Most say home loan bailout unrealisticMany proposals offered to prevent more abuses, but few called viable
By ALAN ZIBELAssociated Press
WASHINGTON — If you want to see a Democratic or Republican member of Congress squirm, mention a multibillion-dollar bailout for the housing market crisis. The apparent discomfort contrasts with reality: Most risky home loans made near the end of the housing boom can't be salvaged.
The unfolding crisis in the $10.8 trillion U.S. home loan market is so widespread and so complex that many experts question whether the government can do much to fix it — especially if a bailout isn't on the table.
"Some people are just in houses that are just way out of reach for them," said Douglas Elmendorf, a senior economics fellow at the Brookings Institution, noting that politicians do not like "explicitly appropriating funds for this."
Congress, the White House and bank regulators have little ability to prevent defaults and foreclosures, said Karen Weaver, global head of securitization research at Deutsche Bank.
"It's unfortunate, but it has to play out. ... We need home prices to come back to reality," she adds.
Washington's desire to help is undercut by the reality that it's not viable to rescue homeowners or banks that made loans or investors that bought securities backed by mortgages.
"I have sympathy with a lot of the borrowers, but I don't see how you would decide which ones were worthy and which ones weren't," Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said last week, while announcing legislation to crack down on mortgage lending abuses.
Frank and several consumer groups say lending law reform is needed to prevent mortgage abuses in the future, while Republicans say doing it now makes it harder for the housing market to recover.
Rep. Patrick McHenry, R-N.C., warned at a House hearing Wednesday that Frank's proposed bill would "push us into a housing recession" because lenders would face new restrictions on their ability to help borrowers refinance.
Political pragmatists say there are so many complicated issues at hand and so many interest groups involved that only narrow proposals can muster support.
For example, Alex Pollock, a resident fellow at the American Enterprise Institute, has drawn up a one-page mortgage form designed to give borrowers a much simpler way to understand the financial commitments involved in a home loan.
Yet his common-sense suggestion is overshadowed by fears of what more defaults will do to the economy and financial markets.
Former Federal Reserve Chairman Alan Greenspan said last week the data suggest the housing downturn is worse than anticipated. However, his analysis of housing statistics put the possibility of a recession in 2008 at 50-50.
Moody's Economy.com projects that more than 2 million mortgages worth about $450 billion will default. Even after homes are sold at foreclosure auctions, investors are still likely to be hit with nearly $150 billion in losses, according to the forecast.
President Bush has pushed for expanded authority for the Federal Housing Administration, a Depression-era agency that insures loans made to low-income borrowers. A bill authorizing the FHA to help borrowers with larger home loans stalled in the Senate after passing the House. Many experts say its impact would be limited.
Sheila Bair, chair of the Federal Deposit Insurance Corp., argues that mortgage servicing companies should agree to widespread conversions of adjustable-rate loans to fixed-rate loans for borrowers who are current on payments but confront rate resets.
Experts in the $6 trillion market for mortgage-backed securities say Bair's idea won't work because mortgage servicing companies, which collect and distribute loan payments to lenders, have a legal responsibility to modify loans only if they're confident the changes would be successful, says Mark Adelson, a mortgage securitization consultant.
Some Democrats and consumer advocates want bankruptcy judges to be able to modify loans to keep struggling borrowers from losing their homes. Critics say the idea would keep lenders out of the mortgage market and result in more bankruptcies.
Finally, some Democrats want Fannie Mae and Freddie Mac to be allowed to expand their mortgage portfolios, creating financial flexibility for investors and lenders to help borrowers refinance. Republicans, however, don't want to do that until the government-sponsored mortgage giants get more oversight in the wake of multibillion-dollar accounting irregularities discovered in recent years.
The federal regulator of Fannie and Freddie agreed to a smaller portfolio cap increase than what Democrats want, arguing that the companies have enough capacity to help the battered mortgage market.
"Fannie and Freddie aren't doing anybody any favors," said Bert Ely, an Alexandria, Va. banking consultant. "They're refinancing people that would be good candidates" for new loans, "no matter what."
(Recasts first paragraph, adds details from the report)
NEW YORK, Oct 31 (Reuters) - A refinancing wave pushed total mortgage applications higher last week on the lowest 30-year mortgage rates since early May despite a small drop in demand for loans to buy homes, an industry trade group said on Wednesday.
The Mortgage Bankers Association's mortgage applications index rose by a seasonally adjusted 3.8 percent to 681.7 in the week ended Oct. 26.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, fell to an average of 6.15 percent from 6.21 percent the prior week. This loan rate was the lowest since 6.13 percent in the May 11 week, helping propel the MBA's refinance index to its highest level since the week of March 9.
The refinancing index jumped 9.2 percent to a seasonally adjusted 2,249.0 last week. Refinancings represented a growing share of total mortgage activity, rising to 49.6 percent from 47 percent the prior week.
Applications to purchase a home, in contrast, declined 0.7 percent last week to a seasonally adjusted 412.9, the MBA said.
Purchase applications have been exaggerated on the high side in recent months as borrowers, facing greater trouble getting mortgages approved by lenders, who have become more restrictive, apply multiple times for one loan.
With less access to credit, home sales are tumbling despite lower prices and other incentives.
Orders for homes are increasingly being canceled when mortgages applied for fall through.
Sales of existing homes fell in September to their lowest level on record dating to 1999, while unsold inventory swelled to record highs even though fixed mortgage rates have been contained.
Mortgages rates last week dropped across loan types, according to the Mortgage Bankers Association. Fifteen-year mortgage rates fell to 5.79 percent from 5.86 percent, and one-year adjustable mortgage rates dropped to 5.93 percent from 6.10 percent.
Adjustable-rate loans represented 14.7 percent of total mortgage activity last week, rising slightly from 14.2 percent the prior week.
© Reuters 2006. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.
by Gary Northby Gary North
Fifty years ago, I read Walter Lord's book on the sinking of the Titanic, A Night to Remember. Frankly, the only fact I can remember about that book is this: the lifeboats were only a little over half full. That grim fact has never left my memory. It was shocking to me then; it is shocking to me now.
If you use Google to search for "Titanic," "lifeboats," and "empty seats," you will find several hundred links. The general consensus is that there were over 400 empty seats. This account is detailed.
Many lifeboats left the ship partially full, and though 706 survivors were rescued by the Cunard Line's Carpathia [when] she arrived on the scene at about 0330, after speeding fifty-eight miles through the ice field, there were 473 empty seats. The death toll was estimated at between 1,500 and 1,635 people.
The lifeboats could carry fewer than 1,200 people. Today, we see this as an outrage, as indeed it was. But we should not forget that this was a government-sanctioned outrage.
Yet for all her safety features, Titanic carried just sixteen lifeboats and four collapsible boats, which could handle only 1,178 people, a meager 35 percent of the maximum passenger and crew complement of 3,511. Even so, this number exceeded the British Board of Trade's requirements, which dated from 1894 (when the largest ship afloat was 12,950 tons), under which Titanic was required to carry only enough lifeboats to seat 962 people.
The Titanic was carrying lifeboats with capacity that exceeded government standards by 22%.
PLAN AHEAD
The vision I have of the night to remember is based on the movie, A Night to Remember, and of course Titanic, which I regard as the most profitable chick flick in movie history.
I am not sure what I would have done, had I been a passenger on that ship. But as an entrepreneur, I know one thing: I would have been the first person to line up at a lifeboat. In high school, when a fire alarm sounded, by the third ring I was at the door. By the fourth, I was outside. I do not recall a single instance when I was not the first one out the door. With poor eyesight, I always sat near the front. However, there was never anything the matter with my legs.
If I had been refused access to that lifeboat – "Women and children first!" – I would have headed rapidly to another lifeboat, on the assumption that the same rule did not hold for every lifeboat. That was in fact the case that night. A lot of men got into lifeboats. I would have been prepared to offer my seat to a woman or child, but once the crewman said "lower it!" I would have sat tight.
Assuming that I got on deck late – highly unlikely – after all lifeboats had been lowered, I would have immediately gone to the closest side of the ship. I would have looked down to see if there were any empty seats in any visible lifeboat. Had I not seen any, I would have gone to the other side.
I would have seen plenty. At that point, I would have had two decisions to make:
As for me, I'm an empty seat guy. If there were a commodity futures contract on the last train out, I would go long.
The water would be painfully cold. But since I was going to wind up in the water anyway, I would have decided to go swimming sooner rather than later. The longer I waited, the longer I would be swimming toward departing lifeboats.
Time was of the essence. The water was close to freezing. I would probably suffer spasms in swimming – maybe near paralysis. I would probably need a life preserver. I would have asked a crewman how to get to a lower deck. Then I would have gone to my cabin. I would have grabbed my life preserver and headed for a lower deck. I would have traded time for a lesser impact. My key to survival would be to keep my senses after impact.
In the water, I would have swum toward where I thought most of the lifeboats were clustered. If they had been moving away from the ship, then I would have tried to guess where they would be when I arrived.
Upstairs, passengers were listening to the band playing songs, although not "Nearer My God to Thee," contrary to legend. Those people were imitating the British by keeping a stiff upper lip. My approach has always been to get my lip as far away from avoidable trouble as I can, fast. Stiffness of lip offers no lure for me.
"Look out below!"
FEDERAL RESERVE POLICY
From that groaning sound, I have concluded that the Good Ship Bubble Economy has hit a monetary iceberg.
The question now is this: Is the scrape long enough so that it has punched a gaping hole in all of the watertight bulkheads?
Before a recession, there are conflicting opinions on this crucial question. One of the signs of this conflict is increasing volatility of the various stock markets. Wild swings take place like the one on October 24: 200 points down for most of the day, the Dow closed down 0.98 point. The bulls and the bears fight for supremacy. The market goes nowhere, wildly.
Alan Greenspan took over as Chairman of the Board of Governors of the Federal Reserve System in October, 1987, just days before the legendary 508-point decline: 22%. His response, like the FED's, was to pump in fiat money – "liquidity." That kept the economy from falling into a recession. Only in 1990–91 did the recession finally hit. The FED's response was the same: increased fiat money. For the next decade, there was no recession.
The NASDAQ's collapse began in mid-March, 2000, which followed the peak of the Dow and the S&P 500 in January. This did not persuade the FED to lower the target federal funds rate. At its March 21 meeting, the FOMC raised the target rate from 5.75% to 6%. Then, incredibly, at the May 16 meeting, it raised the rate half a point to 6.5%. How could the FED in March, 2000 hike the FedFunds target rate by .25 percentage point, two weeks after the stock markets had peaked? How could it do it again in May? Didn't they see what was coming? Obviously, they didn't.
Investors also did not see. The Dow was above 11,000 all through 2000.
Only at the January 3, 2001 meeting did the FOMC lower the target rate to 6%. On January 31, it lowered it to 5.5%. At the March 20 meeting, as the recession was beginning (we learned two years later), the rate was cut to 5%. This was a major cut, as were the cuts that followed.
In the spring of 2001, the recession began. The Dow fell briefly to 9,000. It immediately rebounded above 11,000, as the FED began cutting rates. But 9-11 caused a decline to 8,000.
By November 6, the month that the recession ended, the rate was at 2%. On December 11, it was cut to 1.75% – simply unheard of. One word suffices to describe what happened in 2001: panic. The FED was in sheer panic mode. On November 2, 2002, the rate was cut again to 1.25%.
At first, the stock market responded positively to these rate cuts. It went from 8,000 after 9-11 to well over 10,000 in the spring of 2002. But then it fell. It bottomed at just above 7,000 that fall. It began its long-term recovery in the spring of 2003.
By then, the FedFunds target rate was 1.25%. Then it was cut one last time: June, 2003. There it stayed for a year.
The increases, rising by .25 percentage point at each FOMC meeting, continued until June 29, 2006, when the target rate peaked at 5.75%. There it remained until the September 18, 2007 meeting, when it was cut by half a point.
This rate cut would seem to indicate a shift in monetary policy. So far, it hasn't. The adjusted monetary base has risen at about 1.6% per annum since mid-March. From August 15 until October 10, the adjusted monetary base fell by 1%. That's right: fell. This was during a crisis in the subprime mortgage market. [Note: This chart is updated frequently, so it loses relevance.]
There is no evidence of monetary inflation in the one monetary aggregate that the FED controls directly. In response to the surfacing of the subprime mortgage crisis, which created a panic-driven sell-off of brokerage shares in mid-August, the FED adopted a policy of monetary deflation. Got that? Deflation.
In response, the major brokerage shares soared. You can see this in the following chart of an index known as the XBD, which is published by the American Stock Exchange.
So, in summary, in the three-year period from mid-2004 to September 18, 2007, the FOMC raised the target rate for the FedFunds market from 1% to 5.75%, and the stock market rose from 7,000 to over 12,000. That's "rose." As in "went up a lot."
Then, in response to the subprime crisis in August, the FOMC did two things: (1) it reduced the monetary base; (2) it cut the target rate by half a point.
If there is some economic theory or technical investment strategy that explains all this, let me know. What happened was not intuitive.
NOT SO SMART AFTER ALL
On October 24, a report hit the financial wires that Merrill Lynch – bullish on America – has lost an estimated $8 billion in its subprime mortgage-related investments.
The Dow fell 200 points in response. But then the rumor came: "The FOMC will reduce the FedFunds rate target at its next meeting at the end of the month." The market then rose by 200 points. It closed for the day down by 0.98.
What was the verifiable news? That the geniuses at the nation's largest brokerage house have lost $8 billion in the unfolding disaster of the subprime mortgage market. What was the rumored news? That the FOMC, which 98% of forecasters had already believed would cut the FedFunds target rate, would in fact cut the FedFunds target rate.
This conveys the following information to me: (1) the best and the brightest hot-shots in the financial brokerage industry never saw the subprime mess coming; (2) the best and the brightest stock fund portfolio managers believe in the FOMC as the equivalent of the tooth fairy.
As of October 25, 2007, 174 mortgage lending firms have either gone out of business of have merged with solvent firms since December, 2006. This is tracked on www.ml-implode.com.
The FED under Greenspan lured lenders and home buyers into what have now become visible disasters. But for most of this period, 1991–2005, the policy seemed to create great wealth: rising home prices. That is a long period of success. So, when signs appeared in mid-2005 that the housing market had peaked, and some of us hard-money writers began warning about this, nobody paid attention. But the reality is here.
This brings us back to something that Ludwig von Mises warned against in 1912: when central banks manipulate money in order to lower market interest rates, the entire capitalist class is deceived into believing that more capital is available. Today, almost a century later, this deception is not only still widespread, it is worse. Investors believe that the central bank's ability to lower a target overnight rate enables it to raise stock prices by fiat – not by creating capital, but merely by making a public announcement of a target rate. What Mises described as an error regarding the actual supply of capital has descended into something bizarre: faith in the ability of a central bank to increase the value of capital (stocks) merely by making an announcement – with or without a change in monetary policy. On the basis of this announcement, investors redeploy money from debt to equity. They will do this even in response to a rumor about the announcement.
And yet . . . Merrill Lynch really did lose $8 billion. Very smart people did some very foolish things with investors' money. This capital has now gone into the land where the tooth fairy lives, the land of broken teeth and broken dreams.
Nowhere are dreams more broken than in central California. This is the hot, dry part of the state where most people did not want to live in my youth, the place where Okies and Arkies arrived in 1935. Then came the housing boom. CBS News (Oct. 10) reported on the recent economic carnage. Home builders are walking away from half-completed developments and half-completed homes. They cannot sell anything at yesterday's retail prices.
So developers are scrambling to get rid of houses they can't sell. Many are turning to auctions. "You don't know where the bottom is, and so an auction will tell you if you hit the bottom and where it is," said Craig Barton of Anderson Homes. But as Anderson Homes searches for the bottom, those who bought from the developer at the top feel betrayed. Sherry and Percy Berquist, who paid $597,000 last year were shocked to see $335,000 set as the opening bid for an identical house to be auctioned. The developer may be able to absorb that loss. The Berquists can't. "It's gonna be very tough," said Sherry Berquist. Across the street Amy Sturdevant paid $585,000 for a house. But now the developer has set $295,000 as the opening bid for similar houses down the street. "I feel like my parents' grave has been robbed. This was an inheritance. I sit out here and I look at this," said Sturdevant.
"You don't know where the bottom is, and so an auction will tell you if you hit the bottom and where it is," said Craig Barton of Anderson Homes.
But as Anderson Homes searches for the bottom, those who bought from the developer at the top feel betrayed. Sherry and Percy Berquist, who paid $597,000 last year were shocked to see $335,000 set as the opening bid for an identical house to be auctioned. The developer may be able to absorb that loss. The Berquists can't.
"It's gonna be very tough," said Sherry Berquist.
Across the street Amy Sturdevant paid $585,000 for a house. But now the developer has set $295,000 as the opening bid for similar houses down the street.
"I feel like my parents' grave has been robbed. This was an inheritance. I sit out here and I look at this," said Sturdevant.
In every mania, a few emotion-driven people buy at the top. This now-deflating housing mania was debt-funded. You could still get jumbo loans (above $417,000) last July at fairly low rates. Today, you can't. There is no indication that anyone will be able to do so in time for these now debt-burdened people to get out from under their upside-down mortgages. They must now make mostly interest payments for the next 15 years just to pay off the equity that they have lost in one year. They are prisoners in their McMansions. They will not be able to move out. If a better career opportunity comes up more than 150 miles away, they will have to skip it.
For what? To live in an uncompleted subdivision that will not be completed for many years.
This is the price of central bank policies designed by very smart people. They are very smart people who think that they are wiser than free markets.
They aren't.
CONCLUSION
The U.S. housing market is down – on paper – by over a trillion dollars, CBS News reports. But who knows how much? The report cited one forecast that says it will be down by another $3 trillion in a year. I think this estimate is plausible.
Median prices are down by about 4%, year to year – the first national decline since 1933. Sales are down by 8% nationally, and by 25% in the Southwest.
Why are prices not falling faster? Because sellers think this decline is temporary, that in a year, their homes will be worth what they were a year ago. Sellers learn slowly. Their homes will not rebound just because sellers think they are special, that they can beat the market.
In a year, there will be real fear. Sellers will not be able to sell. Inventories will be much higher. Sellers will be stuck in their homes, or worse, paying the mortgage on their now-empty houses and rent on the one in the new location.
Contracts that are contingent on the sale of a home by the buyer will fall through. Reality will set in.
Some sellers will run out of bargaining room. That is when you should be there with cash.
If you are seller, think "Titanic." Lower your price now and get out while the ship is still afloat. The water will be just as cold next year. Put on a life vest and jump, before the lifeboats float out of swimming distance.
October 27, 2007
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com.He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2007 LewRockwell.com
Gary North Archives
NEW YORK
Real estate wealth is expected decline anywhere from $2 trillion to $4 trillion out of a previous valuation of roughly $21 trillion when the total costs of recent credit crunch are tallied, the New York Times reported on Thursday, citing economists.
And financial firms could face aggregate losses of some $400 billion from expanding troubles related to the subprime mortgage market fallout, the paper said.
That is higher than the roughly $240 billion in financial institution losses from the savings and loan crisis of the early 1990s, adjusted for inflation, the paper said.
The losses in real estate wealth, while large, are substantially less than what investors suffered in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent of market value, the paper said.
However, the recent declines are likely to have a significant impact on consumer spending, since owners will not be able to cash out as much equity from their property, the paper said.
It said the economists' loss estimates for both real estate and financial firms are preliminary and could get much higher.
The Joint Economic Committee of Congress, in a report to be issued today, predicts about two million foreclosures by the end of next year in homes purchased with subprime loans, the paper said.
That's much higher than the Bush Administration forecast in September of some 500,000 foreclosures, the paper said.
By Lou BarnesInman News
All U.S. interest rates have broken lower. The mortgage-defining 10-year T-note is trading at 4.4 percent, down from 4.7 percent last week, but mortgages will be slow to follow. Even agency loans are stuck in credit fear, but are likely to approach 6 percent soon. Fed-defining short-term rates have dived almost a half-percent, a sure sign of renewed credit panic. A Fed cut on Halloween, doubtful on Monday, is now a sure thing. What the hell happened so fast? (As I recite developing misery, a note on morale to people near real estate markets, civilians and pros: Bad news is the only way for us to get the lower rates that our markets need. As Mom said, keep your eye on the doughnut, not the hole.) The market sea-change has been driven by a change in awareness, not data. A one-week pop in new claims for unemployment insurance may turn into a trend, but is not yet; and anyone surprised by the new report of plunging in sales of new homes has been vacationing on another planet. Since the August Crunch, global markets have been lost in the exuberance of cash pouring in from oil and trade, behaving like a bunch of teenage boys with elevated expectations for Saturday's dates, misunderstanding the real distance of hand from promised land. American economy weak, its rates going down ... Sell dollars! Buy euros! Rupees! Buy oil! Gold! Commodity anything! We don't need America to buy exports -- the world has de-coupled! Buy stocks, stocks, stocks, here there everywhere! Finally, two months after the initial grip of the Crunch, the word is out: There is no relaxation at all. We are in a two-part systemic event: Several trillion dollars' worth of trash lies where it was, value and ultimate disposition unknown; and worse, the impaired holders have dramatically reduced extension of new credit. Reported losses at financial institutions, at first thought to be overstated ("kitchen sink" write-offs) are not. More will come. The institutional embarrassment is a greater impediment to new credit than the numbers: The losses are formal confessions by management and directors of personal incompetence. That'll make you risk-averse. PMI and MGIC, mortgage insurers who avoided the worst of the mortgage party by shrinking their market share -- that's what they said -- announced huge losses. The best black comedy: Citi led a parade of giant banks to the Treasury, trying for official blessing to keep $400 billion in off-balance-sheet trash from being forced back on (where it belongs) or into disorderly liquidation (Eeeeek! Might find out what it's really worth!). Why Treasury Secretary Henry Paulson let them in the building is beyond me. He loaned them a conference room and bought sandwiches (day-old, I hope), and the bankers left without even a lipstick-on-a-pig deal among themselves. Federal Reserve Chair Ben Bernanke delivered his best speech in office, a somber affair acknowledging the reinforcing-spiral risk in a credit meltdown, using the same phrase as Vice-Chair Donald Kohn last week: "... Tighter credit could presage a broader weakening in economic conditions that would be difficult to arrest." After the speech, in Q&A, asked about the structured-finance deals presently evaporating, he said this: "I'd like to know what those damn things are worth." The next day, John Mack, CEO of Morgan, volunteered, "It will take at least a year" to come up with proper valuations. We don't have a year without new credit, and there is no way to restore the supply of new credit without recognition and breakup of the dead-loss clog. I'm sure Mack would like to defer loss recognition indefinitely, but his remark indicates abject failure as a public steward, joined by his senior colleagues on The Street. For all the awareness displayed this week by Bernanke and Paulson, they have not presented a single useful idea. Gentlemen, it is time to grasp the nettle: Force the sale or adequate capitalization of this stuff; if the losses are too big for markets or capital to absorb, get on with loss isolation by government guarantee. Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
Fed-defining short-term rates have dived almost a half-percent, a sure sign of renewed credit panic. A Fed cut on Halloween, doubtful on Monday, is now a sure thing. What the hell happened so fast?
(As I recite developing misery, a note on morale to people near real estate markets, civilians and pros: Bad news is the only way for us to get the lower rates that our markets need. As Mom said, keep your eye on the doughnut, not the hole.)
The market sea-change has been driven by a change in awareness, not data. A one-week pop in new claims for unemployment insurance may turn into a trend, but is not yet; and anyone surprised by the new report of plunging in sales of new homes has been vacationing on another planet.
Since the August Crunch, global markets have been lost in the exuberance of cash pouring in from oil and trade, behaving like a bunch of teenage boys with elevated expectations for Saturday's dates, misunderstanding the real distance of hand from promised land. American economy weak, its rates going down ... Sell dollars! Buy euros! Rupees! Buy oil! Gold! Commodity anything! We don't need America to buy exports -- the world has de-coupled! Buy stocks, stocks, stocks, here there everywhere!
Finally, two months after the initial grip of the Crunch, the word is out: There is no relaxation at all. We are in a two-part systemic event: Several trillion dollars' worth of trash lies where it was, value and ultimate disposition unknown; and worse, the impaired holders have dramatically reduced extension of new credit.
Reported losses at financial institutions, at first thought to be overstated ("kitchen sink" write-offs) are not. More will come. The institutional embarrassment is a greater impediment to new credit than the numbers: The losses are formal confessions by management and directors of personal incompetence. That'll make you risk-averse.
PMI and MGIC, mortgage insurers who avoided the worst of the mortgage party by shrinking their market share -- that's what they said -- announced huge losses.
The best black comedy: Citi led a parade of giant banks to the Treasury, trying for official blessing to keep $400 billion in off-balance-sheet trash from being forced back on (where it belongs) or into disorderly liquidation (Eeeeek! Might find out what it's really worth!). Why Treasury Secretary Henry Paulson let them in the building is beyond me. He loaned them a conference room and bought sandwiches (day-old, I hope), and the bankers left without even a lipstick-on-a-pig deal among themselves.
Federal Reserve Chair Ben Bernanke delivered his best speech in office, a somber affair acknowledging the reinforcing-spiral risk in a credit meltdown, using the same phrase as Vice-Chair Donald Kohn last week: "... Tighter credit could presage a broader weakening in economic conditions that would be difficult to arrest."
After the speech, in Q&A, asked about the structured-finance deals presently evaporating, he said this: "I'd like to know what those damn things are worth." The next day, John Mack, CEO of Morgan, volunteered, "It will take at least a year" to come up with proper valuations.
We don't have a year without new credit, and there is no way to restore the supply of new credit without recognition and breakup of the dead-loss clog. I'm sure Mack would like to defer loss recognition indefinitely, but his remark indicates abject failure as a public steward, joined by his senior colleagues on The Street.
For all the awareness displayed this week by Bernanke and Paulson, they have not presented a single useful idea. Gentlemen, it is time to grasp the nettle: Force the sale or adequate capitalization of this stuff; if the losses are too big for markets or capital to absorb, get on with loss isolation by government guarantee.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
NEW YORK (CNNMoney.com) -- As housing markets deteriorated over the summer, and a liquidity squeeze buffeted credit markets, delinquencies and defaults jumped. And now one forecast predicts that these numbers will climb even higher over the next six months.
The Core Mortgage Risk Monitor (CMRM), an index of foreclosure risk compiled by First American CoreLogic, increased by 1.6 percent compared with the three months ended June 30.
The index predicts the chances that future mortgage loan delinquencies will occur and is based on such factors as fraud propensity and collateral risk (the accuracy and sustainability of home prices paid), house price dynamics and the health of local market economies.
Nationally, the index has settled into a level similar to what existed at the end of the last recession in 2001. And because the risk of default continued to rise for two years after that event, CoreLogic predicts the current risk index will keep going up for another 18 months or more.
While the national risk average has risen, scores among metro areas vary widely. "It's not necessarily a national problem," said CoreLogic's chief economist, Mark Fleming. "It's focused on local markets."
High risk markets have foreclosure rates and fraud and collateral risk indices three times the national averages. High risk markets also have job issues such as high unemployment of low wages and wage growth, all indications of economic stress.
By contrast, the lowest risk markets have low unemployment, high-paying jobs and solid job growth, moderate house price appreciation, low foreclosure rates, and minimal fraud and collateral risk. Overall, the rankings strongly support the assertion that mortgage risk is concentrated in specific regional or local markets.
The areas most affected by delinquencies are represented by Rust Belt localities such as Detroit, where the troubled auto industry has devastated the local economy. CoreLogic ranks it as the number one city for delinquency risk.
In more economically healthy areas, overheated housing prices in mostly coastal state communities can drive up the delinquency risk.
High home prices mean that a large percentage of buyers have overextended themselves to get into a home. They may have taken out mortgages with low initial interest rates that later reset much higher, counting on rising prices to allow refincing at lower rates.
But when home prices fell, those escapes shut down, and the risk of delinquency jumped. That's what's happening in many once overheated coastal-states.
Less at risk are cities where the economy remains healthy but prices never ran up at breakneck pace. If home prices are still rising, it further reduces risk. That insulates places Salt Lake City, where median home prices appreciated in double digits over the past 12 months, from wholesale delinquencies.
The fourth market category is made up mostly of what has been dubbed "Superstar Cities," places so attractive that even though homes are very expensive, people still line up to buy them. New York, San Francisco and Los Angeles are good examples.
Sky-high prices in these cities introduce an element of risk but steady demand and high barriers to development (limited open land, stringent regulatory atmosphere) keep prices from falling and risks low.
"The rise in home prices were supported by the fundamentals of the local economy," said Fleming.
Among the 100 largest cities, the major market with the highest risk for delinquencies, after Detroit, is Warren, Michigan, another auto-industry dependent metro area. The only non-Rust Belt cities in the top 10 are Memphis, Tennessee and McAllen, Texas.
The lowest risk metro area is Honolulu, followed by Salt Lake City and Richmond, Virginia.
V-me, que debutó el lunes como un canal de cable digital con programación las 24 horas y disponible por Time Warner Cable, incluye una mezcla de producciones originales y adquiridas, así como programas de la televisión pública adaptados para el público hispano.
La cadena se creó en sociedad con la estación pública de Los Angeles KCET, que marcó el lanzamiento el miércoles con una conferencia de prensa a la que asistieron el alcalde Antonio Villaraigosa y ejecutivos de la cadena con fines de lucro.
V-me (pronunciado veme) se transmite en los principales mercados hispanos por cable digital y a nivel nacional por satélite básico. Alcanza a un tercio de los hogares hispanos de Estados Unidos.
Ofrece programas educativos para niños, así como de estilo de vida, temas de actualidad, ciencia, naturaleza, historia, música, arte y cultura, cine y eventos especiales.
The dollar fell to a new low against the euro on Thursday after the 13-nation European currency broke through the $1.43 mark on reports from Washington that growing economic weakness was boosting jobless claims.
The euro rose as high as $1.4309 after the U.S. Labor Department reported that applications for jobless benefits hit 337,000 last week up 28,000 from the week before and the biggest one-week surge since claims jumped 42,000 in the week of Feb. 10.
The euro settled back slightly to $1.4293 up more than a penny from the $1.4186 it bought in late New York trading on Wednesday, and higher than its previous record of $1.4282 set Oct. 1.
Currency will be a hotly debated topic at an annual G7 Meeting of central bank heads and finance ministers to be held in Washington tomorrow, according to Michael Woolfolk, senior currency strategist at the Bank of New York.
"The fact that the euro has risen suggests that the negative dollar sentiment is strong and persistent, due to recent deterioration in interest rate differentials and growth differentials," Woolfolk said.
European officials are worried that the euros rise against the dollar will hurt exports to the U.S. and China. The European Central Bank is expected to raise interest rates by January, while in the United States, the Federal Reserve will likely reduce interest rates at the end of the month, Woolfolk said.
Cutting the interest rate has helped drive the dollar down against other major currencies, because even though lower interest rates can jump-start the economy, they can weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns.
The jobless increase was four times the gain of 6,000 that economists had been expecting and was taken as a possible sign that the labor market is starting to weaken under the weight of a severe housing downturn and tight credit markets.
Earlier this week, both Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke warned that the housing crisis was likely to last longer than had been expected.
Already on Wednesday, the U.S. Commerce Department said the construction of new homes and apartments plunged to a 14-year low in September, while the National Association of Home Builders' survey of builder confidence fell in early October to the lowest level seen in the 22-year history of the survey.
Many analysts still believe the economy will be able to avoid a recession because they think the Fed, which cut interest rates for the first time in four years in September, will reduce rates again should conditions weaken further.
In other trading, the British pound climbed to $2.0448 on Thursday from $2.0355 in New York the day before, while the dollar slipped to purchase 115.65 Japanese yen from 116.55 the day before. The dollar also fell against the Swiss franc, buying 1.1694 from 1.1814.
EL AGENTE DE BIENES RAICES DE CONFIANZA
A la hora de vender o comprar una propiedad puede ser una experiencia feliz y libre de estres o una desagradable y estresante, ya que no selecciono al agente con la debida experiencia y honestidad para que lo represente.
Un buen agente debe tener las cualidades siguientes:
Primero. Debe estar dispuesto a comprometerse tiempo completo en asesorar y trabajar para obtener la mejor transaccion para el cliente.
Segundo. Conocer la comunidad, las escuelas, las condiciones del Mercado, las ordenanzas y demas informacion local.
Tercero. Que aproveche las ventajas de la nueva tecnologia., pero a la vez no se olvide de la relacion humana entre agente y cliente. El Internet ofrece ventajas de comunicacion rapida, pero no reemplaza el contacto personal.
Si desea vender o comprar una propiedad (residencia, unidades, lotes, negocios, desarollos de terenos, para invertir en bienes y raices, etc…) no dude en comunicarse conmigo. Si desea hacerlo por este medio mi e-mail es: realtorwmprieto@yahoo.com Oficina: 818-790- 8300 Telefono celular: 818 445-1456. Guillermo Prieto, REALTOR®, su servidor, con mas de 20 años de experencia.
As the mortgage industry has changed in recent months and many of the more liberal mortgage programs have been cancelled, borrowers have gone in search of home financing that will accommodate their credit and income profiles. Florida mortgage expert Jim Kemish discusses the amazing Fannie Mae American Dream Initiative and how it might make your dreams come true.The End of an EraIn October of 2006 the subprime home loan industry begin to break down. Wall Street investors, monitoring the default rates of mortgage portfolios and concerned about the continuing drop in real estate prices nationwide decided to stop purchasing subprime loans. By March of 2007 the entire subprime industry as we knew it was gone.The PastFirst time home buyers had taken advantage of the easy guidelines offered by these lenders and had flocked to the real estate market in droves. Over the last five years approximately twenty-two percent of all homes purchased utilized these subprime mortgage products.The Changing MarketWith the demise of the subprime industry millions of potential home buyers are now searching for alternative mortgage products that will accommodate their financial and credit profiles. Even more significant are those millions of people that have already purchased homes with subprime loans and are now in search of a means to refinance. In the majority of cases these homeowners face adjustable rate features that threaten unaffordable payments. Without a means of alternative home financing these borrowers may be forced to sell their homes.The Future is HereThere is a solution that we strongly recommend. Fannie Mae’s American Dream Commitment offers the most exciting, affordable home loan solution that we have seen. To quote Fannie Mae, “Many Americans still are being overlooked, underserved, and overcharged in their search for affordable homeownership.” In defining their goals, Fannie Mae strives to “expand access to homeownership for first time home buyers and help raise the minority homeownership rates with the ultimate goal of closing the homeownership gap entirely.”Fannie Mae to the RescueThis commitment translates into flexible, accommodative, and low cost home financing available to borrowers with less than perfect credit and restrictive budgets. But that’s not all. Reading into the guidelines carefully one will discover some amazing and thoughtful criteria. Amongst these guidelines are included a surprising and liberal allowance for “undocumented income”, expanded seller contribution tolerance, and a complete absence of saving and asset reserve requirements. All of these flexible rules make possible the lowest cost, no money down mortgage program available anywhere. Let’s look at some of the highlights.Credit Requirements are EasyCredit score requirements are now the easiest of all of the no money down mortgage programs available in the home loan market. The guidelines allow for a score of 620, but with moderate compensating factors lenders may approve loans with scores as low as 600.No Housing History RequiredAdditional flexible credit criteria include no requirement for a prior housing history. No money down mortgage programs traditionally required that you prove a timely rent payment history. This program is the exception. You may have been living with your parents or a partner and had no participation in monthly housing payments.Income LimitationsIncome guidelines allow for borrowers to earn up to 125 percent of the HUD Median Income for the property’s area. For example, Florida mortgage borrowers in Palm Beach County may earn up to $69,875 per year and still qualify for the program. Georgia mortgage applicants purchasing homes in Fulton County may earn up to $86,625.Income Limitations May be WaivedDo you earn more than the limit? There a strong possibility that you still qualify. Fannie Mae will lift the income restriction altogether if the property that you are purchasing or refinancing falls into any one of six categories they have determined to be deserving of accommodative financing. I can feel your dismay. Perhaps you are thinking that your home cannot possibly be in one of these areas. You might be surprised. Eight out of ten properties that we check for our customers are in one of these areas.Amazing No Income Verification AllowanceMaybe the most surprising aspect of this program is the allowance of undocumented income. Fannie Mae allows up to one thousand dollars per month of income from a reasonable source to be used. Neither the source of the income nor the income itself needs to be documented. You simply need to state it on your application. This rule gives a nod to the working person that holds a side, weekend, or evening job, often to make end meets. As a Florida mortgage broker I am thrilled to accommodate these hard working borrowers that otherwise might not qualify. Examples of acceptable income include someone working in finance that helps people prepare tax returns on the side, a carpenter that moonlights as a handyman, or a laborer that mows lawns on the weekends.Make Your Dream Come TrueContact your friendly mortgage broker today and ask about the Fanny Mae America Dream Initiative. Whether you are in the market for a new home, or in need of refinancing your current property this program should be considered.
Better late than never.
The Federal Reserve will propose new regulations by the end of this year on subprime loans, Fed Governor Randall Kroszner said at the National Bankers Association convention in Durham, N.C.
There had been calls for action before the housing bubble began deflating last year, but since the credit crisis that shook the financial markets this summer, they have gotten louder, with Congress criticizing the Federal Reserve and other U.S. banking regulators for not doing more to prevent abuses in subprime lending.
Some, like Jim Rokakis, the treasurer in Cuyahoga County, Ohio, have been questioning lending standards since the subprime crisis erupted. Thirty percent of the subprime mortgages in Cleveland have gone bad, Rokakis said, because the mortgage lenders were irresponsible.
Of some 13,000 loans made by Argent Mortgage, a subsidiary of Ameriqwest that was one of the nation's largest subprime lenders, Rokakis said, one-third are now in foreclosure. “They were running out of buyers to feed this so they would bring in buyers with no credit and no down payment,” he said. “Most people in foreclosure not only had no down payment, but got cash back at the close.”
Last month the Mortgage Bankers Association said the rate of mortgages going into foreclosure hit a record in the second quarter, but it took pains to say that the numbers were skewed by four large states -- California, Florida, Nevada and Arizona -- and that outside of them, the situation is improving. (See “Which Came first: California Or Subprime?”)
Subprime adjustable-rate mortgages (ARMs), in which mortgage rates are reset according to changes in interest rates, are the core of the delinquency problem. California has 17% of subprime ARMs in the country and over 19% of foreclosures on subprime ARMs.
Some say the buyers made bad decisions by taking out loans they couldn’t afford, but Rokakis said the mortgage brokers are to blame because they had no ethics and the government is to blame because it should have been overseeing the mortgage industry.
Marc Dann, Ohio’s attorney general, said that Wall Street, the investment bankers and the rating agencies should have known the loans were being obtained through “outright fraud.”
Which is exactly what the Federal Reserve is trying to control with its new regulations. The rules would seek to limit prepayment penalties that can make refinancing unaffordable, stated-income lending, which requires no documentation of financial resources, failure to require escrow for taxes and insurance, and lending to homebuyers who have no way of making payments on time.
Kroszner also said the Fed was going to propose new disclosure rules and may force lenders to present information outlining the terms and risks of their loans at the time of their mortgage applications.
“It’s extremely important to strike the right balance by seeking to protect consumers from abusive lending practices without restricting credit from responsible lenders to borrowers with shorter or lower-rated credit histories,” he said.
Vicki Bryan, an analyst at Gimme Credit, said it’s a case of too little, too late. “We’re now returning to a prudent, more normalized lending world,” Bryan said. “Subprime loans disappeared several months ago so I don’t think [the Fed’s regulations] will make a difference now. The horse is already out of the barn.”
Thompson News contributed to this article
California Association of Realtors economists expect a 23 percent decline in sales of previously owned single-family homes this year, with the median price rising 3.5 percent.
In 2008, the median price is expected to drop 4 percent statewide, with sales falling 9 percent compared to 2007. The statewide median price is expected to be $576,000 this year and $553,000 in 2008, according to the trade group's latest housing market forecast released this week.
"Tighter credit standards, affordability concerns, and a continued standoff between buyers and sellers will contribute to continued weakness in the market going into next year," said Colleen Badagliacco, association president, in a statement.
"Sales could decline more steeply in 2008 if the current liquidity crunch in the mortgage markets has a longer-than-expected duration or if interest rates unexpectedly increase."
And Leslie Appleton-Young, chief economist and vice president for the association, said in a statement, "Geographically, more affordable regions such as the Central Valley and Inland Empire will experience greater softness in the resale market because of the large number of new homes coming onto the market in recent years. Higher-priced regions of the state, such as the San Francisco Bay Area and parts of San Diego, Los Angeles and Orange counties, will react more to affordability constraints."
High-cost markets with median prices over $1 million "will show less stress," Appleton-Young also stated. "The lower-priced markets will continue to face fallout from the subprime crisis, tighter underwriting standards, and competition from new-home developments where price-cutting has been even more severe."
The association expects 367,500 sales of previously owned single-family homes this year, compared with 477,500 last year, and also predicts 334,500 sales in 2008. That compares to a peak of 625,000 sales in 2005.
The last time sales fell below 2007's projected 367,500 units was in 1995, when there were 342,540 sales. Sales last fell below 2008's 334,500-unit forecast in 1985, at 328,270 units, the group also reported. The last time the statewide median price declined was in 1996, when it dropped 0.5 percent. And the statewide median last fell more than 4 percent in 1993, when it dropped 4.5 percent compared to the previous year.
Regionally, the association reported a 15.9 percent peak-to-trough decline in the median home price for the Northern California region through August 2007 -- the price peak was $440,420 in August 2005 and the association is forecasting a median price of $370,390 in August 2007.
The association also reported a 15.7 percent peak-to-trough drop in the Sacramento region, followed by the Central Valley region at 14.8 percent, the High Desert region at 14.2 percent and the Riverside-San Bernardino region at 9.2 percent.
No peak-to-trough declines were reported in the Monterey and Los Angeles regions.
C.A.R. REGION
Peak Month
Peak Price
Aug-07 Median
% Chg From Peak
Northern California
5-Aug
$440,420
$370,390
-15.9%
Sacramento
$394,450
$332,510
-15.7%
Central Valley
$363,680
$309,740
-14.8%
High Desert
6-Apr
$334,860
$287,390
-14.2%
Riverside-San Bernardino
7-Jan
$415,160
$377,130
-9.2%
Northern Wine Country
6-Jan
$645,080
$600,000
-7.0%
Ventura
6-Aug
$710,910
$669,870
-5.8%
Orange County
7-Apr
$747,260
$710,380
-4.9%
San Diego
6-May
$622,380
$595,070
-4.4%
Palm Springs-Lower Desert
5-Jun
$393,370
$377,920
-3.9%
San Luis Obispo
6-Jun
$620,540
$598,400
-3.6%
San Francisco
7-May
$853,910
$832,760
-2.5%
Santa Clara
$868,410
$860,000
-1.0%
Monterey Region
7-Aug
$798,210
0.0%
Los Angeles
$605,300
Source: California Association of Realtors
***
Thinking about a trip to Europe? Start saving. Because of the weakening U.S. dollar, travel overseas is becoming more expensive.
Even if you don't plan a globe-trotting vacation, the falling dollar may cost you. If the slump gets out of control, it could mean inflation and much higher interest rates for Americans.
The dollar has steadily lost value compared with other major currencies since the end of 2002. Result: The euro has risen more than 70% against the dollar. The Canadian dollar, affectionately known as the loonie, is up more than 60% -- to parity for the first time in more than 30 years. The yen is up about 16%.
The dollar is falling partly because Americans import way more goods than they sell abroad -- especially oil -- and must borrow to close the gap. Another factor: Higher interest rates in Europe and elsewhere make those countries' currencies more valuable.
Consider how this affects your life:
In most years, the price of crude oil and gasoline declines in the fall. But this year, AAA's daily price survey shows regular unleaded gasoline at about $2.79 a gallon nationally, up 21% from a year ago.
You may need to stay home. Let's say you went to Paris in early 2002 and paid 100 euros a night for a room in a moderately priced hotel. That was the equivalent of about $86 a night.
Today, that room would cost $142 a night, a 65% increase.
Ditto for neighboring Canada. Keep that in mind if you want to attend the 2010 Winter Olympics in Vancouver.
Your dream BMW costs more. The base price of a BMW 3 Series sport sedan has risen about 20% over the past five years, The Wall Street Journal reported this week. It's likely to go up more.
Though BMW and other automakers may accept lower profits to stay in the U.S. market, the lower dollar boosts prices for imported food, shoes, chemicals and the like. European governments worry that a dollar in free fall could be a disaster even for Germany, Europe's strongest economy.
And if price competition eases, U.S. companies could gradually charge more for products they sell at home.
Interest rates will rise. Somehow, the U.S. has to finance its trade and government deficits, and, at some point, the investors who provide the cash will want to get paid.
The lenders are banks, pension funds and governments in Europe, China, Japan and oil-producing nations. These investors showed their potential muscle over the summer, when many balked at the terms for purchases of mortgage securities and junk bonds that Wall Street banks wanted to sell.
U.S. exports will get a boost. The weaker dollar is a boon for U.S. manufacturers because it makes their products more competitive abroad.
One company that sells bakeware made at a factory in Minnesota expects its exports will grow 50% this year because of the weaker dollar, according to The Wall Street Journal.