Actions by the FED & other rumblings

Fed Chairman Ben Bernanke suggested a new idea to fix the troubled market for mortgages too large for Fannie Mae and Freddie Mac to buy: allow the companies to securitize jumbos, but have the federal government guarantee them. Fannie and Freddie currently can buy mortgages only up to $417,000 and so far Congress hasn't acted to lift that. As an alternative, Bernanke suggested that Congress could consider allowing the companies to buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them, and then turn them into securities to be sold to investors. But is the Federal government willing to take on additional credit risk in addition to FHA, VA, etc?

The House Committee on Financial Services approved the mortgage reform legislation and anti-predatory lending practices by a vote of 45 to 19. H.R. 3915, the "The Mortgage Reform and Anti-Predatory Lending Act of 2007," will create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan, and will attach a limited liability to secondary market securitizers. The legislation will also expand and enhance consumer protections for "high-cost loans," will include protections for renters of foreclosed homes, and will establish an Office of Housing Counseling through the Department of Housing and Urban Development. From here it moves on to the full House . . . .

• E-LOAN, which opened in 1997, laid off 500 employees (out of 950) worldwide. The lay-offs impacted their auto-lending group, programmers overseas, and a few other business lines.
• HSBC withdrew from the mortgage-backed security trading business in the United States. That is not a good thing.
• Trading in Barclays shares, Britain's third-biggest lender, was temporarily suspended from trading after the stock fell 6% in London.
• Edgewater Lending of Clackamas, Oregon announced the closure of their wholesale department but continued their two retail centers. The layoff involves 8 to 10 people.
• California wholesaler ResMae announced that they have ceased accepting locks.
• Indymac reported a net loss of $202.7 million ($2.77 per share) for the third quarter, compared with net earnings of $86.2 million ($1.19 per share) a year earlier.

Bernanke said that there is a host of economic problems which will cause business growth to slow noticeably in coming months. Finally, we actually have some top level government officials recognizing that we have some problems out there. Just as Bill Gross (Bond Guru for PIMCO FUNDS) has come out and stated that if the FED doesn't continue to lower rates over the next several months, the tidal wave will continue to build and we will be in a world of hurt. Not that we're not there already.

Oil Prices, Gas Prices, and Gold all continue to rise which will make consumers pull in their purse strings even more. Foreclosures, Credit Card delinquencies, and Defaults continue to rise. The Dollar continues to weaken. The strong labor /income market, along with the strong global market with demand for US Exports, have kept our economy alive. Builders continue to lower prices to compete and stay alive. Ultimately this hurts the homeowner around the corner. When will this end? When will it get better? No one knows, however, we do need a solution. Lower Rates will help, albeit temporarily.

We have seen some of the biggest institutions come out and waive the white flag. Wamu, Citibank, Morgan Stanley, Merrill Lynch, Goldman Saks, B of A, etc . . . More losses are to follow. Unfortunately, we have not seen the worse of this yet. Traders are starting to price-in another move in December, although we'll need more negative news on the economy before that happens.

Good news? Treasury yields continue to decline, and the 10-yr is down to 4.26% ahead of the three day weekend. (Mortgages, however, are unchanged, primarily because of continued nervousness about that sector, prepayment risk, and money manager's books being set heading into year-end.) We had the September US trade deficit, as expected, and the Import Price Index which rose 9.0% year-over-year! Later we'll see the preliminary University of Michigan Consumer Confidence number. What is the current thinking on another Fed cut in a month? Interest rate futures show a 90% chance that the Fed will lower the Fed Fund rate to 4.25 at the Dec. 11 meeting.

Quote of the Day: "It's never too late to be what you might have been."
~ George Eliot

Let us not forget that Monday is Veteran's Day. Take some time out of your day on Monday to remember those who served our country during time of war and those who gave their lives so that you and your loved ones didn't have to . . . .

The mortgage business

The mortgage business just finished a conference in Boston . Besides the numerous comments about it being a “job fair”, this comment from an attendee was particularly interesting:

“The unfortunate part of the conference was that those who were out of work were actually the most cheerful, as if some weight had been lifted. Those who were working were so concerned about what faces us every day - declining volumes, repurchase issues and declining values – that it wasn’t enjoyable.”

· The latest FDIC data shows BofA controls an 8.9% market share of deposits, followed by JP Morgan Chase at 7.0% and Wachovia at 5.9%. (BofA could still acquire a bank with up to $75B in deposits and still be under the 10% cap.) Speaking of BofA, their earnings today were far below expectations, much attributed to non-performing loans.

· Mortgage applications last week were up slightly, given the Columbus Day holiday.

· Washington Mutual Inc.'s third-quarter profit shrank 72%. WAMU reserved $967 million in the third quarter to prepare for borrowers defaulting on their debt. The bank also had a write-down of $147 million after transferring to its investment portfolio $17 billion in home and other real estate loans that it had originally intending to sell.

· Wachovia plans an aggressive expansion in California – aiming for a fivefold increase in the number of branches in the state over the next several years. Based in Charlotte , N.C. , most think of them as the company that bought World Savings.

The bank is in the process of changing the signs on the former World Savings branches to Wachovia, at which point they will have 149 branches in the state. Wachovia was a regional bank until 2001, when it merged with First Union, and now operates in 21 states. The bank's latest acquisition is the $6.8 billion takeover of brokerage firm AG Edwards.

Rates are continuing to drop, and prices improve, as a) BofA announced their earnings, b) weekly Jobless Claims were +28k to 337k, c) housing market indicators continue to show sustained weakness, and d) the chance of a Fed Funds cut on the 31st have increased to 75%. Is the labor market starting to slide? Later this morning we have September’s Leading Economic Indicators index is expected to show a slight gain of 0.3%, while the Philly Fed will likely decline 3.9 points to a reading of 7.0.

Where is the economy heading? And just what is "FHASecure"? What a great question. Last week Retail Sales was surprisingly strong, up 0.6%, but the University of Michigan Consumer Confidence Index Fell to 82 - the lowest since August 2006 as the outlook for housing worsened. The Producer Price Index was stronger than expected, indicating inflation is still a concern, yet house prices continue to slide in many areas.

Unemployment is low, and many companies are looking for workers (I can’t walk by a Starbucks without thinking about turning in an application!), yet foreclosure rates are climbing because borrowers can’t afford their payments.

Tomorrow we get another clue with the Consumer Price Index, but given that unleaded gas is once again above $3/gallon has led me to tell the kids that Christmas will be slim this year… It hasn’t helped, and this could point to lower rates eventually, that there has been positive overall job growth but all of that growth attributable to three employment categories: education and health services, food service and drinking places, and government (Federal, State, and Local).

Continuing on, mortgage prices have improved a little this morning (and the 10-yr is at 4.66%) but were slightly worse yesterday after a report showed manufacturing in New York reached the highest level in three years (aren’t we a service economy?).

The factory report adds to expectations that the Fed will stay on hold. We also saw an $80 billion plan over the weekend to revive the credit markets: Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to start a fund to help revive the asset-backed commercial paper market.

The high-stakes plan to rescue banks from losses on mortgage securities amounts to a big bet that this group can persuade investors to pour more money into the credit market. Companies depend on commercial paper to finance day-to-day expenses like payroll and rent, although we’re already seeing the jumbo market improve slightly.

Pessimists thought that the “super-SIV story is a bit much for the market to handle...we have some risk that needs to find a home; none of the existing firms want that risk...so we will create a new ‘firm’ to become the buyer of last resort, capitalized from the firms that created the products, but don't want them at current prices.”

Are they trying to create a buyer out of thin air?

Ginnie Mae announced last night that starting December 1, 2007, all FHASecure loans will fall into the GNMA II program but they will be pooled separately as “specifieds” and will not be TBA deliverable. But what is an “FHASecure” loan?

President Bush, on August 31st, announced that HUD's Federal Housing Administration (FHA) will help families avoid foreclosure by enhancing its refinancing program. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.

In addition, FHA will implement risk-based premiums that match the borrower's credit profile with the insurance premium they pay - i.e., riskier borrowers pay more. The press release can be found at http://www.fha.gov/press/2007-08-31release.cfm The FHASecure program was conceived as a way for borrowers that are having trouble making their post-ARM reset payments to refinance into a fixed-rate FHA loan.

You can also visit http://www.fha.gov/about/fhasfact.cfm. Eligible homeowners must have a non-FHA insured ARM that has reset, sufficient income to make the mortgage payment, and a history of on-time mortgage payments before the loan reset.

Thought for the Day: “The ultimate responsibility of a leader is to facilitate other people’s development, as well as his own.”
~ Fred Pryor

Welcome to Stockton : foreclosure capital USA

by Zachary Slobig Thu Sep 13, 9:20 AM ET

STOCKTON , United States (AFP) - A town in central California has become ground zero in the wave of foreclosures plaguing the US housing market in the wake of the sub-prime lending crisis.

With a population of nearly 300,000, Stockton has acquired the unfortunate distinction of having the highest foreclosure rate of any US city, with one in 27 households left counting the cost of the credit crunch, according to Realtytrac, an online marketplace for foreclosure sales.

Stockton 's Weston Ranch neighborhood, a 15-year-old subdivision of modest tract homes, has the worst foreclosure rate in the area, according to ACORN, a national advocacy group for low and moderate-income families.

Adjustable rate mortgages offered to sub-prime borrowers, hopeful homeowners with shaky credit, lured families into houses with inflated prices, said Taylor .

"Many financed one hundred percent of the price, and some even financed the closing costs," she said. "They got in at a teaser rate thinking this neighborhood would be commutable and affordable, and then the rates went up."

Sign-after-sign beckon to potential buyers on the Weston Ranch streets. "American Dream Realty -- Reduced Price!" reads one placard spiked into a brown lawn.

"People are just walking away," said Taylor . "We've seen houses with food still on the table from when the sheriffs have come knocking."

Lupe Dominguez washed his car in his driveway two doors down from a shabby bungalow with a front window covered in a yellow and black poster announcing a public auction with a fifty thousand dollar starting bid.

"That house has been empty for nine months or so and the sign has been there for two," he said.
A friend who lived down the street lost his house to foreclosure and then rented a house that he had to vacate because it too was foreclosed, he said.

Gloria Johnson, another broker in the Weston Ranch area, has increased her volume of "short sales," as a method to help homeowners avoid foreclosure and wrecked credit.
In this arrangement, the borrower provides evidence of financial hardship and the lender agrees to assume a loss and sell the house below the amount owed on the mortgage.

"It is almost like begging, but I am doing everything I can to help these people maintain their dignity," she said.

Taylor too has modified her business practices, shifting her focus from home sales to rental property management, advising clients to wait out the market. She manages fifty rental homes now, properties that she hopes to sell for clients when buyer interest returns.
"There are just are no buyers out there right now," said Taylor .
Houses are sitting on the market three times as long as in 2006 and the average sale price has dropped by 10 percent, she said.

"We've got 350 homes for sale in this neighborhood right now and at this rate, that is five years of inventory," said Taylor .

"Nobody has a crystal ball, but I don't expect to see an improvement until 2010."
Potential homeowners must be better educated about the market, said Lance Hill, a housing counselor with Visionary Homebuilders, a Stockton non-profit whose goal is to extend homeownership to low-income families.

"To be mortgage ready, they need to know what adjustable rates, refinancing, and pre-payment penalties mean, and we must make sure that they have a certain education level," he said.
Stockton has had 8,000 foreclosures so far in 2007.

"Home ownership is a great thing," said Taylor , "But only if you can afford it."

Definitions provided by: U.S. Property Definitions

The Mortgage Minute

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