Jumbo Mortgage Activity Increasing

As this recovery begins, all eyes will be on the housing markets as a gauge for just how strong this return to growth will be.

Of particular note is the jumbo mortgage market which is now springing back to life.

A jumbo mortgage is a home loan with a lending amount above the industry-standard definition of conventional conforming loan limits. With some exceptions, this means an amount above $417,000. A loan in excess of $650,000 is typically referred to as a super jumbo mortgage.

Banks have now resumed underwriting wealthy clients in both of these categories. In fact jumbo activity seems to be brewing even with a limited secondary market for these large payback notes.

For instance, Bank of New York Mellon’s wealth management division reports a resurgence in its high-end lending activity. “We’ve seen significant growth,” says Erin Gorman, their national director of sales. Through the end of May 2009, BNY Mellon’s jumbo lending activities are up 32% by dollar volume compared to that same period in 2008. In the first quarter of 2009, BNY’s average loan balance bounced by 23% compared to the first quarter of 2008.

Another example is found over at Coldwell Banker Residential Brokerage. In the Boston market alone 36 properties of $1 million and up went under contract in March. That figure nearly tripled in May, jumping to 105 mega residential deals.

Mellon’s Gorman currently is observing that her competitors are indeed returning to the jumbo market as the economy recovers.  She notes that during the recession, “we earned a reputation as the go-to player in jumbo mortgages. And that puts us in a strong position as other lenders gingerly move back onto the field.”

BNY Mellon (BK) is one of the 10 large banks announcing that they will begin repayment of their TARP bailout monies to the US Treasury.

What Is Your Gold Standard

Lately I have received many inquiries about whether the physical gold or silver people think they own and have stored with third parties is safe.  Many have asked me to comb through various prospectuses or user agreements and give my opinion.

Because of reader inquiry I have thoroughly researched the GLD ETF and GoldMoney.  However, due to time constraints I have not thoroughly researched other options like the Perth Mint, Kitco pooled accounts, CEF, GTU, other ETFs, Royal Canadian Mint, or plenty of other options.

ROYAL CANADIAN MINT ISSUES

On 12 June 2009 the Ottawa Citizen reported:

To halt a possible “run” on the gold it safeguards for private businesses, the Royal Canadian Mint is reassuring customers their deposits are fully accounted for and in secure vaults as the investigation continues into as much as $20 million in lost precious metals.

There have been widespread issues concerning the gold held by the Royal Canadian Mint.  Supposedly some of the gold was lost, stolen or otherwise has disappeared through some type of accounting discrepancy.

PAPER GOLD VERSUS PHYSICAL GOLD

On 8 September 2008 I was featured on Adam Curry’s Daily Source Code 788 (mp3) where I mentioned in passing that there are approximately 140 ounces of paper gold for every one ounce of physical gold.  The ratios may be even higher for paper silver and physical silver.  As usual GATA hits on the real issue:

Yes, there well may be plenty of gold left at the Royal Canadian Mint, as was insisted upon, with great agitation and anxiety, by the paper gold marketer quoted in today’s Ottawa Citizen story, dispatched to you a little while ago — just as there may be plenty of gold left at Fort Knox. But those are not the most compelling questions. No, the most compelling questions are:  Who really owns that gold? And how many people have claims to it?

Gold is one of the most transparent of assets.  Au, or gold, has the periodic number of 79, a boiling point of 2,856 °C or 5,173 °F, a standard atomic weight of 196.966569(4) g·mol−1 and is metallic yellow in appearance.  On the other hand, the gold market is extremely murky with many shadowy characters lurking in the unsavory places attempting to places risky barriers between owners and their gold.

UNSAVORY GOLD MARKET CHARACTERS

There are many untrustworthy agents which purport to help you answer the questions of how to buy gold or silver but really attempt to sell you paper silver and paper gold which, in many cases, is merely a form of fool’s silver or fool’s gold.

I have thoroughly reviewed the prospectus and found problems with the GLD and SLV ETFs and later found another problem with the GLD ETF where the 10-K precludes the right to audit physical gold inventories.

There are other third-party storage services such as E-gold or the Perth Mint in Australia.  But in July 2008 E-Gold pleaded guilty to money laundering charges in US federal court.  As mentioned earlier, the nation of Canada’s Royal Canadian Mint withheld employee bonuses and sent in external auditors to determine the cause of a multi-million dollar ‘unreconciled difference’ between the financial accounting and the physical bullion.

I recommend staying away from unnecessarily complex instruments even if issued through perceived reputable firms.  For example, in June 2007 Morgan Stanley & Co. settled a class action lawsuit for $4.4 million where the complaint alleged

that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store.  But Morgan Stanley either made no investment specifically on behalf of those clients, or it made entirely different investments of lesser value and security.

While the efficacy of the claim may still be at issue the Better Business Bureau-like complaint from unsatisfied customers who initiated litigation does not inspire confidence for those seeking to reduce risk.  Most people, probably including you, neither want to get involved with an asset that you do not understand nor do you want to get taken in a scam, Ponzi scheme or other type of fraud or theft.

JOHN NADLER’S ADVICE

John Nadler is the Senior Metals Market Analyst for Kitco.com which receives about 5 million hits per week.  His daily commentary is widely available to the gold community.  On 12 June 2009 in Good News/Bad News/ No (Inflation) News Mr. Nadler wrote:

A brief Friday footnote. A lot of ill-informed noise has been generated by the Royal Canadian Mint’s gold reconciliation story, seen in the Canadian press of late. Some ‘market advisors’ found an opportunity in this story, to try to instigate some kind of a “run” of the custodial accounts of that, and other mints around the world. How pathetic. We need very few words to emphatically tell you that Kitco reaffirms its 100% degree of confidence in the RCMs ability to keep the customers’ metals free of any material losses, no matter what the ultimate tally will turn out to be.

The RCM has issued a letter on the subject matter, and it has assured everyone that customer metal accounts are unaffected by the reconciliation problem. We expect a complete report on the findings of an on-going investigation and continue to remain at ease with the status of both our own as well as our customers’ balances at the Mint. As well as those at any other mints around the world. Some over-zealous alarmists need to get a grip and learn how vaults, insurance policies, and such operate in the real world. Until then, we can only call them saboteurs. And anyone who listens to them, sadly misinformed.

SCALPEL PLEASE

The primary reason people own gold or silver is to reduce risk; counter-party, payment, performance, currency crisis, etc.  At all times and in all circumstances gold and silver remains money.  Gold and silver are insurance for when everything else fails.

The intent behind demanding physical gold or silver for immediate possession is irrelevant.  In this case, Mr. Nadler remarks that market advisors attempting to instigate a run on custodial accounts is pathetic.  This is followed up by a reaffirmation of the 100% degree of confidence in the Royal Canadian Mint’s ‘ability to keep the customers’ metals free of any material loss.  It appears that this reaffirmation of confidence is revealing that one of the primary reasons individuals own gold, to reduce risk, is not being met.

Additionally, the Royal Canadian Mint has issued a letter attempting to assure people that their metal is there.  The letter is or should be irrelevant.  Very simply, the metal is either there and available for physical delivery or it is not.  Additionally, Mr. Nadler seems to be encouraging people to wait for ‘a complete report’ about whether their gold is still there or not.

Ad hominem arguments, those arising from or appealing to emotions and not reason or logic, are present in Mr. Nadler’s analysis.  I find particularly humorous the ad hominem attack on ‘over-zealous alarmists’ that do not understand how vaults, insurance policies and the gold market operates ‘in the real world’.  I would like to know which real world Mr. Nadler is referring to; the physical world where gold is an element with a standard atomic weight or the derivative illusion where ‘gold’ is an apparitional derivative of an element with a standard atomic weight.

What exactly should these ’saboteurs’ and those sadly misinformed souls who listen to them ‘get a grip’ on? I think some physical gold would be a good idea.  After all, none of these issues matter until they are the only things that matter.  Demanding physical delivery of physical gold or silver bullion is always a good exercise.  It keeps the third parties and vaults busy, provides jobs and allows the owner of the bullion to have a cute piece of metal to pet.

WHAT TO LOOK FOR

When combing through a prospectus or user agreement the language to find should be extremely simple and clear.  Here is an example from the GoldMoney User Agreement under VIII. Section E:

A User may, by providing GoldMoney with delivery instructions, which instructions must be in the form prescribed from time to time by GoldMoney and the Vault, at any time request GoldMoney to change the goldgrams and silver ounces in his Holding into grams of gold or ounces of silver that are available for physical delivery to the User, provided that there are sufficient goldgrams and silver ounces to take delivery of a London Good Delivery bar of gold, which bar weighs approximately twelve thousand five hundred (12,500) grams, or bar of silver, which bar weighs approximately one thousand (1,000) ounces. GoldMoney will not charge a fee for its service, but fees may be charged by the Vault for acting on the delivery instructions.”

On 7 May 2009 they announced that “In conjunction with Baird & Co. customers can now redeem and take physical delivery of their gold in convenient units of 100 gram or one kilo (1,000 gram) gold bars.”

When I experimented with this option I received this message:

Only Holdings with verified owners that are resident in the following countries can currently redeem bars: United Kingdom, Guernsey, Isle of Man, Jersey. We expect to make these bars available to all of our customers in June 2009 after the initial trial launch has been completed.

I am excited to see the ability to take physical possession at any time of gold in smaller amounts than 400 ounce LBMA bars.  This is an example of what to look for in the language of the legal documents of the third-party service you use to store your physical gold or silver bullion.  Do not use safety deposit boxes or your precious metals may end up on Ebay.

CONCLUSION

Gold is the risk-free asset and along with silver will always be worth something.  There are many shady characters in the bullion market that want to erect barriers between the owners and their cold hard gold or silver bullion.

The prospectus, user agreement, etc. should therefore be pretty simple.  The owner of the gold or silver should be able to demand physical delivery at any time.  There are options for third-party storage of gold or silver bullion, like GoldMoney which is recommended by Michael Maloney, Doug Casey, Peter Schiff and others, that allow for physical delivery at any time.

But sometimes even that highest guarantee is not sufficient for Chicken Little’s gold standard.  In those cases, I think Chicken Little should get a grip; on their physical gold or silver bullion by demanding immediate physical possession.  Why?  Just because Chicken Little can.

If you determine that to satisfy your own gold standard that you will follow Chicken Little’s example and demand physical delivery and are denied I would like to know.  Please leave your comments if you have had or do have any problems with any institutions failing to deliver.

Disclosures:  Long physical gold and silver with no position in GLD or SLV.