Home Loan Focus

Archive for the ‘Mortgage Industry’ Category

The Geithner/Obama plan to ‘help’ home owners called the “Homeowner Affordability and Stability Plan” and the guidelines – Text Version – that spell out how it is to be executed called the “Making Home Affordable” Guidelines have some holes big enough to drop a country (the size of the United States) through.

Problem 1 – Not Big Enough

The program is only designed to cover 7 – 9 million Americans despite the fact that there are between 50 – 80 million Americans holding mortgages.  In 2008 over 2 million people went through foreclosure and 2 million+ more are expected to go through foreclosure in 2009 by the most modest estimates.  8.3 million people currently owe more on their homes than those homes are worth, which means they can not sell their homes and relocate if they lose a job or even get a promotion requiring a move.  Furthermore, if home prices drop just another 5% (and rates have been going down that much every month in 40% of states in the US (not just California as the problem is spreading) then 2.2 million additional borrowers will be underwater.  Plus, almost 2 million people left the United States and moved to Central America last year as jobs evaporated, which also helped to fuel the evaporation of new home buyers capable of buying a home.

This drop in home prices works like an avalanche.  As it drops more, it picks up more snow and increases in speed consuming more and more formerly safe, stable and financially secure Americans that are in its path.  There are only about 40-50 million American homes that are owned free and clear with no mortgage.  But even these are at the risk of lower prices, increasing property taxes, and rising incidences of property crime as suburbia is turns into gang infest ghost towns.

Problem 2 – Wrong Focus

Then there is the issue that after paying $2 trillion to bail out Wall Street this plan only offers up $75 – %80 billion to actual home owners.

$2 trillion if divided amongst 75 million mortgage holders could have provided $26,000 to each home owner to revalue those mortgages, write down principle, and lower mortgage payments or even payoff mortgages all together!  This could have enabled people to tighten their finances, fix their budgets, and if they need to move, sell or buy a home, they could have done it.  And that is 75 MILLION households, not 7 million that just happen to be covered by 2 failed institutions (Fannie and Freddie).

Instead the government has put good money after bad in a never ending hole for capital currently nick named the financial markets.  They complain about the hocus pocus of hedge funds while poring more money into the banks that own, run and invest in hedge funds instead of the people that own real assets (homes).

Problem 3 – Too Little Too Late – Incentive to Foreclose or go Bankrupt

Essentially the government is simply creating an incentive for homeowners to go through foreclosure or bankruptcy.  The real estate market is not in the tank it is going down and down into the tank.  We are NOT at the bottom yet.  Throwing money on the fire does not stifle the flames, it causes it to burn more.

More and more homeowners that are underwater are realizing that their only real option is to sell their home to the highest bidder, their bank holding the mortgage. 

When that isn’t enough the other option is to walk away from their debt all together in bankruptcy.  Through a bankruptcy consumers can dismiss tens of thousands of dollars in debt on their unsecured credit cards, renegotiate their mortgage rates, their mortgage principal, their car loans and more.  Even if they go through Chapter 13 – Reorganization, they stand a better chance of renegotiating their credit card interest rates down to single digits at a time when credit card companies are racing to raise rates up to 30% before new laws go into effect in July 2009.

Plus, the credit card companies are eliminating credit limits for card holders left and right.  They are dropping credit lines, canceling cards and more.  For those people that worked very hard to keep their credit up and pay their credit cards on time, they are seeing their credit rating sabotaged by banks cutting their limits for no reasons that have to do with that consumer.  They might as well already be in bankruptcy!  Their credit rating goes in the tank, their interest rate goes up to 30%, their cards are canceled, Chapter 13 starts to look like a blessing because all the perils of bankruptcy have already been experienced by people that pay their bills on time!

Problem 4 – Government Reinvention of Sub Prime Loans

So after subprime loans supposedly got us into this mess, the government plan relies heavily on sub prime tools to get people ‘out of this problem’.

• ARMs
• 40 Year Loans

Those ‘evil’ adjustable rate mortgages(ARMs) that trapped millions of people are essentially exactly what the government is offering.  They are enabling people to finance at interest rates of 2-4% for 1-4 years to make their homes ‘more affordable’.

Hello! That is exactly what mortgage brokers did with sub prime loans.  They even went one step better offering 0% mortgages. 

The government is essentially prolonging the problem.  This does enable people to live and fight another day from one perspective.  It also enslaves them to their homes, to the banks and now to the government (with a loan that might not be able to be forgiven in bankruptcy) from another perspective.  Would you rather be enslaved to your home, the bank and the government, or rather sell your home back in a foreclosure or escape the bondages of your debt in a bankruptcy and be on the path to healing your finances (with your full income that you have now).

The second thing that the government is offering is a 40 year mortgage.  There is a historical reason why 40 year mortgages have not been offered to the masses.

40 Year Mortgages are a rip off and they do not make homes more affordable. 

A 40 year mortgage will force a person to pay far more on a mortgage than a 30 year mortgage.  The interest like a credit card where a person pays a minimum payment, almost never stops.  After the first 10 years, you might as well have rented your home, because you will not have much more principle built up in your home.  The banks will earn significantly more interest from you during that time.  In fact you will pay for your home multiple times over in interest even though you will still owe the principle!

This isn’t change we can believe in this is just a really bad idea.  That pretty much sums up all of the plans offered so far in fact.

Two days ago the House of Representatives attacked the heads of American banks.  Congress and Barack Obama’s administration have gone to war with Wall Street this week, but some bankers on Wall Street are still capable of extending an olive branch in hopes of a truce and possibly a solution.

J.P. Morgan CEO Jamie Dimon said in a letter to House Financial Services Committee Chairman Barney Frank, D-Mass, that he would set up a three week moratorium on foreclosures

Citigroup and J.P. Morgan suspend foreclosures temporarily – MarketWatch

Dimon is one of the few people on a short list that has the political and business connections and more importantly the knowledge and intelligence to possibly step in and run the Treasury Department.  After watching Secretary Geithner crash and burn with proclamations of detailed plan that was followed up with hollow strategy and a dog and pony show outline (costing $1 trillion), the United States might just need to draft Dimon as a replacement.

In the meantime, mortgage customers of Citigroup and Chase have a temporary reprieve if they need it.  The 3 week term of this temporary moratorium was set by Congress and Geithner that hinted that they will have a solution to fill the void on week 4.

The bailout package was signed by Congress, but so far there is no actual plan to apply the cash to any open problem.  The bailout is not a bailout.  It is the collection of an emergency fund and emergency authorities to be given to the Treasury Secretary (who has delegated the $700 billion to his deputy).

Credit Disappearing

 

In the wake of no action by the government, credit is disappearing.  Sub prime mortgages and later many regular mortgages and home equity lines were the first to go.  Banks that had issued these loans, issued securities backed by these loans and bought or traded in securities from other banks that had issued these loans, rapidly lost their trust in the value of mortgages as an asset. Those banks basically don’t trust the numbers, and now won’t lend to other banks with possibly equally untrustworthy numbers, valuations and balance sheets.

After freezing credit on each other, banks then began to freeze credit on businesses like At&t and Caterpillar.  Simultaneously, major retailers around the country saw their credit lines for purchasing goods to sell during Christmas drop by 40%.  Auto dealers found that they couldn’t sell cars because banks had also frozen credit to car buyers (and now 1 in 5 auto dealers are likely to go bankrupt before next spring.)

College students went off to school this year, paid their tuition with student loan checks issued from major banks that are not in financial trouble, only to be notified several weeks into the semester that those banks had stopped payment on the checks as they ended their own private student loan programs.

What’s Next?  Cutting Up ALL Credit Cards

As we look at the trends, we see that all credit is disappearing across the board unless it is government backed. One of the few areas left is credit cards.  This is a profitable area for banks, but it is also one of the riskiest areas for banks, and banks don’t have the stomach for anything with a hint of risk.  This indicates that banks are going to cancel all those credit cards out there that far too many people in the United States rely on very heavily.

Americans have to prepare for the day when their credit lines will be dropped down to their existing balance and possibly closed or frozen all together.  Many people have already seen their interest rates skyrocket from 4% to 7% to 10% to 25%, and those are people with great credit and no late payment!  If banks can’t get financed, if the biggest companies in the world can’t get financed, if people can’t get a secured loan on a home or a car, its just a matter of time before people can’t get financed on unsecured credit cards. 

Once credit cards are killed off, many areas of the US economy start to break apart from online transactions by all those shopping sites from eBay to Amazon to online auto insurance quotes to identity confirmations based on credit cards to booking travel through major airlines.  We can’t go back to a cash system, because we just don’t have a lot of cash.  So we are going to have to find a different way.

It is no secret that the housing sector is in a bit of a “slowdown”. The Mortgage Bankers Association, who maintains a variety of indices to measure activity, released a report Thursday that declared applications have decreased by 14.1 percent in July.  In addition to the July decline of new applications, refinancing application slipped 22.9 percent last week.

The current trends have really begun to stir originators as well as lending institutions. The MBA suspects that potential home buyers are viewing the record number of foreclosures as their opportunity to ride the decline and jump in as prices drop in order to obtain more favorable conditions.

Meanwhile, single-family homes in some major metro areas have declined nearly 16 percent in value since this time last year.  So don’t expect your banker to give you a free toaster or Panasonic camera the next time you close or finish a refinancing.  They are looking to provide incentives to get people in the door, but they don’t necessarily have the extra funds to spend to do that!

Source: MSNBC

In this quick news report by Reuters things continue to look ugly for Freddie Mac and Fannie Mae.  The real concern for the economy and the world however, is the growing signs of trouble in a number of small to medium sized regional banks.

There are over 90 banks on the FDIC watch list that are facing severe financial threats that could trigger the FDIC to step in and seize control.

The problem is that many investors have even lost confidence in this after the FDIC had to step in and seize IndyMac last week.  IndyMac was not even on the radar for potential trouble and this has many investors concerned that other sleeping giants may fall as well.

Freddie Mac is not the only Mac company to get in trouble this week. California-based IndyMac, one of the largest US mortgage lenders collapsed under the credit crisis this week. Federal regulators barged in and seize the assets of the bank fearing that it could not meet withdrawals from its depositors.

It is the second largest bank to fail in the United States history. This happened on the same day that stocks in Freddie Mac and Fannie Mae dropped by 50%. Just like historical bank runs, depositors had withdrawn $1.3 billion from the bank in the 11 days preceding its collapse.

Depositors are only covered by the federal government for up to $100,000 in deposits. This is a rule that’s been in place since the Great Depression and anyone that hasn’t paid attention to banking law or federal deposit insurance was sadly misinformed and ignorant of their liability.

The subprime crisis is now entering into a stage where it is creating bank failure and depositors around the country need to be aware that they should not have more than $100,000 deposit in any one bank. Given the current climate if they have more than that they might as well be investing in ostrich feathers for all the good the money might do them at the bank collapses just like IndyMac did.

We previously talked about some of the problems that Fannie Mae and Freddie Mac have on Wall Street this week. If you are a severe optimist, you might see potential for an interest-rate drop in these events. This runs a little contrary to conventional wisdom because if these firms have no fail interest rates will likely rise.

There could be an exception to that scenario if the US government takes control over these companies. That could in fact increase solvency and provide a significant amount of capital to enable new loans to continue bust increasing the supply of mortgages and possibly triggering a drop in prices, which for mortgages take place on the interest rate.

Personally I doubt their failure will help mortgage rates much, and I doubt even more that will help the US economy or the federal deficit, but there is a remote possibility that it could actually help things. I’m not going to gamble on it myself and I don’t recommend that you do either.  If you must gamble, save it for your Vegas vacations, that city definitely needs some financial help.

That big Whooosh sound you heard this week is probably the sound of Freddie Mac and Fannie Mae sucking serious wind. You may wonder how that will affect your ability to buy a house.

Here’s where the rubber hits the road in mortgages. On any given day a bank takes in deposits from people that are actually saving money. They then turn around and loan that money out to people in the forms of loans and mortgages.

Those loans or mortgages represent an asset on the books of the banks. The banks don’t like to sit on these assets, especially recently when they’ve made so many bad loans, so they look for a sucker to buy their bad assets. As it turns out there were two major suckers out there, Freddie Mac and Fannie Mae.

These institutions by the assets and have recently lost a lot of money as they started to realize that many of the loans and mortgages were garbage. That loss of money has hit their investors very hard in this week on Wall Street or stock prices plunge down to next to nothing.

They claim to have a lot of money in reserve, we’re talking cash on hand or cash that they can draw on through loans from banks or other investors. If they run out of money they can’t keep continuing to buy mortgages from banks are trying to sell them in those banks will either have to keep their mortgages on their own books or stop making mortgages altogether.

That would very likely represents situation it would cause interest rates to rise as banks take on greater risk and the available market or money tightens up as two of the biggest firms that securitize mortgages go away.   So the big question is, who will actually come to the rescue of these two firms to keep the pyramid scheme of US banking up and running? 

Right now, you can hardly even track investors bailing out of these institutions with gps fleet tracking systems, let alone find someone daring enough to throw good money after so much bad money.