Van Santos

This news surprises me a bit. 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure, but guess what is the driving force?

Individuals with “prime” mortgages:

An industry report shows that a record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit.

The Mortgage Bankers Association said Thursday the foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

At the same time, almost half of all adjustable-rate loans to borrowers with shaky credit were past due or in foreclosure.

California, Nevada, Arizona and Florida accounted for 46 percent of new foreclosures in the country.

I guess the mantra of “only the foolish borrower” is at fault is out the window. Oh, and just so you know - this means 1 in 8 with mortgages are late/in foreclosure.

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). 

My intent was to spend a significant amount of time on this post, do a bunch of research and publish it tomorrow after President Obama releases his plan to assist people with troubled mortgages. Yea, I can’t wait.. basically my mind is occupied, and very annoyed with, what is going on in the government at this point. This includes both parties. With all the money is being thrown around, with all the waste going on, I want to know where our F&#!ing bailout is!

The Trouble Assets Relief Program (TARP) enacted by the Federal Government last year has turned out to be a huge waste of money - $700 Billion dollars to exact. The whole idea of the program was that good old Uncle Sam would provide the money, either by direct investment in a corporation or insuring of troubled assets, in order to stabilize financial institutions. The execution of the TARP, however, was an unmitigated failure at most, very problematic at least.

As of 02/09, the TARP money has been allotted in the following manner:

• $250 billion pledged for purchases of senior preferred shares and warrants in banks and thrifts (direct investment)
• $20 billion pledged for Bank of America in addition to $25 billion pledged under the direct investment program listed above
• $20 billion investment in Citigroup
• $40 billion investment in troubled insurer American International Group
• $20.9 billion to prop up the U.S. auto industry (GM, GMAC, Chrysler, Chrysler Financial)
• $20 billion pledged to cover potential losses for a Federal Reserve program aimed at improving consumer access to credit.

Guess what? TARP has done very little in terms of changing… well… anything. Had the program followed the original plan - the formation of a bank to take troubled assets - the financial institutions in the U.S. would look significantly different at this very moment. The problem is that those overseeing the original TARP program realized they did not have the funding to support such a bank after the got approval to put their plan in motion.

The credit markets are still basically frozen as banks continue to crank down on available credit. As a matter of fact, lending by the top banks in the U.S. actually fell 1% over the last 4 months. Losses at Bank of America and Citigroup were so large that they needed to go back to the federal government for more money. GM needs an additional $16.6 Billion, a good $17 Billion more than they originally stated they needed to fund operations, if they have any hope of staying alive.

So much for that plan.

Seeing the government has had so much success with the TARP, why would the general public expect the execution of a stimulus plan to make a significant impact on the economy? Who cares if it will or will not, right? Let’s pass a $787 Billion dollar stimulus plan anyway…. a plan that has… a lot of money for a whole lot of nothing.

I don’t have the time to break out all the spending, but you can read the bill here and here.

Based off of what I’ve seen there is very little “new spending” in the bill. For the sake of argument let’s say the “new spending” included in the bill is divided up between the states that need the funding. These states then distribute the money on infrastructure projects. How many IT professionals, finance majors, office workers and the like, who lost their jobs, are going to be building bridges and rebuilding road? How many corporate procurement managers will be able to install those solar panels? Really, how many people will this impact?

My guess is very few. But, let’s take it a bit further.

There will be an $800 tax credit for couples (married couples that file jointly, making under $150K a year) or a $400 tax credit for individuals (making under 75K a year). Oh, by the way, that credit includes people who DO NOT PAY TAXES. The IRS will mail checks to individuals who do not pay income tax due to low/no income? Kinda hard to give someone a “tax cut” if they don’t pay taxes, isn’t it?

So where does this leave me?

I’m decidedly middle class which means I fall outside of the eligibility limit set by the government… so I will not be getting a tax credit. Obviously I am not a giant bank, so I am not getting anything there….But let me get this straight. The financial institutions have money thrown at them, they continue to fail, and the government continues to support them. Here, I am paying my taxes – which end up supporting those financial institutions – and I cannot get any type of consideration?

Ok….

The government is providing a “tax credit” to people who DO NOT even pay taxes AND I GET nothing!?!

How is this fair? Let me get past the anger, no rage… I don’t like that idea. It’s socialism, plain and simple, but for the greater good (and I only say in such an extreme case) I can get on board with the idea. As much as it goes against my principles, I can still get on board as I would much rather see the survival of the United States than total anarchy in the name of a personal view.

So far my tax dollars are supporting major corporations and the nations poor but the government and I get nothing. Where is my help on what I need - my property value.

My condo value has fallen so much that I am now roughly anywhere from 60K to 90K “in the red” on my mortgage. While President Obama is expected to announce a mortgage relief program tomorrow, to help those who face foreclosure due to the inability to pay on their mortgage, it appears that there will be very little to assist families that are significantly “in the red” due to property value declines.

Just to recap…

1. Money goes to companies that continues to fail
2. Money goes to people that do not pay taxes
3. Assistance is provided to those who are facing foreclosure but not those in the red due to property value decline

[NOTE: 2/18 - The news coming out today is saying the Govn't will help people underwater by using cash to refi their mortgages. Depending on the info point #3 may change... and my frustration may be defused]

[NOTE #2: 2/18 - Read the impact of the bill, no... didn't defuse my frustration.]

How is this fair to me? How is this fair to the countless other middle class families and individuals facing the same situation, the countless households in this nation that have continued to pay their bills and taxes, even in the hardest of times?

It’s not.

Where is our F&#!ing bailout?

I understand the economy is facing more and more difficulty and that there is no plan that can address everything, but the segment of society that is actually footing the bill – and that is hurting as well – is the group eventually facing pain. The fact no relief or consideration for the individuals actually paying for everything will come back to haunt the government when this segment of society faces large layoffs (more so they they are now), which will trigger an even large wave of bankruptcies and foreclosures.

The shortsighted call to “help the poor” and “the corporations” will create a pressure on the middle class who will be unable to sustain funding the rest of the nation. If we are a lucky nation, and I fear that we are not, the United States will be able to get past this economic event on shoulders of the middle class. If not, the nation will face a depression longer and deeper than anyone had expected. Once the back of the middle class is broken, and there is no where else for the government to find the tax revenue, will the economy face capitulation and a true bottom to the recession will be called.

Things are going to get a lot worse before they get better…

Checking the news stories this morning, I found this little gem:  A refinancing rush as interest rates come down

It’s time for me to call semi-bullsh*t here.  Let’s take a look at some of the specifics behind this flood of new refinances.

Homeowners across the country did the same Wednesday. Mortgage brokers reported a surge of calls from borrowers seeking to take advantage of the Fed’s extraordinary decision. Some brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments. 

(Emphasis add)

A strong credit record, especially in the market, is considered to be over 700.  Unfortunalty the average credit score in the United States is 693.  If you do not fall above this number, good luck at getting a refinance.  Even if you do, you may be out of luck.  Look at that second item – hefty down payments.

A number of lenders are requiring up to 10% down for a refinance.  Others may be able to work with borrowers for less but a higher interest rate.    However, let’s take a worst case situation and assume that there is little equity, that means a large number of people who wish to refinance need to be sitting on a stack of cash.  If you have a 100K mortgage, and the lender requires 10% down to refi, that means a person may need roughly 10K simply to lower their mortgage.

Now what about the people who have lost equity in their house, how will the “refi” boom help these individuals?  If your house value is down roughly 20% and you have little to no equity, you will not be able to refi UNLESS you have that large stack of cash we just spoke of.

Finally, people – and banks – have not learned from the current situation we are in.  

Lisa Wallwork, 37, and her husband, Shawn, are in the process of refinancing the mortgage on the house they’ve owned for five years in Tolland, Conn. They pulled it off the market in September after their house didn’t sell for more than a year.

 

“We wanted to move up to a bigger and better house,” she said.

 

Instead, the couple are refinancing their $185,000 mortgage, pulling out equity to remodel their kitchen and getting a new front door. And they still expect to save up to $300 a month in the process.

(Emphasis add)

What does this remind you of?  People using their homes as credit cards once again.  Pull out equity in order to have cash while increasing your debt.  This is part of what caused the current economic downturn we are facing.

It is critical to question all data that is in the press these days.  Yes, there will be an increase in mortgage related activity but only a small portion of the population will be eligible to reap the benefits. Having 3 requests in one day (making the number up) may seem like a boom if you previously had zero.

This wave of refi’s is helping to establish a new floor in housing prices, true, but there is so much pain in the market that floor may still be years away.

This is a bit of interesting news that came out of the Fed today:

The Federal Reserve announced on Tuesday that it will purchase as much as $600 billion worth of mortgage-backed assets from fledgling companies in hopes of jump-starting lending by banks nationwide.

But it was less than two weeks ago the Fed said:

Purchasing toxic assets from troubled lenders, once the centerpiece of the rescue effort, is now seen as “not the most effective way” to use the government funds, Paulson iterated.

What I cannot tell from the information released today is if the assets mortgage-backed assets the Fed will now purchase are toxic or not. Also, lost in the news coming out today is the fact that the Federal will lend up to $200 billion to holders of securities backed by consumer debt (credit cards, student loans, auto loans).

I almost get the feeling that the government is now in 100% reactionary mode, just throwing money at any problem they see. Remember, uncertainty creates fear.

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.

As of follow up to my post from yesterday, I wanted to highlight data just released from the FDIC.

Here is a quick summary:

• bank profits are down 86%
• 117 banks and thrifts are considered to be in trouble
• 8500 banks reserved $50.2 billion to cover losses from bad mortgages

By no means are the results stellar and, frankly, they are down right ugly; however, the industry is NOT on the verge of collapse.

The most interesting quote from the entire article was glossed over, contained to only one line:

The majority of U.S. banks “will be able to weather” the economic and housing storms, with 98 percent of them still holding adequate capital by the regulators’ standards, Bair said.

Interesting how single piece of good news, the bit of information that is the most pertinent, is given no real attention or priority. The FDIC Chairman is telling the world that 98% of the US banks are fully funded as of today but the press doesn’t seem to care about that. Why? It doesn’t grab your attention, it doesn’t “sell papers.”

Look past the doom and gloom fed by the press and you’ll see that, despite the hard times the industry is facing, it is not the end of the world.