New wave defaults likely as risky loans reset to sharply higher payments
Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia’s Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the “Pick A Pay” loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said.
These “pay option” adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically “recasted” in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.
While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.
Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages “recast” to higher monthly payments over the next two years.
“The next wave (of foreclosures) is coming next year and in 2010, and that is primarily due to these pay-option ARMS and the five-year, adjustable-rate hybrid ARMS that are coming up for reset,” said William Longbrake, retired vice chairman of Washington Mutual. The giant Seattle-based bank, which collapsed this year under the weight of its bad mortgage loans, was one of the biggest originators of pay-option ARMs during the lending boom.
The next wave may be even more difficult to handle than the last one.
“It’s going to get tougher to modify loans as these option ARMs come into their resets," Federal Deposit Insurance Corp. Chairwoman Sheila Bair told msnbc.com this week. "Those are more difficult than the subprime and traditional adjustable rates to modify because there is such a huge payment differential when they reset."
Monthly quota: 45 percent
With 16 years of experience in the mortgage business, McGarry didn’t believe the “pay option” loan was a good deal for most of her customers, so she didn’t promote it.
“I looked at it and I thought: I’m 60 years old. If I were in these peoples’ situation 10 years from now, where would I be?” she said. “Do I want to be in a position that 10 years from now I can’t make this higher payment and I’m forced to make this payment and be forced out of my home? So I wouldn’t do it.”
Her job description included a requirement that she meet a monthly quota of Pick A Pay mortgages, something she said wasn’t spelled out when she was hired. Still, she said, she continued to steer her customers to conventional loans, even though her manager “frequently reminded me that my job requirement was that I do 45 percent of my volume in the Pick A Pay loan.”
In June 2008, her manager wrote a “Corrective Action and Counseling” warning, saying she wasn’t meeting the bank’s “expectation of production.” McGarry soon left Wachovia after finding a job with another mortgage company. On June 30, the bank stopped selling mortgages with negative amortization. In October Wachovia, suffering from heavy mortgage-related losses, agreed to be acquired by Wells Fargo.
A spokesman for Wachovia said that generally the bank doesn't comment on internal marketing policies. But he said commissions on Pick A Pay mortgages were higher because the loans were more complicated and required more work to originate. He also noted that when Wachovia's Pick A Pay loans recast, the payment increase is capped for any given year, which helps ease borrowers' burden of meeting a higher payment.
The first wave of home foreclosures that hit in late 2006 and early 2007 followed the resetting of subprime adjustable mortgages with two- and three-year "teaser rates" written during the height of the lending boom earlier in the decade. But pay-option ARMs — which often don't "recast" for five years — have a longer fuse. Unless defused by aggressive public and private foreclosure prevention programs, the bulk of these loans will explode to higher payments in 2009 and 2010.
The scope of the problem was highlighted in September in a study by Fitch Ratings, one of the bond rating agencies that assesses the risk of defaults on mortgage-backed investments. Of the $200 billion in option ARMs outstanding, Fitch estimates that some $29 billion will recast in 2009 and another $67 billion in 2010. That could cause delinquencies on these loans to more than double, Fitch said.
To make matters worse, only 17 percent of option ARMs written from 2004 to 2007 required full documentation. Many of the borrowers who took out these loans also took out a second mortgage, which means they likely have little or no equity in their home, according to the report. That means many could owe more than their house is worth when the loan recasts to unaffordable payments.
Heavy losses from investments backed by pay option ARMs were a major cause of the demise of Wachovia and Washington Mutual, one of the largest originators of option ARMs during the height of the lending bubble. (Washington Mutual was seized by the FDIC in September, which arranged for the sale of its assets to JPMorgan Chase. Wachovia was acquired in October by Wells Fargo, which outbid Citibank after it arranged a deal with the FDIC to acquire Wachovia.)
Since the housing bubble began to deflate in 2006, roughly 3 million homes have been lost to foreclosure. Over the next two years, another 3.6 million are expected to lose their homes, according to Moody’s Economy.com chief economist Mark Zandi.
Many of the most problematic loans — those sold with a two- or three-year low “teaser” rates — have already reset to higher levels. Those resets have been a major force in the first wave of foreclosures, which rose from 953,000 in 2006 to nearly 1.8 million last year and are on track to hit 3.1 million this year, according to First American CoreLogic, which tracks real estate data.
And the pace of foreclosures is still climbing. More than 259,000 U.S. homes received at least one foreclosure-related notice in November, up 28 percent from the same month last year, according to RealtyTrac.
Though the pace dropped slightly from the previous month, there are indications "that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months," said RealtyTrac CEO James Saccacio.
Mortgage delinquencies — homeowners who have fallen behind but not yet been hit with foreclosure — are also on the rise, according to the latest quarterly survey from the Mortgage Bankers Association. A record one in 10 American households with mortgages was overdue on payments or in foreclosure as of the end of September.
The impact is being felt unevenly across the country. Foreclosures are clustered in states that saw the biggest expansion in lending and home building. In Nevada, one in every 74 homes was hit with a foreclosure filing last month. Arizona saw one in every 149 housing units receive a foreclosure filing, and in Florida it was one in every 157 homes. California, Colorado, Georgia, Michigan, New Jersey, Illinois and Ohio have also been hard hit.
“In the neighborhoods that have concentrations of subprime loans you already have concerns about crashing neighborhoods with too many vacant houses and crime rises,” said Longbrake. “The same thing will be true for these option ARMs. They are concentrated in particular neighborhoods and particular locales around the country."
Developed in the late 1980s, pay-option ARMs were written at first only for borrowers who showed they could afford the full monthly payment. But during the height of the lending boom, underwriting standards were lowered to qualify borrowers who could only afford the minimum payment, according to Longbrake.
College savings made easy
McGarry says she was encouraged to promote the idea that with a Pick A Pay loan the borrower could pay less than the full monthly payment and set aside the difference for savings or investment. The pitch included sales literature comparing two brothers. One took the Pick A Pay loan, made the minimum payment and put money in the bank. The second brother got a conforming loan. Five years later, both brothers needed to pay their children’s college tuition.
“(The brother with the conforming loan) didn’t have the money in the bank,” said McGarry. “And the brother that had the pay-option ARM could go to the bank and withdraw the money and didn’t have to refinance his mortgage. That’s how they sold it.”
McGarry said the sales pitch downplayed the impact of negative amortization. When the loan principal swells to a set threshold — typically between 110 and 125 percent of the original loan amount — the mortgage automatically “recasts” to a higher, set monthly payment that many borrowers would have a hard time keeping up with.
Fitch estimates that the average potential payment increase would be 63 percent, or about $1,053 a month — on top of the current average payment of $1,672.
The impact on the millions of American families losing their homes is devastating. But the foreclosure fallout is being felt around the world. As the U.S. slides deeper into recession, foreclosures are the root cause of a downward spiral that threatens to prolong and widen the economic impact:
-As the pace of foreclosures rises, the glut of homes on the market pushes home prices lower. That erodes home equity for all homeowners, draining consumer spending power and further weakening the economy.
-The overhang of unsold homes also depresses the home building industry, one of the major engines of growth in a healthy economy.
-As home values decline, investors and lenders holding bonds backed by mortgages book steeper losses. Banks holding mortgage-backed investments hoard cash, creating a credit squeeze that acts as a bigger drag on the economy.
-The resulting pullback in consumer and business spending brings more layoffs. Those layoffs put additional homeowners at risk of defaulting on their mortgages, and the cycle repeats.
"Foreclosures are going to mount and the negative self-reinforcing cycle will accelerate," said Zandi. "It's already happening, but it will accelerate in a lot more parts of the country."
As pay-option ARMs put more homeowners under pressure, other forces are combining to increase the risk of mortgage defaults. As of the end of September, the drop in home prices had left roughly one in five borrowers stuck with a mortgage bigger than their house is worth, according to First American CoreLogic. In a normal market, homeowners who suffer a financial setback can tap some of the equity in their home or sell their home and move on.
“That’s a big issue,” said Mark Fleming, First American CoreLogic’s chief economist. “As equity is being destroyed in the housing markets, more and more people are being pushed into a negative equity position. That means that they’re not going to have the option for sale or refinance if they hit hard times."
“Negative equity” is also a major roadblock in negotiations between lenders and homeowners trying to modify their loan terms.
After over a year of debate in Congress, and private efforts by lenders, no one has come up with the solution to the thorniest part of the problem: Who should take the hit for the trillions of dollars of home equity lost since the credit bubble burst?
“(Customers) keep calling and saying ‘With this bailout, this isn’t helping me at all,’” said McGarry, who is now working with clients trying modify or refinance their loans. “It really and truly is not helping them. If their lender will not agree to settle for less than they owe — even though those lenders are on the list of lenders that will work with you — they still are not working with (the borrower).”
It’s a monumental undertaking that was never anticipated when servicers took on the task of managing these mortgage portfolios. These companies are already struggling to keep up with the volume of calls, and defaults are projected to keep rising. They’re also swamped with calls from desperate homeowners who are falling behind on their monthly payments.
“We have never seen anything this large before; we make 5 million phone calls a month to reach out to borrowers,” said Tom Morano, CEO of Residential Capital, the loan servicing unit of GMAC. “The volume of calls that’s coming in is much higher than it has ever been, and everybody is struggling with that.”
Now, as the spiral of falling home prices is exacerbated by rising unemployment, millions of homeowners who were on a solid financial footing when they signed their loan face the prospect of a job loss that would put them at risk of foreclosure. Some servicers say that’s the biggest wild card in projecting how many more Americans will lose their homes.
“The concern I have is if we have an economy where unemployment gets to 8 or 9 percent,” said Morano. “If that happens the amount of delinquencies is going to be staggering.”
With the latest monthly data showing more than half a million jobs were lost in November, some economists now believe the jobless rate could rise from the current 6.7 percent to top 10 percent by the end of next year.
By John W. Schoen MSNBC.com
Thursday, December 11, 2008
Tuesday, December 9, 2008
The Million-Dollar-Home Dream goes POOF!
If you paid seven figures, it probably isn't worth that anymore; for buyers, $500,000 is the new $1 million.
Half a million dollars is, by almost any standard, a lot of money. But during the past few years, when credit was easy and regulations were loose, for many Americans it didn't seem like all that much.
That's because they were able to borrow huge amounts of money to buy new homes, often with little or nothing down. And while most homes sold in the United States, even at the height of the housing bubble, were $500,000 or less, rising prices in many major cities and affluent suburbs around the country pushed the cost of a three-bedroom home into seven figures or more.
But the gap between $500,000 and $1 million is more than monetary. It is also psychological. And during the recent boom years, Americans became reckless consumers, buying cars, houses, clothes and much more that they couldn't really afford. The dream of a $1 million home, once so distant, became tantalizingly reachable.
Now that has all changed. While certain pockets, such as Manhattan, San Francisco and Boston, remain high, real-estate prices around the country have fallen dramatically. The downside to this, of course, is that many people now owe more money on their home than their home is worth. The upside is that valuations are much more realistic — and affordable.
Pain is spreading
That's because homes priced at half a million — and higher — are now also beginning to shrink in value. Initially, the properties hit hard by the subprime crisis were lower-priced dwellings more often than not bought by people with poor credit. But now, as too many people are experiencing, the pain is spreading even to people with good credit and higher incomes.
Until recently, sellers in wealthy neighborhoods were somewhat protected from the subprime credit crisis and were still drawing buyers with high salaries, good credit scores and a cushion of savings. But the problems worsened after global financial-services giant Lehman Brothers collapsed on Sept. 15. Credit markets froze, corporate giants laid off thousands of highly paid workers, and the stocks that padded the portfolios of the wealthy plummeted.
Even once seemingly impervious markets such as New York City, Florida and California, which had attracted well-heeled international buyers looking to take advantage of a weak dollar, began to struggle as the global economic slowdown washed over Europe, Asia and even the Middle East.
Asking prices for luxury homes nationwide have fallen 5.4% since Jan. 4, and such homes now stay on the market for 148 days, compared with 125 days at the beginning of the year, according to The Institute for Luxury Home Marketing's Luxury Market Report, which tracked prices through Nov. 7. The data — compiled by Altos Research — look at prices in the top 10 wealthiest ZIP codes in 30 large metro areas around the country.
Watching and waiting
"The entry level of the upper tier — the $500,000 price point and up — has been softening for a while," said Laurie Moore-Moore, founder and CEO of the Institute for Luxury Home Marketing, a Dallas-based group that trains high-end agents. "What we've also seen in the last month is huge uncertainty at the very top of the market. People want to know where are we headed, how serious [the downturn] is going to be, and what is the duration. There are enough questions that even at the top of the market, people are waiting and watching."
BusinessWeek.com put together a sampling of homes selling for about $500,000 in 17 of the most affluent communities across the nation. A few years ago, those homes would have likely commanded much higher prices.
Art Tassaro, a real-estate agent with Friedberg Properties in the wealthy New York suburb of Cresskill, N.J., said buyers have all but disappeared in the past few months. Sellers who want their home to move quickly need to be aggressive about pricing. One method is to average the three lowest sales prices in a given neighborhood during the past year and then discount that price by an additional 5%, he said.
"If it was bad before, it's worse now," he said.
Of course, if you’re buying …
Grim times for sellers can be full of opportunity for buyers, especially those with cash, Tassaro said.
John Marcell, president of Better Mortgage Brokers in Upland, Calif., said sellers are discounting prices significantly in order to make a sale. Most sales are so-called short sales, where the lender agrees to accept less than the outstanding loan amount to avoid a foreclosure.
High-end homes are just sitting on the market in his area, he said. Entry-level homes now make up the market's strongest segment, because first-time purchasers can take advantage of low prices without having to worry about unloading their existing homes, he said.
"The only sales of million-dollar homes are foreclosures," Marcell said.
By Prashant Gopal, BusinessWeek.com
Half a million dollars is, by almost any standard, a lot of money. But during the past few years, when credit was easy and regulations were loose, for many Americans it didn't seem like all that much.
That's because they were able to borrow huge amounts of money to buy new homes, often with little or nothing down. And while most homes sold in the United States, even at the height of the housing bubble, were $500,000 or less, rising prices in many major cities and affluent suburbs around the country pushed the cost of a three-bedroom home into seven figures or more.
But the gap between $500,000 and $1 million is more than monetary. It is also psychological. And during the recent boom years, Americans became reckless consumers, buying cars, houses, clothes and much more that they couldn't really afford. The dream of a $1 million home, once so distant, became tantalizingly reachable.
Now that has all changed. While certain pockets, such as Manhattan, San Francisco and Boston, remain high, real-estate prices around the country have fallen dramatically. The downside to this, of course, is that many people now owe more money on their home than their home is worth. The upside is that valuations are much more realistic — and affordable.
Pain is spreading
That's because homes priced at half a million — and higher — are now also beginning to shrink in value. Initially, the properties hit hard by the subprime crisis were lower-priced dwellings more often than not bought by people with poor credit. But now, as too many people are experiencing, the pain is spreading even to people with good credit and higher incomes.
Until recently, sellers in wealthy neighborhoods were somewhat protected from the subprime credit crisis and were still drawing buyers with high salaries, good credit scores and a cushion of savings. But the problems worsened after global financial-services giant Lehman Brothers collapsed on Sept. 15. Credit markets froze, corporate giants laid off thousands of highly paid workers, and the stocks that padded the portfolios of the wealthy plummeted.
Even once seemingly impervious markets such as New York City, Florida and California, which had attracted well-heeled international buyers looking to take advantage of a weak dollar, began to struggle as the global economic slowdown washed over Europe, Asia and even the Middle East.
Asking prices for luxury homes nationwide have fallen 5.4% since Jan. 4, and such homes now stay on the market for 148 days, compared with 125 days at the beginning of the year, according to The Institute for Luxury Home Marketing's Luxury Market Report, which tracked prices through Nov. 7. The data — compiled by Altos Research — look at prices in the top 10 wealthiest ZIP codes in 30 large metro areas around the country.
Watching and waiting
"The entry level of the upper tier — the $500,000 price point and up — has been softening for a while," said Laurie Moore-Moore, founder and CEO of the Institute for Luxury Home Marketing, a Dallas-based group that trains high-end agents. "What we've also seen in the last month is huge uncertainty at the very top of the market. People want to know where are we headed, how serious [the downturn] is going to be, and what is the duration. There are enough questions that even at the top of the market, people are waiting and watching."
BusinessWeek.com put together a sampling of homes selling for about $500,000 in 17 of the most affluent communities across the nation. A few years ago, those homes would have likely commanded much higher prices.
Art Tassaro, a real-estate agent with Friedberg Properties in the wealthy New York suburb of Cresskill, N.J., said buyers have all but disappeared in the past few months. Sellers who want their home to move quickly need to be aggressive about pricing. One method is to average the three lowest sales prices in a given neighborhood during the past year and then discount that price by an additional 5%, he said.
"If it was bad before, it's worse now," he said.
Of course, if you’re buying …
Grim times for sellers can be full of opportunity for buyers, especially those with cash, Tassaro said.
John Marcell, president of Better Mortgage Brokers in Upland, Calif., said sellers are discounting prices significantly in order to make a sale. Most sales are so-called short sales, where the lender agrees to accept less than the outstanding loan amount to avoid a foreclosure.
High-end homes are just sitting on the market in his area, he said. Entry-level homes now make up the market's strongest segment, because first-time purchasers can take advantage of low prices without having to worry about unloading their existing homes, he said.
"The only sales of million-dollar homes are foreclosures," Marcell said.
By Prashant Gopal, BusinessWeek.com
Monday, October 6, 2008
The $700 Billion Rescue passed....but will it work???
The $700 billion rescue bill that Congress finally passed will limit panic in the markets, since it gives the government vast new authority to take over sclerotic securities that have clogged the credit system and already brought down some of America's biggest companies. With the feds stepping into the bloodbath, the hemorrhaging should stop. But the economy is still in precarious shape, and unrealistic expectations about the bailout could end up disappointing consumers hoping for some kind of immediate relief.Here are some likely developments for which consumers should prepare:
Less volatility. One thing the bailout will do is give investors some clarity and predictability, which will help calm the financial markets. With a clear plan for handling troubled companies--instead of the ad hoc approach applied to Bear Stearns, Lehman Brothers, and others--the government will abide by a consistent set of bailout rules, which will prevent the wild swings in the stock markets that made September a heart-stopping month.
But beware a sucker's rally. With the congressional melodrama over and the bailout in place, the markets will be reacting once again to ordinary economic forces--which are weak, at best. A few other big financial firms, and a lot of regional banks, are expected to take a hit next, especially if the credit crunch persists. Even if the government manages those problems smoothly, shareholders could get wiped out or of suffer deep losses. The global economy is cooling, too, which means less demand for American exports--a rare economic bright spot until lately--and lower profits for American multinational firms. All of those factors are likely to weigh down stocks.
Safe banks. There will probably be more bank failures, but the bill makes it clear that depositors don't need to worry about their money. The bill raises the amount of deposits covered by the FDIC from $100,000 to $250,000. That makes an implicit guarantee explicit: Until now, the FDIC has covered all deposits, including those over $100,000, to prevent "walks" on banks by people withdrawing everything over the insured limit. Now, the government will guarantees that higher amounts will be covered, even if banks fail.
A recession. Unfortunately, a more stable financial system probably won't prevent a sharp economic downturn, which already seems to be underway. Economists will probably continue to argue about whether it's technically a recession. But for many consumers and a lot of big industries, it doesn't matter what you call it: Times are tough, and getting tougher.
Job cuts in September--159,000--were the most in five years. Most economists are betting that additional jobs are going to be cut in coming months as companies hunker down. Worried consumers are likely to cut spending, deepening the dismal cycle.
There's already a recession in the auto industry, for example, which accounts for a big chunk of Americans' economic activity. Sales in September plunged to the lowest levels in 15 years. Deep worries--and profit-crunching discounts--are spreading to other sectors of the retail economy, too.
The bailout might help contain the damage. Theoretically, the feds' shock therapy will lessen the risk that a lot of companies will go bankrupt, which should motivate nervous bankers to start lending once again, with less fear that their money will vanish. If that actually happens, it will help big and small businesses alike continue to meet their payrolls. But there's nothing in the bill that forces banks to lend money, and they could just keep sitting on their cash for a while. And even if money loosens up, that's still no guarantee that consumers will spend. So any economic boost from the bailout will be indirect and probably take a while.
Minimal tax relief. A tax increase to pay for the bailout seems unnecessary, since many analysts think that the eventual sale of troubled securities could cover the government's costs. But added short-terms costs means that tax cuts anytime soon look less likely. Both Barack Obama and John McCain are pushing tax breaks, a perennial campaign promise. Obama wants to cut taxes for most Americans earning less than $250,000. McCain's plan calls for cutting capital gains taxes and corporate income taxes and extending other tax cuts that are set to expire soon. But don't bank on much relief: With the soaring costs of the federal bailout--plus added expenses, like up to $50 billion in loans for the Detroit automakers--anything that adds to the federal deficit next year is going to be hard to slip past budget hawks in Congress. A smaller set of tax cuts might be possible, though.
Scarce consumer loans. Banks have cut back on virtually every kind of loan to consumers, whether it's for cars, homes, vacations, or small credit-card purchases. One new government provision may help some homeowners who are at risk of defaulting, through a program that allows certain homeowners to renegotiate their loans with the bank. But it's not clear how effective that program will be.
While the bailout is supposed to ease the "credit crunch," it will probably be a while before relief reaches consumers. For one thing, the government will focus first on freeing money for banks and businesses so they are able to keep their operations humming and meet payroll expenses.
If banks do loosen up, the money flow may eventually trickle down to consumers. But stringent lending standards are likely to be in place well into next year, because banks are still digesting defaults on mortgages, car loans, and credit cards. And default rates are rising, not falling. Until those losses are covered, banks are going to say no more often than yes. For the next year or two, many Americans may have little choice but to save for a sunnier day.
Story by: Fadwa Knox
Less volatility. One thing the bailout will do is give investors some clarity and predictability, which will help calm the financial markets. With a clear plan for handling troubled companies--instead of the ad hoc approach applied to Bear Stearns, Lehman Brothers, and others--the government will abide by a consistent set of bailout rules, which will prevent the wild swings in the stock markets that made September a heart-stopping month.
But beware a sucker's rally. With the congressional melodrama over and the bailout in place, the markets will be reacting once again to ordinary economic forces--which are weak, at best. A few other big financial firms, and a lot of regional banks, are expected to take a hit next, especially if the credit crunch persists. Even if the government manages those problems smoothly, shareholders could get wiped out or of suffer deep losses. The global economy is cooling, too, which means less demand for American exports--a rare economic bright spot until lately--and lower profits for American multinational firms. All of those factors are likely to weigh down stocks.
Safe banks. There will probably be more bank failures, but the bill makes it clear that depositors don't need to worry about their money. The bill raises the amount of deposits covered by the FDIC from $100,000 to $250,000. That makes an implicit guarantee explicit: Until now, the FDIC has covered all deposits, including those over $100,000, to prevent "walks" on banks by people withdrawing everything over the insured limit. Now, the government will guarantees that higher amounts will be covered, even if banks fail.
A recession. Unfortunately, a more stable financial system probably won't prevent a sharp economic downturn, which already seems to be underway. Economists will probably continue to argue about whether it's technically a recession. But for many consumers and a lot of big industries, it doesn't matter what you call it: Times are tough, and getting tougher.
Job cuts in September--159,000--were the most in five years. Most economists are betting that additional jobs are going to be cut in coming months as companies hunker down. Worried consumers are likely to cut spending, deepening the dismal cycle.
There's already a recession in the auto industry, for example, which accounts for a big chunk of Americans' economic activity. Sales in September plunged to the lowest levels in 15 years. Deep worries--and profit-crunching discounts--are spreading to other sectors of the retail economy, too.
The bailout might help contain the damage. Theoretically, the feds' shock therapy will lessen the risk that a lot of companies will go bankrupt, which should motivate nervous bankers to start lending once again, with less fear that their money will vanish. If that actually happens, it will help big and small businesses alike continue to meet their payrolls. But there's nothing in the bill that forces banks to lend money, and they could just keep sitting on their cash for a while. And even if money loosens up, that's still no guarantee that consumers will spend. So any economic boost from the bailout will be indirect and probably take a while.
Minimal tax relief. A tax increase to pay for the bailout seems unnecessary, since many analysts think that the eventual sale of troubled securities could cover the government's costs. But added short-terms costs means that tax cuts anytime soon look less likely. Both Barack Obama and John McCain are pushing tax breaks, a perennial campaign promise. Obama wants to cut taxes for most Americans earning less than $250,000. McCain's plan calls for cutting capital gains taxes and corporate income taxes and extending other tax cuts that are set to expire soon. But don't bank on much relief: With the soaring costs of the federal bailout--plus added expenses, like up to $50 billion in loans for the Detroit automakers--anything that adds to the federal deficit next year is going to be hard to slip past budget hawks in Congress. A smaller set of tax cuts might be possible, though.
Scarce consumer loans. Banks have cut back on virtually every kind of loan to consumers, whether it's for cars, homes, vacations, or small credit-card purchases. One new government provision may help some homeowners who are at risk of defaulting, through a program that allows certain homeowners to renegotiate their loans with the bank. But it's not clear how effective that program will be.
While the bailout is supposed to ease the "credit crunch," it will probably be a while before relief reaches consumers. For one thing, the government will focus first on freeing money for banks and businesses so they are able to keep their operations humming and meet payroll expenses.
If banks do loosen up, the money flow may eventually trickle down to consumers. But stringent lending standards are likely to be in place well into next year, because banks are still digesting defaults on mortgages, car loans, and credit cards. And default rates are rising, not falling. Until those losses are covered, banks are going to say no more often than yes. For the next year or two, many Americans may have little choice but to save for a sunnier day.
Story by: Fadwa Knox
Thursday, October 2, 2008
The Consumer Bailout That Nobody Knows About
As congress considers the $700 Billion bailout for the financial system, there is a little known "bailout" for home owners that has already been enacted into law, according to Gibran Nichols, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers. Section 1403 of the new housing bill that was signed into law on July 30, 2008 (HR 3221) requires mortgage servicers to modify loans for homeowners and help them avoid foreclosures as long as three requirements are met:
A.) Default on the mortgage either has already happened or is "reasonably foreseeable"
B.) The homeowner is living in the property as his or her primary residence.
C.) The lender is likely to recover more through the loan modification or workout than by forcing the homeowner into foreclosure
"The fact is that this law is effective immediately, and most distressed homeowners are simply not aware that they have this option," Nicholas said. Borrowers make their monthly payments to mortgage servicers, and servicers keep a portion of the payment as their profit while sending the rest to the Wall Street investors who actually own the mortgage. "This law requires services to act in the best interest of their investors and obligates them to modify your loan if you can afford the modification loan terms and if they are likely to recover more for their investors by working with you than by going all the way through the foreclosure process." Nicholas said.
While negotiating loan modification with your mortgage lender, it is advisable to follow these four steps:
1.) Make sure you are dealing with your lender's loss mitigation and/or work out department
2.) Write a hardship letter demonstrating job loss, serious medical condition, balloon payment coming due, adjustable rate reset or some other financial calamity that will make it impossible for you to continue making your mortgage payments as scheduled. Unless you are in imminent danger or default as required by this new law, lenders are not likely to work with you.
3.) Send the lender you financial statements, employment records, tax returns and bank statements demonstrating how you would be able to afford the modified loan terms under your present financial circumstances.
4.) Send the lender a current appraisal of your home or some documentation on recent comparable sales in your neighborhood demonstrating the current value of your home. "The key to demonstrating how the lender is likely to recover less money through foreclosure than they would by working with you in your purposed loan modification plan," Nicholas said.
It is advisable that you speak with a professional mortgage consultant. Give us a call! We want to help you!!
A.) Default on the mortgage either has already happened or is "reasonably foreseeable"
B.) The homeowner is living in the property as his or her primary residence.
C.) The lender is likely to recover more through the loan modification or workout than by forcing the homeowner into foreclosure
"The fact is that this law is effective immediately, and most distressed homeowners are simply not aware that they have this option," Nicholas said. Borrowers make their monthly payments to mortgage servicers, and servicers keep a portion of the payment as their profit while sending the rest to the Wall Street investors who actually own the mortgage. "This law requires services to act in the best interest of their investors and obligates them to modify your loan if you can afford the modification loan terms and if they are likely to recover more for their investors by working with you than by going all the way through the foreclosure process." Nicholas said.
While negotiating loan modification with your mortgage lender, it is advisable to follow these four steps:
1.) Make sure you are dealing with your lender's loss mitigation and/or work out department
2.) Write a hardship letter demonstrating job loss, serious medical condition, balloon payment coming due, adjustable rate reset or some other financial calamity that will make it impossible for you to continue making your mortgage payments as scheduled. Unless you are in imminent danger or default as required by this new law, lenders are not likely to work with you.
3.) Send the lender you financial statements, employment records, tax returns and bank statements demonstrating how you would be able to afford the modified loan terms under your present financial circumstances.
4.) Send the lender a current appraisal of your home or some documentation on recent comparable sales in your neighborhood demonstrating the current value of your home. "The key to demonstrating how the lender is likely to recover less money through foreclosure than they would by working with you in your purposed loan modification plan," Nicholas said.
It is advisable that you speak with a professional mortgage consultant. Give us a call! We want to help you!!
By: Artcle written by Paige of RISMedia.com
Tuesday, September 9, 2008
Monday, September 8, 2008
Government Takes Control of Fannie Mae and Freddie Mac: Possible Benefits to the Consumer
The government takeover of Fannie Mae and Freddie Mack is designed to put downward pressure of mortgage rates and to ensure that home loans remain available.
Those goals are made crystal clear in the statements made by public officials.
The primary mission of the two mortgage giants "now will be to proactively work to increase the availability of mortgage finance," says James Lockhart, who will temporarily govern Fannie and Freddie.
Lockhart, head of the Federal Housing Finance Agency, adds that his agency will examine Fannie's and Freddie's fees" with an eye toward mortgage affordability."
Treasury Secretary Henry Paluson says the government has three objectives: "market stability, mortgage availability and taxpayer protection." That's another signal that the government wants mortgages to remain available, at good rates, to borrowers with low risk to default.
Jim Sahnger, a mortgage broker with Palm Beach Financial Network in Stuart, FL, says, "The good news for the consumer is that money will still continue to flow, provided you have the ability to qualify."
Rate Reduction Expected
Dean Baker, an economist with the Center for Economic and Policy Research, a think tank in Washington, D.C., says, "I think that the immediate impact will be somewhat positive. You'll see some drop in mortgage rates because it'll decrease the uncertainty" that had pushed mortgage rates up this summer.
Baker says he can imagine a drop in mortgage rates of around a quarter of a percentage point, give or take about 5 basis points. A basis point is one-hundredth of a percentage point. "It's something," he says. "It's not going to make a huge difference."
It's hard to guess the timing of such a rate decrease. Baker says it might happen as soon as today, but possibly later. "Probably we're talking the inside of two weeks," Barker says.
Sahnger agrees that rates will fall soon. "there will be an immediate impact as far as rates," he says. " I think rates are going to improve modestly at the beginning."
Why Rates Should Fall
Mortgage rates are expected to fall because the Treasury Department will buy mortgage-backed securities. Here's why rates would fall as a result of the Treasury buying mortgage-backed securities:
When investors buy bonds, they have a wealth of choices. They can buy U.S. Treasury bills and notes, or corporate debt, or bonds from state and local governments. Or they can buy mortgage-backed securities, which behave much like bonds. Mortgage-backed securities are known as MBS in industry shorthand.
Fannie and Freddie guarantee the mortgage-backed securities that they issue, and those securities are deemed quite safe as investments. Not as safe as Treasury notes, but relatively safe. Fannie and Freddie are government-sponsored enterprises, or GSEs and for decades they had implicit government backing. That backing is now explicit.
In the past few months, investors have rushed to the safety of Treasury notes and haven't been as eager to buy mortgage-backed securities. The lessened demand caused the prices of mortgage-backed securities to go down. When bond prices fall, bond yields rise, and that's what happened with mortgage-backed securities. As yields went up, so did mortgage rates. The difference, or spread, widened between Treasury yields and mortgage-backed securities.
Now that the Treasury will buy mortgage-backed securities, their prices should rise because of the greater demand. (The same thing would happen if the federal government bought, say, boxcar loads of sugar. You would expect sugar prices to go up.) When bond prices rise, yields drop -- so mortgage rates should follow.
Lockhart, whose department will run Fannie and Freddie, describes this succinctly when he says, "As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. (The) Treasury will begin this new program later this month, investing in new GSE MBS."
Jumbo Rates Stay Up
The government's action will have a beneficial effect on some mortgages, but not all. It will have little or no impact on jumbo mortgages -- home loans for large amounts. (The definition of a jumbo loan varies, depending on house prices in each metro area. A jumbo is a loan of more than $417,000 in much of the country, and is higher in more expensive housing markets -- up to $729,750 in places such as Los Angeles.)
Because they are perceived as riskier, rates on jumbo mortgages have been unusually high for the last year. Historically, jumbo rates had hovered about a quarter of a percentage point above the rates for mortgages backed by Fannie and Freddie. Now they're about a full percentage point higher, and that gap is unlikely to fall soon.
The government's bailout of Fannie and Freddie won't affect rates on home equity loans or home equity lines of credit, either.
By: Holden Lewis Bankrate.com
Those goals are made crystal clear in the statements made by public officials.
The primary mission of the two mortgage giants "now will be to proactively work to increase the availability of mortgage finance," says James Lockhart, who will temporarily govern Fannie and Freddie.
Lockhart, head of the Federal Housing Finance Agency, adds that his agency will examine Fannie's and Freddie's fees" with an eye toward mortgage affordability."
Treasury Secretary Henry Paluson says the government has three objectives: "market stability, mortgage availability and taxpayer protection." That's another signal that the government wants mortgages to remain available, at good rates, to borrowers with low risk to default.
Jim Sahnger, a mortgage broker with Palm Beach Financial Network in Stuart, FL, says, "The good news for the consumer is that money will still continue to flow, provided you have the ability to qualify."
Rate Reduction Expected
Dean Baker, an economist with the Center for Economic and Policy Research, a think tank in Washington, D.C., says, "I think that the immediate impact will be somewhat positive. You'll see some drop in mortgage rates because it'll decrease the uncertainty" that had pushed mortgage rates up this summer.
Baker says he can imagine a drop in mortgage rates of around a quarter of a percentage point, give or take about 5 basis points. A basis point is one-hundredth of a percentage point. "It's something," he says. "It's not going to make a huge difference."
It's hard to guess the timing of such a rate decrease. Baker says it might happen as soon as today, but possibly later. "Probably we're talking the inside of two weeks," Barker says.
Sahnger agrees that rates will fall soon. "there will be an immediate impact as far as rates," he says. " I think rates are going to improve modestly at the beginning."
Why Rates Should Fall
Mortgage rates are expected to fall because the Treasury Department will buy mortgage-backed securities. Here's why rates would fall as a result of the Treasury buying mortgage-backed securities:
When investors buy bonds, they have a wealth of choices. They can buy U.S. Treasury bills and notes, or corporate debt, or bonds from state and local governments. Or they can buy mortgage-backed securities, which behave much like bonds. Mortgage-backed securities are known as MBS in industry shorthand.
Fannie and Freddie guarantee the mortgage-backed securities that they issue, and those securities are deemed quite safe as investments. Not as safe as Treasury notes, but relatively safe. Fannie and Freddie are government-sponsored enterprises, or GSEs and for decades they had implicit government backing. That backing is now explicit.
In the past few months, investors have rushed to the safety of Treasury notes and haven't been as eager to buy mortgage-backed securities. The lessened demand caused the prices of mortgage-backed securities to go down. When bond prices fall, bond yields rise, and that's what happened with mortgage-backed securities. As yields went up, so did mortgage rates. The difference, or spread, widened between Treasury yields and mortgage-backed securities.
Now that the Treasury will buy mortgage-backed securities, their prices should rise because of the greater demand. (The same thing would happen if the federal government bought, say, boxcar loads of sugar. You would expect sugar prices to go up.) When bond prices rise, yields drop -- so mortgage rates should follow.
Lockhart, whose department will run Fannie and Freddie, describes this succinctly when he says, "As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. (The) Treasury will begin this new program later this month, investing in new GSE MBS."
Jumbo Rates Stay Up
The government's action will have a beneficial effect on some mortgages, but not all. It will have little or no impact on jumbo mortgages -- home loans for large amounts. (The definition of a jumbo loan varies, depending on house prices in each metro area. A jumbo is a loan of more than $417,000 in much of the country, and is higher in more expensive housing markets -- up to $729,750 in places such as Los Angeles.)
Because they are perceived as riskier, rates on jumbo mortgages have been unusually high for the last year. Historically, jumbo rates had hovered about a quarter of a percentage point above the rates for mortgages backed by Fannie and Freddie. Now they're about a full percentage point higher, and that gap is unlikely to fall soon.
The government's bailout of Fannie and Freddie won't affect rates on home equity loans or home equity lines of credit, either.
By: Holden Lewis Bankrate.com
Tuesday, August 26, 2008
'Hints of a Bottom' in Sight
Though home prices continued to fall in July, there are growing signs that — in some regions at least — the market may be stabilizing as lower prices lure some buyers off the sidelines. But a broad housing recovery faces stiff headwinds in the form of rising unemployment, tighter credit for borrowers and a huge inventory of unsold homes.
The widely watched Standard & Poor's/Case-Shiller national home price index fell by a record 15.4 percent during the second quarter compared to the same period a year ago.
Still, the report offered a glimmer of hope that the slide in home prices may be easing: The rate of price drops slowed from May to June, and regional price data showed that nine of the 20 cities tracked by the index posted slight month-to-month gains.
"If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”
Other housing news this week also gave reason for cautious optimism. Sales of new homes posted an unexpected gain of 2.4 percent in July, and sales of existing homes rose 3.1 percent, more than expected.
But in both cases, the reports were mixed. Median prices for existing homes are still falling, and the number of unsold homes on the market hit an all-time high.
“The question is 'Where is the economy going?'” said Robert Brusca, chief economist at Fact and Opinion Economics. “If the economy gets weaker, this stability we see in housing will give way and we’ll get traditionally weakness in housing that will come from the economy itself. So we have to be concerned about that."
Even the usually optimistic White House was extremely cautious in its reaction. "The data today paint a mixed picture, but it's clear it will still take some time to work through the downturn in housing," White House spokesman Tony Fratto said in Crawford, Texas, where President Bush was spending time at his ranch. "Once housing prices stabilize that will signal a return to a housing industry that can contribute to economic growth."
Like discounted merchandise in a department store, lower home prices should eventually spur sales. Buyers who were priced out of the market during the peak of the housing boom have a better shot at homeownership as prices fall.
The national “affordability index” — which tracks incomes, mortgage rates and home prices —fell a bit in July, meaning houses became a bit less affordable, mainly due to rising mortgage rates. But overall, homes are generally more affordable than they were at the height of the boom.
The recovery in the housing market is being slowed by the availability of credit, now that lenders have substantially tightened up guidelines on approving loans. The supply of mortgage money has also been crimped as the two government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, struggle to cope with mounting losses from foreclosures.
The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease.
“I anticipate seeing price support probably sometime in the first or second quarter of next year when the foreclosure market stabilizes back to more normal numbers,” Damian Kassab, CEO of Warren Bank in Clinton, Mich., said on CNBC.
Foreclosure filings continued to rise in July — up 8 percent from June and 55 percent higher than last July. Last month, the White House signed housing legislation designed to head off foreclosures by allowing an estimated 400,000 homeowners swap their mortgages for more affordable loans.
But homeowners can only participate if their lender agrees to take a loss on the loan. Even if the plan works as intended, some 2.8 million U.S. households will either face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, according to estimates by Moody's Economy.com.
Signs of a bottom in the housing market are further clouded by the recent rise in the unemployment rate. Homeowners who might have otherwise managed to keep up with their mortgage payments will have a harder time doing so if they’re out of a job.
Consumer budgets are also being squeezed by higher food and energy prices, though household budgets have recently gotten something of a reprieve as gasoline prices have eased. That helped lift overall consumer confidence a bit in July, though the outlook for jobs turned bleaker, according to the latest monthly survey from The Conference Board.
“We are not out of this," said Ken Goldstein, an economist at the Conference Board. “We still have months to go before the economy and the housing market will be improving. That's not going to happen until 2009, maybe not until the summer of 2009.”
By: John W. Schoen MSNBC.com
The widely watched Standard & Poor's/Case-Shiller national home price index fell by a record 15.4 percent during the second quarter compared to the same period a year ago.
Still, the report offered a glimmer of hope that the slide in home prices may be easing: The rate of price drops slowed from May to June, and regional price data showed that nine of the 20 cities tracked by the index posted slight month-to-month gains.
"If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”
Other housing news this week also gave reason for cautious optimism. Sales of new homes posted an unexpected gain of 2.4 percent in July, and sales of existing homes rose 3.1 percent, more than expected.
But in both cases, the reports were mixed. Median prices for existing homes are still falling, and the number of unsold homes on the market hit an all-time high.
“The question is 'Where is the economy going?'” said Robert Brusca, chief economist at Fact and Opinion Economics. “If the economy gets weaker, this stability we see in housing will give way and we’ll get traditionally weakness in housing that will come from the economy itself. So we have to be concerned about that."
Even the usually optimistic White House was extremely cautious in its reaction. "The data today paint a mixed picture, but it's clear it will still take some time to work through the downturn in housing," White House spokesman Tony Fratto said in Crawford, Texas, where President Bush was spending time at his ranch. "Once housing prices stabilize that will signal a return to a housing industry that can contribute to economic growth."
Like discounted merchandise in a department store, lower home prices should eventually spur sales. Buyers who were priced out of the market during the peak of the housing boom have a better shot at homeownership as prices fall.
The national “affordability index” — which tracks incomes, mortgage rates and home prices —fell a bit in July, meaning houses became a bit less affordable, mainly due to rising mortgage rates. But overall, homes are generally more affordable than they were at the height of the boom.
The recovery in the housing market is being slowed by the availability of credit, now that lenders have substantially tightened up guidelines on approving loans. The supply of mortgage money has also been crimped as the two government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, struggle to cope with mounting losses from foreclosures.
The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease.
“I anticipate seeing price support probably sometime in the first or second quarter of next year when the foreclosure market stabilizes back to more normal numbers,” Damian Kassab, CEO of Warren Bank in Clinton, Mich., said on CNBC.
Foreclosure filings continued to rise in July — up 8 percent from June and 55 percent higher than last July. Last month, the White House signed housing legislation designed to head off foreclosures by allowing an estimated 400,000 homeowners swap their mortgages for more affordable loans.
But homeowners can only participate if their lender agrees to take a loss on the loan. Even if the plan works as intended, some 2.8 million U.S. households will either face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, according to estimates by Moody's Economy.com.
Signs of a bottom in the housing market are further clouded by the recent rise in the unemployment rate. Homeowners who might have otherwise managed to keep up with their mortgage payments will have a harder time doing so if they’re out of a job.
Consumer budgets are also being squeezed by higher food and energy prices, though household budgets have recently gotten something of a reprieve as gasoline prices have eased. That helped lift overall consumer confidence a bit in July, though the outlook for jobs turned bleaker, according to the latest monthly survey from The Conference Board.
“We are not out of this," said Ken Goldstein, an economist at the Conference Board. “We still have months to go before the economy and the housing market will be improving. That's not going to happen until 2009, maybe not until the summer of 2009.”
By: John W. Schoen MSNBC.com
Subscribe to:
Posts (Atom)