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
Monday, October 6, 2008
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
Monday, July 14, 2008
Imagine Housing Without a Secondary Market
In 1974, the United States was reeling from Watergate and the Vietnam War and stuck in a vexing recession. Inflation was out of control and President Gerald Ford was struggling to get control of the country and its economy. A collectible from those days is a "WIN" button, which stood for "Whip Inflation Now" -- a promotional device that the desperate Ford administration ginned up.
At the time, I was fresh out of college, living in Peoria, Ill., and working as an urban planner. One distinct memory I have was passing the downtown office of Peoria Savings with a sign on the window that read "No Home Loans."
A moratorium on home loans -- can you imagine?
Get ready.
In the early 1970s, the housing market had no meaningful secondary mortgage market. When passbooks savings -- which capitalized most mortgages -- shrank, money for home loans dried up.
In 1968, Fannie Mae and Freddie Mac were re-chartered by Congress as shareholder-owned companies funded solely with private capital raised from investors on Wall Street and around the world. But it was not until the 1980s that they found their footing and their growth mushroomed. Mortgage-backed securities got traction in the early part of this decade with the national push for home ownership. New mortgage instruments were invented to capture global interest in U.S. home loans.
In this period, a secondary market came onto the scene with brute force. By 2005, the size of the market had ballooned to $3 trillion.
And today? It has collapsed. Even Fannie Mae and Freddie Mac are poised for a government bailout. Today, Fannie Mae's stock has tumbled 45 percent and Freddie's has fallen 20 percent. This is after steep declines all week.
So, imagine a return to a housing market without a robust and functional secondary housing market. In other words: a severe credit crunch.
Here are 10 things that I predict will flow from its collapse (many of which have already hit the beleaguered housing market):
1. The capital that exists from direct lenders such as community banks, savings institutions and large commercial banks will fall short of potential demand and focus on bread-and-butter loans, leaving most borrowers out in the cold.
2. Exotic loans of any kind will be completely out of favor, leaving many borrowers and many properties unfundable.
3. Home sellers will become active lenders, but only those who have equity. Seller financing will help some transactions.
4. Second homes, expensive houses and certain types of investment property will be penalized and difficult to fund.
5. Small boutique lenders will enter the business, capitalizing on market voids, funding specialized but secure niches.
6. Investment banks will take care of unleveraged high-net-worth customers, but terms will be unfavorable so this market will further shrink.
7. Sovereign wealth funds are not the solution, because many were burnt on mortgage-backed securities.
8. Those that do lend will revert to back-to-basics underwriting: perfect credit, large down payments, proof of income, personal character and good family upbringing.
9. Housing industry lobbyists will make the mortgage liquidity problem their number one policy issue in the next two years. They will argue that the sky is falling and it is.
10. The trend will keep the housing market starved for capital, prolonging the slump.
Like so many parts of our American culture, the accessibility to unlimited and poorly scrutinized debt helped turn Americans into a sloppy group of consumers, which spawned greedy Wall Streeters, out of control lenders and starry-eyed investors.
By: Brad Inman is founder and publisher of Inman News
At the time, I was fresh out of college, living in Peoria, Ill., and working as an urban planner. One distinct memory I have was passing the downtown office of Peoria Savings with a sign on the window that read "No Home Loans."
A moratorium on home loans -- can you imagine?
Get ready.
In the early 1970s, the housing market had no meaningful secondary mortgage market. When passbooks savings -- which capitalized most mortgages -- shrank, money for home loans dried up.
In 1968, Fannie Mae and Freddie Mac were re-chartered by Congress as shareholder-owned companies funded solely with private capital raised from investors on Wall Street and around the world. But it was not until the 1980s that they found their footing and their growth mushroomed. Mortgage-backed securities got traction in the early part of this decade with the national push for home ownership. New mortgage instruments were invented to capture global interest in U.S. home loans.
In this period, a secondary market came onto the scene with brute force. By 2005, the size of the market had ballooned to $3 trillion.
And today? It has collapsed. Even Fannie Mae and Freddie Mac are poised for a government bailout. Today, Fannie Mae's stock has tumbled 45 percent and Freddie's has fallen 20 percent. This is after steep declines all week.
So, imagine a return to a housing market without a robust and functional secondary housing market. In other words: a severe credit crunch.
Here are 10 things that I predict will flow from its collapse (many of which have already hit the beleaguered housing market):
1. The capital that exists from direct lenders such as community banks, savings institutions and large commercial banks will fall short of potential demand and focus on bread-and-butter loans, leaving most borrowers out in the cold.
2. Exotic loans of any kind will be completely out of favor, leaving many borrowers and many properties unfundable.
3. Home sellers will become active lenders, but only those who have equity. Seller financing will help some transactions.
4. Second homes, expensive houses and certain types of investment property will be penalized and difficult to fund.
5. Small boutique lenders will enter the business, capitalizing on market voids, funding specialized but secure niches.
6. Investment banks will take care of unleveraged high-net-worth customers, but terms will be unfavorable so this market will further shrink.
7. Sovereign wealth funds are not the solution, because many were burnt on mortgage-backed securities.
8. Those that do lend will revert to back-to-basics underwriting: perfect credit, large down payments, proof of income, personal character and good family upbringing.
9. Housing industry lobbyists will make the mortgage liquidity problem their number one policy issue in the next two years. They will argue that the sky is falling and it is.
10. The trend will keep the housing market starved for capital, prolonging the slump.
Like so many parts of our American culture, the accessibility to unlimited and poorly scrutinized debt helped turn Americans into a sloppy group of consumers, which spawned greedy Wall Streeters, out of control lenders and starry-eyed investors.
By: Brad Inman is founder and publisher of Inman News
Tuesday, July 8, 2008
Fed Adopts Plan to Curb Shady Mortgae Practices
Federal Reserve gives home buyers more protection against shady lending practices.
The Federal Reserve has adopted rules to give home buyers more protection from the types of shady lending practices that have contributed to the housing crisis and propelled foreclosures to record highs.
Chairman Ben Bernanke and his central bank colleagues approved a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers -- people with tarnished credit histories or low incomes.
In that regard, the plan would:
-- bar lenders from making loans without proof of a borrower's income.
-- require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.
-- restrict lenders from penalizing risky borrowers who pay loans off early. Such "prepayment" penalties are banned if the payment can change during the initial four years of the mortgage. In other cases, a penalty can't be imposed in the first two years of the mortgage.
-- prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value. The borrower need not have to prove that the lender engaged in a "pattern or practice" for this to be deemed a violation. That marks a change -- sought by consumer advocates -- from the Fed's initial proposal and should make it easier for borrowers to lodge a complaint.
"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities and the national economy," Bernanke said.
"Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower," he added.
For all mortgages, the plan would require advertising to contain additional information about rates, monthly payments and other loan features, and it would curtail certain deceptive or misleading advertising practices.
Other practices also would be clamped down on. Lenders, for instance, have to credit a mortgage payment to the homeowner's account on the day it is received. And, brokers and others are forbidden from "coercing or encouraging" an appraiser to misrepresent the value of a home.
Consumer groups initially complained that the new rules are not strong enough. Lenders worry they are too tough, could limit mortgage options for people and made it harder for some to obtain financing.
The new lending rules may not get a test for some time because there are fewer home buyers these days, given all the problems in the housing and credit markets. Also, some of the shady practices -- along with some lenders -- have not survived, felled by the mortgage meltdown.
"Clearly this is closing the barn door after the fact," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business. Yet, she said, "this is a very important move. It absolutely will make a difference going forward."
Much will hinge on effective enforcement.
The plan would apply to new loans made by thousands of lenders, including banks and brokers. It would not cover current loans.
Those different lenders fall under a patchwork of regulators at the federal and state levels. So it will be up to each of these authorities to enforce the new provisions.
Fed Governor Randall Kroszner, the central bank's point person on the new rules, said the Fed's goal was to protect borrowers from unfair or deceptive practices while also not impeding the flow of credit.
The Fed's rules, he said, should "better protect consumers, while preserving their access to credit as they make some of the most important financial decisions of their lives."
By: AP Business Writer Alan Zibel contributed to this report.
The Federal Reserve has adopted rules to give home buyers more protection from the types of shady lending practices that have contributed to the housing crisis and propelled foreclosures to record highs.
Chairman Ben Bernanke and his central bank colleagues approved a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers -- people with tarnished credit histories or low incomes.
In that regard, the plan would:
-- bar lenders from making loans without proof of a borrower's income.
-- require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.
-- restrict lenders from penalizing risky borrowers who pay loans off early. Such "prepayment" penalties are banned if the payment can change during the initial four years of the mortgage. In other cases, a penalty can't be imposed in the first two years of the mortgage.
-- prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value. The borrower need not have to prove that the lender engaged in a "pattern or practice" for this to be deemed a violation. That marks a change -- sought by consumer advocates -- from the Fed's initial proposal and should make it easier for borrowers to lodge a complaint.
"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities and the national economy," Bernanke said.
"Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower," he added.
For all mortgages, the plan would require advertising to contain additional information about rates, monthly payments and other loan features, and it would curtail certain deceptive or misleading advertising practices.
Other practices also would be clamped down on. Lenders, for instance, have to credit a mortgage payment to the homeowner's account on the day it is received. And, brokers and others are forbidden from "coercing or encouraging" an appraiser to misrepresent the value of a home.
Consumer groups initially complained that the new rules are not strong enough. Lenders worry they are too tough, could limit mortgage options for people and made it harder for some to obtain financing.
The new lending rules may not get a test for some time because there are fewer home buyers these days, given all the problems in the housing and credit markets. Also, some of the shady practices -- along with some lenders -- have not survived, felled by the mortgage meltdown.
"Clearly this is closing the barn door after the fact," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business. Yet, she said, "this is a very important move. It absolutely will make a difference going forward."
Much will hinge on effective enforcement.
The plan would apply to new loans made by thousands of lenders, including banks and brokers. It would not cover current loans.
Those different lenders fall under a patchwork of regulators at the federal and state levels. So it will be up to each of these authorities to enforce the new provisions.
Fed Governor Randall Kroszner, the central bank's point person on the new rules, said the Fed's goal was to protect borrowers from unfair or deceptive practices while also not impeding the flow of credit.
The Fed's rules, he said, should "better protect consumers, while preserving their access to credit as they make some of the most important financial decisions of their lives."
By: AP Business Writer Alan Zibel contributed to this report.
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