This American Life & Planet Money Bring You: BAD BANK

NPR's This American Life has done a few great features on the Subprime Crisis, the Banking Crisis, and the Economic Crisis (they evolve with the news!). Recently, along with the Planet Money team (which I believe became a spinoff team of This American Life after the 1st in the series), they released "Bad Bank". It's another great overview of the challenges before us, some details about how we got here, some good soundbites from congress, etc. They are among the best I have seen at breaking down this complex situation into digestable news. Give it a spin.

Earlier releases:
Giant Pool of Money
Another Frightening Show About the Economy

Stewart vs. Cramer: File under: UNCOMFORTABLE

This is great to watch, and hurts at the same time.

ARRA 2009 - Important Details, Effective Date

ARRA Brings New Opportunity To Refinance or Modify

There has been an overwhelming amount of noise and confusion since the American Recovery and Reinvestment Act of 2009 (ARRA) was announced a few weeks ago. As a follow up to my message from 2/24, below is an summary of the recently released details, some resources to help you figure out if this will benefit you, and some instructions on what steps you should take next. If you think this information is useful, please pass it along. Feel free to forward this email to anyone you know that may be impacted.



The Making Home Affordable government program is divided into two parts:

· Modification Program

· Refinance Program


Despite all the fanfare surrounding this program, it remains 100% VOLUNTARY, and mortgage servicers (the companies that actually collect borrowers’ mortgage payments) are not obligated by law to follow these rules and guidelines...yet. Oddly enough, even if a financial institution has already received assistance with government funding, they are NOT obligated to participate. However, if a financial institution receives new or more government funding in the future, they WILL be obligated to participate.



In other words, the rules are still a bit unclear and nobody really knows who will participate and how it will all work from a practical perspective. Most of what you read and hear about in the media will most likely be speculation at this point. In a nutshell, the program has three elements:

· The government is offering financial incentives to mortgage servicers who modify loans for borrowers.

· The government is offering financial reimbursement to investors if they allow servicers to modify loans and then take a hit on the borrower’s re-default if the property declines in value after the loan modification

· The government is offering financial incentives to borrowers who modify their loans and make their new payments on time



Vacation homes and investment properties don’t qualify for the program. Only borrowers who have experienced some type of financial hardship can qualify. Click on this link if you want to see if you qualify for at least the minimum requirements.




Remember, even if you do qualify under these minimum requirements, your servicer (the company where you send your payments) might not be participating in the program just yet.




Part 2 - Refinance Program


Here’s how it works:

· You need to be current on your mortgage payments (no late payments in the last 12 months)

· Your mortgage balance cannot exceed 105% of the current value of your home

· Your mortgage needs to be owned or guaranteed by Fannie Mae or Freddie Mac

o This may include Alt-A or even sub-prime mortgages



Based on current market conditions, this might make sense for you if:

· You have an adjustable rate, interest only, or balloon mortgage that you want to convert into a fixed rate; or,

· You have a fixed rate mortgage where the interest rate is greater than 5.500%.



Important Dates

· This program becomes effective on APRIL 4. Prior to that date, you can, and should begin the process of gathering required documentation. Please contact me to get this process started.

To find out if your mortgage is owned/guaranteed by Fannie Mae, click here.

To find out if your mortgage is owned/guaranteed by Freddie Mac, click here.


Other Recent Developments


There have been many other recent developments in the markets, as well as new government legislation. Here are just a few recent items that may impact you or someone you know:

· Home improvement tax credit

· First-time home buyer tax credit (Federal)

· New construction home purchase tax credit ( California primary residences)

· Reverse mortgages for home purchase transactions (age 62 or older)

· Suspension of required minimum distributions for certain retirement accounts (age 70 ½ or older)



Let me know if you’d like to discuss any of these items in further detail by sending a quick email.

The Simpsons on 'The Meltdown'

What are you, some kind of talking dog? Put down your gins, and confess your sins! watch now.

Is The Stimulus Coming to a Town Near You?

Stimulus Watch.

This is a pretty cool resource. It gives an overview of the projects, budgets, and number of jobs created by various stimulus plan initiatives.

I clicked around for a few local towns, places I've traveled recently, and places I've lived.

Oakland CA
San Ramon CA
Pasadena CA
San Francisco CA
Jackson MS
Nashville (zip!) TN & Memphis (zilch!) TN
Maui HI
Grants Pass (nada!) OR
Tucson AZ

Frontline on The Mortgage Meltdown

There was certainly some sensationalism, but I liked the way they presented this. In fact, I like the dramatic production effects, such as sirens in the background as if somebody had called 911 as the market chaos reached one apex after another. Kind of amusing, but makes a dry topic easier to watch... Beneath the surface, and particularly interesting is the look at the political and competitive elements of Henry Paulson's actions at the height of the marketplace drama. You can watch it here.

California's $10,000 Tax Credit for New Home Buyers

No income limitations? Not limited to first time buyers?

A quiet little news item that for some reason isn't grabbing as much headline attention as I would expect... has me a little curious about the validity. A quick search points to several mentions, but all trace back to blogs on new home builder sites, and PR releases from builders like THIS ONE. I guess that makes sense, but I'd expect to see more attention drawn to this, or something pointing to an official CA.GOV page.

If this is legitimate, it is in some ways BETTER than the federal tax credit of $8000 to first time buyers with qualified income. And if you are a first time buyer in California, you could be eligible for both!

2009 Homeowner Affordability and Stability - early details

New Initiatives To Help Homeowners

President Obama recently unveiled his plan to help stabilize the housing market and keep millions of borrowers in their homes.

The Homeowner Affordability and Stability Plan includes two initiatives to help struggling homeowners. One is a refinancing program for homeowners with less than 20% equity in their homes, or who owe more than their home is worth. The second program attempts to lower monthly payments for homeowners at risk of losing their home. In adition, the plan includes a third initiative to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

More details are to be released March 4.

What We Know Right Now:

Refinancing Initiative
Under current rules, those families who own less than 20% equity in their homes have a difficult time refinancing and taking advantage of the historically low interest rates. This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth.

Stability Initiative
This initiative is designed to provide help to families as well as entire neighborhoods by helping reduce foreclosures and stabilize home prices. It is intended to help homeowners who are struggling to afford their mortgage payments, but cannot sell their homes because prices have fallen significantly.

The goal of this initiative is simple: "reduce the amount homeowners pay per month to sustainable levels." To accomplish this, lenders are encouraged to lower homeowners' payments to 31 percent of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with Treasury sharing the costs.

More Info

A question and answer document is available HERE courtesy of the National Institute of Financial Education. I'll provide updates as I receive them, and if you want to learn more after March 4th, please send me a note.

Join the Savings Craze! The Paradox of the Paradox of Thrift

Experiencing a recession is great way to force a reassessment of your financial behavior. The Great Depression is famous for shaping a generation of frugal citizens/consumers. Do you feel like you have not been saving enough money? America Saves Week dot Org has a 12 step program for you. Join the craze!

But wait, popular economic theory of the day warns of 'the Paradox of Thrift'. What may be good for the individual is not good for the collective. Waxing economical takes place here, here, and here. Is there a moral dilemma here? Is this why we've been trained to act as consumers, rather than citizens?

Paul Kasriel has another angle. Debunking the Paradox with some tough love for WSJ contributer Daniel Henninger.

Why I Love Rick Santelli

This is a pretty powerful moment, representing the sentiment behind the counter-argument for Economic Stimulus. This is being called Santelli's 'Chicago Tea Party'. You can see Santelli expand the viewpoint here on the Today Show.

Today's View of Capitalism is a Joke

In traditional capitalism, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

In American capitalism you have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

In French capitalism you have two cows. You go on strike because you want three cows.

In Italian capitalism you have two cows, but you don’t know where they are. You break for lunch.

In Real capitalism you don’t have any cows. The bank will not lend you money to buy cows, because you don’t have any cows to put up as collateral.

In Enron Capitalism you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

In Californian Capitalism you have two cows. They are happy.

In Arkansas capitalism you have two cows. That one on the left is kinda cute.

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year - no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

1. buyers must occupy the home for two years as their principle residence
2. includes a two year recapture provision (if they leave the home in two years they lost the credit)
3. purchases of homes by investors are ineligible
   

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.


Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

What If You Could Set Your Own Tax Assessment Value?

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor's opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don't want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with "fixing" the economy. Specifically, he is looking at the "bad bank" concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the "bad assets".

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

• Let the owner of the real estate place the value on his property.
• The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It's a very thought-provoking piece. 2 pages of your time...

Yeah, rates are lower, but...

It's just not that easy to get your hands on the banks' money these days... Great visual representation, and I can tell you, it fairly depicts the view from the front lines here...

We can still get the deals done, but nothing is as simple as it once was!

Barney Frank on High Balance Conforming Loans

I caught a video piece of Barney Frank fielding questions the other day, in which it was painfully obvious to this mortgage planner that the legislation cannot force free markets to do as legislators intend or wish. I wish I had a link to the video, but I don't, nor do I have the time to search for it. I am sure it is out there.

In 2008, the elected representatives on Capitol Hill decided to allow for Fannie Mae and Freddie Mac to purchase loans at a temporarily increased ceiling - ranging by county according to the median home values in these counties. The non-conforming loan breakpoint was 417k, we've talked about it here. Anything above 417 could not be touched by Fannie/Freddie.

The 2008 temporary limits were put into effect, and some areas were able to treat loans all the way up to 729,750 as conforming, per law. But the banks did not like the temporary nature, investors didn't look at it the same way either, and rates and terms for anything between 417 and 729k left much to be desired, and many to be refinanced at some other time, or never.

For 2009, lawmakers made the "temporary" permanent, but revised the limits, bringing the max ceiling down to 625,500 in the highest cost areas. Investors and banks were a little better to adopt these. And in many ways, borrowers with 417-625k see many of the same underwriting rules. But some of the differences are significant.

Pricing these loans is not the same, bringing much disappointment to the borrowing and lending community. Lawmakers stipulated that banks could only package a small percentage (10%) of "high balance" loans with the traditional, sub-417k loans into their bond issues for the secondary market.

There was so much pent up demand from borrowers with high balance loans to refinance, that the banks all got inundated with demand for money under these terms. It put them way off balance, and they dont have 9x the traditional conforming investments to match every dollar worth of high balance loans. So what do they do? Raise rates. So now when you have a high balance loan, your rate is SIGNIFICANTLY higher than the traditional balance conforming loans.

This will ebb and flow as the banks process and liquidate their inventory. But watching Barney Frank scratch his head, saying something to the tune of "I don't understand why anybody would be treated any differently if they were borrowing the higher balance, we changed the rules to make it the same" - which is not a quote, but is precisely what he was saying - you can see why so many of the governments attempts to help the market have not worked, or only partially helped, or helped one area and introduced a new problem...

One more complication in today's market. Next to impossible to predict a given bank's pipeline composition, and therefore next to impossible to know when they will spike their rates overnight, as we are seeing them do erratically.

There's no inflation in our economy - unless you wholesale money

What happened to inflation? 5$ gas, 6$ milk, 7$ Pabst Blue Ribbon!!! ???

Today's PPI (Producer Price Index) came in at a negative for the 5th straight month. It measures commodity prices, and other materials that producers of goods and services need to buy in order to produce their good or service. Tomorrow's CPI (Consumer Price Index - which measures the cost of goods that consumers buy) is expected to indicate the same signal - no inflation to speak of.

Meanwhile, much is being said about the efforts by the government to push down mortgage rates. But the underlying fundamentals that determine interest rates are not correlating with the rates being offered to consumers,. Or they are correlating less than is usual, presenting challenges to consumers and brokers trying to execute on their behalf.

Yes, rates are quite a bit lower. But the challenges of our "new landscape" are also new in nature, and no matter where you turn, it just gets more and more interesting. After 6 quarters of downsizing, banks were slammed in recent weeks with record applications for new loans. There was an immediate logjam. Demand is exceeding capacity. Banks do not need to lower costs to attract business. Margins are fat, 'because they can'.

Icing on the cake: Banks offer lower rates to deals on shorter term locks. But it takes twice as long for them to underwrite files today, so what's the point? You have to lock long-term, which means higher rates. Or, you float. And if you float, you get jumped in line at underwriting by all the locked-in deals. These same banks offer 7 day locks at their absolutely lowest rates... but you can never get within 7 days of closing UNLESS YOU LOCK!

If you do lock, and the period does not wind up being adequate, for ANY reason whatsoever, you can pay to extend it. But banks are doubling and tripling their extension fees as their queue grows longer and longer. Oh, and they are charging some brokers additional fees for not delivering on a loan once it is locked - even if they are too busy to underwrite it!

So lets review:
-banks have been taking it on the chin for ~6 quarters, so...

-rates are down, but not as much as they should be given the government intervention, and economic datapoints
-extension fees are skyrocketing
-processing times are skyrocketing
-lock periods are skyrocketing
-penalty for cancelling is skyrocketing

As far as I know, mortgage rate lock extension fees are not included in the PPI or CPI. Yet another area of the economy overlooked by the economic reporting data. Outrageous! Somebody call David Horowitz!

Great perspective to a timely question

Ric Edelman fields a question from one of his radio show listeners:

Q: Do you and your wife make extra principal payments to your
interest-only loan? Or do you not want to own your home someday?

Many in the investment business suggest investing it in the stock market
- you don't keep up with inflation by putting the money into your home
or keeping the money in cash. Well, over the past decade or so, with all
of the ups and downs of the stock market, I bet the folks who kept their
money in cash or paid down their mortgages fared better than those in
the stock market. I know, I know, the market goes up and down, and over
the "long term" the stock market is supposed to outperform the other
things, but I question this advice sometimes and just wonder if you are
going to own your home someday? If not, why?

Ric: No, we don't make extra payments. We personally handle our money
the same way we advise our clients and consumers.

Why would we want to add extra money to our payment? If you believe that
real estate values rise over long periods, the home's equity will grow
all by itself, and it will do so at such a rate that any extra payments
we'd make would be pointless.

Here's an example: Say you own a $500,000 house with a $400,000
mortgage. You thus have only $100,000 in equity. If you send in an extra
$100 per month for five years, you'll have an extra $6,000 in equity.
But if the house grows just 1% per year, it will produce $25,505 in new
equity, or four times more than your effort from making extra payments!
And if the house grows 2% per year, your new equity will be more than
$50,000!

This is one reason - there are nine others in my DVD on the topic - why
making extra payments is a waste of time and effort.

Of course, I began by asking if you believe that real estate values will
rise over long periods. If you don't believe that, then you shouldn't be
a real estate owner in the first place. You should rent instead.

Also, I note that you referred to those who recommend placing into the
stock market all the money that you'd otherwise use to make extra
payments. I do not agree with that advice. Instead, you should invest
the money in a highly diversified manner. That's because, as you've
noted, it's possible to see stock prices falter for extended periods. By
owning a wide variety of assets, and not just stocks, you reduce the
risk of such underperformance.

But even if you invest solely in stocks, you're highly likely to do
fine. Remember that we're comparing the interest rate on your mortgage
to the performance of the stock market. Since your mortgage will last
for 30 years, we need to evaluate stock prices over that same period.
And in every 30-year period since 1926, according to Ibbotson
Associates, stocks have handily outperformed mortgage rates.

I realize that you're questioning the strategy because of the stock
market's recent performance, but it's precisely at such times that we
need to remind ourselves of the long-term nature of the markets.
Otherwise, you'll be tempted to do the wrong thing at the wrong time for
the wrong reason.

Find out more about Home Ownership here:
http://www.ricedelman.com/cs/education/home_ownership

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.

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.