Van Santos

This is VERY long post that contains the entire text of President Obama’s Troubled Homeowners plan. If you do not care to read a lot, here is the short - short verion:

1. Only mortgages that are owned/guaranteed by Fannie Mae and Freddie Mac will be refinanced under this plan
2. No refis with a LTV greater than 105% will take place
3. Real Estate “flippers” are not covered
4. Protects those who can refi from a decline in value of roughly $6K, no more
5. Attempting to reduce payments for homeowners
6. Does not address the root of the problem - declining values
7. Does not talk about buying toxic assets or creating a bad bank
8. Adds additional 100B to Fannie and Freddie bringing their total bailout package to $200B

President Obama said..

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; 

Sorry, not to be crass - Bullshit!  I know a number of people (5) who played by the rules that are very underwater, none are open for the option listed out by the President today.

Ok, on to the full post….

Yesterday evening I went on a semi-controlled rant about the Government bailouts and stimulus package. The whole point I was driving toward came down to the middle class was left holding the bag in both cases, and is being put under an undue amount financial/economic stress, while obtaining very little in the way of financial assistance during this economic downturn.

A large portion of middle class mortgage holders, who purchased their home within the last three years, find themselves with property values considerably less than what they had paid for. Today news leaked out that the President was going to attempt to address the declining property values, those facing foreclosure and individuals who are underwater in their mortgage.

President Obama started:

“Today, as a result of declining home values, millions of families are “underwater,” which means they owe more on their mortgages than their homes are worth. These families are unable to sell their homes, and unable to refinance them. So in the event of a job loss or another emergency, their options are limited.”

Sounds promising thus far…

“Right now, Fannie Mae and Freddie Mac — the institutions that guarantee home loans for millions of middle-class families — are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater — or close to being underwater — cannot turn to these lending institutions for help.

There goes the hope…

In the second paragraph the speech President Obama is telling us this is more about propping up Fannie Mae and Freddie Mac than helping home owners.

But let’s break down the specifics of the program.

1. Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices

• Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

• Reducing Monthly Payments: For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year:
o Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

First off, this only applies to mortgages that are owned/guaranteed by Fannie Mae and Freddie Mac. If your mortgage is held/owned/guaranteed by another institution you will not be able to utilize this “opportunity”.

Also, the maximum Loan To Value percentage that Fannie Mae and Freddie Mac will be able to refinance is now at 105%. If your property value losses are greater than 20%, and your equity is less than 15%, you will not be able to refinance because your LTV percentage would be higher than 105%.

2. Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

• Helping Hard-Pressed Homeowners Stay in their Homes: This initiative is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.
• No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers.
• Protecting Neighborhoods: This plan will also help to stabilize home prices for all homeowners in a neighborhood. When a home goes into foreclosure, the entire neighborhood is hurt. The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Homeowner Stability Initiative.

• Providing Support for Responsible Homeowners: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

• Providing Loan Modifications to Bring Monthly Payments to Sustainable Levels: The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. Using money allocated under the Financial Stability Plan and the full strength of Fannie Mae and Freddie Mac, this program has several key components:

§ A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

§ “Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.

§ Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

§ Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.
§ Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration — together with the FDIC — has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.
• Institute Clear and Consistent Guidelines for Loan Modifications: Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work. The Guidelines will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans’ Affairs and the Department of Agriculture.
• Other Comprehensive Measures to Reduce Foreclosure and Strengthen Communities

§ Require Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance
§ Allow Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options
§ Provide $1.5 Billion in Relocation and Other Forms of Assistance to Renters Displaced by Foreclosure and $2 Billion in Neighborhood Stabilization Funds
§ Improve the Flexibility of Hope for Homeowners and Other FHA Programs to Modify and Refinance At-Risk Borrowers

The government is making it clear that “Flippers” are not going to benefit from this bailout, which is a good call, but the two key things to pay attention to are:

The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Homeowner Stability Initiative.

And

If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400.

Woo… hoo… $6K! Now my losses only stand at $84K to $54K… and if I’m am lucky enough, I can see a reduction in my monthly interest. The government is attempting to band aide people who have cash flow issues but, again, not address the problem – declining value.

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac:

• Ensuring Strength and Security of the Mortgage Market: Today, using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.

o Provide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.

o Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.

• Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.

• Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

• Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.

• No EESA or Financial Stability Plan Money: The $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.

Part three is telling us the government is doubling the aide to Fannie Mae and Freddie Mac because their losses were so significant, so unexpected, in 2008 the companies are simply burning through money.

By double the funding available, limit their refinancing options, and only address mortgages held by Fannie and Freddie, it appears that Uncle Sam is more concerned about saving themselves than people truly in trouble.

Refinancing will help those with money issues, yes. But if the true aim is to help the entire populous, level the playing field and provide refinancing options for ALL home owners who are underwater.

This plan did not address the one major issue facing the real estate market, the continuing decline in property values. Why are values falling? Well, obviously, in part due to the lack of demand but the “toxic assets” on the books of our financial institutions play a huge part in the market as well. Why? Because the assets have no known value - that is to say the owners of the assets do not truly know how to value them.

First - The government should create the “bad bank” already!

Set a price at which they will buy toxic assets from financial institutions, and create a bottom in the mortgage/CDO market.

Second – Remove the Mark-to-Market accounting rule.

The big reason banks are reporting such huge losses is due to having to report the value of their investments at whatever price it could obtain in the market today. Property is an asset, the value changes over time, and a loss/gain should be recorded when the property (on in this case, the note on the property) is sold. Not simply because it is the end of the quarter.

It almost seems as if the government is no longer looking at the problem facing the economy, almost as if they lost their focus…

Again, where is our F&#$ing bailout?

2/18 7:28 PM UPDATE - The news states that any Bank that got TARP funds has to take part in this program, but nowhere in the text of the bill is that mentioned (or if it is, I missed it). 

The signs were all around but, apparently, no one was paying attention:

“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders….

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

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

No one, except the New York Times.

From very early on I have held the belief that we are not in the middle of a banking collapse, rather we are in the middle of a market correction. It is also important to separate banks that are going under from the likes of Freddie Mac, Fannie Mae, Lehman and AIG. While all can be tied to the same cause, they fall into three separate categories.

Category 1

The retail banking industry, where you and I have our money, has seen 11 organizations close to date. Closures were directly connected to bad debt and an inability to provide liquidity for all deposits within the bank. It important to note, deposits in such banks are federally insured up to $100,000 per account.

Category 2

The recent bankruptcy of Lehman Brothers, a money center bank, falls into the commercial category. They are not a retail bank, nor did they do retail business, which means the government did not need to utilize the Federal bank insurance fund to cover monies. Again, the failure was tied to illiquidity due to bad debt.

Category 3

AIG is neither a retail bank nor a money center bank (brokerage) but an insurance provider to a number of industries, including banking. The liquidity crunch currently facing this organization is due to the insurance underwritten to cover banks debt (both retail and brokerages). No FDIC coverage, no “man on the street” unable to obtain his or her money because of the situation.

Retails banks will continue to fail due to bad debt, and would even fail in good markets due to mismanagement, I think it would be hard to say we have a banking collapse unless people were having difficulty obtaining their money. At that point we would truly be facing a banking collapse, which is why I am concerned to see that the Federal bank insurance fund dwindling and regulators consider options for replenishing it.

From the article:

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Basically, if a large retail bank goes under the FDIC is out of money and needs to find additional funds, most likely in the form of a loan from the treasury. What happens, though, if several large retail banks collapse at the same time?

The FDIC predicts difficulty with one large retail institution; several closings could cause a shortage of funds available to the public. Take it on step further – what if the FDIC cannot obtain the money from the government in order to cover the deposits?

This is what a true banking collapse would be.

In an effort to prevent the proverbial house of cards from falling in the financial industry, the Federal Reserve is providing an 85 Billion dollar loan to AIG in exchange for an 80% stake in the company.

Here is what will now take place:

1. AIG obtains a 2 year, 85 Billion dollar loan
2. Certain lines of business will be sold in order to repay the loan
3. The company’s management will be replaced, former Allstate Corp. CEO Edward Liddy will take the top spot within AIG

Most likely the entire company will be sold, in the long run, to repay the debts owed to the Federal Reserve; however, the two years allows the new management to orderly sell of the company, repay debts, and not cause panic in the financial markets. The major reason the Fed stepped in with AIG, and not in the case of Lehman, was due to the chance AIG would bring down financial institutions in the U.S., as well as overseas financial institutions.

What is unknown at this point is what happens to the company, and any equity holders. Does a much leaner AIG come out to the market place, or does this entire process simply mean here is 85 billion dollars to orderly disband the company leaving employees, equity and bond holders with nothing.

But what does this mean to us, the bag holding public? Nothing. The assets of AIG will have to be sold off in order to pay a loans coming due and thereby protecting the taxpayer.

So, no, this is not like Fannie Mae and Freddie Mac… that is the deal that will hurt the tax paying public.

Others:

Ankle Biting Pundits - The Financial Meltdown
Let’s talk Money - Fed’s $85M loan to AIG; Time to fire Paulson
Lehman collapse - AIG on the way
A Time to choose - $85 Billion to AIG, oh my god
Jon Taplin’s Blog - The AIG Rescue

Not tryin to be an alarmist, but the new Hurricane Ike strom tracks suggest this storm will miss Florida and head into the gulf.   (second view) NOAA is reporting:

IKE IS MOVING TOWARD THE WEST-SOUTHWEST NEAR 16 MPH..IKE IS EXPECTED TO PASS NEAR OR OVER THE TURKS AND CAICOS ISLANDS AND THE SOUTHEASTERN BAHAMAS LATER TODAY OR
EARLY SUNDAY. MAXIMUM SUSTAINED WINDS ARE NEAR 115 MPH…185 KM/HR…WITH HIGHER
GUSTS. IKE IS A CATEGORY THREE HURRICANE ON THE SAFFIR-SIMPSON HURRICANE SCALE. SOME FLUCTUATIONS IN STRENGTH ARE POSSIBLE DURING THE NEXT 48 HOURS…BUT IKE IS EXPECTED TO BE A MAJOR HURRICANE DURING THIS PERIOD.

As I had previously feard, this storm will - most likley - drive up Oil and Natural gas prices when companies shut down platforms due to danger.  What that means for us: depending on the size of the storm,  and the government take over of Fannie Mae and Freddie Mac, gas prices could rise sharply in the next few weeks.

Why the storm and Freddie and Fannie?  Fear helps drive oil price.

If the storm slows after it passes the Turks Islands, if the life of the storm isn’t as strong, industry could be out of the woods.  What is yet to bee seen, however, is where it will make landfall…

More to come.

Another bank hit the skids today - Silver State Bank in Nevada.

Silver State had 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.  As of June 30th, Silver State had $2 billion in assets and $1.7 billion in deposits.  All insured deposits will be assumed by Nevada State Bank and brances will be open on Monday.

Ok, a small bank isn’t too bad but there is news that Fannie Mac and Freddie Mac will be taken over by the government this weekend.  In terms of big business events, this one is HUGE.  According to the article the cost to the tax payer is yet known but you can be 99.999% sure that any share holder equity will be wiped out.  (Translation - the stock will be worthless)

While I would never have been a long term share holder of either company, I think it is highly irresponsible for for Treasury Secretary Henry Paulson to come out and claim there would be no Bail Out of either company. Also, in July, each company said they had plenty of capital to withstand the mortgage meltdown.  Either conditions drastically changed or the companies were lying to investors, as well as the public.

Expect banks to continue to fail over the next several months but, remember, we are not in a banking collapse, we are experiencing a correction.