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Financial Overhaul: The Obama Administration’s Plan

2009-06-18T14:32:00.000-07:00

On the heels of conflicting financial data about the recession’s future, President Obama revealed his plan this week to protect the U.S. financial system from another catastrophe.

The key component of the administration’s plan is beefing up the Federal Reserve’s power, imparting the authority to regulate bank holding companies and other large firms, whose failure could (and did) put the country’s economy in peril. At the same time, the administration is calling for the creation of a new agency to oversee credit and lending practices, with the goal to prevent the risky loans and victimized borrowers that characterize the current housing crisis.

The plan takes aim at the weaknesses now apparent in the current regulatory system, which wasn’t able to respond to today’s complex financial instruments and which allowed abuses and excesses resulting in the country’s slump. One of these weaknesses is a lack of big-picture thinking: while agencies and regulators may be responsible for overseeing individual companies, no one is in charge of looking at the financial system as a whole.

Elements of the plan include:

Boosting the authority of the Federal Reserve to enable increased supervision and regulation of financial companies. This will involve requiring increased capital commitments to offset loans and off-sheet commitments.
Creating the Consumer Financial Protection Agency to review credit and lending practices, in order to provide protection for potential homeowners, students and credit card holders.
Establishing the Financial Services Oversight Council to monitor the overall health of the U.S. financial system.
Requiring that lenders retain a 5 percent stake in all asset-backed securities. This key component was created in order to discourage risky loans and the practice of passing at-risk assets off to other investors, ensuring banks have “skin in the game.”
Mandating that all lenders be held to the same standards as banks, and that mortgage brokers provide clear and concise disclosures.
Setting up a clearer method for regulators to dismantle troubled companies.
Getting rid of the Office of Thrift Supervision. This office oversaw institutions such as Washington Mutual and AIG, which of course turned into some of the biggest failures of the economic crisis.
Ordering shareholders to vote on compensation packages for executives in the financial industry.

The administration is now presenting the plan to legislators, and beginning the daunting process of deflecting critiques by the banking industry and Congress itself.

For Further Reading:
Geithner Defends Plan to Give Fed Stepped-Up Powers (Update2)
Forcing Banks To Put More 'Skin In The Game'
Obama Introduces Sweeping Financial
Obama Defends Financial Overhaul

Time to Declare Economic Marshall Law!

2009-03-27T14:37:00.000-07:00

Since Washington has created the mother of all moral hazards by not holding anyone accountable for this unprecedented economic disaster, the repercussions of which we will be facing for decades to come, rather they have elected to reinforce the offending behavior, thereby guaranteeing its reoccurrence, by paying the offenders enormous bonuses and labeling the Americans (AKA Joe or Jane Taxpayer) who are outraged byy this egregious inequity as “distracted”. Some how it hasn’t quite registered that if Washington is unable to comprehend something as patently obvious as not rewarding the culprits who got us into this mess in the first place by paying them enormous bonuses, then what exactly could Washington possibly be getting right in attempting to correct the disaster? If Washington is serious about wanting to prevent the same mess from occurring yet again in the future it may be time to declare “Economic Marshall Law” and make those responsible face the music. If no one has “technically” done anything illegal (how about gross negligence for starters?) and therefore cannot be criminally prosecuted, this may be the way to go.

If a corrupt compensation system, rampant with incentives in all the wrong places, helped get us into this mess, then start by eliminating it and replacing it with a system featuring the appropriate incentives which are aligned with the best interests of the U.S. taxpayers. If the American taxpayers now have a majority interest in these bailed out firms then don’t its employees have a fiduciary responsibility to protect us from further losses or at the very least to minimize our losses?

Why not begin by disincentivising the employees of the now taxpayer bailed out firms from leaving their jobs by penalizing those who do opt to go, that is those who choose to bail out on us rather than stand by to help clean up their own mess, by establishing a tax penalty or surcharge on the future earnings of any departing employees (or they could be labeled as economic enemy combatants and threatened with detention at Guantanamo:). Then incentivise these employees to stay on and help restore their firms to health by promising to pay their bonuses after the U.S. taxpayer is repaid and offer added incentive bonuses based on a time table of how quickly their firm is able to repay Uncle Sam with interest. What better way could there possibly be to retain these employees than to guarantee payment of the bonuses they claim are due to them for 2008, on top of incentive bonuses promised for rapid repayment of taxpayer dollars, than to pay out this compensation after their firm is restored to financial health and the U.S. taxpayers have been repaid? After all had these companies been allowed to go bankrupt, without taxpayer intervention, the whole bonus issue would have likely been a moot point as insolvent businesses do not typically pay out bonuses!

If Washington found a way to hold onto some 13,000 military personnel who had actually performed and bravely satisfied their employment contracts by creating the “stop loss” program, declaring a time of “extraordinary circumstances”, then declare Economic Marshall Law now, our ravaged economy has proven to be every bit of a national security threat and force these employees to stay on the job until the U.S. taxpayers are repaid. This should be their legal and moral responsibility to all current and future generations of tax paying Americans. Seems pretty simple to me, what am I missing?

New Data on Delinquencies and Foreclosures, and New Details on the Obama Mortgage Plan

2009-03-09T09:56:00.000-07:00

Loan delinquencies rose to record-breaking levels in 2008, but new data show foreclosure rates may be staying put. With new details about Obama’s mortgage modification plan emerging, economic experts and homeowners alike are hoping the plan will point the way towards reduced foreclosures and loan relief.

The percentage of delinquent loans in the fourth quarter of 2008 broke the longstanding record, according to the Mortgage Bankers Association's quarterly delinquency survey released on Thursday. Loans at least 30 days past due rose to 7.88% on a seasonally adjusted basis. Jumping from 6.99% in the third quarter, the increase was the biggest jump since the MBA survey began in 1972.

Loans that are either in the foreclosure process or at least one payment past due totaled a seasonally adjusted 11.18%, the highest ever recorded in the survey.

The survey cited several reasons for the increasing figures, including the rise in unemployment due to layoffs, and the deepening recession. The hardest-hit states continue to be California, Florida and Nevada. Some key states have seen sharp increases in delinquencies, including Louisiana, New York, Texas and Georgia.

Some good news does exist, however. The rate of new foreclosures has remained essentially stagnant. The rate of mortgages entering the foreclosure process, which hit 1.08%, has stayed basically flat for the last three quarters of 2008. According to the MBA’s chief economist, servicers are delaying foreclosure starts in favor of modifying loans or other arrangements, or due to local moratoriums placed on foreclosures.

To further slow foreclosure figures and prevent new foreclosures, the Obama administration announced additional details this week about the proposed mortgage program, designed to help up to nine million families restructure or refinance their mortgages.

The “Making Home Affordable” program takes aim at foreclosures not just to help struggling families, but also to prevent the devaluation of neighborhoods, and stop the steady decline of home values.

Eligibility requirements have been clarified. Those eligible for refinancing under the program are homeowners who are current on their mortgage payments but haven't been able to refinance due to the decrease in the value of their home. Other requirements include:

The loans must be owned or guaranteed by Fannie Mae or Freddie Mac
The property must be owner occupied
The borrower has to have income to support the new mortgage debt
Borrowers need to owe between 80% and 105% of the value of their home
The borrower must have an unpaid principal balance equal to or less than $729,750
The mortgage must have originated before Jan. 1, 2009
Mortgage payments -- including taxes, insurance and homeowners association dues -- have to be higher than 31% of the borrower's gross monthly income

A list of all participating servicers will soon be available online (at FinancialStability.gov).

Mortgages refinanced under the plan will have terms of 30 or 15 years and have a fixed interest rate. The new rate will be fixed for a minimum of five years.

For Further Reading:
More Than 11 Percent of Mortgages Delinquent or in Foreclosure
Mortgage delinquency rate hits record: MBA
Making your home affordable

The Mortgage Fiasco: How the Housing Bubble Developed and Why the Crisis Will Likely Get Worse…

2009-03-02T17:39:00.000-08:00

By Keith Schemm.

In my previous article I discussed some of the reasons why the housing crisis appeared, why borrowers were undeterred by the warning signs of a bubble and how the traditional mortgage broker wasn’t to blame for mistakes made by real estate investors aggressively chasing after profits. Shortly after June of 2003, when mortgage rates hit historic lows, I think that borrower psychology shifted, which resulted in real estate no longer being viewed as a place of residence but as a risk-free investment vehicle for generating equity gains.

Fixed rates for mortgages had clearly bottomed in the early summer of 2003 and as the rates on 10 year Treasuries jumped in July and August of that year we saw a pullback in the number of prime borrowers who were refinancing adjustable rate mortgages into fixed rate loans. The financially savvy baby boomers at that time were for the most part placing their permanent loans on primary residences, second homes, and investment properties that they intended to keep for the long haul. After all, they had lived through the property cycles of the eighties and early nineties and they knew how the ownership game worked. The cost basis of these properties was still modest and the price spiral had not yet begun.

Under normal circumstances, the rising interest rate cycle would have caused housing affordability to suffer, resulting in a slow down in the buying cycle and putting the brakes on the rapid ascent of home values. In previous cycles, when home values became stagnant, a shift to conservatism would have prevailed that would have automatically served to slow down and stabilize the entire system.

However, because there was an inter-generational transition going on (the youngest boomers were turning 40 and the oldest were pushing 60) and a wave of sophisticated new arrivals and Generation Xer’s were now getting their first shot at home ownership, making things different this time. It is at this point that the normal cycle was pre-empted by these events as a generation of fresh buyers were enabled by the advent of new mortgage financing products which lead them to develop an appetite for housing acquisition as pure investment that then became the game-changer.

A number of factors such as higher education levels, rapid financial achievement, and familial pressures for owning versus renting came together to create the real estate super-speculator which helped create the bubble we are now facing. The fast-forward desire for real estate ownership by the individual that would have normally been aspired to in the course of a decade was compressed into just a few years. This short circuited process had both an upside and downside to it. The early adopters of this strategy benefited handsomely via huge (albeit temporary) ramping up of home prices. But the unrealistic expectations for future appreciation that were raised in each successive wave of buyers that came after ward, destroyed the stability of the system of property ownership as a means of building wealth. Many of the new buyers were not ready for the financial consequences of their actions.

We saw parents helping children accomplish what they themselves took years of hard work and saving to achieve, seemingly happened over-night. For example, there is nothing like the experience of renting and saving for a down payment to focus the attention of a borrower on the responsibilities of home ownership. People seemed to know the price of everything, but the value of nothing. The income and credit qualification process was transformed from a litmus test of financial capacity and true readiness into a game of jump through the hoops and find the cheese at the end of the maze.

Throughout 2004 and 2005 prices continued to climb upward and appreciation of 20% and beyond in a year became common, leading to a destructive attitude towards financial prudence which tended to breakdown people’s reluctance to over-encumber themselves. Deferred gratification was an anachronism. Why bother saving 20% (or even 10%) for a down payment on a home when you could take on a little risk and make that return in a year if you purchased immediately, with nothing down, and accept a minimal mortgage payment on an Option ARM. The financial system was in the process of converting all available income, both present and future, into borrowing power and capitalizing that into the present value of real estate.

Each successive wave of borrowers using creative financing enabled the next by forcing them off the fence and into ownership before they were financially ready. As underwriting ratios were pushed to the maximum; new products were introduced to allow the next wave to come into the market and buy. When the standard 80-20 (LTV-Down Payment) fixed rate or adjustable purchase loan was eclipsed as the standard there was no going back. Soon avoiding Private Mortgage Insurance (PMI) became an accepted practice as borrowers resorted to 80-10-10 financing and then the no-down payment loans followed. Over time what was created was a layering of speculators and borrowers with increasingly riskier loan products which had inherently worse capacities to service loans. All were counting on home prices rising ad infinitum in order to bail them out of a situation that in the long run was unsustainable.

Where we go from Here…

In a late 2006 presentation to investors, Credit Suisse showed how this layering of mortgage risk categories could play out as an ARM Reset Schedule in the coming years. In the graphic below we see that this scenario has in fact played out over the last 24 months is a failure of the sub-prime loans en mass. But what’s coming next?

We are living through an historic time and this period will be looked back upon as a defining moment. What will transpire in the next four years with the un-winding of the mortgage credit bubble as it spreads to Alt-A and Option ARMS will seem unbelievable. Over the next few years as society deals with the aftermath of the mortgage credit contraction, along with the unwinding of derivatives worldwide, including: liquidations, bankruptcies, foreclosures and subsequent homelessness and unemployment that will result, future generations will look back and ask the reasons for the dramatic shift that transpired in the way we lived at the end of the 20th century and the first decade of the new millennium.

These factors are now converging in a self-reinforcing and vicious cycle which will eventually cause the US economy and government finances to implode at virtually every level within the next several years, possibly within month and the rest of the world will follow suit as well. The delicate global infrastructure that is so highly dependent on the smooth functioning of both physical and financial transactions is being thrown into global and domestic chaos.

Moreover, in the past a wrench in the gears of finance could be dealt with over time by additional growth in another area of the economy. But in today’s highly integrated global economy, any loss of income committed to mortgage and other debt service could spell disaster. Our economies have evolved during these relatively quiet decades into a fatally sophisticated system of interdependencies that rely upon stability in critical engines of finance and commerce. That stability is now gone. As the Credit Suisse graphic of mortgage resets implies we are now in the eye of the storm between the effects of the Sub-prime Crisis and those coming in 2009 from the Alt-A and the Option ARM loans. Another cautionary note, the potential fiascos in securitized commercial real estate, student, auto, and credit card debt are also currently looming on the horizon.

Home Prices Fall as Delinquencies Rise

2009-03-02T11:05:00.000-08:00

New reports released this week revealed decreased home prices, increased delinquencies, and a population of borrowers eager to shed their adjustable rate mortgages.

Home prices in 20 major cities in the U.S. dropped 2.5% in December 2008, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. In addition, home prices in these cities were down a record 18.5% from December 2007. In the original 10-city index compiled by Case-Shiller, prices were down 2.3% in December, and a record 19.2% from the previous year.

On average, home prices are at levels similar to late 2003, wiping out years of appreciation in the process. The biggest declines were seen in Phoenix, Las Vegas, and San Francisco, where prices were down over 30% from the previous year.

As home prices continue to decrease, equity is reduced, and interest rates reset for many borrowers, delinquencies are accelerating. In the fourth quarter of 2008, bank loan delinquencies were growing faster than at any other time since the Fed started collecting data in 1985, the Federal Reserve reported Tuesday.

In residential real estate, the delinquency rate rose to a record 6.3%, increasing from 5.2% in the third quarter and 3% in 2007. The seasonally adjusted delinquency rate, combining loan delinquencies for residential and commercial real estate, as well as consumer credit cards, rose to 4.6%, up from 3.7% in the third quarter. It’s the highest delinquency rate since 1992.

In an environment like this, with depressed real estate and uncertain loans, new data show American homeowners are bypassing adjustable rate mortgages and aiming for the traditional and the secure.

Of those prime borrowers who refinanced adjustable rate mortgages in fourth quarter of 2008, 97% opted for a fixed-rate mortgage, according to a quarterly report from Freddie Mac. Of those homeowners who already had fixed-rate mortgages and refinanced, 99.7% chose to remain with fixed-rate mortgages.

“The very low interest rates for fixed-rate loans compared with ARM rates in the fourth quarter, combined with worries that rates may rise in the future when the economic recession ends, enticed refinancing borrowers to seek the security of long-term fixed-rate mortgages,” said Freddie Mac chief economist Frank Nothaft in a statement. “When borrowers can lock in a rate of 5 percent or less for 15 years or longer, it’s hard to find a reason not to take it.”

The Mortgage Fiasco: Why Mortgage Brokers are Getting a Bad Rap

2009-02-05T13:15:00.000-08:00

By Keith Schemm.

As the year 2008 has come to a close and the turmoil and upheaval occurring in the mortgage and real estate markets is fully evident, I think it is worth reflecting on the last few years of the housing bubble to ask how did we get here, what have we learned and what’s coming next?

Thinking back to 2002, when I was a loan officer with Erate.com during the go-go years in real estate lending that progressed in quick succession until 2006 when I returned to corporate finance, I couldn’t help but think something had gone seriously haywire in the borrowing and lending culture. Borrowers had long resented the traditional banker sitting behind the big desk with the take-it-or-leave-it attitude and mortgage brokers offered the borrower a chance to get a competitive rate on their loan at a reasonable price with some personal service and expert advice to boot.

I cannot tell you the thousands of thankful clients I talked with over the years who appreciated the clarity and transparency that Erate’s website brought to their mortgage search experience. They really appreciated how Erate’s customer service demystified the loan process for them, we explained the 4-Cs of lending and educated them about how to integrate their loan decisions into their overall personal financial plan.

As the real estate bubble progressed, it was interesting to hear stories from borrowers as to what their financial planners were advising them about other investments and I gave them my own opinions. I once had a 55 year old woman call me about obtaining an option arm on her un-mortgaged personal residence. After talking with her about her ideas I expressed that I didn’t think that was a wise loan decision for her (see my BusinessWeek interview from 2005) and that she should really be locking in low fixed rates at that time. She then went on to say that her financial planner told her that the stock market was the place to be and she could get a better return on her equity if she paid a teaser rate and put the money into the stock market. Well her planner was obviously talking his book (commissions) and my advice didn’t go over to well and she quickly said goodbye.

I had another borrower with very sketchy credit and a lot of credit card debt who had been a longtime renter but had purchased recently and was sitting on a windfall in appreciation. He wanted to refinance and cash out to pay down the credit card balances. I said that I thought that maybe he should think outside the box and sell for a profit now and pay off his debts, build back up his credit score and rent again for a while (seeing that his lifestyle was more suited to being a renter). He said he had never thought of that as an option and thanked me. I certainly hope he got out in time.

Another mistake I saw many borrowers make was letting tax laws dictate the timing of buying and selling property. There were many who took the risk of carrying two properties to satisfy the holding period for preferential long term capital gains tax treatment on personal residences. At the end of the bubble one has to wonder how that worked out for them. Are they still holding? Did trying to save on taxes due to Uncle Sam end up bankrupting them?

By 2004 most, if not all, of the thoughtful borrowers had obtained fixed rates for long term properties. The bubbling prices were now putting the hurt on would be buyers but there was such a frenzy in the air for appreciation that no amount of down-to-earth talk about prices would get through to prospective buyers at this point. I had one young woman who was a recent Harvard Law grad who had gotten a really great job with terrific income growth potential who I just couldn’t get through too. She hadn’t yet saved a serious amount for a down payment but wanted to buy in an “up and coming market” in a shady part of the bay area selling for around $780,000. It was clearly too much money for the property. I did some back of the envelope calculations for her and said that prices had to go up a minimum of 6-7% annually for it to be in her best interest to do the deal and I advised her against it. I think she got the loan somewhere else.

During the bubble you just couldn’t get through to some people about the total lack of reality in their situation. There was always somebody else that they could find to do the loan, add a co-borrower, or bend the rules (or worse) to complete the deal. I am proud to say that we at Erate.com kept our integrity and didn’t descend into that quagmire. In fact, 98% of our loans were “A” paper the rest were special situation Alt “A” and some stated income. I don’t think we did a single sub-prime loan in the 4 years I worked there. Needless to say there were some pretty quiet stretches where interest rates trended up and we didn’t do many loans.

Finally, having 20 years of experience in accounting and finance, I think it is now clear that it was a confluence of trends and events (not due to the traditional mortgage broker) that were in place for 50 years or more in the areas of: public tax policy, societal attitudes and norms, technological capability and credit securitization and attitudes towards risk that had changed which corrupted a longstanding system of private property acquisition and financing in America that resulted in this credit crisis.

In the wake of the bursting of the Dot.com bubble, this evolved into what I term the “Property & Savings Crisis” as much as anything that gripped America and eventually the world in the first decade of the new millennium. It was the mass recognition by the average U.S. consumer that they were incapable of earning enough to adequately save for retirement and that inflation in some other asset, namely real estate, was their only hope in building wealth.

Government’s War on Savers

With the signing of the Federal Reserve Act on Christmas Eve in 1913 (see The Creature from Jekyll Island) the U.S. government began its “War on Savings’ and solidified the banking establishment’s control over the machinery of wealth creation in this country. Since Nixon’s closing of the gold window in 1971, the U.S. saver has endured a policy of government engineered inflation via issuing of Fiat currency. It is a well documented fact that a c.1910 dollar bill is now worth less than six cents today. This intentional government policy of destroying people’s savings over time by growth in the money supply and thus increasing nominal economic activity through inflation has become is so ingrained in the psyche of the population at large that no one even thinks about it anymore.

Property ownership and the favorable tax treatment of the same through the tax code (i.e. mortgage interest deduction, tax credits, and capital gains exclusions) has over time served to make real estate the primary vehicle of personal wealth creation in this country for the common man. However, it always came with the risks embedded in the economic cycle and the periodic real estate downturns along with the inherent dangers in the use of leverage by the individual compounded by the over-leveraging by U.S. corporations and the government.

The difference I see between this cycle and the ones that had preceded it in the 70’s and 80’s is the failure to recognize the moral hazards that developed within the financial industry in allowing Wall Street to effectively become the de facto regulator of itself, compounded by the scale of the securitization of mortgages and the supposed disintermediation of risk through derivatives and the changes made to the compensation scheme for the firms that rated the securities that were later sold in the secondary markets. More on this later…

Is it Foolish to Continue Paying Your Mortgage on Time?

2008-12-07T13:26:00.000-08:00

The government recently announced yet another new bailout program however this 1 has the unusual twist of assisting individual homeowners rather than banks, corporations or Wall Street. The program is aimed directly at distressed borrowers who have little to zero equity remaining in their homes with a pre-condition that they must be a minimum of 90 days delinquent on their mortgage payment to qualify for the program and they must have an outstanding mortgage balance equal to 90%+ of the value of their property. The program, called the Streamlined Modification Program, is being supported by FHFA, the Federal Housing Finance Agency which is the newest overseer of GSEs Fannie Mae and Freddie Mac. Eligible delinquent borrowers are being promised a quick and streamlined process in reducing their mortgage payments to revised affordable levels in an effort to keep them out of foreclosure. The pre-requisite of mortgage delinquency to participate in the program, has some concerned that this is tantamount to encouraging homeowners to deliberately stop making their mortgage payment in order to become eligible under the terms of the program. The government has set up some parameters which may help prevent this outcome, namely that participating borrowers must legally certify that they have experienced an authentic (vs. fraudulent) financial hardship and that they did not in fact intentionally default on their mortgage payment in order to become eligible for the loan modification they are currently seeking. The program would cap an eligible borrower's mortgage payment, along with their total monthly expenses, at 38% of gross monthly household income. However if a homeowner is not able to qualify under the 38% loan modification parameters, they may still be able to negotiate on an individual basis for their own unique loan modification terms. The loan servicers involved in the process would also receive $800 from the government for every troubled borrower they are able to initiate into the program.

Whether or not this program will stop the hemorrhaging or compound the problem by piling on still more bad debt and encouraging homeowners to deliberately decrease their earnings, remains to be seen. But one fact seems indisputable at this point and that is that the real victims of this complex financial calamity are the millions of homeowners who are honest, hard working, played by the rules, knew their own financial limitations and kept to them by not over-extending themselves. The real tragedy of this mess is that the honest borrowers are the ones being hurt most of all, who is stepping up to bail them out?

Forensic Review: A Tactic to Fight Off Foreclosure

2008-11-05T20:50:00.000-08:00

Homeowners having trouble with mortgage payments or facing foreclosure can feel ignored by lenders and desperate for solutions. But there is a way to get lender attention and improve the current financial situation.

A forensic loan review can determine if lenders made any mistakes when the mortgage was issued, mistakes that can be actionable offenses and the key to persuading lenders to help.

A forensic review involves a legal expert examining your loan documents for errors and misstatements. Commonly, the truth in lending statement given by the lender after mortgage application and the APR calculation won't match up with the HUD-1 closing cost sheet you received at closing. Even with small mistakes and tiny percentage errors, you can have cause for legal action. Other major violations to uncover could include illegal predatory lending practices or even outright fraud.

While forensic review is usually a tool of mortgage firms, the current economic climate has resulted in several companies offering review to individuals. The drawbacks could be severe - costs for legal review at San Diego firm You Walk Away can be as high as $3000. But the benefits can be significant. Review companies contend that errors are frequent, and can provide you with the leverage you need to make lenders listen and develop a solution.

Experts assert that the goal of forensic review is not to actually sue, but to gain bargaining power. David Petrovich, executive director of the nonprofit Society for the Preservation of Continued Home Ownership in Oakhurst, N.J., and the author of "Fight Foreclosure: How to Cope With a Mortgage You Can't Pay, Negotiate With Your Bank and Save Your Home," is one of these advocates. Lew Sichelman, a real estate writer for over 30 years, has covered the topic extensively in his syndicated column.

Errors in mortgage documents stem from the housing rush of the last few years, when mortgage companies couldn't push borrowers through fast enough, and often (intentionally or not) overlooked key borrower issues. In the mad dash for more money and more loans, borrowers were confused or actually hoodwinked.

Today, lenders are feeling the repercussions through the housing bust, and are under increased pressure by federal and local regulators to shape up their practices. Mortgage lenders are inundated with requests to improve current loans, and many borrowers can get lost in the shuffle. This tactic of legal review can help borrowers move their case up in the ranks, and get the help they need.

Related Articles:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/19/REVV13DMIA.DTL

The Fed Stands Pat Keeping Rates Unchanged for Now

2008-09-22T10:18:00.000-07:00

At its September 16th meeting, the FOMC decided to keep the benchmark federal funds rate unchanged at 2% for a third consecutive time. This decision was unanimous amongst FOMC members, marking their first uncontested decision on rates in a year. Futures traders were projecting an 80% possibility of a .25 point cut by the Fed yet ironically just several months earlier they were forecasting a 100% chance of a rate increase. After a roller coaster weekend of horrific financial news snowballing from the Lehman bankruptcy filing followed by the B of A acquisition of Merrill Lynch and then the stunning collapse and government takeover of insurance titan AIG, investors and traders alike saw the odds of a cut in the key rate rapidly rising. Fed policy makers had begun their series of seven rate cuts starting in September 2007, commencing just one month after the sub-prime debacle first unfolded, and they continued with this series of rate reductions through April of 2008 when commodities prices and inflation became an overriding concern. Until that time, the Fed's aggressive rate cutting measures had pushed the federal funds rate down from 5.25% to where it stands now at 2.00%. Futures traders had recently been persuaded to believe the Fed would now ease again at its September meeting in an effort to help beleageaugered financial companies weather the storm and support the stock market which had recently suffered its worst daily slide in six years. Rate cut expectations were further supported by the gradually improving news on the inflation front, as oil prices had been gradually declining as the global economy slows. The downside risk to growth and the upside risk of inflation both remain key concerns at the Fed, however the credit crisis appears to be in large part a crisis of confidence and therefore less likely to respond to further a reduction in rates. The Fed has already been working overtime to make funds readily available, providing liquidity directly to the distressed institutions that need it most. Yet another rate cut by the Fed might have been perceived as a panic response to a crisis that is worsening when Fed officials may prefer to let the dust settle a little longer on the most recent stream of financial disasters before taking further action.

Global Outlook: Recession Fears Expand Beyond the U.S.

2008-08-28T10:12:00.000-07:00

The subprime mortgage debacle has had far reaching effects in the U.S. economy. But the effects go beyond our own borders. The economic turmoil has ricocheted throughout the global economy, causing inflation, recession fears and general anxiety.

Consider Europe, which is experiencing the fastest inflation in 16 years and the prospect of a widespread recession. Inflation is currently double the European Central Bank's 2 percent ceiling, and household spending power is quickly being eroded across the continent.

The ECB has authorized nine interest-rate increases since December 2005, in attempts to curb inflation and slow down money-supply growth. The ECB reported this week that this M3 money supply, a figured used as a gauge of future inflation, rose 9.3 percent from a year earlier. This is the weakest growth since November 2006, but still nearly twice the ideal amount to rein in inflation. Policy makers kept the benchmark rate at 4.25 percent this month, a seven-year high, on concerns that inflation may push up wages and prices.

At the same time, European retail sales have declined for a third month in August. Although the measure of sales activity in the region using euros increased slightly this month, it's still the third month the reading held below 50, the boundary between growth and contraction. An executive survey also revealed retailers cut jobs for a fifth month.

Overall, confidence is low across Europe. German business confidence has fallen to a three-year low and consumer sentiment dropped to the weakest since 2003. In France, the housing inventory has reached a record this summer.

In the UK, the outlook is particularly bad. House prices declined this week at the fastest annual rate since 1990, with the average value of a home falling 10.5 percent. At the same time, retail sales have plummeted to the lowest rate since the survey began in 1983. British lending organizations have limited their loans since the subprime collapse, with a 65 percent drop in mortgages granted since last year. The reports suggest a recession is imminent, and forecasts predict the Bank of England will be forced to cut interest rates this year despite fears of inflation.

The economic troubles reach beyond Europe into Latin America, Africa and Asia. In Japan, inflation is a rising concern. Bank of Japan leaders are suggesting a key interest rate increase as the economy shrank at an annual 2.4 percent rate in the second quarter, putting it on the brink of recession.

Globalization has meant significant benefits to the world's economies and citizens, but it also means that the economic problems of one country extend to every country. The ability to recover from our current economic woes will also be affected by the interrelated nature of our global financial systems.

Web Articles:
http://www.bloomberg.com/apps/news?pid=20601068&sid=a5skYtM7P168&refer=economy
http://www.bloomberg.com/apps/news?pid=20601068&sid=a6KueDASBc7M&refer=economy
http://www.bloomberg.com/apps/news?pid=20601068&sid=aDLtFx2ATj.8&refer=economy
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Prices Rise and Credit Contracts: Is the Recession Here?

2008-08-21T14:07:00.000-07:00

Inflation rose in July to the sharpest price increases in 17 years.

Consumer prices rose 0.8 percent on a seasonally adjusted basis from June to July, according to a government report (Consumer Price Index) released today. This is the third consecutive month of inflation, and during the last 12 months prices have risen 5.6 percent.

Driving the price increases are continuing surges in energy and food costs. Energy prices increased 4 percent over the month, while food prices rose 1.2 percent.

The reported figures coincide with consumers cutting back and employment getting squeezed. Core inflation, removing food and energy costs, rose 2.5 percent in the last 12 months, and reaching the levels federal policymakers consider unacceptable. The inflation is causing worker spending power to drop dramatically to rates last seen in 1990. Although average hourly pay rose during the last month, inflation and a cut in average hours means a reduction in real weekly earnings by 0.8 percent. During the last 12 months, real earnings dropped 3.1 percent.

Accompanying the consumer price report was another indication of continuing housing market woes. Existing U.S. home sales fell 16 percent in the second quarter, a 10-year low, according to reports released this week. At the same time, median prices for a single-family house dropped 7.6 percent, from $223,500 to $206,500 over a year period.

A third of all sales in the quarter were foreclosures, with bank seizures of properties in default rising 184 percent in July. Put another way, more than 272,000 properties, one in 464 U.S. households, were in some stage of foreclosure. The increasing foreclosures are depressing home prices further.

For those looking to buy, banks are making it harder to borrow money, with tighter lending standards and terms, according to a survey by Bloomberg. The tight funds extend also to small businesses and credit card loans.

With consumer prices rising, fixed mortgage rates at a six-year high, and a tightening credit crunch, the recession seems to be imminent, or already here.

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Unemployment Spikes, Fed Keeps Interest Rate Level

2008-08-07T10:16:00.001-07:00

Initial claims for state unemployment benefits rose to 455,000 last week, according to reports released by the Labor Department. The new figures represent a jump of 7,000 from previous reports, and the highest rate in six years. Overall, the unemployment rate hit 5.7 percent in July, with some analysts predicting the rate to peak next year at well over 6 percent.

Payrolls declined by 51,000 workers in July, the seventh straight monthly drop. Additional figures for unemployment claims, the moving four-week average, posted a jump over the 400,000 mark, the highest since July 2003 and bypassing the threshold for recession.

The Labor Department did cite increased access of benefits, the result of a new federal program, as a partial cause of the increase. But the rising unemployment is also a result of the slowing economy; companies are cutting costs and reducing staff as demand slows and raw material costs spike.

Rising unemployment also increases worry that consumer spending will decline in the coming months. For the last few months spending has been secure on the basis of economic stimulus checks. Now that these are spent, spending will probably decrease as costs rise, jobs are cut, and the economy continues to falter.

With the economy is dragging and labor markets softening, the Fed decided to halt its pattern of interest rate cuts and stay firm at its recent meeting. The Federal Reserve kept the benchmark interest rate at 2 percent, suggesting that weak employment and general financial instability will keep naturally keep borrowing costs low.

After an aggressive series of rate cuts, the most in two decades, the Fed halted the cuts at their last meeting in June, and has continued to do so. Experts contend the Fed will leave the rate unchanged in coming months in efforts to slow inflation and balance economic turmoil.

A rise in the pending home sales index, based in contracts signed in June, was a surprising but welcome piece of news in the midst of the unemployment and economic crises. The 5.3 rise brought the index to 89.0, the highest since October. Some analysts note this could mean a stabilization of sales and a flattening in the market. Others note it could be a rise from increased sales of foreclosed homes.

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Housing and Economic News: A Roundup

2008-07-23T22:25:00.000-07:00

A flurry of reports, statistics, and announcements this week provide a portrait of the struggling economy as it stands today.

Prices and Inflation

A report from the Labor Department revealed this week that consumer prices jumped 1.1 percent in June, the second-biggest monthly increase since 1982. Over the past year, prices have risen 5 percent. The sharp increases mean worries about the economy are rising as well, and are causing some analysts to predict a boost in interest rates soon.

Major components of the increasing consumer prices are surging food and energy costs. Food prices have jumped 8 percent on an annualized basis during the past three months; energy costs have increased at a 30 percent annualized rate since the start of the year. Other sectors are also feeling the price squeeze, indicating food and energy costs are affecting the entire economy. Transportation costs rose 3.8 percent last month, and rents and education costs also increased.

Overall, core inflation increased 0.3 percent in June.

Housing Market Ups and Downs

Single-family construction starts fell to the lowest levels since 1991 in June, the Commerce Department said Wednesday. The single-family starts in the U.S. fell to an annual pace of 647,000, a decrease of 5.3 percent.

Multifamily home construction starts, on the other hand, jumped 43 percent in June to an annual rate of 419,000. A change in New York City building codes, as well as a general upswing in the Northeast, led the increase with a 242 percent surge in that area.

Taken together, total housing starts rose by 9.1 percent to a 1.066 million per year pace.

The turmoil in the mortgage market, and the sluggish number of starts in portions of the construction market, has caused builder's confidence to drop and job losses to increase. After stabilizing over the last nine months, the National Association of Home Builders/Wells Fargo sentiment index, reflecting builder's confidence, dropped to 16 in July. This is the lowest level since records began in 1985.

In addition, job losses in construction and manufacturing have increased. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month. The total loss of construction jobs since September 2006 has grown to 528,000.

Plans for Fannie Mae and Freddie Mac

Treasury Secretary Henry Paulson expressed confidence this week about the passage of a three-part plan to rescue Fannie Mae and Freddie Mac. His plan will allow the Treasury to increase credit lines for the two companies, buy shares in the firms, and give the Federal Reserve a bigger role in overseeing their capital requirements.

Together, the two organizations own or guarantee more than half of the $12 trillion in outstanding U.S. home loans. The companies have lost more than 80 percent of their stock market values this year as investors grow increasingly concerned about their ability to weather the housing slump.

Paulson emphasized the plan will be temporary, granting the Treasury powers in the interim to support the two companies. Lawmakers intend to tack the rescue plan onto the pending housing bill that will assist subprime borrowers in mortgage refinancing into fixed-rate mortgages backed by the government, and institute tougher regulation for Fannie Mae and Freddie Mac.

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Burgeoning Inflation, Bigger Fed Powers, Better Lender Response: A Market Report

2008-06-20T16:24:00.000-07:00

The economy continued to struggle this week. The most recent statistics shows prices jumped in May as energy costs soared. Prices Americans pay for goods and services is up 4.2 percent for the past year, driven mostly by food and energy costs. When these two items were excluded, prices only rose 0.2 percent.

The higher prices were expected. But they show the pressure being placed on consumers and companies, with higher rates and less credit available to them, and the Federal Reserve, trying to prevent major inflation.

The role of that central bank might expand to better respond to financial emergencies under new recommendations from Treasury Secretary Henry M. Paulson Jr. Paulson is expected to deliver a speech today proposing the Federal Reserve should assume new powers to protect the financial system and intervene in the workings of Wall Street firms.

Responding to the major loss of Bear Stearns, and the emergency steps the Fed took to keep the dissolution from causing a major international catastrophe, Paulson plans to promote the permanent powers of the Fed to respond to any future emergencies. In March, the central bank threw out decades of precedent and provided financial backing for J.P. Morgan Chase's acquisition of Bear Sterns, and made emergency loans available to all major investment firms.

The new recommendations push beyond the financial regulation plan Paulson offered earlier this year, which proposed a bigger role for the Fed without details on what that role would entail. The planned comments for today will offer these details, suggesting the Fed should have the power to step in when a firm poses risk to the system, as well as the power to mandate information sharing from financial institutions to anticipate future problems. This last recommendation will prevent banks and other firms from assuming they can continue risky behavior and still be bailed out.

Paulson's speech comes at the same time as a potential shift in the residential environment. Major mortgage lenders have agreed to assume greater responsibility for and simplify and speed up assistance for assisting homeowners in distress. This move is in response to complaints that lenders have done little to offer help, even as foreclosures climb and late payments skyrocket.

The new guidelines state that lenders will acknowledge borrowers' help requests within five business days, approve or deny requests within 45 days, and update borrowers with status after 30 days. The guidelines also encourage lenders to beef up staff to better respond to homeowners in need, and to consider pausing foreclosure when homeowners contact them.

May Employment Report Spooks the Market

2008-06-07T12:46:00.000-07:00

The Labor Department reported on Friday that payrolls in the month of May fell by 49,000 as job losses continued for the fifth consecutive month, now totaling 324,000 for the year. The unemployment rate rose a surprising half a percent from 5.0% in April to 5.5% in May, reflecting the biggest month over month increase since 1986. The number of unemployed grew to 8.5 million in contrast with this time a year ago when the unemployment totals stood at 6.9 million. The impact of the housing and credit crisis is continuing to take its toll on the economy yet skyrocketing energy prices are a significant culprit as well. Most Americans are being hit from both sides as the value of their home is declining just as other expenses are rising resulting in a drop off in consumer spending leading to a further loss of jobs.

The percentage increase in the unemployment rate was sharper than analysts had anticipated, as most had expected a job loss of closer to 60,000 rather than the 49,000 reported. Many teenage students reported entering the workforce and this may have resulted in a seasonal deviation in the report as teen unemployment experienced its biggest spike since 1948. May's employment report was therefore greatly impacted by both new entrants as well as re-entrants coming into the labor pool. Job growth continues to remain fairly robust in the areas of healthcare, education and government hiring. However the jobless rate overall now stands at the highest level since October of 2004. The Dow fell 395 points or 3.13%, the NASDAQ dropped 75 points or 2.96%, while the S&P 500 fell 43 points or 3.09%, sustaining the sharpest sell-off in three months.

Mortgage Rates improved as investors shifted out of stocks. This could be an opportunity to lock in a low fixed rate.

Freddie Mac Reports Massive Losses

2008-05-23T15:07:00.000-07:00

Freddie Mac, the stalwart government-sponsored entity responsible for mortgage funding and market reporting, has been hit hard by the struggling economy, a recently released report shows.

In the three-month period ending March 31, Freddie Mac lost $151 million, or 66 cents per share. In the first quarter of 2007, Freddie Mac lost $133 million, or 35 cents per share.

While it may seem that the increased loss is significant but not deadly, the bottom line numbers do not reflect the building cost of actual and anticipated losses from defaults, foreclosures, and other credit-related expenses. Freddie Mac reported $1.45 billion of these expenses in the three-month period ending March 31. This represents an increase of more than 50 percent from the previous quarter and more than fivefold from the first quarter of 2007.

Put another way: the estimated asset value of Freddie Mac was $12.6 billion on December 31 of 2007. On March 31 of this year, the estimated asset value plummeted to a negative $5.2 billion. If not for changes in valuation methods, the estimate would have sunk by an additional $4.6 billion.

Freddie Mac is an organization formed by the government to keep credit liquid and mortgage money flowing. The company packages mortgages into securities for sale on the secondary mortgage market, and covers the loan payments if borrowers default. With the booming housing market, Freddie Mac and the other government-sponsored entity, Fannie Mae, were also booming. Accounting scandals at both firms, however, pointed the way for problems with the rest of the housing market and enhanced the damages from the subprime fallout.

Freddie Mac is required to maintain minimum levels of capital as protection against losses, but the government is currently decreasing this amount, counting on the company to help support the struggling market. To raise additional capital, Freddie Mac plans to sell more common and preferred stock, diluting current investor shares and increasing costs to the company, but adding power to Freddie Mac’s ability to meet the housing market’s needs.

Freddie Mac's financial woes are indicative of the housing market and financial services companies’ troubles, with rising loan delinquencies and falling home prices causing massive fallout.

Fed Makes Last Interest Rate Cut in Series to Stimulate Economy

2008-05-01T12:11:00.000-07:00

After seven months of interest rate cuts in a campaign to boost the sagging U.S. economy, the Federal Reserve cut a key interest rate yesterday and signaled this would be the last.

The Fed lowered the federal funds rate, the interest rate banks use when lending to each other, to 2 percent. The goal with this cut is to create lower borrowing costs for adjustable-rate mortgages, credit cards, or business loans, and to offer one more means to prevent the current economic downturn from extending.

In a statement issued with the cut, the Fed indicated this was potentially the last cut in the foreseeable future, but left open the possibility of further cuts if the economy continues to deteriorate. The cut comes at the same time that a new report indicated the economy grew at a small, but better than expected rate in the first quarter. The 0.6 percent annual rate growth, along with fiscal stimulus checks mailing this month, is influencing the Fed's restraint for the time being.

The risks from continued and prolonged interest rate cuts are significant, and important to weigh against the burgeoning economic problems. High inflation, caused by higher prices for food and energy, could raise expectations for future inflation, creating a self-fulfilling prophecy. Continuing to cut the interest rate could weaken the dollar further, and worsen inflation. Plus, continued lowering of rates could undermine the Fed's credibility as an authoritative source for fighting inflation and economic troubles.

Details about the higher prices for food and energy surfaced Thursday. The Commerce Department reported that consumer spending is up 0.4 percent, higher than forecasts. But inflation is responsible for much of this increased spending: without inflation, spending increased by 0.1 percent. The figure for consumer spending is important, as two-thirds of economic activity comes from consumers. Too big of a slowdown could push the country into a recession.

The interest rate cut is another bulwark against deepening economic worries, including the 1.1 percent drop in construction spending in March, a decrease lasting 23 straight months. Unemployment claims rose by 35,000 to 380,000 last week, almost double what economists expected. Unemployment and job losses are also expected to rise in April figures.

Washington Post Articles:

Fed Cuts and Signals Halt

Soaring prices for food, gas push consumer spending higher

Fed Releases Regional Economic Stats

2008-04-29T23:12:00.000-07:00

(from April 22, 2008)

The so called Beige Book report of regional economic statistics was released by the Fed to reflect the overall economic health of the 12 Districts of the Federal Reserve, seemingly taking the "economic temperature" of the nation since the month of February. The news appears to support a weakening economy in 75% of the districts as housing starts have fallen to a 17-year low and foreclosure filings climbed 57%. The news on property values is also bleak as prices have fallen in many areas of the country and could be down by as much as 10% in some locations as the supply of homes for sale continues to outpace demand. Tightened lending guidelines, coupled with the declining credit quality of many loan applicants, means the pool of qualified buyers will continue to shrink dramatically. Overall consumer spending, the linchpin of economic activity in the U.S., has declined in response to the housing crisis as retailers nationwide have begun reporting slow to declining sales, in areas beyond that of the automotive industry, in over 80% of the districts.

The unemployment rate is 5.1% while the consumer price index (CPI) rose 4.00% with the core rate, which excludes food and energy, rising 2.4%. However anemic growth had been reported by the end of 2007, as overall growth had slowed from the brisk pace in the 3^rd quarter of 4.9% down to 0.6% by the 4^th quarter as both consumption as well as business spending had slowed decidedly. In response, the Fed has exercised a policy of monetary easing as they have brought the Fed Funds rate down to 2.25% from 4.25% and will be expected to cut another .25% from the rate at the next FOMC meeting on April 29^th-30^th.

Existing Home Sales Decline Again

2008-04-22T15:31:00.000-07:00

Existing home sales dropped in March, yet another sign of a housing market spiraling downward and dragging the greater economy with it.

The 2 percent drop was the seventh decrease in eight months, according to the National Association of Realtors. The median price of a home also decreased to $200,700, a 7.7 percent drop from last year and the seventh consecutive year-over-year price drop.

In addition, the National Association of Realtors revealed a survey showing 18 percent of homes up for sale in March had negative equity. These homes, where the mortgage was larger than the value of the home, are either in foreclosure or in "short sale." In comparison, from 2002-2006 this amount of negative equity stayed around 3 percent.

Sales are falling as a result of increasing loan restrictions on the one hand, and the prospect of further price declines on the other. Defaults on subprime mortgage loans have led banks to tighten credit and borrowing rules, resulting in less people able to get mortgage loans. For those borrowers who can obtain loans, home values continue to decrease and savvy buyers are waiting until prices hit bottom.

The inventory of homes on the market keeps rising, causing prices to continue to drop. Unsold homes increased 1 percent in March to 4.06 million homes, representing a 9.9-month supply at the current sales pace. Rising foreclosures are pushing more homes on the market.

Existing-home sales make up around 85 percent of the U.S. housing market, and new-home sales make up the rest. Figures from the Commerce Department are expected later this week on sales of new homes, and a 13-year low is predicted. Decreasing overall sales are encouraging builders to stop construction and/or reduce prices. The amount of new homes initiated in March, 947,000, was the lowest in 17 years.

Different areas of the country are experiencing the drop in home sales differently. For March, sales were down 6.5 percent in the Midwest and 3.5 percent in the South, but they increased by 2.2 percent in both the Northeast and the West.

Washington Post Article: Existing home sales fall in March

Economic Reports Profile Sputtering Economy

2008-04-17T09:29:00.000-07:00

Reports released today confirm much of the bad news we've been hearing about the economy.

According to the "beige book," a combination of anecdotal reports prepared by the Federal Reserve that chronicle business conditions from around the U.S., the economy is slowing, the homebuilding sector is tanking, and prices are rising to painful levels.

The residential real estate and construction industry are "anemic," according to the book. The Commerce Department provided more specifics this week on this sector of the economy, nothing that builders started 11.9 percent fewer units of housing in March than in February, a huge decline. Permits for single-family homes are down 63 percent from the 2006 peak. Both numbers together indicate a picture of significantly reduced building activity. But this could actually be a good thing. The backlog of houses available for sale, an astounding surplus nationwide, combined with less construction, could actually help reset the balance of supply and demand, and prod the economy back in shape.

Consumer spending is softening, said the beige book. Plus, prices are rising. Consumer prices were up 0.3 percent in March, according to the Labor Department. Rising prices are due to increases across the board, but are driven particularly by natural gas and heating oil. Food prices are also increasing. In March, food prices rose 1.2 percent from big price jumps in vegetables and beef and the biggest increase in rice prices in more than five years.

Producer prices are also spiking, but so far businesses have kept the majority of price increases away from the consumers. The producer price index rose 1.1 percent last month, the largest increase since November (which experienced the highest one-month increase in 33 years) Over the last year, producer prices for finished goods are up 6.9 percent, the biggest year-over-year increase in nearly two years.

With the cost of living going up consider finding your lowest mortgage rates at ERATE

Since increased producer prices are not affecting the majority of consumer products yet, core inflation (price increases of goods other than food and energy) is still at manageable levels for the Federal Reserve. But the forecast for the immediate future is uncertain.

Washington Post Article:

Fed: Economy Worse Off Than Believed

Producer Prices Rise 1.1% in March; Food Up More Than Expected

World's Central Bankers Address Credit Crisis at G-7 Meeting

2008-04-16T13:15:00.000-07:00

Heads of Finance from Canada, France, Germany, Italy, Japan, the United Kingdom and the Unites States all met this week in Washington. The meeting came a day after Europe's Central Bank President issued a warning that the crisis in the financial markets may develop into a broader economic dilemma. But the so called G-7 finance ministers found little common ground upon which they could agree in dealing with the crisis as each country maintains differing viewpoints on the level of responsiveness required to combat the problem. Discussions involving strengthening the regulatory environment in which the financial industry operates failed to address the pressing need to mitigate the current market crisis. While implementing more stringent regulations would certainly help prevent the recurrence of a similar crisis again in the future, agreement must be reached now to minimize the damage from the existing crisis before re-focusing on the future.

Unfortunately a joint, coordinated level of cooperation appears unlikely as each of the G-7 nations is facing different economic problems and a one size fits all approach will not work. In the United States, the economy is slowing rapidly and the threat of recession is looming, while in Europe inflation seems to be the overriding concern as they are facing the worst rate of inflation in over 15 years. Given this backdrop, it is unlikely that coordinated monetary and fiscal policies could be effectively applied. However looking toward the future, agreement could be reached on issues of improving the level of multi-national cooperation in both monitoring and regulating the financial markets. Agreement may also be reached in implementing new levels of financial transparency along with the disclosure of losses and raising the over all capital requirements. Steps which could be taken jointly now by the central banks, include lending to foreign banks as well as following the path of the U.S. Fed in lending shorter term government securities and acquiring mortgage-backed assets. ERATE is an excellent source to find the lowest mortgage rates in your state for nearly all loan programs.

Expansion of FHASecure Program Proposed

2008-04-16T12:20:00.000-07:00

With over 8.5 million homeowners having virtually little to no equity in their homes, fears of mounting foreclosures continue to grow. In response to the problem, the White House has proposed expanding a program which has been in place since August of 2007 to help stem the tide. This existing Federal Housing Administration (FHA) program makes it possible for many low to moderate income borrowers to refinance into government-insured mortgages, resulting in more manageable monthly payments and helping almost 100,000 homeowners by expanding the role of FHA in dealing with the nationwide credit and housing crisis. FHA loans are insured by the federal government in cases of default though the mortgages themselves are made by private mortgage lenders such commercial banks and mortgage bankers, then after the loans have funded, they are bundled, packaged and sold as mortgage-backed securities known as Ginnie Mae's.

The program, called FHASecure, was established last year to help homeowners in distress who had some equity remaining in their home and had been able to make their mortgage payment but would face a substantial rate increase in the process of refinancing into a government insured fixed rate mortgage. Therefore the program was geared to help borrowers who were stuck in adjustable rate loans (ARMs) and were able to meet their payment obligation up until the point that their interest rate reset higher. About 150,000 homeowners have been able to refinance under FHASecure and the program is projected to reach an additional 400,000 by year's end. Under the new expanded rules proposed, a borrower would be eligible for a refinanced FHA loan even if they were delinquent in making several mortgage payments. With home prices on the decline now in many areas of the country, concessions would be required by both lenders and investors of mortgage-backed securities, because without a reduction in the principal balance owed on the mortgage, a borrower would be left in the position of having to come up with 3% equity in order to refinance. Naturally for an already financially stressed and cash strapped borrower this is not feasible and refinancing is not possible with out agreement by all parties on a reduction of the principal balance. It appears to be the judgment of the Bush Administration that it is the lender and the investor who should bear the responsibility for doing this rather than asking the U.S. taxpayer to assume the burden. Excellent source to find your lowest mortgage rates.

Senate Passes Contentious Housing Package; Bush Offers Own Plan

2008-04-10T10:28:00.000-07:00

A bipartisan package offering assistance to businesses and homeowners hurt by the housing crisis passed the Senate today with an impressive 84-12 vote.

The plan includes large tax breaks for homebuilders, a $7,000 tax credit for buyers of foreclosed properties, and $4 billion in grants to buy and improve abandoned homes. The bill also includes $150 billion in pre-foreclosure counseling and stronger loan disclosure requirements. Finally, it includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans.

Despite the show of support, the bill has many detractors including the House and the Bush Administration. Opponents claim the package is biased in favor of businesses instead of homeowners and bails out lenders with taxpayer money. They contend the tax credit for the purchase of foreclosed homes will unfairly reward purchases happening anyway, give banks an incentive for foreclosure, and depress home values. The House will likely reject key points in the package.

Another key sticking point seems to be the $25 billion tax break offered to homebuilders and other businesses experiencing heavy losses. The tax break was dropped from an earlier bill after criticism, but was added to this package after increasing worries among the public and policymakers about the housing crisis.
The Bush administration offered its own proposal on Wednesday. This narrower plan aims to rescue 100,000 homeowners at risk of foreclosure with relaxed government-backed loans standards and increased loan forgiveness.

Subprime borrowers who have missed two or three mortgage payments will be eligible for assistance from the Federal Housing Administration. More specifically, borrowers who have missed two payments and have at least 3 percent equity, and those who have missed three payments with 10 percent equity, would be eligible. Lenders will be encouraged to forgive portions of some loans and enable refinancing.

The plan drew immediate criticism from consumer groups, who said the small measures would do little to help homeowners with no equity and the millions of homeowners facing resetting loans and foreclosure.

Washington Post Article:
Scant Support for Senate Housing Bill

White House Presents Plan To Aid Subprime Borrowers

Bernanke Talks Recession; Groups Oppose Treasury Plan

2008-04-08T22:48:00.000-07:00

Confirming what many in the industry and throughout the country already believe, Federal Reserve Chairman Ben Bernanke suggested this week that the U.S. might be in a recession.

In comments to the congressional Joint Economic Committee, Bernanke projected the economy could shrink and contract during the first half of this year. He couched his first use of the term "recession" with optimism, saying he expects growth in the second half of the year, and thinks 2009 will be solid on the basis of the recent interest rate cuts and the fiscal stimulus package.

Bernanke outlined the issues that contribute to his assessment of recession, including a stagnant unemployment rate, decelerating consumer spending, tighter credit, and reduction in business prospects and spending.

Analysts believed the Fed Chair's comments explained some of the unprecedented actions in recent weeks, including continuing interest rate cuts and an intervention to save Bear Stearns from bankruptcy. Bernanke claimed the move to help the Wall Street company is a direct motion to preserve credit and financial solvency for the country.

Bernanke's comments came as opposition grows to the Treasury plan to overhaul the nation's financial regulatory structure in attempts to streamline government response to such crises in the future.

The plan, released this week by Treasury Secretary Henry M. Paulson Jr., offers up a wholly revamped system of regulation in the coming decade, correcting the oversight mistakes that led to today's current crisis. The Treasury hopes to create three more powerful agencies to monitor and oversee banking, market stability, and consumer and investor protection in mortgage lending and other activities. Another goal is to ease the approval process from the Securities and Exchange Commission for mortgage-backed bonds, so oversight is more complete. Eventually the SEC would merge with the Commodity Futures Trading Commission. Finally, the plan also grows the role of the Treasury into chief regulator of financial markets.

The mounting opposition (from lobbyists and members of the Bush administration) contends the plan is too widespread, shutting down longtime financial institutions. Banks could have less choice among regulators and credit unions could be placed under new, business-killing regulations. The SEC and CFTC are crying foul about their major overhauls. Finally, many opponents are questioning the wisdom of centralizing regulation into the Treasury, and the benefits of it for the greater economy.

Washington Post Article:
It Might Be a Recession, Fed Chief Tells Congress?
Opposition To Treasury's Blueprint Gains Steam

Insurance Losses Due to Sub-prime Top Those of Natural Disasters

2008-04-01T23:53:00.000-07:00

Insurers are now faced with the prospect of having to hold onto mortgage-backed securities in a market where buyers for such investments have all but disappeared. Without buyers it is difficult if not impossible to establish value and on that basis a ripple effect throughout the entire organization occurs without hope of a turnaround. There is much doubt as to whether significant portions of mortgage-backed debt will ever reach maturity unscathed. The continually unfolding developments resulting from the mortgage meltdown are forecast by many within the industry to ultimately produce a bigger hit to insurers than any of the previous natural disasters. Losses resulting from mortgage-backed securities continue to be revised upward from all initial estimates with no end in sight. And for the first time since the late 1990's the book value of 24 companies within the KBW Insurance Index actually declined.

Total industry losses currently exceed $38 billion and that is not where things will likely end. As auditors continue to process the financial standings of the insurers, many are found to have underestimated their losses and incorrectly valued their holdings. Many portfolio managers are now being advised to carefully weigh the credit quality of all that is purchased to insure each acquisition can safely be held to maturity. Markdowns on many of the now defunct mortgage-backed assets will continue to occur as the assets supporting them, namely home values, continue to decline. It is difficult to project when a bottom will be reached and the course reversed as many insurers may continue with write downs resulting in losses spanning the next five years.