The Mortgage Minute

Housing Limbo: How Low Will Prices Go?

2008-08-22T18:55:00.000-07:00

by Joshua Brockman

NPR.org, August 21, 2008 · These days, many homeowners — and those looking to buy — are nervous. Home sales are also well below what they were during the peak of the housing market. With transportation, food costs and unemployment on the rise, making a decision about one of the largest purchases of your life — a house — is far from simple.

Unfortunately, there's no crystal ball to consult. But there are housing market experts. Here, some weigh in with factors to consider if you're thinking of buying.

How do I judge whether a house is overvalued?

You need to compare the market price to a theoretical price based on current economic and demographic trends, says Celia Chen, director of housing economics for Moody's Economy.com. "Nationally, prices are probably pretty overvalued — by about 10 percent," she says. At the peak of the housing market, when prices were rising rapidly, houses were 20 percent to 25 percent overvalued, she adds.

It's helpful to remember that housing prices don't behave like stocks — they're not going to change overnight, says Dean Baker, co-director of the Center for Economic and Policy Research. In other words, it's going to take time for overvalued houses to reach their true price.

Is the current economic slowdown making the housing market worse?

Yes. But it's important to note that nationwide housing prices started to decline after peaking in the summer of 2006 — before the rest of the U.S. economy began sputtering. Indeed, the bursting of the housing bubble was a major factor in the country's economic slowdown.

Now that the slowdown is in full swing, it's likely to further weigh down the housing market. Baker says that larger-than-average job losses in any region will "further weaken the housing market and prolong the downturn there."

Mike Shedlock, an investment adviser for SitkaPacific Capital Management and the blogger behind Mish's Global Economic Trend Analysis, says he, too, is concerned about negative job reports: "More people out of work is going to put more pressure on people being able to pay their mortgages. So, that's going to lead to more foreclosures [and] more people walking away from their houses."

How do I know when the market has hit bottom?

"Nationally, we're very, very far from any bottom," says Baker, who believes the lowest point may arrive between the middle of 2009 and the start of 2010. He notes the nationwide glut of housing inventory, with the number of new and existing homes on the market at near-record levels and vacancy rates for ownership units at record highs.

Shedlock sees the bottom further out: 2012. He says foreclosures and inventory have to stop rising — and sales figures have to start increasing — before the market can reach its bottom. Even then, consumers shouldn't expect prices to shoot back up. Instead, he says, they'll remain "stagnant or stable," rising slowly in the decade after the bottom. "There's no rush for anyone to buy in now, or even when we see the signs of a housing bottom," he adds.

Moody's Celia Chen adds that housing remains "a better value now than it was a year ago." She predicts home prices will hit "absolute bottom" in the spring of 2009. Chen and other housing experts remain concerned that problems in the credit market as a whole will disrupt funding for home mortgages.

When will prices stop falling?

Inventory has to decline in order for prices to stop falling, says Chen. And right now, "there's too much supply versus demand" around the country, she says.

Some areas of the U.S. with "drastic" price declines include Las Vegas, Miami and San Diego, says Baker. Washington, D.C., has had larger price declines than Boston and New York City, two cities that Baker says have had "moderate" ones. Meanwhile, Baker says the latest housing data suggest that Cleveland and Detroit have "bottomed already."

Chen says certain metro areas in Florida remain "the most overvalued" in the nation, as are certain cities in Arizona and California. All three states have an oversupply of residential real estate. The South and Midwest, however, are regions where houses have remained affordable. And home prices in Columbus, Cincinnati and Indianapolis remain in line with where they should be, because these cities did not experience a "price bubble," she says.

Why is it important to compare the sales price of a house to rental prices before buying?

Comparing the sales price of a house to annual rent for a comparable property gives consumers a good yardstick to know whether it's a financially sound decision to become a homeowner.

One simple way to measure this is by calculating an own-to-rent ratio: Take the sale price of a house and divide it by the annual rent for a similar property or apartment. For example, take a house selling for $180,000, and a comparable house that rents for $1,000 a month ($12,000 annually). The own-versus-rent ratio is 15:1. This number indicates that you have a "balance" between ownership costs and rental costs, says Baker. (One can also do more complicated calculations that factor in additional home ownership costs, including property taxes.)

The ratio is not a magic number, but consumers may want to think twice before purchasing a house once that ratio creeps toward 18:1 or higher. During the peak of the housing bubble, there were ratios greater than 25:1, particularly in parts of California, Baker says. The 15-year average ratio in the U.S. is 11.4, according to Moody's Economy.com.

Nationwide, the ratio of housing prices to rents is "still above the historic average, which means that houses are expensive relative to apartments," says Chen.

How have consumer attitudes toward housing changed?

This market is forcing consumers to embrace the idea that a house is first and foremost a place to live, not a sure-thing investment. Not long ago, investing frenzy fueled the real estate market in "hot" cities like Miami, where investors snapped up condos as if they were going out of style.

"We've had boomers accumulating multiple housing or rental houses on the expectation that housing was a one-way ticket up. And that belief has been shattered," says Shedlock.

"If you're buying to live in a house, it's probably OK to purchase a house now," says Chen. "It's probably better if you wait a little longer."

Baker cautions in a research note that the "failure to recognize declining home prices can cause homeowners to be overly optimistic about their financial situation." As a result, we have an oversupply of houses on the market — and sellers who are "unwilling to drop their price to the market level," he says. The economy would improve, he says, if home sellers recognized their house just isn't worth what it used to be.

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Why Not Just Walk Away from a Home?

2008-02-22T07:29:00.000-08:00

Economy
by Eric Weiner

NPR.org, February 13, 2008 · The Web site for You Walk Away is cheery and reassuring. There's a photo of a happy family in a park, smiling. Another family, also smiling, is packing up boxes.

"Are you stressed out about mortgage payments?" asks the site rhetorically. "Is foreclosure right for you?" it queries, but doesn't wait for an answer. "You are not alone — over 2.9 million homes have foreclosed in the last three years," it says. The not-so-subtle message: Foreclosure need not be a shameful, life-ruining experience. In fact, the company will gladly hold your hand through the foreclosure process—for a fee, of course.

Foreclosure, we're told, is a last resort, an option that no responsible homeowner would ever choose. But some distressed homeowners — no one knows exactly how many — are doing just that. They're voluntarily walking away from their mortgages, engaging in a practice the mortgage industry calls "ruthless default."

But is it really ruthless — or just good businesses sense? Some economists argue it's definitely the latter.

Sometimes, they say, walking away from your mortgage makes economic sense, especially for homeowners who find themselves "upside down" — that is, they owe more on their mortgage than their house is worth. In those cases, "voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans' part," says Nicole Gelinas, writing in The Wall Street Journal .

Separating the economics of foreclosure from the morality (and the stigma) is not easy, though.

"We need a culture of responsible consumers and homeowners," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, echoing a deep-seated American belief that one should always honor financial obligations.

The current housing crisis is different, argue some economists: Since some financial institutions sold these loans in a deceptive manner — for example, by approving people for loans they couldn't really afford — then why should homeowners feel obliged to honor their commitments?

The Virtues of Self-Interest

Most homeowners avoid foreclosure for selfish, and not necessarily moral, reasons. Foreclosure leaves a large black mark on a homeowner's credit rating. It might be as long as 10 years before they can qualify for another mortgage.

But Gelinas — a financial analyst and contributing editor of City Journal — argues that if enough people walk away from their homes, then banks won't blacklist all of them.

"Many walkers are going to want to buy houses again some ay; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment)," she says.

One thing that is certain: Foreclosures are on the rise. The Mortgage Bankers Association estimates that roughly 900,000 Americans were in the foreclosure process as of Sept. 30, 2007 — the most recent data available. That's an increase of 72 percent from the same period a year ago. Cities in California, Ohio, Florida and Michigan posted the highest foreclosure rates in the U.S., according to RealtyTrac, a private firm.

Traditionally, most people who foreclose on their homes do so because they lost their jobs or were hit with unexpected medical expenses. But the subprime mortgage crisis is different. Seven out of 10 people foreclosing on their homes are healthy and gainfully employed, according to John Taylor, president of the National Community Reinvestment Coalition. They simply can't afford to make their monthly payments.

Helping Others Walk Away

The spurt in foreclosures has spawned a cottage industry of firms who smell a business opportunity amid the misery. You Walk Away is getting the most attention, with some 25,000 daily hits to its Web site. (The firm won't disclose how many customers it has.)

For a fee of $995, the company offers services such as a "protection kit." For instance, they'll send a letter that "stops lenders from harassing the homeowner." They'll also put distressed homeowners in touch with a lawyer and an accountant to discuss their options. They'll advise people in the midst of foreclosure how long they can legally live in their homes, tempting people with the prospect that, "You WILL be able to stay in your home for up to 8 months or more without having to pay anything to your lender!"

Chad Ruyle, the company's co-founder, says they are not encouraging people to pursue foreclosure but merely helping them through the process once they have made that decision.

"We're not causing the foreclosure problem," he says. "The problem was already there." Or, as his business partner Jon Maddux puts it, "You can't blame a divorce lawyer for a divorce."

Red Flags

Firms like You Walk Away, though, have raised red flags with credit counselor and consumer watchdogs. Ellen Schloemer, director of research at the Center for Responsible Lending, says borrowers would be better off hiring their own attorneys and accountants, rather than relying on those provided by You Walk Away.

"Just look at the picture [on the company's Web site]," Schloemer says. "It shows people enjoying a day in the park. But foreclosure is no day in the park."

It takes a decade to recover from a foreclosure, she says, and there's not much anyone can do about that. The company, she says, paints a misleading picture of the foreclosure process.

"The real solution is to help people before they're forced into foreclosure," she says.

John Taylor, of the National Community Reinvestment Coalition, says he's concerned that the company might not help customers explore all of their alternatives before going into foreclosure.

"I would rather see people who are facing foreclosure fighting to keep their home, and keep it as long as possible, because help is on the way," he says.

On Tuesday, in fact, the Bush administration announced a new initiative aimed at helping homeowners about to lose their homes. For qualified homeowners, it will freeze the foreclosure process for 30 days. Dubbed "Project Lifeline," the new program will be available to people who have taken out all types of mortgages, not just the high-cost subprime loans that have been the focus of previous relief efforts.

Those efforts, of course, are about avoiding foreclosures, not facilitating them.

"Walking away from one's home should be the absolute last resort," says Gail Cunningham of the National Foundation for Credit Counseling. "However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities."

But there is one category of homeowner, she says, where foreclosure does make sense: people who bought their homes "with their hearts and not their heads."

"For people who may never be able to afford their home, then walking away is a viable option," she says. "If long term, you're not going to be able to sustain the mortgage payment, then you're fooling yourself and should get out of that situation and move on to life after foreclosure."

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SUBPRIME LOANS AND MORE

2008-02-01T17:41:00.000-08:00

It's a Bull Market for Financial Fraud
U.S. Department of Justice
01/31/08

Imagine landing your dream home. Your credit is a bit shaky, but you manage to get a subprime loan with an adjustable rate mortgage. A few years later the interest rates jump and you can no longer afford to pay. You see an ad for a business that will to help pay your mortgage for a modest monthly fee while you get back on your feet.

But here’s the heartbreak: it’s a scam. The con artists just takes your money and runs…

It’s just one of the latest schemes and frauds we’re seeing these days across the financial services industry, our senior criminal investigators said during a briefing Tuesday with the news media in Washington.

These scams—which include plenty of shenanigans with mortgages and subprime loans—are costing the nation tens of billions of dollars a year.

“Greed is definitely not good for our economy right now,” said our top criminal investigative exec Ken Kaiser following the briefing. “It’s hurting homeowners. It’s hurting honest businesses. And it’s hurting investors and markets around the world.”

All good reasons why we’re squarely focused on cracking down on the largest of these financial crimes, launching proactive initiatives and shifting resources as trends emerge, all the while working hand-in-hand with a host of government and private sector partners.

Among the specifics discussed at the briefing:

Subprime mortgage loans:

We're investigating 14 corporations involved in subprime lending as part of our Subprime Mortgage Industry Fraud Initiative launched last year.
The companies come from across the financial services industry, from mortgage lenders to investment banks that bundle loans into securities sold to investors. We’re also looking at insider trading by some executives.

Traditional mortgage fraud:

We have more than 1,200 cases open today (up about 40 percent from last year), mostly involving fraud for profit, where groups of straw buyers, realtors, etc. rig schemes to buy properties that are flipped or allowed to go into foreclosure.
Hotspots include California, Texas, Arizona, Florida, Ohio, Michigan, and Utah.
Suspicious activity reports that we review for potential mortgage fraud have grown from 3,000 in fiscal year 2003 to 48,000 in fiscal year 2007. This year, we’re on pace to receive more than 60,000 such reports.

A recent case: In November, the owners of a long-time Minnesota homebuilder called Parish Marketing—along with a bank officer, a closing agent, and others—pled guilty to a $100 million mortgage scheme involving some 200 homes.

Right now, we’re seeing no links to organized crime syndicates, street gangs, or terrorist groups in our cases.

For more information on financial frauds:
- Financial Crimes Report to the Public, Fiscal Year 2006
- Mortgage Fraud overview

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U.S. News & World Report Editor Compares Credit Crisis to the Great Depression

2008-01-21T14:39:00.000-08:00

By Jeff Poor | January 21, 2008 - 17:06 ET

It's no longer enough to say the economy is heading into or already is in a recession. Invoking the memory of the Great Depression has become the latest way to dramatize the economic turmoil caused by the credit markets.

"[I] think we are facing the worst financial crunch and crisis since the Great Depression," Mort Zuckerman, editor-in-chief of U.S. News & World Report, said on the January 20 "McLaughlin Group."

Zuckerman told viewers we're heading into uncharted territory with this current credit freeze-up.

"You have the entire banking system now that is virtually frozen. And there are, not just this subprime mortgage thing, there are other things called credit default swaps where they will lose as much money, $250 billion on. The banks are frozen. They are not making loans because they have such huge debts that they have to take on to their balance sheets and nobody knows how to deal with that," he continued.

While the financial sector is seeing problems with tightened credit, Zuckerman's reference to the Great Depression could lead viewers to think that the economy is heading toward a depression.

The U.S. economy overall does not appear to be headed for another Great Depression. For the last two quarters, gross domestic produce (GDP) has grown at a rate of 3.8 percent in the second quarter of 2007 and 4.9 percent in the third quarter. Fourth-quarter GDP numbers for 2007 will not be released until March.

Unemployment in the U.S. is also relatively low at 5 percent.

Even the somewhat gloomy forecast from Goldman Sachs Group, Inc. (NYSE:GS), a Wall Street investment bank that has avoided the worst of the subprime mortgage losses, said on January 9 the recession they are predicting would be brief - certainly a far cry from a depression.

"One silver lining is that the recession is likely to be relatively mild by historical standards, with a cumulative contraction in real gross domestic product of only about 0.5%," said a Dow Jones report about Goldman Sach's prediction. "And the economy will eventually walk out of the recession and gradually recover in the course of 2009."

Despite that, strong bearish opinions on the economy as well as parallels to the Great Depression have been cropping up recently in media reports including a January 16 "CBS Evening News" story. That night CBS correspondent Anthony Mason compared problems in the financial sector to banking problems around the Great Depression.

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A Video Message about Current Market Conditions

2008-01-05T21:51:00.000-08:00

A Video Message about Current Market Conditions from Peter Schiff, President of Euro Pacific Capital.

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Bargain houses largely unsold

2007-12-20T00:36:00.000-08:00

By J.N. SBRANTI
jnsbranti@modbee.com
last updated: December 15, 2007 04:23:07 PM

Courthouse-step auctions offer 1,336 properties in foreclosure -- 17 are sold

Another foreclosure record was set in November as 1,336 properties were offered to the highest bidder on the courthouse steps in Modesto, Merced and Stockton.

Now here's the real surprise: Only 17 of them sold, despite lenders offering deeply discounted prices.

Every weekday, starting about noon, auctioneers seek buyers for foreclosed properties of all shapes and sizes. But more times than not, no one bids.

That's because foreclosed homes typically have unpaid mortgage debt far in excess of their current value. When no bidder is willing to pay off that debt, lenders usually get stuck owning the homes.

That happened 411 times in Stanislaus County last month, sticking lenders with more than $139 million in unpaid mortgages, according to ForeclosureRadar, which tracks mortgage defaults.

Of the 419 Stanislaus County homes that went to foreclosure auctions in November, only eight attracted bidders.

Those who do bid are getting increasingly sweet deals, however, as lenders have begun slashing the prices they're willing to accept for foreclosed homes. To lure potential buyers, lenders have begun accepting starting bids far below the outstanding debt on foreclosed properties.

"Investors at auctions typically will buy at a 30 percent discount to market," explained Sean O'Toole, who owns ForeclosureRadar. "So lenders are trying to give as much of a discount as possible to entice investors to buy."

On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.

But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.

Lenders get more desperate

O'Toole said the size of these discounts continues to grow as lenders get more and more desperate to unload properties.

Early in 2007, O'Toole said, discounts were offered on about one-third of the homes in foreclosure auctions statewide, and those discounts averaged about $9,000. By November, he said, two-thirds of the state's homes in foreclosure auctions were discounted, with discounts averaging $48,000.

Many of the foreclosed houses in Stanislaus, San Joaquin and Merced counties, however, are being discounted by $100,000 or more, O'Toole said.

Dave Rhodes of Oakdale recently took advantage of one such deal. Two weeks ago, he bid $1 over the starting price for a 1,356-square-foot home on Poppy Patch Drive in Modesto. He was the only bidder and bought the house for $163,181, even though the lender had been owed about $264,000.

"I'm not a big spender. I'm a bottom feeder," said Rhodes, who has been a regular at Modesto's foreclosure auctions for more than a year. He researches many of the homes being foreclosed, but rarely bids at auctions. His last purchase was in January, when he bought a fixer-upper in Empire.

Hundreds receive no bids

Discounted starting bids "have become more and more prevalent the last three months" in Modesto, Rhodes said. That's why he comes prepared to bid on great deals.

Before potential buyers are allowed to bid, they must show the auctioneer a cashier's check for the full amount they're willing to bid. Rhodes said he had a cashier's check for $185,000 with him the day he bought the Poppy Patch home, so he could have gone higher had someone bid against him and he wanted to keep bidding.

Competitive bidding is rare, however, even with discounted starting prices.

Example: An Oakdale home on Ranger Street sold new in 2006 for $610,000. It went into default with an outstanding loan balance of $530,892. Last month at the foreclosure auction, the starting price was $395,000. No one bid.

Also last month, a Manteca home on South Sonora Avenue that had an outstanding loan balance of $487,956 was offered for a starting bid of $331,500. No one bid.

And in Merced, a home on West 22nd Street with an outstanding mortgage of $279,785 was offered at $153,000. No one bid.

"There are literally hundreds of examples in these counties," O'Toole said about discounted properties going unpurchased. "They ... represent good opportunities for folks to buy properties directly from the bank at a deep discount."

Lenders don't want the houses

In San Joaquin County last month, for instance, 664 foreclosed homes went to auction, but only eight were sold to bidders. Lenders took back 656 houses with unpaid debts of more than $245 million.

In Merced County last month, 253 homes went to auction, with only one receiving bids and being sold. Lenders took back the rest with unpaid debts of nearly $88.4 million.

Statewide, 12,282 properties went to foreclosure auctions, but only 321 were sold to bidders. Lenders took back the rest, which had unpaid debts of nearly $4.8 billion.

Those lender-owned foreclosed houses then typically are listed for sale with real estate agents or are privately auctioned off. Either way, lenders end up paying assorted commissions and fees to sell the property. While waiting for deals to close, the lenders must maintain the homes and pay taxes, insurance and assorted other ownership costs.

"They don't want to hang onto those homes, mow those laws and pay those Realtor fees," said Rhodes, explaining why lenders are willing to give foreclosure auction bidders such good deals.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

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Warsing used the United States mails to commit foreclosure fraud

2007-12-17T16:04:00.000-08:00

December 12, 2007
U.S. Department of Justice
Northern District of Ohio

Gregory A. White, United States Attorney for the Northern District of Ohio, announced today that a federal grand jury in Cleveland, Ohio, charged James A. Warsing of Ashtabula, Ohio, with eight counts of Mail Fraud.

The indictment charges that between 2001 and 2005, James A. Warsing, using his company, WJW Enterprises, devised a scheme to defraud various homeowners threatened with foreclosures, by falsely promising he could save the homes from foreclosure. It was further alleged that Warsing fraudulently obtained large sums of monies from homeowners promising to use such monies to settle their accounts with lenders but used the money for other personal and business purposes.

As a further part of the fraud, Warsing used the United States mails to send advertisements for WJW Enterprises to prospective clients and to receive checks from homeowners. It was alleged that Warsing collected over $500,000 from homeowners during the period 2002 through 2004.
The actual sentence in this case, upon conviction, will be determined by the Court under the Federal Sentencing Guidelines which depend upon a number of factors unique to each case, including the defendant's prior criminal record, if any, the defendant's role in the offense and the unique characteristics of the violation. In all cases the sentence will not exceed the statutory maximum and in most cases it will be less than the maximum.

The case is being prosecuted by Assistant United States Attorney James C. Lynch, following an investigation by the Federal Bureau of Investigation, Painesville, Ohio.

An indictment is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it is the government’s burden to prove guilt beyond a reasonable doubt.

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China and the Arabian Peninsula as Market Stabilizers

2007-12-13T17:21:00.000-08:00

So, you want to know one man's idea of why our economy hasn't crashed yet, despite oil nearing $100 a barrel, the subprime mess, and the current credit crisis? The following was authored by George Friedman, CEO of Strategic Forecasting, Inc.

He makes a very compelling case...

The single most interesting thing about today's global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads. Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion.

Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy.

But the financial markets are managing, as is the economy.
What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles -- the subprime mortgage market -- has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor's 500 fell from a high of about 1,565 in mid-October to a low of 1,400 on Oct. 19. Since then, it has rebounded as high as 1,550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn't happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

In the U.S. stock market -- and world markets, for that matter -- we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened.

Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

So what is going on?

Part of the answer might well be this: For the past five years or so, China has been throwing around huge amounts of cash. The Chinese made big, big money selling overseas -- more than even the growing Chinese economy could metabolize. That led to massive dollar reserves in China and the need for the Chinese to invest outside their own financial markets. Given that the United States is China 's primary consumer and the only economy large and stable enough to absorb its reserves, the Chinese -- state and nonstate entities alike -- regard the U.S. markets as safe-havens for their investments. That is one of the things that have kept interest rates relatively low and the equity markets moving. This process of Asian money flowing into U.S. markets goes back to the early 1980s.

Another part of the answer might lie in the self-stabilizing feature of oil prices, the rise of which should be devastating to U.S. markets at first glance. The size of the price surge and the stability of demand have created dollar reserves in oil-exporting countries far in excess of anything that can be absorbed locally. The United Arab Emirates , for example, has made so much money, particularly in 2007, that it has to invest in overseas markets.

In some sense, it doesn't matter where the money goes. Money, like oil, is fungible, which means that if all the petrodollars went into Europe then other money would flow into the United States as European interest rates fell and European stocks rose. But there are always short-term factors to consider.

The Persian Gulf oil producers and the Chinese have one thing in common -- they are linked to the dollar. As the dollar declines, assets in other countries become more expensive, particularly if you regard the dollar's fall as ultimately reversible. Dollars invested in dollar-denominated vehicles make sense. Therefore, we are seeing two massive inflows of dollars to the United States -- one from China and one from the energy industry. China 's dollar reserves are derived from sales to the United States , so it is stuck in the dollar zone. Plus, the Chinese have pegged the yuan to the dollar. The energy industry, also part of the dollar zone, needs to find a home for its money -- and the largest, most liquid dollar-denominated market in the world is the United States.

The United States has created an odd dollar zone drawing in China and the Persian Gulf . (Other energy producers such as Russia , Nigeria and Venezuela have no problem using their dollars internally.) Unhinging China from the dollar is impossible; it sells in dollars to the United States , a linkage that gives it a stable platform, even if it pays relatively more for oil. Additionally, the Arabian Peninsula sells oil in dollars, and trying to convert those contracts to euros would be mind-bogglingly difficult.

Existing contracts and new contracts managed in multiple currencies -- both spot and forward managed -- would have to be renegotiated. Any business working in multiple currencies faces a challenge, and the bigger the business, the bigger the challenge. The Arabian Peninsula accordingly will not be able to hedge currencies and manage the contracts just by flipping a switch.

This provides an explanation for the resiliency of U.S. markets. Every time the news on the subprime situation sounds so horrendous that it seems the U.S. markets will crash, the opposite occurs. In fact, markets in the United States rose through the early days, then sold off and now have rallied again.

Where is the money coming from?

We would argue that the money is coming from the dollar bloc and its huge free cash flow from China , and at the moment, the Arabian Peninsula in particular. This influx usually happens anonymously through ordinary market actions, though occasionally it becomes apparent through large, single transactions that are quite open. Last week, for example, Dubai invested $7 billion in Citigroup, helping to clean up the company's balance sheet and, not incidentally, letting it be known that dollars being accumulated in the Persian Gulf will be used to stabilize U.S. markets.

This is not an act of charity. Dubai and the rest of the Arabian Peninsula, as well as China , are holding huge dollar reserves, and the last thing they want to do is sell those dollars in sufficient quantity to drive the dollar's price even lower. Nor do they want to see a financial crisis in the U.S. markets. Both the Chinese and the Arabs have far too much to lose to want such an outcome. So, in an infinite number of open market transactions, as well as occasionally public investments, they are moving to support the U.S. markets, albeit for their own reasons.

It is the only explanation for what we are seeing. The markets should be selling off like crazy, given the financial problems. They are not. They keep bouncing back, no matter how hard they are driven down. That money is not coming from the financial institutions and hedge funds that got ripped on mortgages. But it is coming from somewhere. We think that somewhere is the land of $90-per-barrel crude and really cheap toys.

Many people will see this as a tilt in global power. When others must invest in the United States , however, they are not the ones with the power; the United States is. To us, it looks far more like the Chinese and Arabs are trapped in a financial system that leaves them few options but to recycle their dollars into the United States . They wind up holding dollars -- or currencies linked to dollars -- and then can speculate by leaving, or they can play it safe by staying. In our view, these two sources of cash are the reason global markets are stable.

Energy prices might fall (indeed, all commodities are inherently cyclic, and oil is no exception), and the amount of free cash flow in the Arabian Peninsula might drop, but there still will be surplus dollars in China as long as it is an export-based economy. Put another way, the international system is producing aggregate return on capital distributed in peculiar ways. Given the size of the U.S. economy and the dynamics of the dollar, much of that money will flow back into the United States . The United States can have its financial crisis. Global forces appear to be stabilizing it.

The Chinese and the Arabs are not in the U.S. markets because they like the United States . They don't. They are locked in. Regardless of the rumors of major shifts, it is hard to see how shifts could occur. It is the irony of the moment that China and the Arabian Peninsula, neither of them particularly fond of the United States , are trapped into stabilizing the United States . And, so far, they are doing a fine job.

Stumble It!

Definitions provided by: U.S. Property Definitions

'Too Little, Too Late' Subprime Solution

2007-12-10T09:50:00.000-08:00

ECONOMY OF APATHY:
On Thursday, President Bush stood with Secretary of the Treasury Henry Paulson and Secretary of Housing and Urban Development Alphonso Jackson to announce an agreement with the mortgage industry to provide relief to families facing home foreclosures.

"The holidays are fast approaching and, unfortunately, this will be a time of anxiety for Americans worried about their mortgages and their homes. There's no perfect solution, but the homeowners deserve our help," Bush said.

His plan would freeze mortgage rates for some troubled borrowers. Yet the vast majority of Americans facing foreclosure would be left out by the Bush plan, including the record 351,000 people who fell into foreclosure in the third quarter of this year. The deal asks for only a voluntary freeze on interest rates, and does not require congressional approval or funds.

The effects of the subprime mortgage crisis have spread throughout other sectors of the economy, an estimated 800,000 Americans have are already faced foreclosure since mid-2007, and 3.5 million loans are expected to default before the end of 2010.

Although Bush's plan will offer substantial help to thousands of families, it is, as The New York Times editorial board described it, "too little, too late and too voluntary." Andrew Jakabovics of the Center for American Progress said, "As with other serious crises that have happened on Bush's watch, the solution is to make it the next administration's problem."

SMALL HELP FOR THOUSANDS:
After months of ignoring the mortgage crisis, Bush's acknowledgment of the problem is certainly a step in the right direction.

For those who qualify -- an estimated 250,000 borrowers -- Bush's plan would give them a five-year freeze on their adjustable loan rates. "Bush will also ask Congress to temporarily expand the authority of states and localities to issue tax-exempt mortgage-revenue bonds to help people refinance their mortgages."

Further, those borrowers who do not qualify for a rate freeze can still receive help from mortgage counselors, who can walk them through the process of refinancing and help them stay on top of their payments.

Secretary Paulson described the HOPE NOW program as "a coalition of mortgage servicers, counselors and investors that are working to avoid preventable foreclosures and to improve the functioning of the mortgage markets." Paulson said that 50 percent of foreclosures occur "without borrowers ever talking with a mortgage counselor."

The HOPE NOW program, which will use a national letter campaign as well as other publicity efforts to reach homeowners, will thus provide needed assistance and advice to millions of Americans unsure of how to cope with rising interest rates. Additionally, some homeowners may be able to refinance into private, fixed-rate mortgages, or use Federal Housing Administration loans.

Article source: Center for American Progress

Stumble It!

Definitions provided by: U.S. Property Definitions

A Mortgage History Lesson & Foreclosure Tax Repercussions

2007-11-30T15:46:00.000-08:00

The current mortgage environment has drawn many comparisons with the 1930's, when the government stepped in. It is generally agreed that without those fundamental changes, the Great Depression could have been much worse than it was. In the early part of the last century, most home loans were a 5-yr ARM with a balloon payment. Keeping that in mind, here's a brief summary:

In 1932, the National Association of Real Estate Boards proposed (and Congress created) the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. The Appraisal Institute was also founded in 1932 by the appraisal industry. Bankruptcy and eviction laws were modified and in 1933, Congress created the Home Owners Loan Corporation to help borrowers move from 5-yr balloon loans to 15-year amortizing mortgages.

In 1934, Congress created the Federal Housing Administration (FHA) to insure mortgages and the Federal Deposit Insurance Corporation (FDIC), intended to prevent runs on banks from depleting resources for home mortgages. Lastly, in 1938, Congress created the Federal National Mortgage Association (FNMA or Fanny Mae). Some argue that it is very early in this current business cycle; however it is easy to see the amount of government intervention juxtaposed with today's market, especially at the Federal level.

A plan is nearing fruition on a plan to freeze some subprime rates, but that won't help those already foreclosed upon. As most originators know, in many states (including California), most mortgages that are used to purchase a residence are nonrecourse, but mortgages from refinancing a previous mortgage are usually recourse, based on the note. So, can the lender come after the borrower for the difference? If the loan (Deed of Trust) is a purchase money loan secured by a house that is the borrower's principal residence, the answer is generally "no."

California's anti-deficiency laws [California Code of Civil Procedure Section 580(b)-(d)] protect homeowners by preventing lenders from doing any more than taking back the property. These anti-deficiency laws were enacted during the Depression to give homeowners a fresh start, without a deficiency judgment hanging over their heads. However, the code section is fairly specific. The loan had to be for the purchase of the property and the borrower has to occupy it as his or her principal residence: (No non-owner or vacation homes.) The lender can choose to file a judicial foreclosure against the borrower. For loans involving a refinance or line of credit (technically not purchase money loans) a lender could go after the borrower for the difference.

Regarding tax consequences, here are some sites that may be of help for you:
Questions and Answers on Home Foreclosure and Debt Cancellation -- IRS http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Interest/Dividends/Other Types of Income: 1099 Information Returns (All Other) -- IRS http://www.irs.gov/faqs/faq4-4.html

Foreclosures and Repossessions -- IRS http://www.irs.gov/publications/p544/ch01.html#d0e914
Tax Consequences of a "Short Sale" of Real Estate vs. Foreclosure - CPA's website http://www.realestateinvestingtax.com/shortsale.shtml

Blog worth checking on-- http://dirtlaw.typepad.com/blog/2007/02/preforeclosure.html

In recent weeks jumbo loans have worsened relative to conforming prices, almost back to where they were when they were "bad" a few months ago, and currently have a difference of roughly 1%. So, as usual, headline-grabbing Treasury yields are improving, yet mortgages are plodding along. Conforming rates have improved slightly, jumbo prices hardly at all, while Treasury rates are down. If asked why, the primary reasons are:

Continued fear of delinquencies and foreclosures with mortgages (something not present with Treasury securities)

Investors nervous about declining property values in many markets (not a factor with Treasury securities)

The fear of early pay-offs on current mortgages if rates continue to move down (also not a factor with Treasuries).

The investor perceptions of mortgage companies and FNMA & FHLMC (their stocks are down 50% in recent months) are not helping either.

News today that "The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations," is helping us somewhat. In fact, financial stocks are up significantly today. But the 10-yr bond continues to dance around 4% and mortgage prices are roughly unchanged.

Oil has dropped into the $89/barrel range for the first time in over a month. The economic news this morning was mixed. Personal Income was +.2 Personal Consumption was +.2%, with no revisions, but the price deflator moved up year-over-year. Unfortunately rates had crept up overnight, given the potential rally in the stock market.

Besides announcing $1.4 billion in HELOC-related write-downs, Wells Fargo engaged in further product changes. Effective today, for all of their nonconforming Verification of Assets loans, the maximum debt-to-income ratio requirement will decrease from 45% to 38%, and non-self-employed borrowers now have reduced eligibility for Limited Doc/VOA. At least one of the borrowers on the loan application must have their income derive from self-employment to be eligible for Limited Doc/VOA documentation option.

Speaking of Wells Fargo, they are absorbing $1.4 billion in losses on home equity loans that borrowers have stopped repaying. Well Fargo's troubled home equity loans, totaling $11.9 billion, represent about 14 percent of the bank's total home equity portfolio of $83.4 billion. The bank has said most of the delinquent loans originated from mortgage brokers or other lenders on the wholesale market. Wells Fargo is now steering clear of virtually all home equity loans made outside its own offices.

FNMA announced changes to their Alt-A program, effective March 1, 2008. (Remember that most, if not all, investors will probably follow suit.) "In light of the continuing deterioration of market conditions," FNMA will no longer purchase No Income/No Assets (NINA) documentation loans, or No Ratio (No Income/Verified Assets [NIVA]) documentation-type loans. Beginning then, FNMA will only purchase Stated Income/Verified Assets (SIVA) and Stated Income/Stated Asset (SISA) loans, with the following eligibility adjustments: for cash-out refinance loans, the maximum LTV/CLTV is reduced to 75% for all except 1-unit primary residence, the minimum FICO score is increased to 660 regardless of LTV/CLTV, and for 3- to 4-unit properties, the minimum FICO score is increased to 700.

Chase, effective today, is changing their risk-based price adjustments for Agency fixed rate products. Needless to say, they are not for the better. This is in reaction to FNMA and FHLMC's loan level pricing adjustments based on LTV and FICO scores. In addition, JP Morgan Chase will be cutting 91 jobs at a Southern California Mortgage Operations Center.

Freddie Mac is offering $6 billion of preferred stock, saying that the capital will be used for their base requirements. Freddie also cut their dividend by 50%.

Quote of the Day: "This time, like all times, is a good one if we but know what to do with it." ~ Ralph Waldo Emerson

Stumble It!

Definitions provided by: U.S. Property Definitions

Even my parents own a shredder

2007-11-20T14:14:00.000-08:00

Even my parents own a shredder. (It sits, still wrapped in the box, under their rotary dial telephone that they lease every month from AT&T.)

Experts say that estimating how frequently confidential mortgage data is leaked is difficult, because many breaches go unnoticed. For three days in July, however, Bob Segall, a reporter at WTHR-TV in Indianapolis , Indiana , looked into 40 dumpsters behind loan branches and title companies that handle mortgage documents. In 18 of them he discovered sensitive information about various borrowers. "You could see their complete financial lives on paper, dating back 20, 30, 40 years," he said. Among the finds inside the mortgage files: a letter from one borrower's counselor saying he was doing well in alcohol rehab . . . .

Who were the top non-conforming lenders for the first half of 2007? There are no surprises: Countrywide, Wells Fargo, Citibank, Chase, Bank of America, WAMU, Residential Capital, Wachovia, Indymac, and American Home.

Is there any good news out there? Evidently not right now.

Total Existing Home Sales fell 8.0% and are 19% below a year ago. The national median existing-home price for all housing types was $211,700 in September, down 4.2% from September 2006. Total housing inventory inched up 0.4 percent at the end of September to 4.40 million existing homes available for sale, which represents a 10.5-month supply at the current sales pace.

The price of the average home Centex sold fell 8% from a year ago, and in some locations prices were slashed 15 to 20 percent, executives said.

Merrill Lynch took an $8.4 billion hit in the third quarter from revaluing bonds backed by mortgages and other write-downs, and recorded a $2.24 billion loss for the quarter compared with a profit of $1.94 billion a year earlier.

National City said third-quarter earnings fell 80% and recorded a net loss of $152 million in its mortgage banking business in the third quarter.

Bank of America issued a short statement announcing the closing of their wholesale operation: “Today Bank of America announced that it will exit the wholesale mortgage business in order to devote increased energy to its expanding retail channels."

Stumble It!

The Great Depression Comparison & A Short Course in MI

2007-11-15T15:26:00.000-08:00

There are rumors about UBS having huge losses. Bear Stearns, the second largest underwriter of mortgage-backed bonds in the U.S., will write down the value of its subprime-related assets by $1.2 billion in the fourth quarter, cut 900 jobs, and seen its shares drop 38% this year. Barclays, the U.K.’s third largest bank, wrote down $2.7 billion due to credit-related securities tied to the U.S. subprime-mortgage market collapse. Morgan Stanley, Goldman Sachs, Merrill Lynch, the list rolls on and on.

What seems to be safe? The short end of the curve is where the safe haven buying is strongest. The long end of the curve, while doing better, is not doing well due to inflation worries. And therefore mortgage prices are not really benefitting from the strength in bonds.

According to Reuters, Wells Fargo & Co, which has been fortunate enough (so far) to have sidestepped many of the credit and liquidity problems plaguing most U.S. mortgage lenders, believes the nation's housing slump is the worst since the Great Depression and is far from being over. Chief Executive John Stumpf said on Thursday that the second-largest U.S. mortgage lender and fifth-largest U.S. bank is "not immune" from the storm, but is well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008.

"We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a Merrill Lynch & Co banking conference in New York. "I don't think we're in the ninth inning of unwinding this," he continued, "If we are, it's an extra-inning game."
Shares of Wells Fargo fell $1.13, or 3.4 percent, to $32.12 in afternoon trading on the New York Stock Exchange.

Where’s the good news? Besides oil prices sliding back to $93 per barrel, the MBA said that mortgage loan application volume was up 5.5% on the week. The refinance numbers were +6.4% and purchases increased 4.8%. The news out this morning is certainly good for bonds. Treasury rates have dropped dramatically, however mortgage prices have not followed.

Today the 10-yr is at 4.24%, yet conforming rates are still in the low 6’s. Something similar happened 5 years ago, when the Fed began lowering rates in spite of no one having a good sense for where rates were heading. When uncertainty is present, investors require a greater relative yield to compensate for prepayment risk: "Is the loan I buy now for 102 going to pay off in 4 months?" Until there is better consensus about rates, or things stabilize, expect the same issue to exist.

Our flat yield curve has certainly gone away: the spread between a 2-yr and a 10-yr Treasury security is over .75%, whereas a year ago it was less than .12%.
The Consumer Price Index was as expected (+.3%, core rate +.2%, year-over-year up 3.5%, core up 2.2%), and Jobless Claims moved up 20k to 339k.
Bill Beckman, the president of CitiMortgage, sent out a letter stating that "…at CitiMortgage we continue to focus on growing profitable share through a balanced sourcing model via Correspondent, Wholesale and Retail channels….We continue to be a leader and supporter of the mortgage banking community by supporting and promoting the long-term health and viability of the mortgage lending community…. Our acquisition of ABN AMRO Mortgage Group/InterFirst earlier this year, year-to-date Citi maintains its #3 market share in both originations and servicing, our continued support of non-conforming and non-prime products...."

From the LA Times: Countrywide said its monthly mortgage volume fell 48% in October from a year earlier as it all but stopped making sub-prime loans and sharply cut back on home equity lines of credit. Meanwhile, delinquencies on the mortgages for which Calabasas-based Countrywide handles the billing and other services continued to mount, and their stock is down 68% this year. CW funded $22 billion in home loans last month, down from $41.9 billion a year earlier but up 4% from September's $21.2 billion. Countrywide funded just $3.2 billion in mortgages through loan brokers last month, a startling 57% decline from the level of a year earlier.

In addition, CW’s Home Equity group eliminated the reduced doc option above 80% CLTV, entirely eliminated CLTV’s above 90%, and disbanded all ARM subprime lending.

Wells Fargo wholesale announced to their broker clients that non-Full Doc 2nds are "going away" next week, which impacts standalone and piggyback transactions.

Fannie Mae said its third-quarter loss widened to $1.52 billion. For the first nine months of the year, Fannie Mae's net income plummeted to $1.5 billion from $3.0 billion in the same period in 2006.

Wachovia Corp. said the pretax value of collateralized debt obligations (CDOs) invested in asset-backed securities declined by $1.1 billion last month. That's on top of a $1.3 billion write-down during the third quarter.

Fitch Ratings downgraded the ratings on $37.2 billion in collateralized debt obligations that were part of 84 transactions. Fitch also affirmed ratings on $6.9 billion worth of CDOs.

E*Trade Financial, not to be confused with ELoan, saw its stock price crumble 55% Monday morning after an analyst at Citigroup said there's a 15% chance the depository could go bankrupt.

At this point, 2nd mortgages are "few and far between," enforced by recent studies that show piggyback loans with FICO scores of 660 or below were 43% - 50% more likely to go into default. This alone would cause investors to switch their focus from buying 2nds to buying larger first mortgages with mortgage insurance and sure enough, loans with MI tend to receive more Accept/Approve recommendations and are a credit enhancement.

Mortgage insurance companies tout the "simpler financing": one loan to close, one interest rate, one set of underwriting guidelines, and they state that this typically results in competitive monthly payment & lower life-of-loan costs.

MI can generally be cancelled (based on loan servicer's requirements) which will lower the monthly payment, but in the mean time there are two annual premium types: annual (level or declining) and split-premiums. Annuals are the old way of MI: MI is collected annually (included in PITI), it is cancellable, it is refundable (prorated), it is tax-deductible, and the first year premium could be paid as an NRCC.

Splits are a hybrid of One-Time MI and Monthlies: an upfront premium is paid by the builder/seller/borrower (there are limitations on concessions), there is a significantly reduced monthly policy that the borrower is then responsible for (through PITI), it is cancellable, it is refundable, it is tax deductible, and it is also available on Alt-A products.

There's also One-Time MI, where the MI is collected upfront in a single premium... it offers some advantages, but is expensive. Most people opt for LPMI. From a pricing standpoint, MI companies say that the splits are good because of pricing to the borrower once the up-front portion is paid. They are limited by investors, though. Annuals are widely accepted but are more costly to the borrower over the long-run, even if the first year is paid.

Speaking of mortgage insurance, news came out late last week that Old Republic bought a stake in PMI & MGIC. The parent company of Republic Mortgage Insurance Co., Old Republic International, disclosed the acquisition of 15% in two of its rivals in the mortgage insurance business

Thought For the Day: "Finish each day and be done with it . . . You have done what you could; some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; you shall begin it well and serenely." ~ Ralph Waldo Emerson

Actions by the FED & other rumblings

2007-11-09T14:41:00.000-08:00

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

2007-11-08T19:41:00.000-08:00

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

2007-11-08T17:41:00.000-08:00

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

2007-11-08T13:40:00.000-08:00

The Mortgage Minute