Home Loan Focus

Archive for the ‘Sub Prime’ Category

Image via Wikipedia

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.

We mentioned in a former article that one of the largest mortgage companies in the US collapsed this week.  That’s a sign that the mortgage crisis is turning into a banking crisis.  At the same time that happened Freddie Mac and Fannie Mae’s saw a massive devaluation and are threatened with failure as well.

If banks lose the ability to sell off your mortgage to Freddie Mac and Fannie Mae that will leave them with no other choice but to negotiate a better deal with you in several areas whether you are trying to refinance a mortgage or even buy a foreclosure property from them.

Today, for the most part, banks do not have to deal with you very much when you are in trouble nor even when they are in trouble.  They have a get out of jail card from Freddie and Fannie, but if that option goes away sometime soon, they might have to make a deal and work with their customers to stay afloat and that could be just the lifeline you need to save your house or even to get a great deal.

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.

The CIT Group announced the sale of its home loan business including regular home mortgages as well as manufactured home mortgages.  The company by many analysis estimates came close to bankruptcy as they suffered through 4 quarters of losses after making too many bad mortgage loan calls.

After personally doing business with CIT in their core business, Business Loans, for several years, I have to wonder if the mortgage loan business exit surgery is more endemic of a larger problem at CIT.  There are aspects of their business that are very tight, when it comes to processing and collecting payments and other aspects.  However, they seem to have a collective short coming in my opinion when it comes to evaluating loan risk and underwriting loans.

So far business loan defaults have not made the headlines that mortgage defaults have, but as more businesses suffer the impact of inflation, higher fuel costs, and a slow down in the global economy, the CIT’s core business may suffer strains that may not fair any better than its mortgage business.  With many large office and processing areas around the country, some of which I have visited personally, I expect that cut backs will likely follow and this might even harm CIT’s real competency (running tight processes in transactions) which could destabilize the rest of the business.  The famous (some would call them infamous) debt collectors of business bad debt, might find themselves in the cross hairs of debt collectors if that happens and they do not have a large number of real assets to sell off to pay down their debt.  You sure can’t put out a financial fire by selling off the office furniture…

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.”

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.

Below we’ve pulled together a series of video news articles.  These are stories about potential of a coming recession and the impact of the recession could have on people just like you.  As these things go, recessions cannot be determined until after they’ve happened.  Many people did not start to feel the impact of a recession until it’s well under way.  This particular recession that we may be facing a have been in part triggered by the subprime mortgage scandals.  That combined with the bursting of the real estate bubble, the war in Iraq in general instability around the world are all fueling the fire.

It is been almost 20 years since the US went through the last recession, and many people are not experienced with dealing with times are troubled in this way.  If we are headed into a recession, now is the time to make adjustments in your lifestyle, your finances and your priorities.

Many different people find different ways to handle the recession.  This might come in the form of cost cutting or efforts to increase their income.  Some people will lose their jobs, and some of those people have to find entirely new careers and skill sets to win those careers.  When the Internet bubble broke a few years back, many salaried employees took their savings and went to school to get MBA’s and advanced degrees hoping to weather the storm and school.  There’s no perfect solution are fit for everyone, and hopefully if this recession is mild we will have to resort to grilling up squirrels on billet grilles in a college dorm room somewhere like former presidential hopeful Mike Huckabee.

The important thing to consider is what you will do, how you will manage times when the dollar does not buy as much as it did whether that’s milk or gas or clothing or even your house payment.

The two largest backers of home loans in the United States have agreed to new over site.  New standards will be effected to increase the quality of home appraisals.

A long-term investigation by New York State Attorney General Andrew Cuomo’s office has led the two largest purchasers of home loans in the U.S. — Fannie Mae and Freddie Mac — to enter into cooperation agreements.

The pacts require the companies to only buy loans from banks that meet new standards designed to ensure independent and reliable appraisals. Cuomo’s office had been investigating fraud in the home appraisal process.

Deal reached with home loan companies – Business First of Buffalo

Home appraisals and fraud related to those appraisals were and are a significant part of the problem that has created the sub prime mortgage scandal.  Many banks performed appraisals or hired appraisals that never took place.  Many appraisers only viewed comparables and never set foot in the neighborhood of the home let alone the house. In extreme cases, some houses were not even confirmed to exist at all.

The loans that were made on these properties were very risky.  Banks essentially sold mortgage backed securities that were more risky than taking a bet in a Las Vegas hotel.  This is likely to be just one of many reforms that will continue to come and be developed.