Home Loan Focus

Archive for the ‘mortgage system pitfalls’ Category

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.

Senator Kent Conrad found himself in a bit of a pickle this week, as it was revealed that he received favorable treatment from Countrywide when financing a Florida vacation home for over $1 million.

The favorable treatment came in two forms and relates to Barack Obama’s most recent scandal.  James Johnson was working for Barack Obama trying to vet Vice Presidents when it was revealed that Johnson used to be a lobbyist and had received sweet heart loan deals himself after leaving one of those companies.

Johnson apparently told Sen. Conrad to call the CEO of Countrywide, one of the companies at the heart of the subprime loan scandal, which is currently being purchased by Bank of America.  The CEO of Countrywide later instructed loan officers at Countrywide to shave off one point from the points paid on the mortgage. 

The dollar value of this transaction was not that great and the Senator after admitting the perspective of possible impropriety has promised to donate about $10,500 to charity.  It points out though that many lawmakers, who may not always get direct benefits in the form of campaign contributions may be getting a lot of smaller perks on the side and through the backdoor.  If a Senator can save $10k on a home loan, what do they save when they buy a car or shop for medical insurance?  Do they pay anything on credit card rates or hotel stays?

Conrad (D-N.D.) said yesterday that he sees nothing wrong with calling Mozilo, the chief executive of the nation’s largest mortgage lender, Countrywide Financial. And the Senate Budget Committee chairman is adamant that he received no special deals.

But by reaching out to Mozilo, Conrad became another VIP enrolled in the “FOA” — Friends of Angelo — loan program.

“[T]ake off 1 point,” Mozilo instructed a subordinate in a March 17, 2004, e-mail obtained by Condé Nast Portfolio magazine. In another e-mail that April about a Conrad loan, Mozilo wrote: “Make an exception due to the fact that the borrower is a senator.”

A few years ago consumers were trying to figure out how to add every conceivable amenity from 3 and 4 car garages to home theater seating to their homes and then flip them making a profit and moving on to something even better.  These days they are doing good just to get financing at all not only in the US but also in the UK.

The Bank of England reported that the number of new mortgages being approved for people buying a home was just 58,000, the worst monthly figure since the Bank began collating the data 15 years ago, and only about half the recent peak of 115,000 witnessed in May last year.

Observers had expected a small rebound after the severe crisis the credit markets experienced in March, when Bear Stearns had to be rescued by the US Federal Reserve.

Mortgage approvals fell to new low in April – Mortgages, Money – The Independent

That is the perception by some recent surveys.  Home prices declines could accelerate just like stock price declines accelerate during a crisis.

Prices in areas such as Las Vegas and Miami dropped more than 20 percent, while Charlotte, NC alone stood out with an increase in the top 20 US cities in the survey.  But living here in Charlotte, it would appear to me that even the Charlotte hold out is a bit of a fluke.  The numbers for Charlotte a month after the survey seemed to indicate that Charlottes hold out increase was more about a delay in change and a slower moving bubble.

That said, this survey and the new idea that home prices could drop this fast is bad news for mortgages.  If a property considered ‘real property’ does not have ‘real stable’ value, then as an asset it can not necessarily back itself.  That means that the risks that banks take on real estate is actually higher.  Higher risk always translates into higher interest rates.  That means higher buying prices, slower sales rates and slower demand, which also drives down home prices even more. We are looking at a situations that is almost like hyperdeflation.  In the past the Federal Reserve has always tried to put a corset on inflation, but in this situation we almost need a tourniquet on deflation.

The Federal Reserve is expected to drop rates yet again tomorrow in a further attempt to get the US economy out of what most people believe is a true recession.

Oil prices are pushing up on $125 a barrel, food costs are escalating rapidly due to demand for ethanol, and its even rumored that postage prices may increase soon, so postage tape and stamps plus bulk rates could go up as well.

That all points to inflation, which in some cases has started to sneak into some mortgage rates, which despite the Federal reserve moves are not offering people much in the way of savings as banks pocket the adjustment in the form of profits to offset their sub prime loans.  In that regard, another Fed rate cut is likely to be more of a bailout move than it is a boost to the economy.

Different states throughout the United States utilize two basic concepts when it comes to property ownership. The first concept is known as title theory. In title theory of the lender has the right to assume instant possession of the mortgage property when the borrower defaults. Once the lender assumes the properties of property can be sold.

The second concept is known as lien theory. Lien theory requires the lender to foreclose on a lien on the property in the court of the jurisdiction relevant to the transaction. Only a court action can give them the ability to acquire possession of the property. At that point the property can be offered up for sale and the funds from the sale can be used to extinguish the debt.

In both lien theory and title theory if there is any money left over from the sale after the debt has been paid, the Boer war is entitled to receive that money. If the lender has to spend any money to sell the property, these are known as cost of sale, the lender can recoup that expense is well before the borrower receives any money from the sale. The sales are often managed by a representative of the court, typically known as an executor. Unfortunately, lenders are often in a hurry to recoup their losses and avoid further risk. Sales often happen fast and with minimal effort. Excess funds during a sale are not always common.

If an owner had a large amount of escrow in their home, they could potentially have refinanced and avoided the foreclosures in the first place. So banks or lenders often end up selling homes at an amount just above what they need to cover their unpaid debt, leaving very little if anything for the borrower. Monitoring the behaviors of the parties during a sale will typically yield little benefit. Its difficult to prove that lenders are doing anything wrong when they take no effort to fix up a home for sale and give it enough curb appeal to garnish a better rate. A lender can hardly be expected to put more good money after what is already proven to be bad.

Similarly, home owners that have lost their homes often do not want to give up the property and their efforts to delay exit or foreclosure can also harm the ability of the home to sell at a good price. The two sides in these case can become embroiled in arguments and controversy, even engaging lawyers and private investigators armed with a telephoto spy camera, but it rarely amounts to anything useful for either side.

The concept of mortgages stayed back to ancient Egyptian times.  A mortgage is essentially a promise or pledge of some type of property against a debt.  Under ancient Roman law, if the person did not pay their debts, they would become a slave to the person that the debt was owed an unpaid.

Reforms in Roman law enabled people to avoid slavery by giving up their property which would then be sold to pay down the debt.  As time progressed, Western lenders bound by Christian strictures and laws would assume the control of this property and receive up the profits or rents from that property until the debt was paid instead of selling it.  As the 14th century came to be, Jewish lenders that were not bound by Christian strictures were laws were able to charge interest and this process known as hypothication became popular.  This process were interest was charged and able property owners to maintain control over their land or property while paying interest to the people that they borrowed a principal amount from.

Today, when we consider foreclosure, we think of losing our credit, our home, maybe even the new home theatre system with all those expensive CAT6 cables dipped in gold.  We don’t think of being put into bondage and slaving literally for the person or company that we borrowed the money from in the first place.  That may sound archaic, but as late as just a few decades ago many people were still sent to debtors prisons in the South Pacific from France and England.  When large debts are involved in default, fraud often goes hand in hand and today many people might still end up in prison not for the bad debt itself but for other reasons related to that debt.

Over the last seven years the Republican administration of George Bush and the Republican led Congress (up until 2006) were so bad at managing the nations finances that it was hard to conceive that anyone, anything or any other party could be worse.  Democrats seem to be working to prove that they are just as bad at helping Americans and the US economy as their Republicans cohorts on Capital Hill.

This week, the two sides are arguing over a Sub Prime bail out that seems designed to bail out no one, yet it will spend $300 billion dollars.

What it might do

1.  Give funds to local communities to go fix up empty foreclosed homes. 

Why?  Who knows, maybe it will give the mice and the looters something fresh to compete over.

2.  It will replace a borrowers existing mortgage with an FHA backed mortgage and will give the Federal Government partial ownership of your home. 

Why? Who knows, maybe the Federal Government hopes to get a foot in the door on legal grounds in case they want to perform a search or seizure of your property without a warrant with a warrantless wire tap.  The last thing the fed wants to do is go into the real estate business again having to comply with local ordinances and bylaws on maintenance and upkeep.  Wasn’t the United States set up in part so that people could get away from governments that owned all the land?

3.  It would require banks to write down the principal amount of a mortgage balance to recognize new home loan values in various areas. 

Why?  If you currently owe more on your home than it can be sold for in the market, financially you will have the incentive to walk away and leave the bank with the bad deal.  That increases defaults, drops property values further and creates more instability for all of your neighbors who might soon fall into the same problem.

What it will not do

1.  Allow Bankruptcy Judges to do what they used to do and negotiate better interest rates and principal amounts to avoid a total default and loss by the home owner and the banks.

2.  It will not help people facing foreclosure avoid foreclosure.  (But they will fix up your house real nice after you are kicked out by the local sheriff)

3.  It will not bail out speculators that gambled on the value of your home as collateral.  But it will back their remaining investments with an FHA guarantee so that they can take their money and run to another investment arbitrage opportunity, maybe something in grape seed extract commodity contracts.

Related Stories on this Topic

Senate deal breathes life into housing rescue bill
MarketWatch – 37 minutes ago
By Greg Robb, MarketWatch WASHINGTON (MarketWatch) — Legislation to rescue the collapsed housing market has been given new life in the Senate, …

UPDATE 1-US Senate leaders to draft compromise housing bill
Reuters – 47 minutes ago
By Kevin Drawbaugh WASHINGTON, April 1 (Reuters) – Democrats and Republicans in the US Senate agreed on Tuesday to craft a compromise bill to help …

Senate Announces Breakthrough On Housing Bill
CBS News, NY – 54 minutes ago
By Martin Kady II (The Politico) The Senate may have a deal in hand with the stalled housing bill. In a surprise announcement, Senate leaders Mitch …

Foreclosure Relief Bill Clears Hurdle
The Associated Press – 1 hour ago
WASHINGTON (AP) — A legislative effort to address the nation’s home foreclosure crisis moved forward in the Senate Tuesday as Democratic and GOP leaders …

Foreclosure Relief Bill Clears Hurdle
The Associated Press – 1 hour ago
WASHINGTON (AP) — Senate leaders reached a deal Tuesday to advance legislation to ease the nation’s home foreclosure crisis. The bill has not been written …

Senate leaders to draft compromise housing bill
Reuters – 1 hour ago
WASHINGTON (Reuters) – Senate Democrats and Republicans agreed on Tuesday to craft a compromise bill to help homeowners in the widening US mortgage market …

Homeowner relief bill stalled in Senate
CNN – 18 hours ago
WASHINGTON (CNN) — Though lawmakers have vowed to confront the deepening mortgage crisis, Senate leaders are locked in a procedural stalemate over how to …

Democrats seek quick strike vs. foreclosure
CNNMoney.com – 20 hours ago
Key leaders say they’ll seek a vote aimed at keeping families in their homes. By Les Christie, CNNMoney.com staff writer NEW YORK (CNNMoney.com) — Leading …

Senators Set to Debate Housing Crisis
U.S. News & World Report, DC – 21 hours ago
Sens. Harry Reid and Chris Dodd stress importance of solving the foreclosure problem that threatens US homeowners By Katherine Skiba What Democrats call a …

Senate Democrats to seek support for foreclosure prevention bill …
CNNMoney.com – Mar 31, 2008
WASHINGTON, Mar. 31, 2008 (Thomson Financial delivered by Newstex) — Senate Democrats will try as early as tomorrow to win support for a controversial bill …

Foreclosure relief bill clears first Senate hurdle as Republicans …
PR-Inside.com (Pressemitteilung), Austria – 1 hour ago
© AP WASHINGTON (AP) – Senate leaders have reached a deal on advancing legislation to ease the US home foreclosure crisis. The bill has not been written yet …

Senate Still Stalled Over Housing Package
CQPolitics.com, DC – 2 hours ago
Senate leaders remained at an impasse Tuesday over Democratic housing legislation that includes a controversial change to bankruptcy law, suggesting the …

Debate over Allowing Judges to Modify Loans Continue
DSNews.com, TX – 4 hours ago
The Foreclosure Prevention Act of 2008—a legislative package that aims to
help families with an assortment of legislative measures such as allowing judges …

Political tax gestures offer state no solution Scrap Republican …
The Ann Arbor News – MLive.com, MI – 5 hours ago
Last week, just before going on spring break, the state Senate approved a GOP-authored bill that would put a 33-month moratorium on a "pop-up” in property …

Senate Democrats push foreclosure relief measures
WLOS, NC – 11 hours ago
CAPITOL HILL (AP) — The Senate today takes up a housing bill that aims to ease the nation’s foreclosure crisis. Provisions include four billion dollars for …

Dems want GOP help on stimulus plans
Politico, DC – 11 hours ago
By VICTORIA MCGRANE | 4/1/08 4:43 AM EST Photo: AP Top Democrats swept back into Washington on Monday, eager to show the American people they’re ready to …

Senate Democrats Say Relief for Homeowners Should Come First
Bond Buyer (subscription), NY – 14 hours ago
By Lynne Funk Immediate help for homeowners suffering from the housing crisis should be superior to a long-term overhaul of federal regulation of Wall …

Nevada foreclosures making housing personal for Reid
The Hill, DC – 20 hours ago
By J. Taylor Rushing The housing crisis has hit Nevada harder than any other state, creating a highly personal issue for Senate Majority Leader Harry Reid …

Reid and Dodd Will Discuss Housing Crisis
KLAS-TV, NV – Mar 31, 2008
US Senators Harry Reid and Chris Dodd today are scheduled to discuss Democratic Party efforts to address the nation’s housing crisis. …

GOP had 9-1 edge in bills passed
Deseret News, UT – Mar 30, 2008
By Lee Davidson and Bob Bernick Jr. Republicans sponsored nine of every 10 bills that passed the 2008 Legislature. This comes even while House Democrats …

Senate leaders agree to work toward comp
Life Style Extra, UK – 35 minutes ago
WASHINGTON (Thomson Financial) – Senate Democrats and Republicans today agreed to work toward compromise housing legislation, and said leaders and staffs of …

The Federal Reserve this week unleashed a $200 billion non bailout initiative.  They are essentially allowing investors to take mortgage backed securities and swap them for US treasuries.

The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems. 

Bloomberg.com: Worldwide

You might think of it like a collateral swap.  Say your teenager has an old beater of a car.  Maybe they bought it from a junk yard for $800 and fixed it up with $200 in labor and 2 months of elbow grease and amazingly the car runs and even passed inspection so that it can be licensed and insured.

Your teenager then comes to you and tells you that they need $4000 in cash for some un-related purpose.  You agree to loan them the money and accept the title to their junker car as collateral.  Now, unfortunately for you, you have 10 other teenagers in need of money too (maybe you adopted or something).  You can’t keep making collateral loans on junker cars.  So you take your loan document and you swap it out with the Feds for a loan document from the US government on US treasuries.

Your teenager now has to repay the government and the government has to repay you.  Odds are (theoretically) that the government will be able to pay you back in dollars with less risk than your teenager.

Sound too good to be true?

Well, it is kind of.  The risk here is that the when the US government pays you back, they pay you in dollars.  If you are watching the currency market lately, the dollar is rapidly approaching the point where it will be worthless.  Don’t believe me, then let me know how many gallons of gas you can buy with a dollar today and how many gallons you will be able to buy with a dollar paid back to you by the treasury when ever they actually pay you.  I’m guessing that unless the government doesn’t fix its finances with something akin to a massive financial colon cleanseing process, you will be better off burning those dollars than trying to exchange them for gasoline to burn in your own car.

As the real estate market starts to settle out, and as inflation starts to enter into the picture, it is very likely that America will see a period in real estate very similar to what we experienced in the 70s and early 80s.  Fewer people will own their own home and more people will write.

The equation has not changed in that there are still many many people looking for places to live.  The population across United States is expected to increase by 100 million people over the next 15 to 20 years.  Those people have to live somewhere in those places do not exist today.

Some people would point to the Federal Reserve and state that the Federal Reserve is lowering interest rates and that mortgage rates should follow soon.  The problem is that inflation has entered into the equation.  The Federal Reserve cannot control inflation especially when the United States has a massive debt that is building on a regular basis.  That inflation essentially adds percentage points to the real mortgage rates banks can offer.  Let’s say that the Federal Reserve sets rates at 3%, and inflation is running at 3%, and banks need to make a profit of 1 1/2 percent to keep operations going in to lure in investors to buy securitized mortgages.  That would mean that the real interest rate for a person with excellent credit would start off at 7 1/2 percent.  If that person has less than stellar credit the interest rate is going to be even higher.

If inflation increases, then interest rates in total will also go up no matter what the Federal Reserve does.  Now as those interest rates go up that points towards the need for many people looking for a home to live in to consider renting.  It also means that people that are sitting on homes today with low interest rates are likely to become landlords very soon.  If they are locked into an interest rate is lower than what can be had on the market, they may not make their money back in equity in the house but they could make it back in rent.  In doing that we are going to see a nation change from being a flip that house nation into a rent that house, sublet the apartment, where sublet that room.

For a similar example, you can look at what is going on in city centers around the US or even in the United Kingdom or Europe.  We all face the same inflation and the same rising population centers.  All those baby Emily crib sets have to go somewhere.