year of this, it was not for me. You have to know your own personality. And I found, for my personality, I couldn’t take the stress of it every day. And so I pretty much stopped day trading, and I wrote books on helping people manage the risk part of it. Anyone can learn about the technical aspects of it, like the charting and the indicators, but it’s the emotions that are the difficult part to manage. That’s what really ruins most people. I emotionally did not have what it takes to be a professional day trader, especially a momentum trader. And I saw that it was easy to blow up my account. And some days I’d blow up that day or that week, and I got out of it.
Andy Rosen: Sierra, it must also take nerves of steel to stop after a couple minutes. If you’re doing well, it’s probably tempting to say, oh, I could get more. Right? It seems like one of the things you’re describing is managing that and knowing when to stop. I would love to hear either one of you talk about when to stop. When it’s time to stop, whether you’re having a good day or a bad day. When it’s prudent to take a deep breath.
Sierra Smith: One thing I always tell my students is that when it comes to day trading, green is green. It doesn’t matter if you made $500 or $5. Because I promise if you saw $5 on the ground, you would pick it up. I think I have lost so much money in the markets just holding out on trades and just like, hey, you know what? It’s going up. I could hold this out for five more minutes, 10 more minutes, and then it ends up reversing back down against my trend. And the minute that I see I’m in profit enough that I’m happy with, I will end my trade. And I think the reason why I trade like that, again, is because I’m at a point where it’s not like I’m trading trying to compound my account and secure my lifestyle.
That’s all said and done now. I feel like now my trade’s very relaxed. It’s just get in, get out, make something for today, and then go on about my day. That’s why I’m OK with just being in trades for a few minutes. Sometimes I will exit a trade and then the stock will run three more dollars and I’m like, man, I could have made so much money. But as long as I left with something, I’m good.
Andy Rosen: And what about on a bad day? There’s got to be a temptation to chase a loss to try to get it back. How do you manage that?
Sierra Smith: I have trading rules, actually. I have personal rules for me when it comes to trading. If I take a loss, I’m just going to be done for the day. Honestly, I could have a risk or a probability of being able to make that back, but I would rather take one loss than take two losses or three losses trying to keep revenge trading and get that back. Lost a lot of money doing that also. I’ll no longer be doing that when it comes to trading. I just think when you take a loss, you have to make sure that you don’t let your losses lose that battle, if that makes sense. Obviously you have to have a stop loss and proper risk management, so that way it’s not like when you do lose, you’re losing your entire account size every single time.
Andy Rosen: Tell me, if there are listeners out there who are thinking, this sounds fun, this is something I might be interested in, I would like to try it out, where do you recommend people start? What’s the first step someone should take? Thinking of someone who might not even have a brokerage account and just wants to figure out if day trading is something they could ever do.
Sierra Smith: I think people who want to start, should start with not by learning anything about brokerage accounts or charting or anything, I think they just need to learn what trading is and what trading is not. Because I know a lot of people want to start when they hear how much money that people have made, but they have to understand what trading is. What trading really is and what it isn’t.
And then after that, I say people need to start with just looking at charts and just seeing if they can find some that make sense to them. And the biggest thing that helped me learn how to trade was having somebody who walked through it with me. Because you have to know what type of learner you are. Some people can read books on options training and learn. Some people watch videos, some people need one-on-ones with people. So just figuring out how you learn and using that and applying that to the trading world.
Andy Rosen: Michael, what do you think?
Michael Sincere: I think that people should, again, as I said, start small. I think if they know nothing about the market at all, they should start with opening up an account, starting with index funds or mutual funds. Start at that level. They really need to understand the stock market first. If you want to become a day trader of stocks, do a small amount, open up. But you have to start with the brokerage account, you have to learn the different aspects. And that means learning about the indicators and learning there’s a lot to the market that a lot of people don’t know.
Now, eventually, if you want to trade options, you should first start by learning the different aspects of options. There are great books on trading and on investing with options. But again, there’s no rush. If you’re coming in trying to make big money fast, that may not turn out so well. Basically, become a student of the market.
Andy Rosen: Both of you. Thank you so much for coming onto the show and telling us about your perspectives. Thank you so much.
Michael Sincere: Thank you.
Sierra Smith: You are so welcome. Thanks for having me.
Sean Pyles: Hey, Andy, I’ve got to tell you, I am pretty torn after hearing that conversation. Sierra seems to be living a super cool and successful life at such a young age. And there’s part of me that wants that, but there’s another much more rational part of me that knows that it’s just not realistic.
You hear about all the money she’s made, and it can be easy to forget that the vast majority of day traders lose money. I really view Sierra’s narrative as a cautionary tale, maybe, for her followers online more than for Sierra herself, because people might view her TikToks or courses, or those of another day trader, and think that this is a secret path to instant wealth, but it’s really not. Again, in all likelihood, you’re going to lose money if you do what Sierra does.
Andy Rosen: Sean, I think I have to agree. Obviously, Sierra does seem to be living a super cool life. She seems to be having a really good time, and that’s her life. And a lot of people have tried this and had very different results. And so, yeah, you might wind up like her and you might envy her, but on the other hand, you could wind up like the majority of traders and not get the kind of results you’re looking for, or wind up losing something that’s important to you.
You may be able to improve your chances by doing very scrupulous research, paying really close attention to your investments and how they’re performing moment to moment. But on the other hand, your research may lead you, as it seems to have done Sean, to the conclusion that this investing style isn’t for you. Maybe you don’t even have the time for it. And many people spend hours doing this every day and still lose money. As we said before, those are not the people you tend to see promoting their trade as much as the winners do.
Sean Pyles: No, and that’s why at the end of the day I know that I’m much more of a Michael than a Sierra. I love to do some research and have a solid understanding of what I’m going to be doing with my investment strategy. Plus, like Michael, I do not have the emotional fortitude to weather the big ups and downs that Sierra experiences on a daily or hourly basis.
All right, well Andy, how about a preview of what’s coming up in episode three of this series? Are we going to Vegas?
Andy Rosen: Well, some people would say we are, because we’re talking about options trading, short selling, derivatives, and contracts, all of which can have huge upsides and huge downsides. But they’re also very important in the market, so it’s worth hearing how they work, who might want to include them as part of a diversified portfolio, and how to know when it’s time to leave it to the pros.
Sam Taube: The risk and reward tends to be a lot higher than with just stock ownership. Because generally, with derivatives trading, you’re either going to get a big payout, double your money or something like that, or you’re going to lose everything you invested in a particular contract.
Sean Pyles: For now, that is all we have for this episode. If you have a money question of your own about investing or anything else, turn to the Nerds and call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.
Andy Rosen: This episode was produced by Tess Vigeland and me, Andy Rosen. Sean and Liz Weston helped with editing. Chris Davis helped with the fact-checking. Kaely Monahan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help.
Sean Pyles: Here’s our brief disclaimer one last time. We are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances. And with that said, until next time, turn to the Nerds.
Are you still looking to buy a place before time runs out? Don’t want to miss out on the next big housing boom?
Well, it might already be too late, assuming you’re looking to turn a big profit, or any profit at all.
A new report from two bond strategists at Bank of America Merrill Lynch, whose merger was a direct result of the latest financial crisis, predicts little upside from current levels.
In fact, after a couple years of modest growth, home prices are basically expected to go nowhere for the foreseeable future.
Home Prices Are Nearly 10% Overvalued Today
The pair, Chris Flanagan and Gregory Fitter, contends that U.S. home prices are now 9.7% overvalued relative to household incomes, using the S&P/Case-Shiller Home Price Index as the measuring stick.
Simply put, incomes haven’t done a whole lot lately, but home prices (as we all know) have surged since the crisis abated.
In fact, even after chalking double-digit gains from 2012 to 2013, asking prices in many hot markets are still more than 10% above year-ago levels.
According to their math, home prices were about six percent below fair value at the end of 2011. So it looks as if we overshot the mark once more.
Unfortunately, after stellar gains like that it’s pretty difficult to keep the momentum going, even with limited supply and low mortgage rates available.
After all, affordability has its limits, and it’s finally being tested after a few silly good years.
Not Much to Look Forward to Now
While they noted that their outlook is “well out of consensus,” Flanagan and Fitter only see home prices rising another three percent annually each year for the next two years.
That would push home prices to a level that is around 12% above fair value as determined by household income, compared to six percent below fair value when home prices bottomed in late 2011.
Then from 2016 to 2022, their model forecasts modest declines followed by an eventual recovery resulting in flat net annualized home price gains over that period.
In other words, after this current seller’s market spits out a few more nominal gains, home prices are going to settle into a range and stay there. Of course, that’s not necessarily a bad thing.
In fact, the pair thinks it’s a “fantastic outcome” and just what policymakers had in mind when establishing new regulatory framework and lending laws.
Their research echoes that of Trulia’s Bubble Watch, which revealed that home prices were still about three percent undervalued, but expected to be just right by the end of the year, or early next year.
The takeaway here is that no one wants another housing bubble just years after the worst financial crisis in recent history.
So yes, it’s a bummer that home prices aren’t going to continue flying higher and higher, but it should mean a more sustainable market for years to come.
Of course, these are all just assumptions and predictions. Economists are often wrong (and typically never right), so taking their word for it is a bit of a stretch as well.
Additionally, I doubt any model predicted home prices would rise as much as they did during the last boom, so assuming they won’t deviate from “normal levels” this time around is also hard to swallow.
Lastly, remember that this is the national picture, and that home prices can and will vary tremendously from metro to metro.
The recent increase in mortgage rates, which has made buying a house or borrowing against home equity more expensive, in part reflects a broad increase in rates on long-term U.S. Treasury securities. But the increase in 30-year fixed mortgage rates over the past year has been unusually large relative to rates on long-term Treasury securities, which may suggest that mortgage rates are being pushed up by temporary factors. In particular, as the path of future interest rates becomes more certain, mortgage rates could fall by roughly half a percentage point.
Why have mortgage rates risen by so much more than yields on 10-year Treasury bonds? We find that much of the increase in this spread can be attributed to two factors: interest rates on Treasury bonds with maturities less than 10 years are higher than rates on 10-year Treasury bonds and mortgage prepayment risk has increased. Higher interest rates on shorter term bonds matter because mortgages are generally held for fewer than 10 years. Prepayment risk is higher than in recent decades largely because of uncertainty around future interest rates. Both these factors are likely to continue to push up mortgage rates over the next few quarters.
Factors Contributing to the Spread between Mortgage and 10-Year Treasury Bond Rates
Mortgage rates reflect the cost of using a mortgage to buy a home or tap home equity and thus affect the price of real estate and housing wealth. To the degree that the Federal Reserve’s tightening of monetary policy pushes up mortgage rates, this channel is an important way in which tighter monetary policy slows the economy and dampens inflation. As shown in figure 1, there has been a long downward trend in mortgage rates (dark green) over the past forty years in line with the rate of 10-year Treasury bonds (light green). However, the spread between mortgage rates and Treasury bond rates fluctuates for various reasons, including changes in credit conditions and interest rate uncertainty.
Mortgage rates generally track the rate on 10-year Treasury bonds because both instruments are long term and because mortgages have relatively stable risk. Nonetheless, to compensate investors for the higher risk of mortgages, rates for fixed mortgages have historically been, on average, one to two percentage points higher than Treasury yields. As rates on 10-year Treasury bonds have risen since mid-2020, mortgage rates have risen as well. But, over the past year, mortgage rates have risen by a surprisingly large amount relative to the 10-year Treasury rates, putting more restraint on borrowing conditions and the housing market.
Figure 2 shows the spread between 30-year fixed mortgage rates and 10-year Treasury rates from 1997 through May 2023. The peak spread during the housing crisis was 2.9 percentage points, reflecting a sharp tightening of credit conditions and significant disruptions in the financial markets that fund mortgages. The spread rose again during the COVID-19 pandemic, peaking in 2020 at 2.7 percentage points, reflecting shorter-lived disruptions in financial markets and concerns among lenders and investors in mortgage assets. Recently, the difference between 30-year fixed mortgage rates and 10-year Treasury rates has widened to an unusual degree. Since October 2022, the spread has hovered near the levels last seen during the housing crisis.
To explain why the spread between 30-year fixed mortgage rates and 10-year Treasury rates is so large, figure 3 parses it into three components:
The spread between the rate charged to borrowers and the yield on mortgage-backed securities (MBS), referred to as the primary-secondary spread, which is generally stable when the costs of mortgage issuance are stable (blue).
A combination of an adjustment for mortgage duration and prepayment risk (light green). The duration adjustment reflects that mortgages are generally held for fewer than 10 years and are more closely related to rates on a 7-year rather than a 10-year Treasury security. Prepayment risk reflects the probability that a future drop in rates induces borrowers to exercise their option to refinance.
The remaining spread, which reflects changes in demand for mortgage-related assets after adjusting for prepayment risk (purple).
Given estimates of 1 and 3, we are able to estimate 2 by subtraction.
Factors Driving Higher Mortgages Rates
Using this framework, we find that the biggest reason that the mortgage spread to the 10-year Treasury rate is higher relative to other periods is due to the duration adjustment and prepayment risk. Since mortgages are typically held for fewer than 10 years, they have a shorter duration than 10-year Treasuries. Since early 2022, and for the first time since 2000, the rate on 7-year Treasury securities is higher than the rate on 10-year Treasury securities. In particular, from 2015 through 2019, the 10-year rate exceeded the 7-year rate by about 0.15 percentage point on average. Instead, year-to-date, the 7-year rate has exceeded the 10-year rate by about 0.10 percentage point, on average. As a result, the duration adjustment explains roughly a quarter of a percentage point of the unusually large spread shown in figure 3.
In addition, prepayment risk is higher now than in previous years. Borrowers with mortgages are affected differently if interest rates rise or fall. If rates rise, mortgage holders can simply choose to keep their mortgages at the previously issued rate. Instead, if rates fall, mortgage holders can prepay and refinance their mortgages at lower rates. That means that if there is a wider range of uncertainty around the future of interest rates—even if that range is symmetrical—there is a higher probability that current mortgage holders will find it advantageous to refinance in the future. As it happens, measures of interest rate uncertainty (such as the MOVE index, or Merrill Lynch Option Volatility Estimate Index) are currently higher than before the pandemic. Moreover, when rates are very low as they were in early 2020, there is only so much lower they can go, and thus borrowers and lenders alike see a smaller likelihood of a new mortgage being refinanced to a lower rate in the future. Instead, when mortgage rates are higher, as they are now, there are more possible future outcomes where rates fall and mortgages are refinanced. In other words, mortgage lenders want to protect against the possibility that mortgages issued recently will be refinanced to lower rates. As a result, lenders charge a premium.
To get a sense of how much this factor is pushing up mortgage rates to an unusual degree, it is useful to compare the estimated contributions of the duration adjustment and prepayment risk now versus the late 1990s, which was before the housing bubble, the housing crisis, the slow recovery from the 2008 recession, and the COVID-19 pandemic. In the late 1990s, 10-year Treasury rates were moderately higher than today but, like today, the 7-year rate was higher than the 10-year rate. At that time, the estimated contribution of the duration adjustment and prepayment risk to the mortgage rates spread was roughly a half percentage point lower than today.
While the largest factors driving high mortgage rates are the duration adjustment and prepayment risk, another reason mortgage rates have been unusually high is because of a slightly elevated primary-secondary spread. Lenders often finance mortgages by selling claims to MBS, which are pools of mortgage loans that are guaranteed by government-sponsored enterprises. The spread between the primary mortgage rate to borrowers and the secondary rate on MBS reflects the costs of issuing mortgages. For example, originators have to bear interest rate risk between the time an interest rate on a mortgage is set and when it is closed. The primary-secondary spread jumped by 0.3 percentage points toward the end of 2022, but has retraced most of the runup since then.
Finally, the component after accounting for those factors is also somewhat elevated relative to before the pandemic. This component, referred to as the option-adjusted spread (and “other” in figure 3) is likely elevated due to reduced demand in the MBS market. In recent years, the Fed has reduced its holdings of MBS. In addition, private investors in MBS have readjusted portfolios in response to an increase in interest rates. This was particularly true when long-term Treasury rates jumped in the fourth quarter of 2022; demand for MBS has remained cool since then. In addition, holders of MBS may be more pessimistic about prepayment risk than empirical models reflect, which could be the case if investors think that future mortgage rates are more likely to be a little lower relative to current rates rather than a little higher.
Conclusions
Higher mortgage rates are probably here to stay for a while, but a reduction in uncertainty could meaningfully bring down mortgage rates. If interest rate uncertainty returns to more normal levels and prepayment risk fell back to levels seen in the late 1990s, rates could fall – perhaps by half a percentage point. Nonetheless, one factor keeping rates higher that is likely to persist for the next several quarters is dampened demand for MBS as the market for mortgage financing continues to recalibrate to restrictive monetary policy and higher interest rates.
Until the economy slows to a more sustainable pace, uncertainty will remain. How will a slowdown affect house prices? How much will it reduce the income of borrowers? Will financial markets remain stable? Until such questions are resolved, unusually high mortgage rates will probably continue to cool the housing market and dampen borrowing against housing equity.
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Today, Bank of America reached a historic agreement with the U.S. Department of Justice to pay the largest settlement in U.S. history related to toxic mortgage loans it knowingly sold to investors.
In short, the company admitted that it misrepresented the quality of the loans it packaged and sold to investors via its Merrill Lynch and Countrywide Mortgage brands, as well as through Bank of America.
Additionally, the bank has taken responsibility for its faulty loan origination practices that resulted in Fannie Mae, Freddie Mac, and the FHA taking on countless bad loans that eventually hurt American taxpayers (not to mention homeowners).
The bank also settled a case with the SEC in which it knowingly “shifted the risk” of wholesale loans originated by mortgage brokers that were described internally as “toxic waste.”
Simply put, the bank and its affiliates made trillions of very bad loans that they tried to pawn off, and now they must pay.
Speaking of payment, the company has agreed to pay $9.65 billion in cash, including $5.02 billion in civil monetary penalty and $4.63 billion in compensatory remediation payments.
Additionally, BofA will provide $7 billion in consumer relief, which will come in the form of loan modifications, including principal balance reductions, forbearance, and second mortgage extinguishments.
How Does a 2% Interest Rate Sound?
Thanks to a major settlement with the Justice Department
Related to its questionable loan origination practices
Bank of America will offer some lucky homeowners
2% mortgage rates on fixed mortgages
Most significantly, some lucky homeowners will receive principal reductions that lower their loan-to-value ratio to 75%. But that’s not all. They’ll also receive a 2% interest rate on their mortgage that is fixed for the life of the loan.
The Department of Justice provided an example where a homeowner with a $250,000 mortgage balance would see it fall to just $112,000 on a property worth only $150,000 today.
That’s a pretty good deal, regardless of what may have happened to the homeowner.
Let’s be honest, a lot of borrowers knew they weren’t providing proper income documentation either, or that their home appraisal was a tad bit steep. But I’m sure they looked the other way, just like everyone else at the time.
The DoJ also negotiated a tax break for those who receive relief under the settlement assuming the Mortgage Forgiveness Debt Relief Act isn’t extended.
They created a so-called 25/25 Tax Relief Fund where 25% of the value of the relief will be made available to offset any tax liability, up to $25,000. But the amount of money set aside is limited, so not all homeowners will be able to take advantage.
During his speech, Associate Attorney General Tony West called on Congress to extend the Act so homeowners won’t be on the hook for phantom income.
Bank of America will also be required to provide more low- to moderate-income mortgage originations, expand affordable housing initiatives, and provide community reinvestment for neighborhoods experiencing or at risk or urban blight.
The settlement is expected to reduce the company’s third quarter pre-tax earnings by $5.3 billion and reduce earnings per share by 43 cents.
Obviously the stock was up on the news, because that’s how the stock market works. But really, investors are probably happy to see the bank move forward from the mortgage mess once and for all.
And its current price of under $16 a share is still just a fraction of what it was during the previous housing boom when shares traded in the low $50 range.
Bank of America Mortgage Rates Are Fairly Competitive
While Bank of America’s standard rates are pretty competitive
You might find a better deal with a non-household name
And receive a better overall home loan experience
Sometimes smaller is better if you want a more personal touch
At the time of this writing (June 5th, 2018), Bank of America was offering a 30-year fixed mortgage at 4.625% with 0.414 mortgage points. It works out to an APR of 4.798%.
They also have a 20-year fixed at 4.375% (4.638% APR) with 0.655 mortgage points.
And a 15-year fixed is being offered at 4% even (4.339% APR) with 0.699 mortgage points.
Bank of America also offers ARMs, including a 10/1 ARM, 7/1 ARM, and a 5/1 adjustable-rate mortgage.
As of 6/5/18, they were priced at 4.125% (4.659% APR), 4% (4.711% APR), and 3.875% (4.774%), respectively. As you can see, the APR of each product is very similar, so it’s important to look at all the details when deciding on a loan product.
For the record, their advertised rates tend to require a credit score of 740 or higher and a minimum 20% down payment.
Most lenders, including Bank of America, assume you’re a pristine borrower so they can advertise the lowest mortgage rates possible.
What movies do you respect but did not enjoy watching? For example, they had artistic values, a powerful story, or were generally well-made, but for whatever reason, didn’t float your boat? After polling the internet, here are the top twenty-five film responses.
1. Uncut Gem (2019)
“This! I completely agree with you. Uncut Gemswith Adam Sandler is a great movie I will never see again. I felt like I had a panic attack the entire way through,” shared one.
Another admitted, “I thought Adam Sandler did a phenomenal job, and it was a great movie; I hated every second of it. I was too nervous, anxious, and annoyed at everyone’s decisions.” Finally, a third said, “Agree. Uncut Gems was supposed to put the audience on edge most of the time, and it did. Very Well. It made me feel super anxious.”
2. The Joker (2019)
“I cast my vote for the Joker movie. I get why people like it, but man, what an utterly unpleasant yet respectable movie,” someone suggested. “That whole routine at the comedy club made me cringe so hard it hurt, even if it was completely the point,” confessed a second.
“Yeah. It’s well made, and it’s an interesting idea. But I hate the movie. As both just a film and an exploration of a comic book villain that didn’t need one.” Joker 2 will be a musical starring Lady Gaga.
3. Schindler’s List (1993)
“Schindler’s List. It’s a brilliant movie, and everyone should see it once, but I will never watch it again,” one expressed. “It was such a powerful, horrifying movie about a reality we were lucky not to have been a part of,” another shared.
“Came here for this. The entire movie – which is incredible and necessary to watch – felt like my stomach dropped, like when you’ve reached the peak of a roller coaster and are about to go down.”
“Except there was no relief. No thrilling rushes down or satisfaction of catching your breath as it hits another incline—just a lasting gut punch followed by the realization that it wasn’t just a movie. I’ll never watch it again,” a third user stated.
4. American History X (1998)
One person admitted, “I discussed American History X with a dear friend, and we agreed that 1.) The dental scene on the curb had scarred our minds for life, and 2.) Once was PLENTY.”
Another suggested, “Everyone needs to watch American History X, but it’s a movie I don’t want to watch again.” A third shared, “I own the movie and have watched it two times. Steven Spielberg did an outstanding job.”
“The musical score is hauntingly beautiful. The production was a Super Bowl, World Series, and Stanely Cup. All wrapped up in one. Must watch this historic and horrific movie.”
5. A Clockwork Orange (1971)
“I vote A Clockwork Orange,” one replied. “I’m shocked this was only mentioned once on this list so far. This film is thoroughly unenjoyable to me.”
“I’ve only seen the film once, about a decade ago, so I don’t have the best insight. However, if I remember correctly, the film shows that while criminals can be ruthless, the justice system they’re placed in can be similarly horrific,” a second added.
“It was tough and not a first date movie. The strength of your disgust is the entire point. Alex is a monster, and that must be made clear. With that being said, I did not enjoy this movie, but I respect it,” a third user expressed.
6. Dunkirk (2017)
“This was my answer. It did an amazing job capturing the feeling of being in that war; the only problem was that feeling was miserable. I would not willingly experience that again,” shared one.
“One thing I liked about Dunkirk, which made it hard to watch, was the age of the soldiers. The kids on the beach looked so young, too young to be in such danger, but that’s how it was,” another admitted.
“And yet, despite almost feeling shell-shocked while viewing Dunkirk, it continues to be one of my most respected movies. Don’t get me wrong; I would never watch it again, but yeah.”
7. 1917 (2019)
“I respond strongest in films to the feeling of unfair power imbalances. So scenes where bullies pick on the small kid etc., get to me. This film felt like that to a million, but there wasn’t an end to it. But it was a terrific piece of cinematic artwork,” one expressed.
“When the credits rolled, I had a panic attack in the cinema. Unfortunately, I’ve not yet had it in me to rewatch it, but good lord, what a fantastic film to never watch again,” stated another.
“I saw it in theaters, and the sound was physically jarring. Which I suppose is what they were going for, trying to give the audience that feeling of tension and fear that the character was experiencing, but as a moviegoer, that was unpleasant.”
8. The Revenant (2015)
“Powerful performances by Leonardo Dicaprio and Tom Hardy, beautiful cinematography and soundtrack, and a brutal tale of survival and revenge, what’s not to love? I would never watch it again, though,” admitted one.
“I said immediately after seeing this movie; I enjoyed it. Leo is great. I will never see it again. Everyone needs to see this movie at least once in their lifetime. It provokes the thought of who Hugh Glass was in REAL LIFE,” a second shared.
“I’m going to go on a limb and say The Revenant was enjoyable, but I won’t sit through that again. Still weird to me that that’s the movie Leo won an Oscar. Not several other better performances and movies. A good, bad film overall.”
9. The Lighthouse (2019)
One person noted, “The Lighthouse was a stunning film with wonderful performances by Robert Pattinson and Willem Dafoe. Hear me clearly when I say this, I WILL NEVER WATCH THIS AGAIN.”
“This, the cinematography was some of the best and most interesting I’ve seen, and the performances are incredible. But it’s such an uncomfortable movie to watch,” said another.
“This is exactly it,” a third agreed. “It’s a visually stunning film. Parts of it still get me, particularly where Dafoe is giving this excellent monologue while dirt is flying into his face and mouth. I can’t, at my own will, sit through this movie for a second viewing.”
10. 2001: A Space Odyssey (1968)
“2001: A Space Odyssey. It’s a remarkable technical achievement. But as a movie, I can’t do it again,” said one. “I love this sci-fi classic. It’s stunning, and the slow-burn nature of the pacing helps make it feel more human if that makes sense.”
“But I’m also not too fond of it. It’s also prolonged and weird,” another replied. “Yeah, same here. I get that this beloved and respected film is a technical masterpiece. But it is so dull. So mindboggling dull,” a third added.
11. Citizen Kane (1941)
“Citizen Kane deserves the accolades. It broke a lot of ground visually and technically. It’s based on the lives of egomaniacal newspaper barons, which a modern audience has mostly forgotten. But you don’t want to watch it repeatedly,” one expressed.
“I only watched it to watch Mank, and it took me three tries to finish it… I know this film was innovative regarding cinematography, editing, and script, but it was just not for everyone,” replied another.
“For me, it’s about something other than not liking it in total but not liking the story itself. The film is gorgeous, but I see it as the story of the rise and fall of a detestable person and all the despicable people who surrounded him,” a third person shared.
12. Hotel Rwanda (2004)
“Yeah, that movie is emotionally exhausting. You become so invested in the story that you can feel the dread of these terrified citizens scrambling to survive. I had to watch this in high school for a class discussion in French Class. I will never watch this again,” admitted one.
A second noted, “It’s interesting how little violence they choose to show. Using your imagination puts you in the hotel occupants’ shoes, and the unknown can be more frightening. It is surely a story that needs telling, but I would not recommend it for anything other than research.”
“We watched this in high school for a History through Film course. It took a couple of days to watch and discuss, but it became one of those movies I watched once. Too emotional and upsetting for me,” a third user noted.
13. Amistad (1997)
“Amistad with Matthew McConaughey has no-frills, matter-of-fact scenes of brutality towards enslaved people. I respect it as probably close to accurate. But they are hard to watch. My wife cannot watch Amistad again, and I won’t let her. She broke down sobbing the one time she saw Amistad,” one confessed.
“This movie was so hard to watch, but that means it is making its intended point,” another said. “To this day, scenes of abject brutality don’t sit well. I know that it happens, it’s historically accurate, but nothing is entertaining there. It’s instructive, of course. I still haven’t watched The Passion.”
14. 12 Years a Slave (2013)
“The one time my partner asked how bad 12 Years a Slave I told her she would not want to watch it. However, that movie made a lasting impression, enough for the both of us,” reported one.
“She saw the look on my face and has never asked to watch it. I understand its message so much that I need never see it again.” A second agreed, “12 Years a Slave, for sure. It’s upsetting and unsettling, but well done and accurate.”
15. The Road (2009)
“The Road did an excellent job of capturing a sense of hopelessness, but I couldn’t make it through the whole movie a second time. Finally, I got about halfway through and realized that I didn’t need or enjoy how it made me feel. But by that point, I was too far in to turn back,” someone explained.
“The relationship between the two main characters was very well done,” shared another. “I enjoyed seeing it done well. But, on the flip side, I had an overwhelming sense of dread once the film was over. Won’t be doing that again.”
“I was the same way with this movie. I had to finish it, will never view it again. I don’t have the emotional resilience to repeat the experience. But, the book is just as much, if not bleaker, so it’s a faithful book-to-film adaptation,” a third informed.
16. Eraserhead (1977)
“I feel this way about most of David Lynch’s work. Utterly enthralling and wildly unique, but generally, just not for me. I do find David Lynch, the person, to be delightful, though,” someone stated.
“I watched it once and found this film super interesting and stylistically incredible, but would I watch Eraserhead again? Not really. I also wanted to love Twin Peaks, but it fizzled out for me,” confirmed another. “I just watched this for the first time yesterday. What an absolute slow burn of a masterpiece. I’ll never watch it again.”
17. Mother! (2017)
“OH, MY WORD! I had to go way too far down the list for this one. I respect the movie for what it did, but I will never watch this again. It also didn’t help it was advertised all wrong,” suggested one.
“The end of this film I had in my head for over a month. Sweet Christmas, the anxiety and panic the ending induced was horrifying and amazing simultaneously,” a second confessed.
Finally, a third admitted, “One of the most anxiety-inducing movies I’ve ever seen. That scene with the baby sent me into a full-on panic attack. I can respect this as a form of art, but I could never watch this a second time around.”
18. The Tree of Life (2011)
“In a theater, I saw this, The Tree of Life with Terrence Malick, and many people clapped at the end. My sister and I thought it was the most boring thing we’d ever seen. We had no idea why everyone was clapping. I would not sit through that again,” one informed.
“I was furious after seeing this movie. Forty-five minutes of off-screen whispering, 45 minutes of the end of 2001: A Space Odyssey and dinosaurs. Then 45 minutes of other random things. I didn’t get any of it. Call me insane, but I respect his work of art; I would never participate in watching it again.
19. Solaris (1972)
“Tarkovsky’s films, specifically Solaris. It is a profound work in its own right. But Solaris is much too slow for me. I recently attempted to watch Stalker but couldn’t make it through. Hope to finish Stalker soon” noted one.
A second shared, “Recently watched Solaris in the last two years. You must be in an exceptional mood to watch this Tarkovsky movie. Solaris is heavy, mentally, and thematically dense,” reported another.
“And not only that, but the things he wants you to examine are so gosh darn lofty. He’s the film equivalent of reading War and Peace or Ulysses. I understand his premise, but I could never watch this movie again.”
20. Dancer in The Dark (2000)
“Dancer in the Dark. One day I was thinking: It’s been long enough that I’ve been tempted to watch it again recently, but then I remember a few key scenes, and I know I can’t,” someone informed.
“Yes. Holy smokes, the ending is so freaking bleak. It’s an absolute triumph, but catch me never watching that movie again as long as I live. I also didn’t enjoy it, but I respected it,” a second added. “I came here to say this. I watched it 20 years ago and loved it, but I’m not putting myself through it again. It’s peak bleak,” a third agreed.
21. Black Panther (2018)
“I understand and appreciate what the film achieved for the black community, but overall it was pretty dull. I get it, Marvel Cinematic Universe and all, but I couldn’t bare to watch this again,” reported one.
“It’s a badly paced movie. It has a good cast, but most have nothing substantial to do other than Michael B. Jordan, a great villain. It is let down by the climax being a battle between two almost-identical CGI models against a CGI background,” another concurred.
22. Grave of The Fireflies (1988)
“Grave of the Fireflies. Excellent movie, but it was emotionally exhausting, and I can’t watch it again. Talk about full-on ugly crying,” one confessed. “Easily the greatest movie I’ve ever seen that I will never watch again. That’s my formal review. This animated film was soul-crushing,” a second replied.
“I WISH sometimes I had the fortitude to watch it again, but after my experiences with the language and history/culture and time spent there (esp in Hiroshima)……every time I think I can revisit the film, I just feel utterly haunted,” a third user admitted.
23. The Irishman (2019)
One user shared, “The special effects were incredibly distracting for me in The Irishman. I was stoked to see the heavy hitters from the mob movies’ glory days, but walked away scratching my head.”
“Same here, I love the old mob movies, so I was stoked to hear about Robert DeNiro, Al Pacino, and Joe Pesci in a movie together. So it felt weird wanting the movie to end already. Would not recommend,” another noted.
“Perfect answer,” a third replied. “I was so excited about The Irishman, and I tried to assure myself that I liked it even while watching it. Yet I’ve never even considered rewatching it or recommending it to anyone.”
24. Mulholland Drive (2001)
“I love him, but can you blame someone for saying I respect Mulholland Drive but did not enjoy watching it? I feel that way about many of David Lynch’s works,” someone confessed.
“I don’t even get why it’s so good. I enjoyed Twin Peaks, but all of his stuff is weird for the sake of being weird. Can someone explain why Mulholland Drive is so good?” asked another.
“It’s a beautiful take on the spectacle of Hollywood. I can appreciate that was the message, and it was aesthetically pleasing at any one moment. It just never captured my interest like I wanted it to. And I don’t mind the freaky. I liked Eraserhead,” replied a third user.
25. The Killing of a Sacred Deer (2017)
“The Killing of a Sacred Deer is one of the best and most disturbing films I’ve seen in a long time. It has stuck with me, but I’m in no hurry to rewatch it anytime soon or ever!” one exclaimed. “I like The Killing of a Sacred Deer. But it was alarming, both about how monstrous “regular” people can be and how scary the aftermath is. So I am in no rush to subject myself to that again,” another reported.
Source: Reddit.
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