Tuesday, December 16, 2008

FHFA September Foreclosure Prevention

Here's a news release from the Federal Housing Finance Agency, for those keeping an eye on foreclosure and note modification trends:

FHFA September Foreclosure Prevention Report Released

Washington, DC – James B. Lockhart, Director of the Federal Housing Finance Agency today released the September monthly Foreclosure Prevention Report, which provides comprehensive monthly data on the loss mitigation efforts of Fannie Mae and Freddie Mac as well as information on delinquencies, foreclosures initiated and foreclosures completed.

Since year-end 2007, while loans 60+ days delinquent have increased, loans for which foreclosure was started actually decreased. Loss mitigation actions have increased for all workout types. Short sale and deed-in-lieu volumes increased significantly in September 2008. In comparison to 2007, the Enterprises’ loss mitigation performance ratio shows considerable sustained improvement with the year-to-date ratio at 54.6 percent versus 43.5 percent for 2007.

The report shows that as of September 30, 2008 of the Enterprises’ 30.7 million residential mortgages:

  • Loans 60+ days delinquent (including those in bankruptcy and foreclosure) as a percent of all loans increased from 1.46 percent as of March 31 to 1.73 percent as of June 30 to 2.21 percent as of September 30.
  • Loans for which foreclosure was started as a percent of loans 60+ days delinquent declined from 8.29 for the first quarter and 7.81 percent for the second quarter to 7.12 percent for the third quarter.
  • Loans for which foreclosure was completed as a percent of loans 60+ days delinquent increased from 2.41 percent for the first quarter to 2.55 percent for the second quarter and stabilized at 2.55 percent for the third quarter.
  • Modifications completed declined from 15,636 for the first quarter to 15,372 for the second quarter to 13,450 for the third quarter. However, loans reinstated through Fannie Mae’s HomeSaver Advance (HSA) Program increased from 1,244 in the first quarter to 16,658 in the second quarter and 27,277 in the third quarter.
The loss mitigation ratio is calculated at the total mitigation activities (payment plans, HomeSaver Advances, loan modifications, short sales, deeds in lieu, assumptions, and charge-offs) divided by the total of loss mitigation activities plus foreclosures completed and third-party sales.

Sunday, December 14, 2008

Interesting Commentary From JP Morgan Chase

A colleague forwarded this to me, so I don't have the direct link.

"In recent months, Wall Street has seen an extreme liquidity drought with steady redemptions from hedge funds and long-term mutual funds. However, this doesn't mean that investors have no money to put to work. In fact, in November, M2 (the total value of money held in cash, checking accounts, savings accounts, CDs under $100,000 and retail money market accounts) exceeded $7.9 trillionfor the first time, up 7.4% over the past year. Interestingly, holdings in these short-term accounts now exceed the total capitalized value of the S&P 500. The problem is not the ability of investors to invest, but rather their willingness to do so."

Don't want to miss the bounce, do you? Good time to be checking in with your financial planner. Please email me if you need a referral.

Monday, December 08, 2008

How to get a Cheap Vacation to Antigua


Elite Island Vacations has thrown out an interesting twist on the stock market uncertainty - a bet that your financial stock shares are likely well below their fair value. They are willing to take your shares at July 1 2008 value in exchange for travel services - with some restrictions I am sure.

Example: GOOG shares closed at $302 today. On July 1, they were worth $534. If you have shares of Google, and want to go to Antigua, you can pay with your shares, and get $534 of travel for every single share - that you would only be able to get $302 on the open market for.

Why do this? Elite Island Vacations clearly believes that the shares are worth more than their current trading value. That and the fact that they are very clever marketers. It's no different than offering a sale on their service, but this is bound to get a lot of attention. I'd certainly never heard of them before.

Is The Loan Modification Trend Working?

New reports on CNBC today that the re-default rate on modified mortgage loans is greater than 50% after 6 months.

That's a pretty disappointing and discouraging statistic. A lot of money is being spent on the modification efforts, and with that kind of performance, lenders are going to be less likely to continue the effort.

This gives good fuel to the debate over whether market intervention can soften the blows of a natural market correction....

Wednesday, November 26, 2008

Is the 'Bailout' Working?

Some evidence of the US Government's activity affecting our markets in positive ways:

Yesterday, a statement from FHFA Director James B. Lockhart:

“The Federal Reserve Board’s announcement that it will purchase debt of the Federal Home Loan Banks, Fannie Mae and Freddie Mac as well as the mortgage-backed securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie Mae is a very positive step. This $600 billion program should be a major boost to the mortgage and housing markets. By providing more liquidity to the market FHFA expects these actions to help reduce the large interest rate spreads between mortgages and Treasuries, resulting in lower mortgage rates over time, assisting homeowners and home purchasers.”

And then, a press release:

FHFA URGES SERVICERS TO TAKE PROMPT ACTION ON LOAN MODIFICATIONS

And then, the announcement of a new report: "Monthly Foreclosure Prevention Report" which promises to detail the efforts to slow down the flood of foreclosure activity.

STRONG moves are being made to stop foreclosures from happening in such large quantities, as the downward spiraling momentum they bring is causing rot within our nation's housing stock. Property inventory declined this month for the first time in months, quarters, over a year? Let's hope it is the beginning of a trend... There was a 39% decrease in foreclosures in California, month over month, largely due to the cancellations and the moratorium imposed by the government, which is being followed by most major lenders and loan servicers.

Decreasing inventory causes a shift in supply/demand equilibrium. Are we nearing a bottom? Is it time to be thinking about investing in real estate?

Saturday, November 22, 2008

Some Painful Medicine from Peter Schiff

Some interesting retrospective views in this collection of Peter Schiff interviews on various financial circuits. Why post this? There's nothing valuable or encouraging listening to somebody who can look back and say "I told you so", but we really need to be careful when we listen to people who are in agreement on things that obviously want to believe. Listen to that voice that stands against the pack, and just give it a thought or two. Its very interesting to hear people laughing at Schiff as he made his forecasts.



I am optimistic, but cautious. And also realistic. We will hit a bottom, and we will recover. We are still adjusting to this environment, and there are some violent corrections going on that are going to damage a lot of people. A long bumpy road is ahead, but we'll get there.

Monday, November 17, 2008

401(k) Seizure? Time for a Dose of Reality

Another vein of panic running through the foundation of the economic and financial stability - whatever amount of it is left - is a concern over an impending seizure by the government of 401(k) balances to be used for some nationalized program used for bailout funds. The Wall Street Journal ran an editorial on Friday, allowing this widespread concern to proliferate.

You can disregard any fear over this - it ain't gonna happen.

According to George Miller (D-CA), who is chairman of house Committee on Education and Labor, this is nowhere near the intention or goal of Miller, or anybody else in congress.

Miller's hearings on 401(k) legislation have the following objectives:
1. Expose excess fees that Wall St middlemen take from workers accounts
2. Bring young and low wage workers into the system
3. Ensure that retirement accounts have diversified investment options with low fees
4. Ensure workers have access to reliable independent investment advice
5. Reduce vesting periods and portability of 401(k) accounts

Congressman Earl Pomeroy (D-FL), member of the House Ways and Means Committee, says he is against anything of the sort, and suggests that this concept was born out of political gaming, pushed by conservatives as a threat of what a Democratic leadership landscape might bring.

Speaker of the house, Nancy Pelosi, says "we would never even consider a proposal to seize retirement assets." in a statement issued to Ric Edelman, financial planner, when asked specifically about this topic.

One of the voices pushing this concept, Teresa Ghilarducci of New York's New School for Social Research, who is referenced in the Wall Street Journal piece, even claims in an interview with Edelman that her comments were taken way out of context. However sour on the concept of 401(k)s, she admits she was never suggesting that the government take the funds under control.

If you want more information about participating in 401(k) plans, please contact your plan administrator at work, or your financial planner. If you would like a referral to a financial planner, please contact me.

Tuesday, October 28, 2008

Monday, October 20, 2008

2009 Conforming Loan Limits

The Federal Housing Finance Agency (FHFA) expects to announce 2009 conforming loan limits for Fannie Mae and Freddie Mac by November 7.

The limits define the maximum loan size of mortgages that can be purchased by the Enterprises. You may recall that under the Housing and Economic Recovery Act of 2008, FHFA was directed to set conforming loan limits each year for the nation as a whole as well as for high-cost areas. The rules governing how the loan limits are established differ from the rules set forth in the Economic Stimulus Act of 2008 (ESA), which applies to loans originated in 2008.

For example, under ESA, loan limits for high-cost areas were set at 125% of local house price medians and the maximum high-cost limit was 175% of the national conforming limit ($729,750 in the continental U.S.)

Under HERA, the high-cost area loan limits are 115% of local price medians up to a maximum of 150% of the national limit. In 2009, if the national limit remains at $417,000 for one-unit properties, the maximum limit in high-cost areas would be $625,500 for the continental U.S.

To determine high-cost area limits under HERA for 2009, FHFA will use median home values estimated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). The FHA median prices will be calculated in the coming weeks by FHA for the purpose of determining its 2009 loan limits. The latest release from FHFA can be found here.

Why do Mortgage Rates Seem So High in This Market?

A few factors are contributing:

· In order to fund the rescue and the new government guarantees, our Treasury must sell more new Treasury securities to raise money. And the Treasury has to offer higher interest rates to sell them.

· Mortgage related bonds always trade at a slightly higher yield due to the prepayment and delinquency risk.

· The cost of financing mortgages has increased for Freddie and Fannie due to the plan for the FDIC to back the newly issued, unsecured debt of some banks. By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields - and to pay for that they'll have to charge borrowers higher interest.

· And in case anybody forgot, we had ‘the panic of 08’ the week before last. A massive liquidation of assets occurred, as people and institutions converted stocks, bonds, and everything else into cash. Mortgage bonds plummeted in value like everything else, causing the rates to spike. We saw the average 30 year fixed go from 5.9% to 7.05% in one week. Nobody is rushing back into this market… mortgages are tied to housing, and housing is at the epicenter of this entire financial crisis.

We are in seldom-explored territory, if not uncharted waters altogether. The risk of waiting for the market to come your way exceeds the risk of inking a deal at a rate that 'just has to come back down. If you have a deal on the table, close it. If you want to see what I mean in numbers, email me.

Monday, October 13, 2008

Why There Are Critics Of The Bailout/Rescue Plan

It's because of complicated concepts like this one, brought to light by David Kotok of Cumberland Advisors, in his September 24 piece titled "Helicopter Hank". He writes:

"... With the government holding a large portfolio of mortgages, the Fed's ability to fight inflation will be conflicted, because each increase in interest rates will impose capital losses on those holdings, making it mroe difficult to sell them back to the marketplace and delaying getting them off the Fed's and government's balance sheets..."

A little hair on this dog, so it goes. Raise rates to fight inflation, see the value of the bond holdings and mortgage securities go down. Makes sense. This does not mean the plan by and large won't work, but this is one of potentially several conflicts within the plan that are open to debate.

Thursday, October 09, 2008

Feedback Loops - I Raise My Hand And Ask, "Is There Homework?"


Scientists must be folding their arms and shaking their heads at the financial industry. The financial media and economic discourse of the day has adopted the term "Negative Feedback Loop", a term that originated in scientific labs, to describe the downward spiraling momentum of our economy (housing values go down, more people are encouraged to sell, foreclose, etc, and that causes values to go down further, and round and round we go...).

The market action systematically feeds its result back into the force that caused it to do what it just did. A feedback loop. Have you ever stood between two mirrors, and looked at your reflection, and then the infinite reflections of your reflection behind it? Its like that.

Problem is, we've got the name wrong. This may sound like I'm picking on a technicality here, but I think it points to a bigger problem.

A "Negative Feedback Loop" sounds like the right way to describe what we are seeing in the economy. But a true Negative Feedback Loop is one where the output of the system works against the system, causing it to lose momentum, and return to equilibrium. What we have here is a Positive Feedback Loop, or one where the output reinforces the input. The result is an increasingly negative impact on our economy, so its easy to understand the confusion. We had another Positive Feedback Loop that fed the mania side of the cycle as well.

A snowball rolling downhill, growing in weight, causing it to keep rolling, is a Positive Feedback Loop.

Why do I split hairs here? The widespread adoption of an erroneously illustrated concept just begs the question of who is doing the thinking out there, and who is doing all the talking. The mainstream media just takes it in on one side, spits it out the other, no regard for accuracy or perspective. All of the talking heads, the so-called experts, the pundits, the authorities, they're all confused like the rest of us about the big picture.

And it's a tough issue to figure out, so confusion is understandable. But our electable leaders and policy makers would serve us all well to admit what they don't know. Seems to me they feel a need to convince us that they do know, and the next thing you know, they're acting on their contrived and false sense of confidence. And let's face it, since 8 out of 10 Congressmen have no formal education in economics, most of these folks are expert at one thing, and one thing only: getting votes.

The bomb has gone off in the markets, and there's a lot of dust flying around. Those of us who slow down and focus while everyone else runs around screaming, are going to be the first to see what the new landscape looks like.

Tuesday, October 07, 2008

2008 Q3 Financial Dictionary

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no “fun”.
BROKER -- What my financial advisor has made me.
BULL MARKET -- A random market movement causing an investor who mistakes himself for a financial genius.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
INSTITUTIONAL INVESTOR -- Former investor who's now locked up in a nuthouse.
MARKET CORRECTION -- The day after you buy stocks.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
PROFIT -- An archaic word no longer in use.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
VALUE INVESTING -- The art of buying low and selling lower.

Friday, October 03, 2008

Revised Emergency Economic Stabilization Act

The bailout bill. The recovery bill. All the controversy, all the market whipsaws, the panic, the debates, the politics. It passed today. Signed by the president. Want to know the details? Here's 451 pages of weekend reading for you.

Wednesday, October 01, 2008

Worth A Watch - Bird And Fortune

Bird and Fortune - Subprime Crisis


Tuesday, September 30, 2008

Does This Work?

Came across this quote from Michael Lewitt of Hegemony Capital Management recently:

At some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes. This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results.

hmm. An interesting idea, and one that garners some attention in a climate like this one. I don't think it would hold water in a bull market, say what you will about moral sentiments, but a very interesting thought to say the least...

How To Get Your March Madness Fix In September

There is no better time in the sporting calendar than the first weekend of March Madness. It can be a long wait year over year, especially if your bracket gets blown out early. So what is one to do in the downtime, especially when the Giants and A's can't make the playoffs, the Olympics are over, the Raiders and 49ers are struggling at best, and you don't give a rip about hockey?

Play September Madness, of course.

How Big Is This Bailout?

Bailouts are nothing new, history has many examples. Some recent ones are explored below courtesy of ProPublica, and are put into perspective in terms of their size with a nice visual. If any of the links are broken, view them here.

With the flurry of recent government bailouts, we decided to try to put them in perspective. The circles below represent the size of U.S. government bailout, calculated in 2008 dollars. They are also in chronological order. Our chart focuses on U.S. government bailouts of U.S. corporations (and one city). We have not included instances where the U.S. government aided other nations.

Check out how the Treasury did in the end after initial government outlays.


Industry/Corporation Year What Happened Cost in 2008 U.S. Dollars
Penn Central Railroad 1970 In May 1970, Penn Central Railroad, then on the verge of bankruptcy, appealed to the Federal Reserve for aid on the grounds that it provided crucial national defense transportation services. The Nixon administration and the Federal Reserve supported providing financial assistance to Penn Central, but Congress refused to adopt the measure. Penn Central declared bankruptcy on June 21, 1970, which freed the corporation from its commercial paper obligations. To counteract the devastating ripple effects to the money market, the Federal Reserve Board told commercial banks it would provide the reserves needed to allow them to meet the credit needs of their customers. (What happened after the bailout?) $3.2 billion
Lockheed 1971 In August 1971, Congress passed the Emergency Loan Guarantee Act, which could provide funds to any major business enterprise in crisis. Lockheed was the first recipient. Its failure would have meant significant job loss in California, a loss to the GNP and an impact on national defense. (What happened after the bailout?) $1.4 billion
Franklin National Bank 1974 In the first five months of 1974 the bank lost $63.6 million. The Federal Reserve stepped in with a loan of $1.75 billion. (What happened after the bailout?) $7.7 billion
New York City 1975 During the 1970s, New York City became over-extended and entered a period of financial crisis. In 1975 President Ford signed the New York City Seasonal Financing Act, which released $2.3 billion in loans to the city. (What happened after the bailout?) $9.4 billion
Chrysler 1980 In 1979 Chrysler suffered a loss of $1.1 billion. That year the corporation requested aid from the government. In 1980 the Chrysler Loan Guarantee Act was passed, which provided $1.5 billion in loans to rescue Chrysler from insolvency. In addition, the government's aid was to be matched by U.S. and foreign banks. (What happened after the bailout?) $3.9 billion
Continental Illinois National Bank and Trust Company 1984 Then the nation's eighth largest bank, Continental Illinois had suffered significant losses after purchasing $1 billion in energy loans from the failed Penn Square Bank of Oklahoma. The FDIC and Federal Reserve devised a plan to rescue the bank that included replacing the bank's top executives. (What happened after the bailout?) $9.5 billion
Savings & Loan 1989 After the widespread failure of savings and loan institutions, President George H. W. Bush signed and Congress enacted the Financial Institutions Reform Recovery and Enforcement Act in 1989. (What happened after the bailout?) $293.8 billion
Airline Industry 2001 The terrorist attacks of September 11 crippled an already financially troubled industry. To bail out the airlines, President Bush signed into law the Air Transportation Safety and Stabilization Act, which compensated airlines for the mandatory grounding of aircraft after the attacks. The act released $5 billion in compensation and an additional $10 billion in loan guarantees or other federal credit instruments. (What happened after the bailout?) $18.6 billion
Bear Stearns 2008 JP Morgan Chase and the federal government bailed out Bear Stearns when the financial giant neared collapse. JP Morgan purchased Bear Stearns for $236 million; the Federal Reserve provided a $30 billion credit line to ensure the sale could move forward. $30 billion
Fannie Mae / Freddie Mac 2008 The near collapse of two of the nation's largest housing finance entities was yet another symptom of the subprime mortgage and housing market crisis. In an effort to prevent further turmoil within the financial market, the U.S. government seized control of Fannie Mae and Freddie Mac and guaranteed up to $100 billion for each company to ensure they would not fall into bankruptcy. $200 billion
American International Group (A.I.G.) 2008 When AIG was unable to secure a private-sector loan, the federal government intervened by seizing control of the insurance giant. $85 billion
Auto Industry 2008 In late September 2008, Congress approved a more than $630 billion spending bill, which included a measure for $25 billion in loans to the auto industry. These low-interest loans are intended to aid the industry in its push to build more fuel-efficient, environmentally-friendly vehicles. The Detroit 3 -- General Motors, Ford and Chrysler -- will be the primary beneficiaries. $25 billion
Troubled Asset Relief Program 2008 The Bush administration has proposed a rescue plan to ease the current crisis on Wall Street. If approved by Congress, the Treasury Department will be authorized to purchase up to $700 billion of distressed mortgage-backed securities and other assets and then resell the mortgages to investors. $700 billion

Monday, September 29, 2008

Quick Details On Bailout Plan's Unsuccessful Vote

BOTTOM LINE: House vote on TARP failed 205-228. We expect legislation to reemerge in the near future, but the extent of the modications that will be necessary is unclear. There still appears to be a good chance that Congress enacts some type of stabilization package before the election. Another vote is possible in the House later this week -- perhaps on Thursday -- but the situation is fluid.

KEY POINTS:

1. A simple majority was needed to pass the TARP plan. 140 Democrats voted in favor, and 66 Republicans supported the bill, leaving the bill 12 votes short. Internal vote counts prior to the vote expected roughly that number of Democrats to vote for the bill, but expected a greater number of Republican votes than materialized. Assuming that Democratic votes on the bill do not change, House Republicans are likely to be the key to unlocking additional support for the bill, so the focus over coming days is likely to be on what additional concessions they may request.

2. Congress will be in recess on Tuesday, and will return to legislative business on Wednesday. Another vote then is possible, but looks likely to occur at earliest on Thursday. It is not clear whether major concessions will be necessary, or whether minor changes to the bill would be enough to secure the incremental votes necessary for passage.

3. The House can bring the bill up quickly if a compromise is reached among House and Senate leaders and the White House on potential modifications. If the House is able to pass an amended plan later this week, the Senate should prove to be less challenging. However, the legislative process in the Senate takes at least two days for procedural reasons, so passage in both chambers by the end of the week could be a challenge.

Sunday, September 28, 2008

Interesting That This "Crisis" Is Happening During An Election Year

Just because of the way it shapes the discourse on the matter, the way it causes the public to value the players and the voices, the way it will shape the election, and how the election will shape the eventual path forward. I watched most of the McCain / Obama debate last week, and I have to say, when asked about their opinions on the bailout plans, I felt embarrassed that either tried to express any opinion whatsoever. Henry Paulson's request for $700bn came with a "trust me, I know what I am doing" style plea, there wasn't much to make an opinion of. Most of congress seemed perplexed by the details, so why should Obama or McCain represent to have a grasp of what it entailed, and then elaborate? Why can't they just say "I dunno, my economists will advise me on that when the details become more clear..."?

The republicans have voted down the bailout plan. The market is in a panic-style reaction. Stocks are way down, treasuries are way up, flight to safety. Even if some of them support the bailout effort, they all know that if they allow it to pass on a democrat-carried vote, McCain can soapbox all the way to the November election about how the democrats are bailing out Wall Street. You have to wonder what this would have looked like if it happend after the election...

Here are some more politically charged items floating around my desk today:

1- NY Times article dated 9 years ago tomorrow, talks about the Clinton Administration urging FannieMae to make more subprime loans. From the article:

"The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring."

2- Ron Paul preaching tough medicine in today's bailout plan vote.

3- On the fall of Lehman Brothers, Bill Bonner writes:

"... how a company that survived the Civil War, the railroad bankruptcies, the panics, WWI, the Great Depression, WWII, and the Cold War couldn't survive the biggest financial boom in Wall Street history?..."

In fairness, they survived the boom, just not the bust. But thought-provoking enough... well said.

Friday, September 26, 2008

Where Are California's Most Undervalued Real Estate Markets?

According to the Sept 10 Kiplinger Letter, which they admit may surprise some, they are:

San Diego 17.2% undervalued!
San Francisco 15.9% undervalued!
Stockton 13.8% undervalued!
Vallejo 13.4% undervalued!
Modesto 12.9% undervalued!
Santa Ana/Anaheim 12.4% undervalued!
Santa Barbara 12.3% undervalued!
Sacramento 11.1% undervalued!

Despite the fact that some of these areas are known to have some of the worst subprime mortgage problems, Global Insight (a forecaster) suggests that they have relatively healthy economies, strong job growth to support demand, and home prices have already dropped significantly.

hmmm... signs of a bottom? or overly optimistic?

Tuesday, September 23, 2008

Buy And Bail vs Note Modification

If you bought your home sometime in 2005 or 2006, you likely nailed it at the peak, depending on exactly where and exactly when you bought. And if your home has lost a significant amount of value, you have to wonder why you are still paying the bill for the mortgage, especially if the mortgage is bigger than the value of your home.

So what can you do?

+One option is to stick it out. Do nothing. Keep paying and stay put until the home value comes back... how ever long that ends up taking.

+Another is to attempt a short sale, where your lender agrees to let you sell your home for less than the balance owed on the note, and then be forgiven of any debt you cannot pay off with the proceeds from the sale.

+Less appealing is foreclosure. Let the bank take your home, walk away, etc. Bank's problem now. Your credit will be trashed, but you won't keep bleeding cash into a bad investment. Hope you can find a new home (even a place to rent) with that new 500 FICO score...

+Enter the Buy & Bail strategy. Buy a new home now, and once it closes, let the old one go into foreclosure. This sounds nice if you bought your home for $1MM, and now the one next door is selling for $600k. The problem is, your new lender wants to make sure you can afford the payments on both homes. So you try to off-set the costs of the home you will depart by bringing in a renter. If you can find one.

This might have worked, except that banks are concerned about fraud when you claim a renter who may just be a straw person, or suggest you are going to rent a home, and then walk away from the obligation to repay... aka "Bail". Your intentions clearly were not honest, and the new lender now has a brand new client with a 500 FICO score. That's not what they were signing up for.

So underwriting guidelines are responding to this practice, which has been seen before in top-heavy markets, by changing the way they value that rental income. Quite simply, if you don't have at least 30% equity in the home you will be departing, you don't have adequate 'incentive' to make good on that payment. Why would you keep paying the bill? So the new lender says: rental income is worthless in this scenario.

Here is some text from a recent FHA announcement:
This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage.

That will break down quite a few "buy and bail" strategies for consumers who thought they were making a crafty maneuver in this challenging market.

But is there a better alternative?

Have you considered requesting a note modification? There is a bloodbath going on out there. Banks are at the epicenter. They do not want you letting your house go into foreclosure. They can't take it, literally. Maybe you bought more house than you could afford, maybe the payments skyrocketed based on a loan feature you were not informed of, maybe you lost your source of income, had a divorce, etc... you're ready to throw in the towel.

Sensitive to the threat, and also under pressure from the government banks are working with consumers to renegotiate the terms of their loans. Results can include: forgiveness of debt, restructuring of payment, reduction of rate, extension of terms, etc. Any feature of your loan can be re-written. You can contact them yourself, but you'll have much better results with an attorney in your court. Learn more about this here.

Thursday, September 11, 2008

Down Payment Assistance Programs - Updates At Legislative Level

I am breaking a long inexplicable silence here to follow up to a recent post about rules surrounding seller-funded down payment assistance programs (DAP).

What's a DAP? (or a DPA? I'm not sure if there is an official acronym; both seem prevalent at this point). With the credit markets recoiling, the ability for homebuyers to enter the market with small down payments has been hampered. Big time. Lender's simply want the borrower to have skin in the game, so that if the value drops a little, they still have incentive to keep paying back the loan.

The DAP programs that were eliminated in the recent HR 3221 Housing Bill refer to those facilitated by a charitable organization to essentially 'launder' a down payment from the seller of the home. The down payment needs to be from the buyer's funds, not the seller's. If it came from the seller, its the same as buying the house for cheaper. Proponents of DAP argue that the borrower has equity in the house, regardless of the source. Opponents claim that the fair value of the house is really the purchase price less the seller-funded down payment, or in other words, there is no equity.

FHA was allowing these programs until they realized that default rates on borrowers with DAP assistance were 3x that of borrowers who funded their own down payment.

But without DAP in the market, fewer buyers can get into the market at entry level. And if there are no first-time buyers, who do the move-up buyers sell their homes to? They don't, and all of the sudden, nobody is buying anything, and inventories skyrocket, and prices fall... sound familiar? This is the "plankton theory of housing". We need first time buyers to keep everything moving...

There are also community organizations that provide down payment assistance, but do not receive funding from the seller of the home. There is no regulation on the table to curtail these programs, and with them, buyers can still obtain 100% financing in some circumstances.

Here is the latest on the seller-funded side of the practice:

At this point the ban on the use of seller-funded down-payment assistance with FHA-backed loans takes affect October 1st. But a compromise may be in the works. HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, may pass. HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680, who relied on seller-funded gifts, might be subject to higher insurance premium fees. Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA's insurance requiring taxpayer subsidies. Chairman Barney Frank said, "The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing…That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground.”

Thursday, July 24, 2008

Indymac Failure Raises Important FDIC Questions

For years, FDIC coverage has been a fairly irrelevant concern in the personal finance area. But with the recent collapse of Indymac Bank, and with so many financial institutions teetering in this environment, it's a good time to get familiar with the risk of having large deposits with banks, and with how FDIC insurance works.

A history of the FDIC can be viewed here, and their main site is here. For up to $100,000 per depositor, checking and savings deposits are insured against institutional failure by the federal government. There are some particular nuances to this however, when you have multiple deposits with different institutions, or deposits in different types of accounts or with different joint ownership, etc.

A new tool published on the FDIC site will help you tally up your savings to find out what your protection is exactly.

With increased down payment requirements for mortgage financing these days, we are seeing more and more consumers with greater than $100k in savings. Even if it is a temporary position as you prepare to make your down payment, you don't want to get caught over-exposed with the wrong custodian.

And if you are someone who sits on this much cash for longer than short-term, you may want to run your strategy by a financial planner, especially in light of our current inflation.

Wednesday, July 23, 2008

Interesting Perspective On Federal Economic Stimulus Package From Hoisington Investment Management (Watch Out For Deflation! ...yes, "DEFLATION")

From a recent article presented by John Mauldin in his "Outside the Box" weekly, Van Hoisington and Dr. Lacy Hunt write:

"Fiscal Policy would seem to be undisputedly supportive for the economy with Treasury's $110 billion in rebate checks and a Federal budget deficit that is approaching a record $500 billion. But that is not the case. The Treasury does not $500 billion in its checking account to cover the deficit, nor even the lesser amount for the rebates. The Treasury has to raise these funds by selling debt securities to the private sector. Credit availability may be thought of as a pie. When the Federal sector, which is the economy's premier borrower, takes more of that pie, fewer dollars are left for the private sector. Thus, deficit financing crowds out funds that would have gone to private uses. With the exception of the Federal funds rate, in the first half of this year, virtually all money and bond yields rose, a clear sign that the deficit usurped funds for the private sector. This has had the impact of slowing, rather than stimulating economic growth."

This makes for an interesting debate. Is it all politics? Does the government really lack the economic understanding to do what's best for us at this point, even if misjudgements that got us here were made in the past? Or is this perspective simply inaccurate? What portion of those rebate checks work back into the economy, stabilize personal finances, or help somebody avoid a foreclosure, etc?

Down Payment Assistance Programs - Keeping An Eye On Legislation


Lots of sparks flying right now, with popular down payment assistance programs (DAP) to first-time home buyers under scrutiny, and a mortgage industry fearful of losing another business niche. This recent story brought quiet a bit of chatter into the markets.

The FHA, who lost $4.6 billion last year, may be losing their ability to accept down payment assistance money. Nearly 79,000 people last year took advantage of them, where nonprofit groups provide buyers with money for down payments and home sellers then reimburse the organizations and pay an administrative fee. The FHA said seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the agency. The Senate version of the housing bill would have banned the programs but the House version would not. At this point a compromise bill has backed the Senate's version on this, which also is supported by the Bush administration.

Friday, July 11, 2008

Credit Score Tips (5 Common Mistakes To Avoid) From Edward Jamison

With mortgage lenders raising their minimum FICO score requirements lately, it is as good a time as ever to get in touch with your credit profile. A high percentage of credit reports we look at contain errors and inaccuracies that our clients were unaware of - and if we are working on a purchase contract, or taking advantage of a briefly open window of opportunity to refinance, its often too late to do anything about it by the time we see the score.

Edward Jamison is an attorney who provides credit score repair advice. I am not endorsing his product, but he has a significant presence in the mortgage industry as a go-to for clients in need of credit clean-up. He'll tell you that much of what he does is stuff a consumer can do on their own, as long as they know how credit scoring works.

Credit scoring models are not 100% transparent, but there are many sources out there who claim to know how to tweak here and there. The problem I see is that much of the advice conflicts with one another, sometimes in significant ways. Jamison seems about as credible as any in providing advice, so I figured this brief article was worth a read at least. Look it over and see if you have made any of these mistakes. And if you need further help, contact me and we can go through your report together.

Monday, June 30, 2008

What's The Monthly Payment On A 2 Billion Dollar Home?

A lot.

But you probably have other types of problems when you are worth $42bn than making your mortgage payment. Such as, figuring out which of your 6 levels of garage you want to park on for any given day, or deciding which in-your-house gym you'd like to lift weights in. Or finding your kids.

Due up this January, the world's most expensive home. There are video and photo tours in this article. Not really my style, but I could manage...

Tuesday, June 24, 2008

Inflation Panic 2008 - What Are We Headed For?

I wonder if in a few years, when we look back at this great Credit Crunch episode, and the associated economic slowdown, if we will remember the extreme moodiness of the markets during the transition. It seems every other week the Dow is posting multi-day consecutive 3-digit gains or similar consecutive losses. The financial news media is loaded with guys who say "we are nearing bottom" or "we are at the bottom", yet none of these guys was here telling us we were headed for this in the first place, so how are they expecting to be viewed as credible? One article I read recently (from Marc Faber, introduced by John Mauldin) labeled this a "conspiracy of optimism". A pretty dismal prognosis for our economy is laid out in this piece. I have to admit, it was a bit jarring to read.

But the view is a slight bit different in this one, from Pimco's Paul McCulley. With all this debate going on about stagflation, wage-price spirals, the 1930s (depression) or the 1970's ("the lost decade", at least economically speaking), and general financial Armageddon, eyes are on the Federal Reserve this week for an updated policy statement. Expectations, via the Fed Funds Futures trading activity, are all over the place in predicting the Fed Funds rate over the coming year. There is a general lack of consensus, the market is confused.

It will be interesting to see if "Doctor" Bernanke appears on board with McCulley's concept of a Hippocratic Oath, and there should be a lot of attention on tomorrow's Fed news release.

Interesting times for sure. Where exactly is this economy headed, and what's it going to mean to you? How does it impact your investments? Your employment? Your family? Are you positioned to endure the downdrafts as well as participate in the bull runs?

Friday, June 13, 2008

Hidden Camera Inside A Mortgage Company Office?

Is this the scene inside a local mortgage company office? Could be, although the lack of empty desks might be a clue that it is not. Nonetheless, it is a fair depiction of the office rage that I have heard too many times in the last year.

I have heard a few statistics ranging from 40-50% workforce attrition in recent weeks. To be perfectly honest, while I know some great people are being knocked out, the industry was due for a cleansing. All markets need to correct when they grow out of control for a prolonged period.

How Foreclosures Increase The Risk Of West Nile Virus


A couple of interesting news headlines today, especially when you put them together. First, a 48% surge in foreclosure filings nationwide for the month of May. The 'pig in the python' is just beginning. If you want to learn more about this, and more about the shape of things to come, email me.

And second, public health workers in Phoenix have devised a strategy to combat a spike in mosquito populations now that so many homeowners have abandoned their homes, and their pools, leaving the water to stagnate and become a habitat for the little pests. They are concerned that thriving mosquito populations raise the risk of outbreak of West Nile.

So this is another sign of how foreclosures can drag down community integrity. We have some choppy waters ahead still, but there is opportunity across the board. You must learn to position yourself, and ownership of a home requires much more careful planning today than in recent years. Work with a qualified professional to review your position and if you must abandon your home, for the sake of the neighborhood, drain the pool on your way out the door.

Monday, June 09, 2008

Ed McMahon In Foreclosure - Lessons Learned?

Ed McMahon, notable sidekick to Johnny Carson for what, 25 years or so, host of Star Search for 12 years, and pitchman for Publishers Clearinghouse Sweepstakes for who knows how many years, is making headlines for hitting the skids. At 85 years old, he is late on roughly $650,000 in payments on his $4.8 million mortgage with Countrywide.

So what's the problem? For a guy who's been working forever, in the entertainment industry, where we are taught that employment is very lucrative, this seems pretty odd.

Apparently at 83 years old, Ed broke his neck, and has been unable to work. And the housing market coupled with the his injury is forcing him to fail making his payments. He put the home on the market 2 years ago, and has been unable to sell it.

Are we really supposed to believe that a guy who was forced to stop working at 83 due to injury, and worked in a lucrative business all his life is supposed to go broke 2 years later? Are we supposed to feel sorry for this? In the article, McMahon cites "the economy, health problems, and poor planning" as reasons this happened. I think we can strike the first two excuses from the list.

He isn't exactly shirking responsibility, but this is an "aw, shucks" way of avoiding the significance of POOR PLANNING. First of all, the guy should have socked away a boatload of cash in his line of work. Second, he should have planned for retirement, differently, and should not have been living in a house with 4.8MM in debt unless he had significant liquid assets on the other side of his balance sheet. I love that he was still working at age 83, but sadly this seems now to have been out of necessity rather than a passion for his work.

The market has been turbulent, this much is obvious. But when high profile, high income-earning people like this get caught up in the mess, you have to take a hard look at why. Is the economy so bad that even rich guys like Ed McMahon, Jose Canseco, and Evander Holyfield are getting wiped out? Or is it a fact that people with more money that most of us can fathom can get ruined with poor planning, while modest income-earning blue collar workers, and others can take a slow steady path to safety and wealth if they plan wisely? The answer is very clearly the latter.

Look at this headline for Holyfield's case. "Not Broke, Just Not Liquid". You must learn how to plan, and learn not to compartmentalize your financial decisions. For those who's mortgage is their biggest bank account, this is where it begins. Work with a Mortgage Planner to learn how to position yourself for the right balance of cost, safety, and return on your investment.

Friday, May 30, 2008

The Wise Words Of Paul McCulley

Paul McCulley with Pimco is one of my favorite economists to listen to or read about. He has some great ways of describing the markets, and especially the current credit crisis, against the backdrop of classic economic theory. I have a few recent articles that are each insightful and interesting, and couldn't throw into the recycle bin before reading a few times. Here are some highlights, with links through to each:

-November 15 2007:

"Indeed, I’ve taken to calling the 2004-2006 vintages of limited or no document, no down payment, negative amortization (pay-option) subprime ARM loans as not loans at all, but rather free, at-the-money call and put options on property prices. Not exactly free, to be sure, as the putative borrower was obligated to pay something in cash interest, even if not the full amount, with the unpaid amount being added to the principal.

But as a practical matter, the options were essentially free. If home prices went up, the putative “borrower” would stay current, as the call went into the money, refinancing before the ARM reset, essentially re-striking the option exercise price higher. Simply stated, the borrower wouldn’t default, as logical people do not walk away from in-the-money call options.

And they didn’t, until about a year ago. As a consequence, default rates on pools of such subprime loans came in amazingly low, soothing rating agencies’ nerves and re-enforcing the shadow banking system’s appetite for securitized pools of them.

But if house prices didn’t rise, the call option would fall out of the money, and the put option – the right to default on the full principal value of the loan – would go into the money. Indeed, house prices didn’t have to fall, but simply not rise for this outcome to unfold, given negative amortization. In which case, the putative borrower would no longer have any incentive to stay current: Why throw good money after bad for an at-the-money call option that you got for free, which has gone out of the money?

And so it came to pass about a year ago, when early-payment defaults became a new phrase in our collective lexicon. The home price bubble popped, the at-the-money call options went out of the money, the at-the-money put options went into the money, and the holders of them remembered the wisdom of Paul Simon’s 1975 treatise on 50 ways to leave a bad situation:

You just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee
And get yourself free

And with Jack, Stan, Roy, Gus and Lee setting themselves free, the shadow banking system was revealed to be caught between the longing for love and the struggle for the legal tender, living life as Jackson Browne’s Pretender, ships bearing their dreams sailing out of sight, with the junkman pounding their fenders. To wit, a run on the asset backed commercial paper market!"


- March 2008 (interviewed by Katheryne M Welling)

"Only the rating agencies? I’d say the creators and issuers of all that funny paper bear some burden.
They were clearly at the scene of the fraternity party. But it was the rating agencies that were providing the kegs. You couldn’t have played the game without the rating agencies.

I’d say Wall Street and the banks provided the kegs and the rating agencies provided the false IDs.
Touché. Good analogy."


- May 2008

Read the whole thing via the link above. A great walk-through of the role and responsibility of the Federal Reserve, and some throwbacks to McCulley's often-quoted evident mentor, Hyman Minsky, who was a noted specialist in Financial Instability Hypothesis.




Buy Or Rent - What Can We Learn From The Rent Ratio?

The New York Times has an interesting graphic illustrating the costs of renting versus owning a home in various US cities. The Rent Ratio is a useful metric for people contemplating the costs of renting versus owning a home. Bay Area residents will notice that the ownership premium is higher here than many other areas, especially non-coastal metro zones. Historical appreciation records are likely the reason why buyers are willing to pay a greater premium in these cities.

Understanding the true costs of renting relative to the true cost of owning, you need to look well beyond average rent prices and average mortgage payments for equivalent properties. A true rent vs. buy analysis will take into account:

  • inflation of rent costs
  • opportunity costs of down payment funds that could have been invested elsewhere
  • return on investment of dollars invested rather than spent on mortgage payments in excess of equivalent rent
  • tax implications of owning real estate
  • appreciation of housing as an asset
Also, are we looking at the cost of renting the home we want to buy? Or are we looking at the cost of renting the home we would likely rent, if we chose not to buy? They may not be the same, for when we are not required to sink 100k or 200k into a down payment, we may be inclined to spend an extra $200, $300 even $500 a month more in rent. If you want to see how a true rent vs. own analysis works, please email me.

Some other interesting observations: San Jose, CA has the highest ratio. New York City is surprisingly low, suggesting that it's not only expensive to own, but also to rent in that city.

Friday, May 23, 2008

OFHEO's Four Quarter Price Change By State For US Housing

Interesting graphic. With all the news about house price declines, and expectations of declines in the current marketplace, there are some interesting take-aways from this chart, published last week by OFHEO. You can read the full report here. OFHEO says the decline in values is accelerating. I like the pictures, and this one is telling. Most markets appear flat, and Utah and Wyoming are showing above-average gains year-over-year. Worst performance is in California. Easy come, easy go? Housing prices, like all asset value cycles, are showing characteristics of "Mean Reversion".

Monday, May 19, 2008

Two Great Market Articles

From the WSJ, "Bernanke's Bubble Laboratory". Within this, a great quote from famed economist John Maynard Keynes "the market can remain irrational for longer than you can remain solvent." This quote conjures up memory of a former roommate who was an analyst with a major Wall Street firm, and his frustration over the 1999-2000 apex of the NADAQ. He simply didn't believe it, and went short on an NASDAQ index security. He held out and held out, and finally was forced to cover about a month before the market turned and dumped. He knew better, but the market still rules...

From BBC News, "The US Sub-Prime Crisis in Graphics". Loaded with visual aids.

Friday, May 16, 2008

Another Reason To Pay As Little As Possible Into Your Home Equity


Reason: Corrupt Insurance Companies.

File under: SAFETY.

Staying liquid is safer. Might it cost you a few more dollars? Sure, but its safer. What's that worth to you? Nothing brings that point home like images of houses in flames, homeowners in tears, and more houses in flames.

Watch all three installments of this video, an effort by PBS and Bloomberg.

I can't really weigh on where the bias is in this, but I am sure there is some. The media loves to portray big business (insurance companies) as evil, and looking to choose dollars over people all day long. But how well do you know about your homeowners policy? Do you know anybody who lost their home in the Oakland Hills Fire? How about the 2003/2004/2005/2006/2007 fires in San Diego/Los Angeles/Orange/San Bernadino/Santa Barbara/Ventura County?

What I can do, is point out to you that it is important to review and understand your policy. It's important to work with an insurance provider who is reputable and reliable. If you need a referral to one, please email me.

And I can also teach you some highly effective mortgage strategies that help you take control of your financial profile, build liquidity and safety, and rest easy at night.

Nobody expects disaster to happen to them. But if it does, and you have a fight on your hands with the insurance company, it can take YEARS to settle, or be indemnified. Regardless of the outcome, where are you going to live while the fight goes on - and how are you going to pay for it when the insurance company is denying your claim?

Here's another example: Senator Trent Lott has been down this road related to Hurricane Katrina devastation to a home he owned free and clear.

Wednesday, May 14, 2008

This American Life - Podcasting On The Giant Pool Of Money AKA Mortgage Meltdown


If you are looking for an overview of the mortgage meltdown, a recent This American Life podcast provides an excellent comprehensive overview. They touch on just about every dynamic in 'the perfect storm' that led us to where we are today. Specifically, they hit on:

  1. the "innocent consumer vs innocent banker" debate
  2. excess global liquidity leading to poor evaluation of investment risk
  3. abuse of low documentation financing*
  4. CDOs and rating agencies
  5. hot potato nature of the process between origination and securitization of mortgage loans
  6. the unexpected end of house price appreciation, and how it exposed systematic problems
  7. small banks vulnerability to leveraged wharehousing from larger banks
  8. challenges related to loan modifications in the wake of securitized and derivitivized mortgages
  9. why the "credit crisis" was not ever going to be confined to "Subprime"
  10. why the credit crisis extend beyond mortgages into student loans, credit cards, etc.

Some criticisms from my point of view while listening...

  1. Could use more of "The Nothing Song"
  2. * from item 3 above, they fail to acknowledge the intent of low documentation financing and why these programs were really created in the first place.
  3. did this "poor Marine" really think he could afford the home? Sounds like the broker was a creep, but would the Marine have been as willing to go along with all of this if he didn't expect the home to be skyrocketing in value?

This is well worth a listen. Its nearly an hour long, but if you are interested in understanding why it is currently much more difficult to borrow money to buy a home, why foreclosures are happening at a record pace, and how the natural motivation of greed causes financial markets to bubble up and pop every once in a while, then this is an hour you need to set aside.

If you want to measure this against the historical record of financial crisis, see "Manias, Panics and Crashes" by Charles Kindleberger.

If you want to look at this within the context of of chaos and complexity theories, and learn how we might predict when and where and how big the next financial crisis will be, see "Ubiquity: Why Catastrophes Happen" by Mark Buchanan.

Monday, May 12, 2008

Jumbo & Conforming Loan Limits - More Market Chatter 5/12/08

Last week Fannie Mae made an announcement about a new "keys to recovery initiative". Below is an overview as forwarded by a colleague. We are expecting more to follow this week, but at the origination level, we are already seeing the effects of this in the Jumbo-Conforming sector pricing for the new high balance conforming sized transactions. If you have questions about this, email me.


KEYS TO RECOVERY INITIATIVES

Fannie Mae’s Keys to Recovery™ initiatives are geared toward providing liquidity, stability, and affordability to the housing and mortgage markets for the long term, and include steps to keep struggling borrowers in their homes, assist prospective homebuyers with home purchases, and stabilize communities impacted by the
mortgage market downturn. The initiatives include
1) a new refinancing option for Fannie Mae “underwater” borrowers that will allow for
refinancing up to 120% of a property’s current value;
2) a renewal and expansion of the company’s partnership
with the state Housing Finance Agencies (HFAs) to provide $10 billion in financing for qualified, first-time
homebuyers;
3) in partnership with Self-Help Credit Union, a new initiative that allows families in hard-hit
communities to reside in foreclosed properties on a rent-to-own basis; and
4) pricing for new jumbo-conforming
loans that will be flat to conforming for portfolio asset acquisition through the end of the year.

Refinancing “Underwater” Borrowers
With home prices declining in many areas of the country and lending standards tightening as a result of the
ongoing turmoil in the housing finance system, many borrowers find themselves with mortgages that exceed
the value of their homes and are locked out of refinancing into safer loans that would allow them to sustain
their mortgage payments.
In order to assist borrowers whose home equity is “underwater,” reduce foreclosures and support sustained
homeownership, Fannie Mae will purchase refinanced loans the company owns for up to 120% of the current
property value provided the borrower is current with their mortgage payments.

HFA Investment

HFAs exist to provide affordable homeownership and rental housing opportunities within their states. The
majority of HFA single-family business is for first-time homebuyers who have received borrower counseling
and down payment and/or closing cost assistance from the government.
Fannie Mae has maintained a long-term agreement with the National Council of State Housing Agencies
(NCSHA) to purchase loans generated by the HFAs. The company is renewing and expanding its agreement
with NCHSA to purchase up to $10 billion in HFA loans by the end of 2009. In addition, the company will
provide preferred pricing on HFA business to lower borrower costs for first-time homebuyers.

Neighborhood Stabilization
In order to minimize the neighborhood impact of foreclosed properties, Fannie Mae will support an initiative
with Self-Help Credit Union in partnership with local non-profits to purchase Fannie Mae-owned, foreclosed
homes in hard-hit neighborhoods. The nonprofits would acquire and rehab the properties, and then sell them to qualified borrowers or enter into a customized lease-purchase agreement. The initiative will be geared toward borrowers who have the income to qualify for the home purchase, but need additional time to improve creditworthiness. Participants choosing the rent-to-own option would be granted up to five years to qualify for the mortgage and receive extensive credit counseling during the lease period.

Jumbo-Conforming Loans
Following passage of the Economic Stimulus Act of 2008, Fannie Mae is temporarily able to purchase loans
greater than the conventional-conforming loan limit of $417,000. In certain high cost-areas as designated by
HUD, the company is able to purchase jumbo-conforming loans up to $729,750 in the continental U.S. The
company is now accepting deliveries of 15-year and 30-year fixed-rate (FRM), and certain adjustable-rate
(ARM), jumbo-conforming mortgages.

In order to bolster liquidity in the jumbo-conforming market and help reduce rates for jumbo-conforming
mortgages in high-cost areas, the company will now:
• Price new jumbo-conforming loans flat to conforming for portfolio asset acquisition through the end
of the year. This means that although jumbos are not TBA-eligible, we will be pricing them as if
they were.
• Allow for cash-out, jumbo-conforming loan refinancings.
• Expand loan-to-value (LTV) criteria for jumbo-conforming purchase loans and limited cash-out
refinancings.
• Offer expanded jumbo-conforming FRM and ARM options.

HomeStay
The company’s Keys to Recovery™ efforts build on Fannie Mae’s HomeStay™ initiative announced last year.
The company is working with lenders, loan servicing companies and policymakers to respond to the housing
and mortgage market crisis with a goal to minimize the impact on families and communities by preventing
foreclosures, supporting counseling efforts, and providing market stability. Through HomeStay™, since the
beginning of 2007, the company has:
• Helped more than 200,000 at-risk homeowners refinance into safer loans or work out their loans,
including nearly $28 billion in refinancings for subprime borrowers.
• Provided more than $10 million in grants – and hundreds of employee volunteer hours – to support
foreclosure prevention counseling and workshops since the housing crisis deepened last year.
• Worked with loan servicers to emphasize work-outs for delinquent loans, instituted attorney incentive
fees for workouts, provided HomeSaver Advance™ loans that allow borrowers to catch up on their
delinquent mortgage payments, deployed staff to work on-site with our largest servicers, and made
dozens of operational changes and enhanced servicer authorities to allow for easier modifications and
work-outs.
• Supported HOPE NOW initiatives and public policies to give at-risk and delinquent borrowers a better
chance to afford their mortgages.

Thursday, May 08, 2008

Jumbo & Conforming Loan Limits - More Market Chatter 5/8/08


A big wet blanket got thrown on the whole idea of the new conforming loan limits when we realized that the banks were going to take advantage of the new limits to off-load some frozen pipeline to Fannie Mae and Freddie Mac, but not turn around and extend the offer to the consumer. As a result, we saw a new market form between Conforming and Jumbo sized loans - the new "Agency Jumbo", "Conforming-Jumbo", "High Limit Conforming", or whatever you want to call it - the names are all over the place. But banks priced these much closer to the currently-dysfunctional Jumbo market rates - with 30 year loans pricing at 7% and higher.
But not any more! Here is some fresh news from a colleague:

Fannie Mae threw some chum into the water for loan agents in high balance areas, saying that it will buy jumbo mortgages for the same prices as smaller loans. Some random notes:

  • Fannie is expecting the benefits of the price improvement to be passed along to the consumer. The intention and spirit of the price change is to improve the rate for the borrower, not to present an arbitrage opportunity. Fannie’s policy is that for loans already in pipeline lenders can float the borrower’s rate lower or sell already closed loans at the originated market level - they will not buy closed loans at flat to conforming. Other investors have yet to announce firm guidelines regarding those loans already locked in.
  • Credit pricing is unaffected, and all adjustments still apply, including the 25bp for fixed rate, 75bp for ARMs, and the 25bp adverse market delivery charge.
  • Fannie Mae approved seller/servicers should see approximately a 37bp yield improvement for the jumbo-conforming fixed rate and a 20bp yield improvement for the jumbo-conforming 5/1 adjustable rate whole loan postings.
  • Fannie Mae Trading Desk will buy jumbo-conforming adjustable rate securities at levels flat to where they are bidding conforming ARM securities.
  • Fannie also announced that they will handle refinancings of non-delinquent mortgages for as much as 120 percent of property values when it owns the existing loans.
  • Some investors made the change effective immediately and reduced the spread from 150 basis points down to 50 bps, of which 25 bps is a direct fee to Fannie Mae.
  • Manual u/w is still required, DU can be run but it must meet the product overlays.
Questions about what any of this means TO YOU? Email me here! This appears to be legitimate, real positive news. For the first time since the crisis began back in August, we are seeing 30 year rates near or even below 6% at the new conforming limits in high cost areas!

Wednesday, May 07, 2008

Interest Rate Spreads And Why The 10 Year Treasury Is Not The Best Indicator Of Mortgage Rates

One of the topics that comes up on a daily basis with my clients is the relationship between mortgage rates and the headline-grabbing interest rate reference points like the 10 Year TreasuryNote, or the Federal Funds Rate.

A very common misconception is that mortgage rates are based on the 10 Year Treasury Note. I am not exactly sure what the logic there is, but I have heard people say that the average 30 year mortgage lasts only10 years. Seems like a pretty loosey-goosey way for a bank to call out a price for lending their money out on a 30 year term. Do mortgage rates correlate to the 10 Year Treasury at all? Over time, mortgage rates and the 10 Year Treasury do trend in the same direction, but on a day by day basis, they often go in different directions, or at least at a different pace. There are separate specific implications for each, and they react to a different set of data points in different ways - at times, the differences can be significant.

The other question I get rather frequently is how the Federal Reserve will impact rates with their recent string of cuts to the Fed Funds rate. People continuously expect that its best to wait until after the cut to take advantage of lower rates. Again, not the correlation you are looking for. The Fed has cut 7 times in the recent cycle, and on the first 6, mortgage rates spiked in response. On the last one, rates went down a little. Do mortgage rates react to the Federal Reserve actions? Absolutely, but its the greater economic context that matters at the time, and dictates the type of reaction.

So what's the best metric for determining mortgage rates? MBS, or mortgage-backed securities, aka mortgage bonds. Read a definition of these here. When mortgage bonds trade at higher prices, the associated interest rates drop. This tells lenders for new mortgage issues what the current value and rate of return is on long-term bond money, and helps them set their rates.

Each of the first 6 cuts this time around have brought on a perceived increase to the threat of inflation. Long term fixed-income securities, like bonds, Treasury Notes, etc, HATE inflation. If you were a bank, and committed to lend 100 dollars to somebody for 30 years, and then inflation doubled, your 100 dollars would be worth far less than you had expected it would be when you loaned it out. So you would loan your next 100 dollars at a higher interest rate to compensate. Accordingly, rates on mortgages jumped at each time.

Then on the most recent cut, the Federal Reserve hinted at the idea that this would end the cycle. It gave the bond market confidence that no further inflation pressure would be invited, and the bonds rallied on the news. Rates went lower.

The bottom line when it comes to trying to predict mortgage rates, is that you need to know where MBS are trading, and what the climate is for them amidst the constant inflow of economic data points. They react very strongly to things like the Unemployment data, GDP, CPI, PCE, PPI, Home Starts and Sales, and a bunch of other metrics. Depending on the mood, different indicators have different impacts. If inflation is a hot button, the inflation barometers like the CPI and PCE will have heavy influence. If we are looking for indicators of recession, MBS will be sensitive to GDP, Consumer Confidence, Retail Sales, etc.

The Cleveland Federal Reserve has an article out discussing the increasing spread between Treasury and mortgage rates. With the current credit crisis, money has rushed into bonds as usual. But mortgage bonds have been relatively less appealing, as the whole mortgage marketplace is at the epicenter of the crisis. Last time we had a recession, money flooded into all bonds, Treasury and especially MBS because the housing economy was strong, and MBS values were thus very secure. This is why we are seeing a lack of correlated movement between these two instruments.

If you are entrusting a mortgage professional with the management of your debt, you need to align with one who understands interest rates. They need to specifically understand the market for mortgage-backed securities, and the economics behind the current credit and liquidity crisis. If the person you are speaking with tells you that mortgage rates are based on the 10 Year Treasury, or especially if they call the 10 Year Treasury Note a Treasury Bond, there's a risk they are going to mishandle your business. And if they say they 'can't see into the crystal ball', its likely a sign that they don't have a clue what upcoming events might be influencing rates.

Monday, May 05, 2008

What Was Wrong WIth The Mortgage Business? Stuff Like This

Here is a story about an internal memo from a major bank that was leaked out to the public, and to the media. It was a primer on how to trick the internal underwriting software into liberally approving loans that may not pass muster with a human underwriter. Such programs will provide a fast track to closing that essentially bypasses the human "manual" underwriting effort. The secret? Inflate the applicant's income to make it look so "over-qualified" that the underwriter doesn't even ask to see proof of income.

I know, I know. Just read the article. This represents an investment appetite well out of touch with risk assessment, and is symptomatic of an exuberant market. I'm not a huge fan of the 'media tint', especially with their ability to adequately report on the credit crisis, and this is no exception. There are misrepresentations, and the media loves to portray the entire industry as deliberately trying to hurt consumers. Keep in mind, banks don't benefit when they write loans that go into default. Even though they often transfer the liability through securitization into the secondary market, they still have rating agencies , shareholders, and reputations to answer to. Granted, there were flaws all up and down the system, but that's my point. The banks were not looking to make stupid investments so they could deliberately cause people to buy - and then lose their homes. They got carried away much like the borrower who signed their name to the application with bogus data got carried away. All based on the expectation that the home would keep rising in value. Economics.


Investor Emotion Cycle: Is Now Time To Buy?

We are seeing a classic asset bubble cycle in the housing market (as well as the credit market, etc). Many investors feel that the best time to buy is when the general public is selling, and financial market history is full of retrospective examples that validate this philosophy. The chart below provides a walk-through of the cyclical nature of asset markets, often characterized by irrational (exuberance) on the way up, and irrational (panic) on the way down.
The curve may not always look this symmetrical, but the general idea is clear. And so where are we with housing in this cycle? I'd say we are somewhere between "Panic" and "Despondency". And there is no doubt that great deals are out there today, and will continue to show up on the market. Today's home seller is motivated by fear or necessity; they are not selling because they think its the best time - they just think today is better than tomorrow.

I think the real test is how long this lower part of the curve drifts on before we see "Hope" take over. We are seeing seasoned investors out poking around again, and looking for the 'right' deal. I get the sense that many do not believe we have seen the optimal entry point back in the market. Could be a slow rise back to optimism, but it will eventually get there...

Friday, May 02, 2008

Social And Economic Problems With The US Housing Market; Would You Rent Your Home To Jose Canseco?


First things first. Jose Canseco, who I will always remember for bouncing a ball off his head and over the home run wall, and getting pulled over in my hometown a few times cruising in a convertible and a gun in his lap, is in foreclosure. Unless he owns another home to move into, he's looking for a place to rent. Are you looking for a renter to that investment home you speculated on and can't refinance because of the credit crisis?

A new report from the Center for Economic and Policy Research, and the National Low Income Housing Coalition presents some of the current trends in the relationship between home renting and ownership. They present a good outline of some of the challenges lawmakers are facing when trying to figure out how to regulate us out of the current mess we are in. Worth a read, at least of the executive summary. Definitely read it if you are thinking of renting your house to Jose Canseco.