Home Loan Focus

Archive for April, 2008

It takes two quarters of negative growth to officially make a recession.  The first quarter of the year, which many people expected would be the first quarter of negative growth just barely managed to eek out 0.6% of growth if Commerce Department numbers are to be believed. (In past years they have often updated their numbers when more accurate information came in, so this possible good news could be a calculation error or bad data.)  That said if the information is correct, then this last quarter was not the official start of the 2008 recession.

The American economy remained stuck in the slow lane over the first three months of the year, expanding by a modest 0.6 percent annualized rate, the Commerce Department announced Wednesday morning.

Exports Help Economy to Modest Growth – New York Times

The impossibly weak US dollar pushed exports abroad as other countries picked up our goods and services at a bargain.  That’s not something that is likely to last as the cost to produce products increases, those prices to export will have to go up and end the arbitrage.  Its even more likely that some of these exports were short lived at best as the US manufactures less and less products all the times from automobiles to ram to textiles.  Now the big question is what will the Federal Reserve do?  They are expected to signal their next move in about 90 minutes, which could help the anemic growth continue or could push us head on into a recession.

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.

So I’m here in Laughlin Nevada which saw massive price inflation during the run up of the real estate market.  Home prices went up 200% from 2003 to 2005, but since 2005 they have dropped 50%.

That’s a heck of a roller coaster (or river raft ride).  That like Oprah’s weight when someone replaces her diet pills with placebos every other month.

People that bought homes before 2005 are doing fine, but people that bought homes after are hurting and lost their shirts in the desert.

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.

Two day pain interest is a very common and accepted practice.  There are generally two basic types of loans that are offered.  Secured loans where some form of property is still offered as a promise to pay down the debt and the advent that the borrower fails to pay. 

Unsecured loans are also a popular form of loan as no type of property is held in security against the debt.  This means that if a borrower defaults on a loan to a lender, the lender has no recourse to take any of the borrower’s money or property.

Secured loans are typically used for the purchase of real estate while unsecured loans are typically used for relatively small amounts of money on items such as credit card debt, home improvement or furniture loans, some college loans, and even some online auto insurance policies can be funded with a small loan.

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.

Freddie Mac is working to buy up mortgages totaling about the same amount as were foreclosed in California last year, $15 billion.

Freddie Mac is lending a jumbo hand to a group of major U.S. banks, offering to buy as much as $15 billion in mortgages that used to be too big for its program.

On Thursday, Freddie Mac (nyse: FRE – news - people ) said it would purchase home loans of up to $729,000 from lenders including Wells Fargo, JPMorgan Chase, Citigroup, and Washington Mutual.
Freddie Mac Super-Sizes Its Program

This has been expected for a couple months now since the government cleared the way for Freddie Mac to take on these jumbo sized loans a process that mirrors a plan also allowing VA loan amounts to go higher as well.

In the past, a borrower that wanted to borrow more than $417,000 would have to get a primary mortgage for the first part of the mortgage up to that old max and then another for the amount over that paying a substantially higher interest rate.  Potentially, now Freddie Mac can make it easier for people to take out a loan or more importantly refinance with a federally backed loan as Freddie Mac now starts to purchase loans off the books of banks, enabling them theoretically to re-extend new credit to new borrowers.  That said, don’t run the printers out of ink yet, the big ‘if’ in this equation is the concept of re-extending the credit once the banks are bailed out by Freddie Mac.  It could be possible that Freddie Mac and the US government are just taking on bad loans from banks that could write good loans in the first place.

Finding good news in the mortgage industry and market these days is twice as hard as finding a needle in a haystack that was bull dozed for a new sub division 2 years ago.  Fortunately, there is some good news out there.  Mortgage rates held steady and didn’t increase for the second week in a row despite the continued decline in the value of the dollar and oil prices that went over $115 a barrel this week.

Thirty-year mortgage rates were at an average of 5.88 percent, while 15-year mortgages dipped to an average of 5.40 percent from 5.42 percent last week, Freddie Mac said.

One-year adjustable rate mortgages, or ARMs, fell to an average of 5.10 percent from 5.18 percent.

Freddie Mac said the “5/1″ ARM, set at a fixed rate for five years and adjustable each following year, averaged 5.48 percent, down from 5.56 percent a week earlier.

A year ago, 30-year mortgage rates averaged 6.17 percent, 15-year mortgages 5.89 percent and the one-year ARM 5.45 percent. The 5/1 ARM averaged 5.92 percent. 
US 30-year mortgage rates hold steady for second week

Its not the greatest news, but not the worst either.  The mortgage industry has been suffering from the equivalent of mesothelioma as it fights to exorcise the demons of bad mortgages written under the auspices of sub prime lending.

The sub prime mortgage scandal was definitely created in large part by mortgage brokers offering up shady deals, but they could not have acted in a vacuum. Someone had to underwrite those mortgages and securitize the portfolio, reselling it to investors via hedge funds. Well, FBI Director Robert Mueller and the FBI is still in the process of following the money working to trace the fraud back to the money that created that demand and enabled it to happen by not operating in a truly free market fashion.

“We are targeting accounting fraud, insider trading and deceptive sales practices. These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds.” Subprime probe may lead to hedge funds, others: FBI

Mortgage fraud was possible in part because the people that should have been reviewing the mortgage brokers actions and the banks above them both turned a blind eye to what was really going on. In the drug world, this is part of the reason why the FDA is in place to test drugs, such as was done with lipovox reviews, and now many politicians including the Fed are lining up to set up controls that would do the same in the mortgage market.