I often listen to CNBC when I am working on the computer (if I am not on the phone). I am amazed how often I hear (or read) about the bottom of the housing market. Often we hear that the stock market is predicting the bottom. I wonder if any of these cheerleaders actually looks at the relevant statistics. Again, let's do some basic arithmetic so that even a Realtor can understand.
Yesterday we found out that new home sales are running at an annual rate of 526,000, the lowest number in almost two decades. The supply of new homes, in terms of the amount of time it would take to work through the inventory available for sale was 8.4 months last October. It is now an even 11 months. (source for data: www.weldononline.com)
How many homes did the home building industry start building last month? Housing starts were running at an annual rate of 947,000. Permits for new homes was 927,000. That means the industry is building over 400,000 more homes than they are selling. Add in a million or so foreclosures. Kill the subprime market. Really make it hard to get a loan securitized for anything but government backed mortgages.
Home construction is going to drop precipitously before the inventory of new homes is worked through. Those who are predicting a rebound this quarter are simply not paying attention to the basic math. New home prices are down 13.3% year over year. They are going much lower. Margins are going to get squeezed. Now maybe the market is pricing all this in. But I think there are better places to gamble than the home builders.
Are you paying attention, Lennar?
Saturday, April 26, 2008
Monday, April 21, 2008
Interest Rates Edge Up... Take Action Now!
"THERE IS NOTHING WRONG WITH CHANGE, AS LONG AS IT IS IN THE RIGHT DIRECTION." ~ Winston Churchill.
And there were some big changes indeed for Bonds and home loan rates last week - but not necessarily all in the "right direction". For most of the week, Bond prices were pummeled lower, causing home loan rates to rise - and even after a Friday afternoon rally, home loan rates worsened by about .25% for the week overall.
One silver lining...some of the abuse that Bonds took was at the hands of somewhat positive economic news. Remember that positive or strong economic news tends to benefit Stocks, which in turn can pull money out of Bonds - which causes Bond prices to worsen and home loan rates to rise. So when news hit of a far better than forecast Retail Sales Report and much better than expected earnings reports from giants like Google, the financial markets responded by flowing money over into Stocks, and right out of Bonds, causing home loan rates to rise.
Also hurting Bonds was inflation chatter during speeches made by several Federal Reserve Presidents, who vocalized their concerns over the persistence of inflation in the current economy. Additionally, the Producer Price Index showed wholesale inflation to be climbing higher, thanks to record high oil prices and a seventeen-year high on food prices. Because inflation erodes the value of the fixed return provided by a Bond, the scent of inflation in the air always causes Bond prices to decline, and as a result, home loan rates will rise.
Even though Bond prices ended the week lower than they began, it is still a good time to take advantage of historically lower home loan rates before rising inflation continues to push rates higher. If you, or a friend, family member, neighbor or coworker needs advice on the latest changes in the market, please feel free to get in touch.
And there were some big changes indeed for Bonds and home loan rates last week - but not necessarily all in the "right direction". For most of the week, Bond prices were pummeled lower, causing home loan rates to rise - and even after a Friday afternoon rally, home loan rates worsened by about .25% for the week overall.
One silver lining...some of the abuse that Bonds took was at the hands of somewhat positive economic news. Remember that positive or strong economic news tends to benefit Stocks, which in turn can pull money out of Bonds - which causes Bond prices to worsen and home loan rates to rise. So when news hit of a far better than forecast Retail Sales Report and much better than expected earnings reports from giants like Google, the financial markets responded by flowing money over into Stocks, and right out of Bonds, causing home loan rates to rise.
Also hurting Bonds was inflation chatter during speeches made by several Federal Reserve Presidents, who vocalized their concerns over the persistence of inflation in the current economy. Additionally, the Producer Price Index showed wholesale inflation to be climbing higher, thanks to record high oil prices and a seventeen-year high on food prices. Because inflation erodes the value of the fixed return provided by a Bond, the scent of inflation in the air always causes Bond prices to decline, and as a result, home loan rates will rise.
Even though Bond prices ended the week lower than they began, it is still a good time to take advantage of historically lower home loan rates before rising inflation continues to push rates higher. If you, or a friend, family member, neighbor or coworker needs advice on the latest changes in the market, please feel free to get in touch.
Saturday, April 19, 2008
Readers Ask: "How Does a Short Sale Affect My Credit?"
I get this question all the time. My answer is a hedge, but it can be a useful hedge.
A short sale can have serious legal, financial, and tax consequences for you which depends on your particular situation. I do not fully know all of your circumstances, and in any case, am not legally qualified to give you an answer that may be appropriate for you.
You need to consult with the appropriate professionals to determine for yourself if the consequences of a short sale are right for you. These may include an attorney specializing in consumer and bankruptcy law, your financial or tax advisor and/or a CPA. If you don't know of or have these trusted advisors, I can refer people to you.
While a 'short sale', which is an agreement by your mortgage lender(s) to accept a payoff of the loan(s) for an amount less than the note amount, seems like an easy answer for a seller who owes more than a home is worth in today's market, it is not that easy to find a buyer for these types of situations. The main reason is that less than 10% of offers from potential buyers who go through a short sale process result in closed escrows. Why? First, banks don't like to lose money, and to generate offers the seller will likely have to heavily discount a listing price, which the potential buyer will likely further heavily discount. Second, the bank requires extensive information that is packaged properly in order to be considered. Most lenders are overwhelmed with applications, and proper presentation will get a timely review. Others just get tossed on the pile.
Once a seller and a potential buyer have reached an agreement 'subject to the lender's approval', the process begins with getting the short sale approved through the lender. This is not easy (remember the less than 10% get approved?), and it takes a lot of time. Many buyers will not go the distance, and if the sellers have other assets, the lenders will want them. Also, many Realtors will not show short sale listings to their clients given alternatives, since the low probability of a successful close of escrow means that there is a lot of wasted time and effort, with no payday.
The hit on your credit is severe and lasts a long time. Many professionals that I have talked with say it is as severe as a foreclosure on your credit. If you have to find a rental to live in afterward, the hit on the credit is so severe that you may find it very difficult for landlords to approve you. You may have to pay the difference between negotiated payoff and the note as taxable income if it is non-owner occupied. You might be tempted to listen to lots of advice and information by uncertified professionals or the media, much of which is misleading or just wrong. You really need to talk with certified professionals about your situation, and not heed advice of well-meaning family, friends, or even a Realtor. The consensus view is that short sales are better than foreclosures, but only if the short sale is approved by the lender(s).
As a responsible Realtor, I would not consider taking a short sale listing until my potential client had consulted these professionals. If a potential client will not take that basic advice in their own best interest, then they will likely not take my advice through the listing period. If we don't have that kind of relationship, then what is the point? They need to find someone for better or worse that they will be able to work with.
As a potential seller in a tough financial situation, you really need to get solid and professional information on how a short sale will affect you and your particular situation. It may be that another option, such as leasing it out either long-term or short term, a lease option to purchase, or deed in lieu of foreclosure may be a better alternative for you. Letting the home go to foreclosure may be what eventually happens if you don't follow your professionals' advice.
There is of course lots of commentary on short sales in the media and on the web for you to consider:
http://www.trulia.com/voices/Foreclosure/Does_the_short_sale_go_on_your_credit_report_-12935--
http://activerain.com/blogsview/452160/Short-sale-does-affect
Just Google whatever combination of 'short sale', foreclosure and credit that you want.
A short sale can have serious legal, financial, and tax consequences for you which depends on your particular situation. I do not fully know all of your circumstances, and in any case, am not legally qualified to give you an answer that may be appropriate for you.
You need to consult with the appropriate professionals to determine for yourself if the consequences of a short sale are right for you. These may include an attorney specializing in consumer and bankruptcy law, your financial or tax advisor and/or a CPA. If you don't know of or have these trusted advisors, I can refer people to you.
While a 'short sale', which is an agreement by your mortgage lender(s) to accept a payoff of the loan(s) for an amount less than the note amount, seems like an easy answer for a seller who owes more than a home is worth in today's market, it is not that easy to find a buyer for these types of situations. The main reason is that less than 10% of offers from potential buyers who go through a short sale process result in closed escrows. Why? First, banks don't like to lose money, and to generate offers the seller will likely have to heavily discount a listing price, which the potential buyer will likely further heavily discount. Second, the bank requires extensive information that is packaged properly in order to be considered. Most lenders are overwhelmed with applications, and proper presentation will get a timely review. Others just get tossed on the pile.
Once a seller and a potential buyer have reached an agreement 'subject to the lender's approval', the process begins with getting the short sale approved through the lender. This is not easy (remember the less than 10% get approved?), and it takes a lot of time. Many buyers will not go the distance, and if the sellers have other assets, the lenders will want them. Also, many Realtors will not show short sale listings to their clients given alternatives, since the low probability of a successful close of escrow means that there is a lot of wasted time and effort, with no payday.
The hit on your credit is severe and lasts a long time. Many professionals that I have talked with say it is as severe as a foreclosure on your credit. If you have to find a rental to live in afterward, the hit on the credit is so severe that you may find it very difficult for landlords to approve you. You may have to pay the difference between negotiated payoff and the note as taxable income if it is non-owner occupied. You might be tempted to listen to lots of advice and information by uncertified professionals or the media, much of which is misleading or just wrong. You really need to talk with certified professionals about your situation, and not heed advice of well-meaning family, friends, or even a Realtor. The consensus view is that short sales are better than foreclosures, but only if the short sale is approved by the lender(s).
As a responsible Realtor, I would not consider taking a short sale listing until my potential client had consulted these professionals. If a potential client will not take that basic advice in their own best interest, then they will likely not take my advice through the listing period. If we don't have that kind of relationship, then what is the point? They need to find someone for better or worse that they will be able to work with.
As a potential seller in a tough financial situation, you really need to get solid and professional information on how a short sale will affect you and your particular situation. It may be that another option, such as leasing it out either long-term or short term, a lease option to purchase, or deed in lieu of foreclosure may be a better alternative for you. Letting the home go to foreclosure may be what eventually happens if you don't follow your professionals' advice.
There is of course lots of commentary on short sales in the media and on the web for you to consider:
http://www.trulia.com/voices/Foreclosure/Does_the_short_sale_go_on_your_credit_report_-12935--
http://activerain.com/blogsview/452160/Short-sale-does-affect
Just Google whatever combination of 'short sale', foreclosure and credit that you want.
Friday, April 18, 2008
Bigger Fall After a Bigger Gain
by Lawrence Yun, Chief Economist, NAR Research
The stream of stories about housing's downturn continue in the media. But I can't stress the reality enough: not all housing markets have suffered to the same extent. We are all well aware of the current weak housing market regions: California, Florida, Arizona, Nevada, and the D.C. region. We should also be aware that these areas were also the places where prices increased the most during the housing boom. Current price declines of 5% to 20% are not as frightening for those who bought a home for the long-term.
Long-term Housing Equity
For example, based on NAR price data, a typical homeowner who bought a property in 2000 would be have accumulated $123,000 in Phoenix, $150,100 in Orlando, $242,800 in Riverside-San Bernardino, and $252,000 in the Washington, D.C. metro region. That does not even include any additional equity that homeowner acquired from paying down mortgage debt from his/her normal amortizing monthly payments. The equity position would be less for those homeowners who took out home equity loans and who took cash-out refinances. (I would personally advise against tapping into housing equity unless it is for investment reasons - like paying for tuition or to open a business).
Data from the Federal Reserve further affirms the long-term housing equity accumulation for homeowners even with recent declines in home prices. Homeowners' net housing equity (home value minus mortgage debt) rose from $6.2 trillion to $9.6 trillion from 2000 to 2007.
No Price Decline in Many Parts of the Country
And as I say, in many parts of the country, there has not been a price decline. NAR data indicate that essentially half of the 150 metro markets studied in the U.S. experienced a price increase throughout the past seven years. Data from the Office of Federal Housing Enterprise Oversight (OFHEO) also show that close to 70 percent of the 287 markets the agency tracks had price increases throughout those same seven years. In rural America, the price declines are even more rare.
Because of different price measurements, the gain could also be different depending on how the price statistics are calculated. Only when the homeowner him or herself sells their home - i.e., has a actual price against which to measure - would they know for sure how much equity was accumulated or lost. The Case-Shiller home price index, by contrast, which looks at a very narrow 20 markets, finds most markets experienced price declines in 2007. Interestingly though, if one uses the Case-Shiller national aggregate price index, the housing equity gains are much higher than under other price data. From 2000 to 2007, a typical U.S. homeowner would have accumulated $103,400 according to Case-Shiller rather than the $75,400 equity gain as is implied by the NAR data.
The Case-Shiller price gain appears outsized and not necessarily what most people would be saying. Perhaps, the methodology of the Case-Shiller price index brings volatile swings that distort underlying trends. So the recent decline in the Case-Shiller price measurement may not be due completely to a decline in home prices but rather to a downward adjustment after illusory high price gains it showed during the market boom. These illusory price gains also fooled Wall Street and global capital providers into believing that the underlying housing collateral was worth more than it actually was. Ask Bear Stearns if it would have made a similar bet if it knew that home values were not as high as indicated by Case-Shiller.
Sure, home prices have fallen measurably in some Florida and California markets - as reflected in both Case-Shiller and NAR data. But broadly speaking the decline in the Case-Shiller price measurement may be just a downward adjustment to compensate for unrealistically strong price gains it recorded during the housing market boom.
[Call Ray and the SCV Home Team at 661-287-9164 or post your comments here.]
The stream of stories about housing's downturn continue in the media. But I can't stress the reality enough: not all housing markets have suffered to the same extent. We are all well aware of the current weak housing market regions: California, Florida, Arizona, Nevada, and the D.C. region. We should also be aware that these areas were also the places where prices increased the most during the housing boom. Current price declines of 5% to 20% are not as frightening for those who bought a home for the long-term.
Long-term Housing Equity
For example, based on NAR price data, a typical homeowner who bought a property in 2000 would be have accumulated $123,000 in Phoenix, $150,100 in Orlando, $242,800 in Riverside-San Bernardino, and $252,000 in the Washington, D.C. metro region. That does not even include any additional equity that homeowner acquired from paying down mortgage debt from his/her normal amortizing monthly payments. The equity position would be less for those homeowners who took out home equity loans and who took cash-out refinances. (I would personally advise against tapping into housing equity unless it is for investment reasons - like paying for tuition or to open a business).
Data from the Federal Reserve further affirms the long-term housing equity accumulation for homeowners even with recent declines in home prices. Homeowners' net housing equity (home value minus mortgage debt) rose from $6.2 trillion to $9.6 trillion from 2000 to 2007.
No Price Decline in Many Parts of the Country
And as I say, in many parts of the country, there has not been a price decline. NAR data indicate that essentially half of the 150 metro markets studied in the U.S. experienced a price increase throughout the past seven years. Data from the Office of Federal Housing Enterprise Oversight (OFHEO) also show that close to 70 percent of the 287 markets the agency tracks had price increases throughout those same seven years. In rural America, the price declines are even more rare.
Because of different price measurements, the gain could also be different depending on how the price statistics are calculated. Only when the homeowner him or herself sells their home - i.e., has a actual price against which to measure - would they know for sure how much equity was accumulated or lost. The Case-Shiller home price index, by contrast, which looks at a very narrow 20 markets, finds most markets experienced price declines in 2007. Interestingly though, if one uses the Case-Shiller national aggregate price index, the housing equity gains are much higher than under other price data. From 2000 to 2007, a typical U.S. homeowner would have accumulated $103,400 according to Case-Shiller rather than the $75,400 equity gain as is implied by the NAR data.
The Case-Shiller price gain appears outsized and not necessarily what most people would be saying. Perhaps, the methodology of the Case-Shiller price index brings volatile swings that distort underlying trends. So the recent decline in the Case-Shiller price measurement may not be due completely to a decline in home prices but rather to a downward adjustment after illusory high price gains it showed during the market boom. These illusory price gains also fooled Wall Street and global capital providers into believing that the underlying housing collateral was worth more than it actually was. Ask Bear Stearns if it would have made a similar bet if it knew that home values were not as high as indicated by Case-Shiller.
Sure, home prices have fallen measurably in some Florida and California markets - as reflected in both Case-Shiller and NAR data. But broadly speaking the decline in the Case-Shiller price measurement may be just a downward adjustment to compensate for unrealistically strong price gains it recorded during the housing market boom.
[Call Ray and the SCV Home Team at 661-287-9164 or post your comments here.]
California Sales Improve to Pre-Credit Crunch Levels
The California housing market continued to reel from the joint effects of tighter underwriting standards, the ongoing credit or liquidity crunch, and a softening economy. However, home sales have improved in recent months and are now within range of pre-credit crunch levels according to C.A.R. Sales of existing detached single family homes exceeded 300,000 for the second month in a row with seasonally adjusted and annualized sales of 343,220 homes in February. Sales rose 9.5 percent compared to January when 313,580 homes were sold, but declined steeply from 480,170 sales in February 2007, equivalent to a 28.5 percent year-to-year decrease.
Sales have now increased four months in a row from a low point of 265,030 sales in October of last year, and are just shy of sales in the 350,000-range that prevailed in the summer of 2007 just before the credit crunch drove sales down. Based on C.A.R. research, the background or ‘baseline' amount of activity that occurs regardless of whether the market is in a slow or active mode is thought to be roughly 350,000 sales, given the state's demographics and stock of homes. During the worst of the credit crunch, activity fell below that range because of difficulty in securing funding for loans among buyers who otherwise could and would buy a home at this time. As time has passed, adjustments by both borrowers and lenders have enabled the market to move forward at a somewhat improved pace.
The median price, however, continued to decline by record margins in February. The median price in California was $409,240, down 4.8 percent from the January median of $429,790 and down by a record-setting 26.2 percent from the February 2007 median price of $554,280. The median price in February was 31.5 percent below the record median of $597,640 that was set in April of last year. The statewide median was last in the low $400,000 range during late 2003 and early 2004.
The credit crunch, tighter underwriting standards, and significantly higher jumbo loan rates all contributed to a steep decrease in sales of homes above $500,000 as a share of the statewide market. This affected the mix of statewide sales and gave rise to the record-setting 26.2 percent decrease in the median. -- By comparison, the average year-to-year change in median prices across the regions of California was a somewhat smaller 19.8 percent decline in February.
Even if monthly sales for the state have shown improvement in recent months, sales for all of 2008 are still expected to decrease 6 percent annually compared to 2007. Moreover, home prices face stiff headwinds because of the large number of distressed sales that are expected throughout the year. On the bright side, lower prices and mortgage rates help affordability, while higher loan limits in 2008 should provide some welcome relief from the credit crunch.
from Southland Regional Association of Realtors
Sales have now increased four months in a row from a low point of 265,030 sales in October of last year, and are just shy of sales in the 350,000-range that prevailed in the summer of 2007 just before the credit crunch drove sales down. Based on C.A.R. research, the background or ‘baseline' amount of activity that occurs regardless of whether the market is in a slow or active mode is thought to be roughly 350,000 sales, given the state's demographics and stock of homes. During the worst of the credit crunch, activity fell below that range because of difficulty in securing funding for loans among buyers who otherwise could and would buy a home at this time. As time has passed, adjustments by both borrowers and lenders have enabled the market to move forward at a somewhat improved pace.
The median price, however, continued to decline by record margins in February. The median price in California was $409,240, down 4.8 percent from the January median of $429,790 and down by a record-setting 26.2 percent from the February 2007 median price of $554,280. The median price in February was 31.5 percent below the record median of $597,640 that was set in April of last year. The statewide median was last in the low $400,000 range during late 2003 and early 2004.
The credit crunch, tighter underwriting standards, and significantly higher jumbo loan rates all contributed to a steep decrease in sales of homes above $500,000 as a share of the statewide market. This affected the mix of statewide sales and gave rise to the record-setting 26.2 percent decrease in the median. -- By comparison, the average year-to-year change in median prices across the regions of California was a somewhat smaller 19.8 percent decline in February.
Even if monthly sales for the state have shown improvement in recent months, sales for all of 2008 are still expected to decrease 6 percent annually compared to 2007. Moreover, home prices face stiff headwinds because of the large number of distressed sales that are expected throughout the year. On the bright side, lower prices and mortgage rates help affordability, while higher loan limits in 2008 should provide some welcome relief from the credit crunch.
from Southland Regional Association of Realtors
Thursday, April 17, 2008
The Worst May Be Over, but...
By David Wessel
Wall Street Journal
April 17, 2008; Page A2
Watching the housing-mortgage-banking-credit crisis is like watching the goriest parts of a scary movie. You put your hands over your eyes, spread your fingers a bit, peek through the cracks and ask: "Is it over yet?"
Here's where the story stands right now: Barring any unanticipated collapse of a pillar of Wall Street or a European bank, the risk of financial catastrophe has receded, even though markets remain so far from normal that they're exceptionally hard to read. But the wave of economic pain -- the foreclosures, bankruptcies, pay cuts and layoffs -- has yet to crest.
The plot began with sinking U.S. housing prices triggering a massive disturbance in global financial markets last summer, a disturbance that continues. Yet some key measures suggest things are moving in the right direction. In markets where speculators can bet on the collapse of a big bank or company, the odds placed on a big bank going bust have fallen from implausibly high levels. The odds the markets put on a wave of defaults by nonfinancial corporations also are down. And yields on short-term U.S. Treasury bills, which plunged as money rushed into the ultimate in safe securities, have inched up, even on days when bad news about the U.S. economy ordinarily would have pushed those yields down in anticipation of further interest-rate cuts by the Federal Reserve.
The Fed's aggressive actions -- cutting short-term rates by three percentage points since September and devising new ways to lubricate money markets -- have helped. Equally important is the ability and willingness of big financial companies -- Citigroup, Wachovia, Washington Mutual and (if they keep their promises to regulators) mortgage giants Fannie Mae and Freddie Mac -- to raise billions of dollars to rebuild their diminished capital cushions. This capital-raising is essential if banks are to keep lending, instead of contracting and strangling the economy in a prolonged credit crunch. It's also a hopeful hint that some big-money players think it's time to invest in U.S. banks, albeit at bargain-basement prices.
But all is not yet well. Persistent strains in the market where banks lend to one another overnight, or for just a few days, are baffling, even to smart observers inside the Fed and on Wall Street. Banks understandably continue to be cautious about making mortgages and other loans, given how many bad loans they've made. But cautious about lending to other banks? That's unnerving to say the least.
"The fragility of short-term credit markets," Fed governor Kevin Warsh said in a speech this week, "is a powerful manifestation of...loss of confidence" in the entire architecture of the financial system. (That, too, is a bit unnerving coming from a Fed governor.) "There are some encouraging, early signs of repair, but regaining the confidence that markets require will take time, and perhaps uncomfortably to some, patience," he said.
So much for the markets. What about the rest of the economy? Employment is falling. So are housing prices. The bulk of forecasters in the latest Wall Street Journal survey foresee home prices declining into 2009; nearly one in eight say they won't touch bottom until 2010.
Prices of food and energy are rising. And a credit crunch is sure to make it tougher than usual for American consumers to borrow to keep spending. (President Bush is probably relieved he isn't up for re-election.) Macroeconomic Advisers, the St. Louis forecaster that makes a monthly guess about gross domestic product, estimates the U.S. economy contracted at a 13% annual rate in February, the sharpest monthly decline in its data since September 2001.
Offsetting that drag on the economy is the vigor of U.S. exports. And, of course, the impact of the interest-rate cuts the Fed already has made and the checks Mr. Bush and Congress decided to send to most American families this spring has yet to be fully felt. "The fiscal stimulus is in the mail," says Richard Berner, a Morgan Stanley economist. "The monetary stimulus is in the pipeline."
Nevertheless, the economy where most Americans live and work -- that is, off Wall Street -- looks likely to get worse before it gets better. Maybe credit markets already are so pessimistic that they won't turn lower on any further bad economic news.
But stocks? Predicting their direction is treacherous. If this is truly the worst financial crisis in a generation, is it plausible that the Dow Jones Industrial Average -- now down more than 11% from its October peak -- has fallen as far as it is going to fall? And if banks are groaning under the weight of bad loans now, further deterioration of the job market and consumer finances can only make matters worse and discourage them from lending.
The scariest scenes of the movie may be past, but the good guys haven't won yet.
Write to David Wessel at capital@wsj.com
Wall Street Journal
April 17, 2008; Page A2
Watching the housing-mortgage-banking-credit crisis is like watching the goriest parts of a scary movie. You put your hands over your eyes, spread your fingers a bit, peek through the cracks and ask: "Is it over yet?"
Here's where the story stands right now: Barring any unanticipated collapse of a pillar of Wall Street or a European bank, the risk of financial catastrophe has receded, even though markets remain so far from normal that they're exceptionally hard to read. But the wave of economic pain -- the foreclosures, bankruptcies, pay cuts and layoffs -- has yet to crest.
The plot began with sinking U.S. housing prices triggering a massive disturbance in global financial markets last summer, a disturbance that continues. Yet some key measures suggest things are moving in the right direction. In markets where speculators can bet on the collapse of a big bank or company, the odds placed on a big bank going bust have fallen from implausibly high levels. The odds the markets put on a wave of defaults by nonfinancial corporations also are down. And yields on short-term U.S. Treasury bills, which plunged as money rushed into the ultimate in safe securities, have inched up, even on days when bad news about the U.S. economy ordinarily would have pushed those yields down in anticipation of further interest-rate cuts by the Federal Reserve.
The Fed's aggressive actions -- cutting short-term rates by three percentage points since September and devising new ways to lubricate money markets -- have helped. Equally important is the ability and willingness of big financial companies -- Citigroup, Wachovia, Washington Mutual and (if they keep their promises to regulators) mortgage giants Fannie Mae and Freddie Mac -- to raise billions of dollars to rebuild their diminished capital cushions. This capital-raising is essential if banks are to keep lending, instead of contracting and strangling the economy in a prolonged credit crunch. It's also a hopeful hint that some big-money players think it's time to invest in U.S. banks, albeit at bargain-basement prices.
But all is not yet well. Persistent strains in the market where banks lend to one another overnight, or for just a few days, are baffling, even to smart observers inside the Fed and on Wall Street. Banks understandably continue to be cautious about making mortgages and other loans, given how many bad loans they've made. But cautious about lending to other banks? That's unnerving to say the least.
"The fragility of short-term credit markets," Fed governor Kevin Warsh said in a speech this week, "is a powerful manifestation of...loss of confidence" in the entire architecture of the financial system. (That, too, is a bit unnerving coming from a Fed governor.) "There are some encouraging, early signs of repair, but regaining the confidence that markets require will take time, and perhaps uncomfortably to some, patience," he said.
So much for the markets. What about the rest of the economy? Employment is falling. So are housing prices. The bulk of forecasters in the latest Wall Street Journal survey foresee home prices declining into 2009; nearly one in eight say they won't touch bottom until 2010.
Prices of food and energy are rising. And a credit crunch is sure to make it tougher than usual for American consumers to borrow to keep spending. (President Bush is probably relieved he isn't up for re-election.) Macroeconomic Advisers, the St. Louis forecaster that makes a monthly guess about gross domestic product, estimates the U.S. economy contracted at a 13% annual rate in February, the sharpest monthly decline in its data since September 2001.
Offsetting that drag on the economy is the vigor of U.S. exports. And, of course, the impact of the interest-rate cuts the Fed already has made and the checks Mr. Bush and Congress decided to send to most American families this spring has yet to be fully felt. "The fiscal stimulus is in the mail," says Richard Berner, a Morgan Stanley economist. "The monetary stimulus is in the pipeline."
Nevertheless, the economy where most Americans live and work -- that is, off Wall Street -- looks likely to get worse before it gets better. Maybe credit markets already are so pessimistic that they won't turn lower on any further bad economic news.
But stocks? Predicting their direction is treacherous. If this is truly the worst financial crisis in a generation, is it plausible that the Dow Jones Industrial Average -- now down more than 11% from its October peak -- has fallen as far as it is going to fall? And if banks are groaning under the weight of bad loans now, further deterioration of the job market and consumer finances can only make matters worse and discourage them from lending.
The scariest scenes of the movie may be past, but the good guys haven't won yet.
Write to David Wessel at capital@wsj.com
Monday, April 14, 2008
Consequences for 'Walk-Away' Borrowers
Daily Real Estate News | April 14, 2008
The government and the lending industry are taking aim at “walk-away” home owners who stop making payments and months later send the house keys back to their lender.
Such borrowers will not be able to get another mortgage through Fannie Mae for five years, unless there are “documented extenuating circumstances.” In that case, the prohibition is three years. Even after the prescribed time has elapsed, a borrower with a foreclosure in his file will have to make at least a 10 percent down payment and have a FICO credit score of at least 680 to qualify for a Fannie Mae loan.
Freddie Mac, which counts foreclosures as major credit black mark for seven years, is now aggressively pursuing walk-away borrowers where permitted under state law, a senior official said.
Federal legislation enacted last year allows home owners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven.
Walk-away borrowers, by contrast, have nothing forgiven, and the Internal Revenue Service may demand taxes on the balance they never paid, the IRS says.
Source: Washington Post Writers Group, Kenneth R. Harney (04/12/2008)
The government and the lending industry are taking aim at “walk-away” home owners who stop making payments and months later send the house keys back to their lender.
Such borrowers will not be able to get another mortgage through Fannie Mae for five years, unless there are “documented extenuating circumstances.” In that case, the prohibition is three years. Even after the prescribed time has elapsed, a borrower with a foreclosure in his file will have to make at least a 10 percent down payment and have a FICO credit score of at least 680 to qualify for a Fannie Mae loan.
Freddie Mac, which counts foreclosures as major credit black mark for seven years, is now aggressively pursuing walk-away borrowers where permitted under state law, a senior official said.
Federal legislation enacted last year allows home owners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven.
Walk-away borrowers, by contrast, have nothing forgiven, and the Internal Revenue Service may demand taxes on the balance they never paid, the IRS says.
Source: Washington Post Writers Group, Kenneth R. Harney (04/12/2008)
Tuesday, April 08, 2008
Bush Backs More Support for Homeowners
By DAMIAN PALETTA and JOHN D. MCKINNON
Wall Street Journal
April 8, 2008 6:19 p.m.
WASHINGTON -- The Bush administration appears set to support a significant expansion of its assistance for struggling homeowners, a move that could also forestall more aggressive action currently being contemplated by Democrats in Congress.
In a draft of testimony for a congressional hearing, Brian Montgomery, the commissioner of the Federal Housing Administration, is expected to say that a federal program that offers government insurance for mortgages created last summer "can and should be extended in a responsible way."
Many of the details about the expansion are not clear, but it seems likely that the program could become the administration's most aggressive response to the housing crisis, which has prompted Washington to reverse years of laissez-faire attitudes toward the economy.
The expansion would be focused on helping struggling homeowners who owe more than their house is worth.
Under the expanded program, lenders could get FHA insurance for problem loans in exchange for "voluntarily writing down the outstanding mortgage principal," according to the testimony. That would entail the government being responsible for an increasing number of risky loans.
Mr. Montgomery emphasizes in the testimony that "while considering any changes to FHA, we must ensure that the financial solvency of the [FHA] must not be compromised." FHA is a division of the U.S. Department of Housing and Urban Development, which didn't return calls seeking comment.
Under the original program created last year, known as FHASecure, homeowners with high-interest, adjustable-rate mortgages currently can refinance into an FHA-insured mortgage and lower their monthly payments. To date, the administration says it's served 145,000 homeowners in need, and projections show that it will likely reach more than 400,000 by year's end. A temporary expansion of the program would be expected to add significantly to that total.
The moves highlighted the deep political fault lines emerging in Washington over the housing market. Both the Republican Bush administration and Democrats in charge of Congress are eager to be seen addressing the problem. But both have ideological objections to the other side's approach so far, and both see potential advantage in casting the other side as intransigent and out of touch.
The administration proposal appeared calculated to put a conservative White House imprimatur on a basic concept that Democrats also have been weighing – using the government's power to induce lenders to reduce payments for struggling homeowners, while also providing some government guarantee that the loan, or most of it anyway, will be repaid. The administration's approach is likely to be narrower in terms of the number of homeowners who could qualify.
Write to Damian Paletta at damian.paletta@wsj.com and John D. McKinnon at john.mckinnon@wsj.com
Wall Street Journal
April 8, 2008 6:19 p.m.
WASHINGTON -- The Bush administration appears set to support a significant expansion of its assistance for struggling homeowners, a move that could also forestall more aggressive action currently being contemplated by Democrats in Congress.
In a draft of testimony for a congressional hearing, Brian Montgomery, the commissioner of the Federal Housing Administration, is expected to say that a federal program that offers government insurance for mortgages created last summer "can and should be extended in a responsible way."
Many of the details about the expansion are not clear, but it seems likely that the program could become the administration's most aggressive response to the housing crisis, which has prompted Washington to reverse years of laissez-faire attitudes toward the economy.
The expansion would be focused on helping struggling homeowners who owe more than their house is worth.
Under the expanded program, lenders could get FHA insurance for problem loans in exchange for "voluntarily writing down the outstanding mortgage principal," according to the testimony. That would entail the government being responsible for an increasing number of risky loans.
Mr. Montgomery emphasizes in the testimony that "while considering any changes to FHA, we must ensure that the financial solvency of the [FHA] must not be compromised." FHA is a division of the U.S. Department of Housing and Urban Development, which didn't return calls seeking comment.
Under the original program created last year, known as FHASecure, homeowners with high-interest, adjustable-rate mortgages currently can refinance into an FHA-insured mortgage and lower their monthly payments. To date, the administration says it's served 145,000 homeowners in need, and projections show that it will likely reach more than 400,000 by year's end. A temporary expansion of the program would be expected to add significantly to that total.
The moves highlighted the deep political fault lines emerging in Washington over the housing market. Both the Republican Bush administration and Democrats in charge of Congress are eager to be seen addressing the problem. But both have ideological objections to the other side's approach so far, and both see potential advantage in casting the other side as intransigent and out of touch.
The administration proposal appeared calculated to put a conservative White House imprimatur on a basic concept that Democrats also have been weighing – using the government's power to induce lenders to reduce payments for struggling homeowners, while also providing some government guarantee that the loan, or most of it anyway, will be repaid. The administration's approach is likely to be narrower in terms of the number of homeowners who could qualify.
Write to Damian Paletta at damian.paletta@wsj.com and John D. McKinnon at john.mckinnon@wsj.com
Sunday, April 06, 2008
Breaking News!! Association of Realtors reports sales and price decline
Home sales decreased 28.5 percent in February in California compared with the same period a year ago, while the median price of an existing home fell 26.2 percent, the California Association of Realtors® (C.A.R.) reported.
"Although sales rose for the fourth straight month in February by 9.5 percent compared to the previous month, they continued to be dragged down by the ongoing effects of both the credit/liquidity crunch and tighter underwriting standards that have reduced the pool of qualified buyers who can obtain a loan," said C.A.R. President William E. Brown.
"It is crucial that FHA reform legislation currently under consideration by congress include higher loan limits for high-cost states like California," he said. "The proposed legislation also includes a reduction in the down payment requirement for FHA loans and will include condominiums in the FHA single-family program, which will make it easier for buyers in the condominium market to qualify for loans."
Closed escrow sales of existing, single-family detached homes in California totaled 343,220 in February at a seasonably adjusted annualized rate, according to information collected by C.A.R. from more than 90 local Realtor® Associations statewide. Statewide home resale activity decreased 28.5 percent from the revised 480,170 sales pace recorded in February 2007.
The statewide sales figure represents what the total number of homes sold during 2008 would be if sales maintained the February pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.
The median price of an existing, single-family detached home in California during February 2008 was $409,240 a 26.2 percent decrease from the revised $554,280 median for February 2007, C.A.R. reported. The February 2008 median price fell 4.8 percent compared with January's revised $429,790 median price.
"The Federal Reserve Bank's recent action to reduce the federal funds rate will have little near-term direct effect on the housing market," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. "However, Fed rate cuts should result in more favorable real estate finance rates as we move though the year."
Highlights of C.A.R.'s resale housing figures for February 2008:
C.A.R.'s Unsold Inventory Index for existing, single-family detached homes in February 2008 was 14.3 months, compared with 8.2 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
Thirty-year fixed-mortgage interest rates averaged 5.92 percent during February 2008, compared with 6.29 percent in February 2007, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.03 percent in February 2008, compared with 5.51 percent in February 2007.
The median number of days it took to sell a single-family home was 68.6 days in February 2008, compared with 66.1 for the same period a year ago.
"Although sales rose for the fourth straight month in February by 9.5 percent compared to the previous month, they continued to be dragged down by the ongoing effects of both the credit/liquidity crunch and tighter underwriting standards that have reduced the pool of qualified buyers who can obtain a loan," said C.A.R. President William E. Brown.
"It is crucial that FHA reform legislation currently under consideration by congress include higher loan limits for high-cost states like California," he said. "The proposed legislation also includes a reduction in the down payment requirement for FHA loans and will include condominiums in the FHA single-family program, which will make it easier for buyers in the condominium market to qualify for loans."
Closed escrow sales of existing, single-family detached homes in California totaled 343,220 in February at a seasonably adjusted annualized rate, according to information collected by C.A.R. from more than 90 local Realtor® Associations statewide. Statewide home resale activity decreased 28.5 percent from the revised 480,170 sales pace recorded in February 2007.
The statewide sales figure represents what the total number of homes sold during 2008 would be if sales maintained the February pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.
The median price of an existing, single-family detached home in California during February 2008 was $409,240 a 26.2 percent decrease from the revised $554,280 median for February 2007, C.A.R. reported. The February 2008 median price fell 4.8 percent compared with January's revised $429,790 median price.
"The Federal Reserve Bank's recent action to reduce the federal funds rate will have little near-term direct effect on the housing market," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. "However, Fed rate cuts should result in more favorable real estate finance rates as we move though the year."
Highlights of C.A.R.'s resale housing figures for February 2008:
C.A.R.'s Unsold Inventory Index for existing, single-family detached homes in February 2008 was 14.3 months, compared with 8.2 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
Thirty-year fixed-mortgage interest rates averaged 5.92 percent during February 2008, compared with 6.29 percent in February 2007, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.03 percent in February 2008, compared with 5.51 percent in February 2007.
The median number of days it took to sell a single-family home was 68.6 days in February 2008, compared with 66.1 for the same period a year ago.
Thursday, April 03, 2008
Housing Relief Comes at a Cost: No More Easy Money
Fannie Mae Tightens Loan Criteria for Credit Scores
Fannie Mae's Managing Director, Brian Faith, released a statement on Wednesday that gave notice that at least one of the two government sponsored enterprises (GSEs) that play a major role in the nation's mortgage industry has decided it would be wise to protect its own interests.
Government lawmakers have increasingly focused on Fannie Mae and the other GSE, Freddie Mac, as a big part of efforts to ease the credit crunch. The Office of Federal Housing Enterprise Oversight (OFHEO) recently lifted the loan limit to make it possible for the GSEs to buy what are generally termed jumbo mortgages and reduced capital requirements to enable Freddie and Fannie to purchase more mortgages for their own portfolios.
The public statement by Faith was very general, saying in part:
"As Fannie Mae has expanded its mortgage guaranty business to serve the market's urgent need for stability, liquidity and affordability, the company has undertaken a series of steps to protect borrowers, manage the increased credit risk in the market, and fortify the company's capital position. Among these steps, our company is continually assessing and establishing new pricing, eligibility and underwriting criteria for our business that more accurately reflects the current risks in the housing market and guards against the potential for foreclosure. These changes are incorporated into our underwriting system and include adjustments to credit score criteria, loan-to-value ratios, down payment requirements, accurate valuation practices, and consideration of markets where home prices may be falling."
"Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission. We will continue striving to responsibly strike that balance."
However, in a memo to its business partners, Fannie Mae got a bit more specific. Fannie Mae will now require a minimum credit score of 580 for most loans that it buys although it says it will still acquire loans with lower score under certain very limited circumstances. This is not a major change as 94 percent of Fannie's business last year was in loans with scores over 620. It also announced some changes in the maximum loan-to-value of loans it would purchase.
Fannie also said it would lengthen the period needed for borrowers to re-establish their credit history after a foreclosure to five years from four years with, again, some exceptions for extenuating circumstances.
What is most interesting about all of this is that it sounds as though Fannie Mae is prepared to stand its ground and protect itself and its shareholders in the face of demands that it be all things to all forces in the current crisis.
from Mortgage News Daily, April 3, 2008
Fannie Mae's Managing Director, Brian Faith, released a statement on Wednesday that gave notice that at least one of the two government sponsored enterprises (GSEs) that play a major role in the nation's mortgage industry has decided it would be wise to protect its own interests.
Government lawmakers have increasingly focused on Fannie Mae and the other GSE, Freddie Mac, as a big part of efforts to ease the credit crunch. The Office of Federal Housing Enterprise Oversight (OFHEO) recently lifted the loan limit to make it possible for the GSEs to buy what are generally termed jumbo mortgages and reduced capital requirements to enable Freddie and Fannie to purchase more mortgages for their own portfolios.
The public statement by Faith was very general, saying in part:
"As Fannie Mae has expanded its mortgage guaranty business to serve the market's urgent need for stability, liquidity and affordability, the company has undertaken a series of steps to protect borrowers, manage the increased credit risk in the market, and fortify the company's capital position. Among these steps, our company is continually assessing and establishing new pricing, eligibility and underwriting criteria for our business that more accurately reflects the current risks in the housing market and guards against the potential for foreclosure. These changes are incorporated into our underwriting system and include adjustments to credit score criteria, loan-to-value ratios, down payment requirements, accurate valuation practices, and consideration of markets where home prices may be falling."
"Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission. We will continue striving to responsibly strike that balance."
However, in a memo to its business partners, Fannie Mae got a bit more specific. Fannie Mae will now require a minimum credit score of 580 for most loans that it buys although it says it will still acquire loans with lower score under certain very limited circumstances. This is not a major change as 94 percent of Fannie's business last year was in loans with scores over 620. It also announced some changes in the maximum loan-to-value of loans it would purchase.
Fannie also said it would lengthen the period needed for borrowers to re-establish their credit history after a foreclosure to five years from four years with, again, some exceptions for extenuating circumstances.
What is most interesting about all of this is that it sounds as though Fannie Mae is prepared to stand its ground and protect itself and its shareholders in the face of demands that it be all things to all forces in the current crisis.
from Mortgage News Daily, April 3, 2008
Uncle Subprime
April 3, 2008
Mortgage foreclosures haven't yet hit their peak, it's an election year, and Congress is back in session. Hold onto your wallets because a housing bailout is moving forward unless the White House says no.
Senators from both parties agreed late yesterday to throw about $11 billion more at the housing market, and we'll have more to say about that later. But think of Uncle Sam as the subprime lender of last resort and you are getting close to what the Beltway is contemplating. In the name of preventing foreclosures, House Financial Services Chairman Barney Frank wants to transfer the risk of further declines in home prices to taxpayers from lenders and borrowers.
Mr. Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.
For the borrower, the deal is even sweeter: a low fixed monthly payment and a reduction in the principal to market value. The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis. The deal is so sweet that even Mr. Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance. His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.
The pols also understand, but won't admit, that you can't bail out borrowers without bailing out lenders. And on both counts, we're not talking about the most deserving recipients in the history of welfare: Those receiving bailouts will be lenders who chased high returns despite the risks, and borrowers challenging historic rates of delinquency even before rate resets. Many will also be fraudsters, given that mortgage fraud has increased more than 1,200% since 2000.
A new study from the Boston Federal Reserve destroys the myth of the victimized subprime borrower. Boston Fed economists examined 1.5 million homeownerships over nearly 20 years and found that the overwhelming reason for subprime foreclosures is not unsustainable debt foisted on ignorant borrowers or even financial setbacks. People walk out on subprime mortgages when the value of their home declines.
Homeowners who've suffered a 20% decline in home prices are 14 times as likely to default as those who have enjoyed a 20% gain. "Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages," says the Boston Fed study. In other words, even if the government moves these borrowers into FHA-guaranteed mortgages with fixed rates, but home prices keep falling, lots of borrowers will stiff the taxpayers like they've been stiffing private lenders.
Traditionally, lenders making a commitment to finance your home have demanded that you make a commitment as well: a down payment. But during the credit boom, the shrinking market share of FHA-insured loans demonstrated how much the world was changing. FHA was intended to help moderate-income borrowers afford homes by requiring merely a 3% down payment. When subprime lenders started offering loans with zero down, FHA asked Congress to let their lenders do the same. Fortunately for taxpayers, Congress resisted. In the fourth quarter of 2007, FHA loans were one mortgage category that actually enjoyed a decline in foreclosures.
That trend may not last, because Mr. Frank's bill waters down FHA underwriting standards. Today, the FHA tells lenders that a borrower should not have debt payments amounting to more than 43% of monthly income, but Mr. Frank's bill allows this figure to rise as high as 55%.
Under current FHA guidelines, lenders must also closely examine a borrower's credit history. Yet under the "flexible underwriting standards" in Mr. Frank's draft, borrowers can't be denied FHA insurance due to a low credit score. Delinquency on existing mortgages also can't be the sole reason to deny FHA insurance. Mr. Frank's bill authorizes the Secretary of Housing and Urban Development to contract out for a new underwriting system, and it should be entertaining to see what HUD's political minds can devise to appease pressure groups.
In sum, Mr. Frank is volunteering U.S. taxpayers to insure $300 billion in mortgages with underwriting standards to be named later. Connecticut Senator Chris Dodd thinks $400 billion is more like it. Quavering Republicans should do the political math. The Mortgage Bankers Association tracks 46 million mortgage borrowers, and 42 million are paying on time. More than 20 million households own their homes outright and, having worked for years to pay for them, probably don't want to pay for someone else's. Neither do 35 million renters who didn't take a flyer on nicer digs.
The good news is that a taxpayer champion is emerging from, of all places, Florida. His state is ground zero in the housing downturn, but House Republican Tom Feeney says, "My constituents are not terribly sympathetic with borrowers who made bad decisions." We're told the White House will oppose the Frank-Dodd bailout, but if there's any doubt, Mr. Bush should have Mr. Feeney in for a chat.
The lead editorial column in today's Wall Street JournalSee all of today's editorials and op-eds, plus video commentary, on Opinion Journal.
[As always, Ray Kutylo and the SCV Home Team view macro-economic decisions as well outside of our authority to influence. However, we are all influenced by these decisions in both our personal and business environments. Public policy, either good or bad, will have far-reaching effects. We pay attention to these currents and changes in directions of public policy in order to better advise our clients.]
Mortgage foreclosures haven't yet hit their peak, it's an election year, and Congress is back in session. Hold onto your wallets because a housing bailout is moving forward unless the White House says no.
Senators from both parties agreed late yesterday to throw about $11 billion more at the housing market, and we'll have more to say about that later. But think of Uncle Sam as the subprime lender of last resort and you are getting close to what the Beltway is contemplating. In the name of preventing foreclosures, House Financial Services Chairman Barney Frank wants to transfer the risk of further declines in home prices to taxpayers from lenders and borrowers.
Mr. Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.
For the borrower, the deal is even sweeter: a low fixed monthly payment and a reduction in the principal to market value. The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis. The deal is so sweet that even Mr. Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance. His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.
The pols also understand, but won't admit, that you can't bail out borrowers without bailing out lenders. And on both counts, we're not talking about the most deserving recipients in the history of welfare: Those receiving bailouts will be lenders who chased high returns despite the risks, and borrowers challenging historic rates of delinquency even before rate resets. Many will also be fraudsters, given that mortgage fraud has increased more than 1,200% since 2000.
A new study from the Boston Federal Reserve destroys the myth of the victimized subprime borrower. Boston Fed economists examined 1.5 million homeownerships over nearly 20 years and found that the overwhelming reason for subprime foreclosures is not unsustainable debt foisted on ignorant borrowers or even financial setbacks. People walk out on subprime mortgages when the value of their home declines.
Homeowners who've suffered a 20% decline in home prices are 14 times as likely to default as those who have enjoyed a 20% gain. "Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages," says the Boston Fed study. In other words, even if the government moves these borrowers into FHA-guaranteed mortgages with fixed rates, but home prices keep falling, lots of borrowers will stiff the taxpayers like they've been stiffing private lenders.
Traditionally, lenders making a commitment to finance your home have demanded that you make a commitment as well: a down payment. But during the credit boom, the shrinking market share of FHA-insured loans demonstrated how much the world was changing. FHA was intended to help moderate-income borrowers afford homes by requiring merely a 3% down payment. When subprime lenders started offering loans with zero down, FHA asked Congress to let their lenders do the same. Fortunately for taxpayers, Congress resisted. In the fourth quarter of 2007, FHA loans were one mortgage category that actually enjoyed a decline in foreclosures.
That trend may not last, because Mr. Frank's bill waters down FHA underwriting standards. Today, the FHA tells lenders that a borrower should not have debt payments amounting to more than 43% of monthly income, but Mr. Frank's bill allows this figure to rise as high as 55%.
Under current FHA guidelines, lenders must also closely examine a borrower's credit history. Yet under the "flexible underwriting standards" in Mr. Frank's draft, borrowers can't be denied FHA insurance due to a low credit score. Delinquency on existing mortgages also can't be the sole reason to deny FHA insurance. Mr. Frank's bill authorizes the Secretary of Housing and Urban Development to contract out for a new underwriting system, and it should be entertaining to see what HUD's political minds can devise to appease pressure groups.
In sum, Mr. Frank is volunteering U.S. taxpayers to insure $300 billion in mortgages with underwriting standards to be named later. Connecticut Senator Chris Dodd thinks $400 billion is more like it. Quavering Republicans should do the political math. The Mortgage Bankers Association tracks 46 million mortgage borrowers, and 42 million are paying on time. More than 20 million households own their homes outright and, having worked for years to pay for them, probably don't want to pay for someone else's. Neither do 35 million renters who didn't take a flyer on nicer digs.
The good news is that a taxpayer champion is emerging from, of all places, Florida. His state is ground zero in the housing downturn, but House Republican Tom Feeney says, "My constituents are not terribly sympathetic with borrowers who made bad decisions." We're told the White House will oppose the Frank-Dodd bailout, but if there's any doubt, Mr. Bush should have Mr. Feeney in for a chat.
The lead editorial column in today's Wall Street JournalSee all of today's editorials and op-eds, plus video commentary, on Opinion Journal.
[As always, Ray Kutylo and the SCV Home Team view macro-economic decisions as well outside of our authority to influence. However, we are all influenced by these decisions in both our personal and business environments. Public policy, either good or bad, will have far-reaching effects. We pay attention to these currents and changes in directions of public policy in order to better advise our clients.]
Top 10 Seller Short Sale Questions..Answered
Most Common Questions A Seller Will Ask
by Tim and Julie Harris
Number 10
I can't make my house payments, but I do have an ability to pay back all or part of the negative equity. Also, I want to preserve my credit score...is a short sale right for me?
Probably, not. In cases where the seller can pay back all or part of the negative equity (usually to the 2nd lien holder), it makes sense for them to work out a repayment plan. The lender will then release the lien and allow the home to close.
Number 9
If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?
The mortgage insurance is not there for your protection, just the mortgage lender's.
Number 8
Do I have to have my home "Approved" by the lender prior to offering it for sale as a short sale?
No. Technically speaking there is no such thing as being "Short Sale Approved." The actual approval only happens with an accepted offer.
Number 7
I just missed a payment and I know I will miss more...how long does the foreclosure process take and is there time to do a short sale?
The foreclosure process takes differing times depending on your state. In the Midwest a foreclosure can take over a year. In California its taking 6+ months. Generally speaking a well priced short sale being processed by an educated short sale listing agent will sell and close in less than 120 days.
Number 6
Will I still have to pay property taxes if I do a short sale?
Property taxes will always have to be paid as part of any accepted short sale. Whether it's you or the lender, it depends on their policies and the specific agreement you reach while negotiating the short sale.
Number 5
I owe more than my home is worth and I can't make the payment. Do I have to somehow qualify for a short sale?
The simple answer is NO. If someone can't make their payment and they are otherwise insolvent, they qualify for a short sale. Note: insolvent simply means their total debts are great than their assets.
Number 4
Do I have to pay income taxes...I have heard that I will get a 1099. Will the loss the bank takes be treated as a taxable gain to me...the seller...is this true?
It WAS true, now it's not. Consult your Tax Attorney or Qualified CPA. Very recently the tax law was modified and now most people who do a short sale will have no taxes due.
Number 3
How do you, my listing agent get paid...who pays your commission?
The bank will pay the commission along with all the other usual closing costs.
Number 2
Do I have to miss a payment to do a Short Sale?
No. Late last year most major lenders started accepting short sale offers from sellers who have never missed a payment.
Number 1
I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender. Most short sales do involve 1st and 2nd lien holders.
by Tim and Julie Harris
Number 10
I can't make my house payments, but I do have an ability to pay back all or part of the negative equity. Also, I want to preserve my credit score...is a short sale right for me?
Probably, not. In cases where the seller can pay back all or part of the negative equity (usually to the 2nd lien holder), it makes sense for them to work out a repayment plan. The lender will then release the lien and allow the home to close.
Number 9
If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?
The mortgage insurance is not there for your protection, just the mortgage lender's.
Number 8
Do I have to have my home "Approved" by the lender prior to offering it for sale as a short sale?
No. Technically speaking there is no such thing as being "Short Sale Approved." The actual approval only happens with an accepted offer.
Number 7
I just missed a payment and I know I will miss more...how long does the foreclosure process take and is there time to do a short sale?
The foreclosure process takes differing times depending on your state. In the Midwest a foreclosure can take over a year. In California its taking 6+ months. Generally speaking a well priced short sale being processed by an educated short sale listing agent will sell and close in less than 120 days.
Number 6
Will I still have to pay property taxes if I do a short sale?
Property taxes will always have to be paid as part of any accepted short sale. Whether it's you or the lender, it depends on their policies and the specific agreement you reach while negotiating the short sale.
Number 5
I owe more than my home is worth and I can't make the payment. Do I have to somehow qualify for a short sale?
The simple answer is NO. If someone can't make their payment and they are otherwise insolvent, they qualify for a short sale. Note: insolvent simply means their total debts are great than their assets.
Number 4
Do I have to pay income taxes...I have heard that I will get a 1099. Will the loss the bank takes be treated as a taxable gain to me...the seller...is this true?
It WAS true, now it's not. Consult your Tax Attorney or Qualified CPA. Very recently the tax law was modified and now most people who do a short sale will have no taxes due.
Number 3
How do you, my listing agent get paid...who pays your commission?
The bank will pay the commission along with all the other usual closing costs.
Number 2
Do I have to miss a payment to do a Short Sale?
No. Late last year most major lenders started accepting short sale offers from sellers who have never missed a payment.
Number 1
I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender. Most short sales do involve 1st and 2nd lien holders.
Friday, March 28, 2008
How to Help the Kids Buy First Home
Helping the kids buy a first home is a time-honored tradition that has become even more significant as home prices rise and incomes flatten.
Here are three ways parents can help their children:
Cash. For parents with the means, cash is clean and easy. An individual can give $12,000 a year to a recipient without having to pay a tax on the gift. Therefore, a couple could give an adult child and the child's spouse a total of $48,000 in one year. To keep things simple, the gift is best given well in advance of the mortgage application.
Cosigning or otherwise jointly investing in the property. This can work for parents of more limited means or those who want to be paid back. The biggest risk is that the offspring will be unable to meet their obligations and it will affect the parent’s credit rating.
Knowledge and hard work are worth gold. Parents who can’t afford to help financially may be able to provide experience and even some sweat equity to help the kids make a smart housing choice.
Source: Market Watch (03/21/08)
Here are three ways parents can help their children:
Cash. For parents with the means, cash is clean and easy. An individual can give $12,000 a year to a recipient without having to pay a tax on the gift. Therefore, a couple could give an adult child and the child's spouse a total of $48,000 in one year. To keep things simple, the gift is best given well in advance of the mortgage application.
Cosigning or otherwise jointly investing in the property. This can work for parents of more limited means or those who want to be paid back. The biggest risk is that the offspring will be unable to meet their obligations and it will affect the parent’s credit rating.
Knowledge and hard work are worth gold. Parents who can’t afford to help financially may be able to provide experience and even some sweat equity to help the kids make a smart housing choice.
Source: Market Watch (03/21/08)
Thursday, March 27, 2008
40 Tips for an Exceptional, Superb & Powerful Life
Frank, a valued member of the SCV Home Team, just sent me this list. What do you think? Do you have anything to add?
1. Take a 10-30 minute walk every day. And while you walk, smile. It is the ultimate anti-depressant.
2. Sit in silence for at least 10 minutes each day. Buy a lock if you have to.
3. Buy a Tivo (DVR), tape your late night shows and get more sleep.
4. When you wake up in the morning complete the following statement, 'My purpose is to________ today.'
5. Live with the 3 E's -- Energy, Enthusiasm, and Empathy.
6. Watch more movies, play more games and read more books than you did last year.
7. Always pray and make time to exercise.
8. Spend more time with people over the age of 70 and under the age of six.
9. Dream more while you are awake.
10. Eat more foods that grow on trees and plants and eat fewer foods that are manufactured in plants.
11. Drink green tea and plenty of water. Eat blueberries, wild Alaskan salmon, broccoli, almonds & walnuts.
12. Try to make at least three people smile each day.
13. Clear your clutter from your house, your car, your desk and let new and flowing energy into your life.
14. Don't waste your precious energy on gossip, energy vampires, issues of the past, negative thoughts or things you cannot control. Instead, invest your energy in the positive present moment.
15. Realize that life is a school and you are here to learn. Problems are simply part of the curriculum that appear and fade away like algebra class .....but the lessons you learn will last a lifetime.
16. Eat breakfast like a king, lunch like a prince and dinner like a college kid with a maxed out charge card.
17. Smile and laugh more. It will keep the energy vampires away.
18. Life isn't fair, but it's still good.
19. Life is too short to waste time hating anyone.
20. Don't take yourself so seriously. No one else does.
21. You don't have to win every argument. Agree to disagree.
22. Make peace with your past so it won't screw up the present.
23. Don't compare your life to others'. You have no idea what their journey is all about.
24. Ladies - Go on and burn those 'special' scented candles, use the 600 thread count sheets, the good china and wear our fancy lingerie now. Stop waiting for a special occasion. Everyday is special.
25. Guys: Go out and golf or fish or putter around the house or whatever it is that makes you happy. No one is in charge of your happiness except you.
26. Frame every so-called disaster with these words: 'In five years, will this matter?'
27. Forgive everyone for everything.
28. What other people think of you is none of your business. And if you knew how infrequently they thought of you, you certainly wouldn't care what they thought.
29. Time heals almost everything. Give time, time!
30. However good or bad a situation is it will change.
31. Your job won't take care of you when you are sick. Your friends will. Stay in touch with them.
32. Get rid of anything that isn't useful, beautiful or joyful.
33. Envy is a waste of time. You already have all you need. God provides, remember?!
34. The best is yet to come. (In Heaven)
35. No matter how you feel, get up, dress up and show up.
36. Do the right thing!
37. Call your family often.
38. Each night before you go to bed complete the Following statements:
'I am thankful for __________. Today I accomplished _________.'
39. Remember that you are too blessed to be stressed.
40. Enjoy the ride. Remember that this is not Disney World and you certainly don't want a fast pass. You only have one ride through life so make the most of it and enjoy the ride.
LIVE, LOVE, LAUGH. LIFE'S A GIFT ... UNWRAP IT!
Have a great day.
1. Take a 10-30 minute walk every day. And while you walk, smile. It is the ultimate anti-depressant.
2. Sit in silence for at least 10 minutes each day. Buy a lock if you have to.
3. Buy a Tivo (DVR), tape your late night shows and get more sleep.
4. When you wake up in the morning complete the following statement, 'My purpose is to________ today.'
5. Live with the 3 E's -- Energy, Enthusiasm, and Empathy.
6. Watch more movies, play more games and read more books than you did last year.
7. Always pray and make time to exercise.
8. Spend more time with people over the age of 70 and under the age of six.
9. Dream more while you are awake.
10. Eat more foods that grow on trees and plants and eat fewer foods that are manufactured in plants.
11. Drink green tea and plenty of water. Eat blueberries, wild Alaskan salmon, broccoli, almonds & walnuts.
12. Try to make at least three people smile each day.
13. Clear your clutter from your house, your car, your desk and let new and flowing energy into your life.
14. Don't waste your precious energy on gossip, energy vampires, issues of the past, negative thoughts or things you cannot control. Instead, invest your energy in the positive present moment.
15. Realize that life is a school and you are here to learn. Problems are simply part of the curriculum that appear and fade away like algebra class .....but the lessons you learn will last a lifetime.
16. Eat breakfast like a king, lunch like a prince and dinner like a college kid with a maxed out charge card.
17. Smile and laugh more. It will keep the energy vampires away.
18. Life isn't fair, but it's still good.
19. Life is too short to waste time hating anyone.
20. Don't take yourself so seriously. No one else does.
21. You don't have to win every argument. Agree to disagree.
22. Make peace with your past so it won't screw up the present.
23. Don't compare your life to others'. You have no idea what their journey is all about.
24. Ladies - Go on and burn those 'special' scented candles, use the 600 thread count sheets, the good china and wear our fancy lingerie now. Stop waiting for a special occasion. Everyday is special.
25. Guys: Go out and golf or fish or putter around the house or whatever it is that makes you happy. No one is in charge of your happiness except you.
26. Frame every so-called disaster with these words: 'In five years, will this matter?'
27. Forgive everyone for everything.
28. What other people think of you is none of your business. And if you knew how infrequently they thought of you, you certainly wouldn't care what they thought.
29. Time heals almost everything. Give time, time!
30. However good or bad a situation is it will change.
31. Your job won't take care of you when you are sick. Your friends will. Stay in touch with them.
32. Get rid of anything that isn't useful, beautiful or joyful.
33. Envy is a waste of time. You already have all you need. God provides, remember?!
34. The best is yet to come. (In Heaven)
35. No matter how you feel, get up, dress up and show up.
36. Do the right thing!
37. Call your family often.
38. Each night before you go to bed complete the Following statements:
'I am thankful for __________. Today I accomplished _________.'
39. Remember that you are too blessed to be stressed.
40. Enjoy the ride. Remember that this is not Disney World and you certainly don't want a fast pass. You only have one ride through life so make the most of it and enjoy the ride.
LIVE, LOVE, LAUGH. LIFE'S A GIFT ... UNWRAP IT!
Have a great day.
Lower Long Term Mortgage Rates Spur More Loan Applications
Long term mortgage rates fell dramatically during the week ended March 20 according to the Primary Mortgage Market Survey released by Freddie Mac. Short term rates remained relatively unchanged although fees and points bumped up to the highest levels we have seen in the three years we have been tracking the Freddie Mac report.
The 30-year fixed-rate mortgage (FRM) had an average rate of 5.87 percent with 0.5 point for the week compared to the previous week when it averaged 6.13 percent with 0.5 point. Last year at this time the 30-year averaged 6.16 percent.
The 15-year FRM dropped 33 basis points to 5.27 percent. Fees and points were unchanged at 0.5. One year ago the average rate for the 15-year was 5.90 percent.
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) carried a mean rate of 5.56 percent, down from the previous week when rates averaged 5.58 percent. Fees and points, however, rose to an average of 0.9 point from 0.6 point. One year ago the 5-year ARM averaged 5.91 percent.
One-year Treasury-indexed ARMS averaged 5.15 percent, an increase of one basis point from the previous week and points increased from 0.7 to 0.8. This same week in 2007 the one-year ARM averaged 5.40 percent.
"Mortgage rates fell this week as various actions were taken to improve market liquidity," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, the inflation report from the Consumer Price Index (CPI) reflected weaker price increases than consensus expectations. Unchanged in February both including and excluding food and energy costs, it is the first time the core CPI did not report a monthly increase since November 2006.
from Mortgage News Daily March 27, 2008
The 30-year fixed-rate mortgage (FRM) had an average rate of 5.87 percent with 0.5 point for the week compared to the previous week when it averaged 6.13 percent with 0.5 point. Last year at this time the 30-year averaged 6.16 percent.
The 15-year FRM dropped 33 basis points to 5.27 percent. Fees and points were unchanged at 0.5. One year ago the average rate for the 15-year was 5.90 percent.
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) carried a mean rate of 5.56 percent, down from the previous week when rates averaged 5.58 percent. Fees and points, however, rose to an average of 0.9 point from 0.6 point. One year ago the 5-year ARM averaged 5.91 percent.
One-year Treasury-indexed ARMS averaged 5.15 percent, an increase of one basis point from the previous week and points increased from 0.7 to 0.8. This same week in 2007 the one-year ARM averaged 5.40 percent.
"Mortgage rates fell this week as various actions were taken to improve market liquidity," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, the inflation report from the Consumer Price Index (CPI) reflected weaker price increases than consensus expectations. Unchanged in February both including and excluding food and energy costs, it is the first time the core CPI did not report a monthly increase since November 2006.
from Mortgage News Daily March 27, 2008
Tuesday, March 25, 2008
U.S. Officials Warn of Scams Targeting Homeowners
By EVAN PEREZ
March 25, 2008; Page A3
Wall Street Journal
Federal officials say a wave of opportunistic scams are targeting homeowners trying to avoid foreclosure in the current housing downturn.
Monday, prosecutors in California unsealed twin cases against 19 people who, according to agents from the Federal Bureau of Investigation and the Internal Revenue Service, skimmed nearly $13 million in equity from 115 homeowners coast to coast under the guise of a mortgage rescue.
Real-estate scammers "took advantage of the elevated market that peaked in 2005, and here now the vultures are waiting as the market goes down," said U.S. Attorney McGregor Scott of Sacramento.
Click for Full article
March 25, 2008; Page A3
Wall Street Journal
Federal officials say a wave of opportunistic scams are targeting homeowners trying to avoid foreclosure in the current housing downturn.
Monday, prosecutors in California unsealed twin cases against 19 people who, according to agents from the Federal Bureau of Investigation and the Internal Revenue Service, skimmed nearly $13 million in equity from 115 homeowners coast to coast under the guise of a mortgage rescue.
Real-estate scammers "took advantage of the elevated market that peaked in 2005, and here now the vultures are waiting as the market goes down," said U.S. Attorney McGregor Scott of Sacramento.
Click for Full article
Wednesday, March 19, 2008
Stratfor's take on Fed Rate Cut Decision
The U.S. Federal Reserve reduced its headline interest rates from 3 percent to 2.25 percent on Tuesday afternoon. The cut, which was a quarter point less than the consensus expectation of 1 percent, followed the Fed’s March 16 redefinition of the rules of borrowing. Nevertheless, the U.S. markets did not plummet in disappointment.
It is always difficult to understand the Fed’s reasoning. A guess would be that this actually was an attempt to instill confidence in markets. A full point cut might have been perceived as ongoing panic, while a smaller cut might have been seen as too much concern about inflation — not a trivial fear, but not good for the markets. A three-quarter point cut may have been an attempt to cut interest rates while still showing some confidence.
For the most part, the Federal Reserve prefers to ignore the financial markets along with all of the noise that is a regular feature in the world of Wall Street. It is not that there is no money or discussions of economic import occurring there — far from it — but that the Fed sees the financial markets as simply one aspect of the entire economy, and a rather erratic aspect at that. Better, goes the Fed’s thinking, to focus on the nuts and bolts of the “real” economy so that the entire thing can be kept on an even keel.
The Fed in this case is worried about the equity markets. The decline in housing prices already has taken a cut out of the net worth of individuals while hurting institutions holding mortgages of various sorts. A full-blown bear market on top of the decline in home values might have concerned the Fed more than a usual downturn would have. The double whammy of housing price declines and stock market crashes could have been devastating, even to an economy as large as the United States’. Therefore, the Fed appears to be exceedingly concerned about keeping the U.S. equity markets from tanking and is paying attention to its psychology as well as the fundamentals.
In reality, the housing correction is rather mild by historical standards, and the stock markets — only down by roughly 15-20 percent since the start of the subprime problems — are not exactly terrifying compared to previous stock crashes. But tell that to the people on Wall Street who live and breathe on the day-to-day deltas in both worlds. Their panic — and the place they occupy between the Fed, the housing market and the stock markets — is forcing the Fed to take actions that it would prefer not to.
The last time the Federal Reserve felt it necessary to enact sharp cuts when the danger to the real economy was this nebulous was during the Alan Greenspan era in the early weeks after the 9/11 attacks. Then, a cascade of rate cuts — one for a full percentage point — pared rates to the bone. In retrospect, the Federal Reserve probably overreacted. The benefit of hindsight tells us that the American recovery — not recession — began in October 2001. But the perception at the time was that the system itself might have been in danger, so there was no reason to spare the horses.
Now, as in 2001, the actual threat probably is not as bad as it seems. Now, as in 2001, the Fed’s goal is to assuage panic. But now, unlike in 2001, the panic is largely constrained to Wall Street.
That distinction provides the Federal Reserve with the opportunity to draw a line between Wall Street’s expectations and reality. The Street was expecting a rate cut of 1 percent or even more. The Fed ultimately gave up “only” three-quarters of a percent. The subtext is that the Fed is not as concerned as the Street about what is going on out there. It is a subtle difference, but one that is required to prevent the likes of Enron from being more than a footnote in American corporate history.
Click Here to Send Stratfor Your Comments
It is always difficult to understand the Fed’s reasoning. A guess would be that this actually was an attempt to instill confidence in markets. A full point cut might have been perceived as ongoing panic, while a smaller cut might have been seen as too much concern about inflation — not a trivial fear, but not good for the markets. A three-quarter point cut may have been an attempt to cut interest rates while still showing some confidence.
For the most part, the Federal Reserve prefers to ignore the financial markets along with all of the noise that is a regular feature in the world of Wall Street. It is not that there is no money or discussions of economic import occurring there — far from it — but that the Fed sees the financial markets as simply one aspect of the entire economy, and a rather erratic aspect at that. Better, goes the Fed’s thinking, to focus on the nuts and bolts of the “real” economy so that the entire thing can be kept on an even keel.
The Fed in this case is worried about the equity markets. The decline in housing prices already has taken a cut out of the net worth of individuals while hurting institutions holding mortgages of various sorts. A full-blown bear market on top of the decline in home values might have concerned the Fed more than a usual downturn would have. The double whammy of housing price declines and stock market crashes could have been devastating, even to an economy as large as the United States’. Therefore, the Fed appears to be exceedingly concerned about keeping the U.S. equity markets from tanking and is paying attention to its psychology as well as the fundamentals.
In reality, the housing correction is rather mild by historical standards, and the stock markets — only down by roughly 15-20 percent since the start of the subprime problems — are not exactly terrifying compared to previous stock crashes. But tell that to the people on Wall Street who live and breathe on the day-to-day deltas in both worlds. Their panic — and the place they occupy between the Fed, the housing market and the stock markets — is forcing the Fed to take actions that it would prefer not to.
The last time the Federal Reserve felt it necessary to enact sharp cuts when the danger to the real economy was this nebulous was during the Alan Greenspan era in the early weeks after the 9/11 attacks. Then, a cascade of rate cuts — one for a full percentage point — pared rates to the bone. In retrospect, the Federal Reserve probably overreacted. The benefit of hindsight tells us that the American recovery — not recession — began in October 2001. But the perception at the time was that the system itself might have been in danger, so there was no reason to spare the horses.
Now, as in 2001, the actual threat probably is not as bad as it seems. Now, as in 2001, the Fed’s goal is to assuage panic. But now, unlike in 2001, the panic is largely constrained to Wall Street.
That distinction provides the Federal Reserve with the opportunity to draw a line between Wall Street’s expectations and reality. The Street was expecting a rate cut of 1 percent or even more. The Fed ultimately gave up “only” three-quarters of a percent. The subtext is that the Fed is not as concerned as the Street about what is going on out there. It is a subtle difference, but one that is required to prevent the likes of Enron from being more than a footnote in American corporate history.
Click Here to Send Stratfor Your Comments
Why do mortgage rates go up when the Federal Reserve cuts rates?
from Brian Woolley
Countryridge Financial, a subsidiary of Metrocities Mortgage
The Federal Open Market Committee lowered the Fed Funds Rate to 2.250 percent yesterday while leaving the door open for future rate cuts.
Stock markets cheered the Fed's move; the Dow Jones Industrial Average rallied 400 points in the wake of the announcement.
Meanwhile, the cash that fueled the stock gains had to come from somewhere and one of those places was the bond market. It's no surprise, therefore, that following the FOMC's press release, 30-year fixed rate mortgages spiked by 0.250%.
Stated more clearly: The Fed cut the Fed Funds Rate and mortgage rates went up.
Every time that the Federal Reserve cuts the Fed Funds Rate, it's an explicit signal the economy needs a trickle-down jumpstart.
When the Fed Funds Rate is lower, doing business is cheaper for banks, who in turn make it cheaper for businesses to do business, who in turn make it cheaper for consumers to live life.
This process can take up to a year for each rate cut or rate hike.
Meanwhile, as the changes to the Fed Funds Rate trickle their way through the economy, carrying on ordinary, day-to-day activities gets "cheaper" for everyone in the country. There's more money left for discretionary items, or investment in capital items, or whatever.
For example, the Federal Reserve has cut the Fed Funds Rate by 3.000 percent since September.
American consumers borrow $2.5 trillion on their credit cards so the 3-point reduction equates to $75,000,000,000 in interest payment savings.
You can only imagine what the reduction can do for businesses because businesses borrow far more money than consumers.
So, when the Fed cuts rates, its hope is that most of these "savings" get pumped back into the economy somehow. This is how rate cuts can lead to economic growth .
Sometimes, though, the growth is uncontrolled.
The fancy word for this situation is "inflation" and inflation is the enemy of mortgage bonds; it erodes the value of U.S. dollars and that's the currency in which mortgage bond payments are made.
So, it makes sense that mortgage rates rise when the Fed cuts the Fed Funds Rate. By stimulating the economy, the Federal Reserve is making long-term inflation much more likely.
Some people think the Federal Reserve is foolish right now but the FOMC voters don't seem to care. They are more concerned with relieving short-term pressures on the economy and will deal with what comes later, later.
Even if it's runaway inflation.
Brian Woolley is one of our favorite lenders
Knowledgeable, Experienced, Trusted
661-290-3700
Countryridge Financial is associated with Keller Williams VIP Properties in Santa Clarita
Countryridge Financial, a subsidiary of Metrocities Mortgage
The Federal Open Market Committee lowered the Fed Funds Rate to 2.250 percent yesterday while leaving the door open for future rate cuts.
Stock markets cheered the Fed's move; the Dow Jones Industrial Average rallied 400 points in the wake of the announcement.
Meanwhile, the cash that fueled the stock gains had to come from somewhere and one of those places was the bond market. It's no surprise, therefore, that following the FOMC's press release, 30-year fixed rate mortgages spiked by 0.250%.
Stated more clearly: The Fed cut the Fed Funds Rate and mortgage rates went up.
Every time that the Federal Reserve cuts the Fed Funds Rate, it's an explicit signal the economy needs a trickle-down jumpstart.
When the Fed Funds Rate is lower, doing business is cheaper for banks, who in turn make it cheaper for businesses to do business, who in turn make it cheaper for consumers to live life.
This process can take up to a year for each rate cut or rate hike.
Meanwhile, as the changes to the Fed Funds Rate trickle their way through the economy, carrying on ordinary, day-to-day activities gets "cheaper" for everyone in the country. There's more money left for discretionary items, or investment in capital items, or whatever.
For example, the Federal Reserve has cut the Fed Funds Rate by 3.000 percent since September.
American consumers borrow $2.5 trillion on their credit cards so the 3-point reduction equates to $75,000,000,000 in interest payment savings.
You can only imagine what the reduction can do for businesses because businesses borrow far more money than consumers.
So, when the Fed cuts rates, its hope is that most of these "savings" get pumped back into the economy somehow. This is how rate cuts can lead to economic growth .
Sometimes, though, the growth is uncontrolled.
The fancy word for this situation is "inflation" and inflation is the enemy of mortgage bonds; it erodes the value of U.S. dollars and that's the currency in which mortgage bond payments are made.
So, it makes sense that mortgage rates rise when the Fed cuts the Fed Funds Rate. By stimulating the economy, the Federal Reserve is making long-term inflation much more likely.
Some people think the Federal Reserve is foolish right now but the FOMC voters don't seem to care. They are more concerned with relieving short-term pressures on the economy and will deal with what comes later, later.
Even if it's runaway inflation.
Brian Woolley is one of our favorite lenders
Knowledgeable, Experienced, Trusted
661-290-3700
Countryridge Financial is associated with Keller Williams VIP Properties in Santa Clarita
OFHEO opens floodgates of liquidity for Fannie and Freddie
Fannie and Freddie's regulator unveiled a reduction of the capital the firms must hold to 20% from 30% previously. Ofheo said the move could provide up to $200 billion in immediate liquidity to the troubled mortgage-backed securities market. "We believe they can play an even more positive role in providing the stability and liquidity the markets need right now," Ofheo Director James Lockhart said in a statement.
This reduction combined with the increase of the portfolio caps announced last month should allow Freddie and Fannie to purchase or guarantee about $2 trillion in mortgages this year. This capacity should allow them to assist in subprime refinancing and loan modifications and do more in the jumbo mortgage market which they have been granted temporary permission to enter.
Treasury Secretary Paulson lauded the move. "Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market," he said.
For more information see: http://online.wsj.com/article/SB120593069669648325.html?mod=djemalertNEWS
This reduction combined with the increase of the portfolio caps announced last month should allow Freddie and Fannie to purchase or guarantee about $2 trillion in mortgages this year. This capacity should allow them to assist in subprime refinancing and loan modifications and do more in the jumbo mortgage market which they have been granted temporary permission to enter.
Treasury Secretary Paulson lauded the move. "Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market," he said.
For more information see: http://online.wsj.com/article/SB120593069669648325.html?mod=djemalertNEWS
No Good Options, but Better than Doing Nothing
We live in interesting times!
The week has been historic in the financial and housing markets with all of the moves by the Federal Reserve, the Treasury, and the regulatory agencies to soften the decline in housing prices and the increase in the foreclosure rate.
Excesses in housing with cheap money and lax lending standards, as well as enough fingers of blame for all parties to make it look like a circular firing squad, has led to where we are. As I have recently written in a column titled "I'm from the Government, and I'm here to help you", all of the policy options are pretty bad, and usually when the government gets involved in markets, the pain goes deeper and lasts longer. Time will tell as to whether this will hold true. After all, Congress has not made any impact on the situation yet, other than the usual hot air of promises and more promises. They still have plenty of time during this election year to make really bad policy decisions in legislation. Given the anti-mania in the housing market, some of it will actually get passed in all likelihood. Lenders will have money to lend, and the interest rates are attractive for right now.
The brief take-away is: all of the mucky-mucks will ensure that housing and the financial markets do not collapse right before the election.
For now 'le crisis de jour' has been averted, there's lots of activity and adjustments, panic has abated, and it's OK to buy and sell property.
Give me a call at 661-287-9164 if you want to buy or sell residential real estate in our market area.
The week has been historic in the financial and housing markets with all of the moves by the Federal Reserve, the Treasury, and the regulatory agencies to soften the decline in housing prices and the increase in the foreclosure rate.
Excesses in housing with cheap money and lax lending standards, as well as enough fingers of blame for all parties to make it look like a circular firing squad, has led to where we are. As I have recently written in a column titled "I'm from the Government, and I'm here to help you", all of the policy options are pretty bad, and usually when the government gets involved in markets, the pain goes deeper and lasts longer. Time will tell as to whether this will hold true. After all, Congress has not made any impact on the situation yet, other than the usual hot air of promises and more promises. They still have plenty of time during this election year to make really bad policy decisions in legislation. Given the anti-mania in the housing market, some of it will actually get passed in all likelihood. Lenders will have money to lend, and the interest rates are attractive for right now.
The brief take-away is: all of the mucky-mucks will ensure that housing and the financial markets do not collapse right before the election.
For now 'le crisis de jour' has been averted, there's lots of activity and adjustments, panic has abated, and it's OK to buy and sell property.
Give me a call at 661-287-9164 if you want to buy or sell residential real estate in our market area.
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