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  • Home mortgage musings

    The problem as I see it has 2 major points. One is to not artificially prop up home prices (that's how we got here in the first place) and the second is to try and stop as many foreclosures as possible by restructuring loans. Keeping these two things in mind as key goals, I think the next goal would be to try and accomplish this with as little use of government bailout funds as possible. I think the lending institutions and secondary mortgage holders need to take the most hit as they got the most gain largely through bad and unsustainable business practices.



    Treasury eyeing 4.5% mortgages?
    Economists question propping up home prices

    By Matt Carter, Thursday, December 4, 2008.
    Inman News

    News that the Treasury Department may use Fannie Mae and Freddie Mac's influence on mortgage markets to push interest rates on home loans down to 4.5 percent has raised hopes for a boost in home sales but sparked debate on whether it's wise to prop up housing prices.

    The Wall Street Journal reports that the Treasury is considering using Fannie, Freddie and other government-sponsored entities to purchase securities backed by mortgages at a price equivalent to a rate of 4.5 percent.

    Treasury officials have not commented, but the Federal Reserve announced a similar program on Nov. 25, saying it would spend $600 billion to buy mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae.

    The announcement brought down interest rates on conforming loans by about 1 percent and sent mortgage applications soaring (see story).

    Each 1 percent reduction in mortgage interest rate gives home buyers about 10 percent more purchasing power. That can not only get buyers off the fence, but also prop up home prices. Stabilizing prices in markets where foreclosures have created a glut of homes for sale would be good for home builders struggling to clear backlogs of inventory. It's unclear if the Treasury plan would also help borrowers refinance, which would also reduce foreclosures.

    In a speech today, Federal Reserve Chairman Ben Bernanke said problems in housing and mortgage markets "have become inextricably intertwined with broader financial and economic developments." Lenders appear to be on track to initiate 2.25 million foreclosures in 2008, compared with less than 1 million a year before the financial crisis, Bernanke said.

    While industry groups like the the National Association of Home Builders and the National Association of Realtors are all in favor of lower mortgage rates, some economists say home prices in some markets need to fall further before they return to affordable levels.

    Appearing on Yahoo! Finance Tech Ticker today, economist Nouriel Roubini called the plan reportedly being considered by the Treasury "a direct bailout" of home builders. Roubini said prices need to fall another 15 percent to reach affordable levels.

    Before news of the Treasury plan leaked Wednesday, Dean Baker, co-director of the Center for Economic Policy Research, issued a report advocating that Fannie and Freddie stop buying mortgages in markets where house prices continue to be out of line with rents, in order to bring prices down another 20 to 30 percent.


    That would put more homeowners underwater -- owing more on their mortgage than their home is worth -- and could lead to more foreclosures. One solution suggested by Baker is to give homeowners who are foreclosed on the right to become long-term renters of their homes.

    Baker argues that it's better to get price declines out of the way than to take measures that only prolong the inevitable.

    "At the new lower prices, home buyers would be less fearful that there would be a further decline in prices," Baker said. "This should cause many potential home buyers -- who have been waiting for the price decline to stop -- to re-enter the market."

    Bringing prices back in line with historical levels "is the most effective way to boost demand in the market and to begin to reduce the record vacancy rate."


    Some observers fear that now that news that the Treasury is considering such a plan has leaked, it will hurt home sales because prospective buyers will stay on the sidelines until it is clear whether the government will take further action to bing down mortgage rates.

    In theory, Treasury Secretary Hank Paulson could use the second half of the $700 billion troubled asset relief program (TARP) to buy up mortgage-backed securities. Although the program was created on the premise that it would be used to buy troubled assets, so far Paulson has concentrated on shoring up banks by providing them billions in liquidity in exchange for an ownership stake (see story).

    The Treasury Department hasn't embraced another propsal that FDIC chairwoman Sheila Bair says could be undertaken under TARP: partially insure lenders when they agree to modify as many as 2.2 million loans, at a cost of about $24 billion (see story).

    The Treasury and Federal Reserve have been taking unprecedented measures to head off a collapse of the financial system that was initially sparked by falling home prices and a rise in foreclosures. Bernanke said today that in many cases, lenders would be better off modifying borrower's loan terms than foreclosing. They may be missing opportunities to do loan modifications because the sheer volume of delinquent loans has overwhelmed the capacity of many servicers. The process is further complicated because most loans are packaged into securities sold to investors, and the rules governing the investments may discourage servicers from undertaking modifications, the Fed chairman said.

    Bernanke said the FDIC plan, which aims to reduce monthly payments to 31 percent of the borrower's income, would standardize the process of restructuring loans, and minimize the government's involvement to when a re-default occurs. The FDIC assumes one in three modified loans would re-default, costing taxpayers $24.4 billion but preventing 1.5 million foreclosures by the end of next year.

    Another step to prevent foreclosures might be to bring down the interest rate borrowers will pay under the Hope for Homeowners program, Bernanke said. The program allows delinquent homeowners to refinance into FHA-insured loans when their lender agrees to write off enough loan principal to create some equity for the borrower.

    The Hope for Homeowners program hasn't been popular with lenders, and was modified under the same legislation that created the TARP program to reduce the amount of required write-downs on some loans, permit up-front payments to holders of second loans, and allow loan terms of up to 40 years.

    Bernanke said the interest rate on the loans is still expected to be "quite high" -- roughly 8 percent. Treasury could bring down the rate by exercising its authority to purchase the securities issued by Ginnie Mae to fund the program, Bernkanke said, if Congress increased the debt ceiling to allow that.

    -------------------

    I think this is the type of strong governmental leadership that we need to properly unravel this economic mess. I do like Ms. Bair...

    At Yahoo Finance, you get free stock quotes, up-to-date news, portfolio management resources, international market data, social interaction and mortgage rates that help you manage your financial life.


    AP
    FDIC's Bair warns investors fighting loan changes
    Thursday December 4
    By Marcy Gordon, AP Business Writer

    FDIC chief Bair says investors fighting loan changes could provoke backlash from Congress

    WASHINGTON (AP) -- Investors in mortgage securities who are challenging home loan modification programs aimed at avoiding foreclosures could provoke a "backlash" from Congress, the head of the FDIC said Thursday.

    Sheila Bair, the chairman of the Federal Deposit Insurance Corp., made the comments in response to a question following a speech to a consumer group gathering.

    Two companies that invested in mortgage-backed securities recently sued Countrywide Financial Corp. over its plans to make as much as $8.4 billion in loan modifications as part of a settlement with attorneys general in 15 states. Their lawsuit maintains that Countrywide, now owned by Bank of America Corp., sold most of the loans to trusts that turned them into securities, and that Countrywide intends to pass the cost of reducing the mortgages to the trusts.

    Elsewhere Thursday, two Countrywide subsidiaries agreed to repay $11.5 million to nearly 4,800 North Carolina borrowers who were overcharged on their mortgages, the state banking commission said. Countrywide Home Loans and Countrywide Mortgage Ventures will refund the money to close an investigation.

    For lenders and companies servicing loans held by struggling borrowers, Bair said, "There is an obligation to modify, not to foreclose." "Investors should be taking a hard look at what they're advocating," she said. The harder investors push, "the more there's going to be backlash here."

    Congress may step in and change the legal obligations of mortgage servicers toward investors, she suggested.

    Bair was the leading architect behind a loan modification program at IndyMac Bank, a big thrift that failed in July and was taken over by the FDIC, in which thousands of struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren't paying more than 38 percent of their pretax income on housing.


    Bair was asked Thursday about an industry-backed proposal being considered by the Treasury Department to lower the rate on 30-year home loans to 4.5 percent by buying mortgage-backed securities from government-controlled Fannie Mae and Freddie Mac.

    "Getting mortgage rates down is ... positive, but it doesn't help people that currently have unaffordable mortgages because it doesn't help them refinance," Bair said. "Low interest rates help some consumers, but the ones that really need help and can't refinance are not helped."

    Bair has been pushing for the government to use $24 billion in bailout funds to help 1.5 million borrowers avoid foreclosure by guaranteeing modified mortgages -- a move opposed by Treasury Secretary Henry Paulson and the Bush administration.

    In her remarks to the Consumer Federation of America gathering, Bair disputed the notion that the Community Reinvestment Act -- the 1977 law requiring banks to make loans in low-income areas where they operate as a condition for opening new branches -- was a cause of the subprime mortgage debacle and ensuing financial crisis.
    Critics of the law, notably conservative Republicans, recently have blamed the crisis on the lending law, saying it forced banks to make home loans to borrowers who were bad credit risks. Champions of the law, known as CRA, credit it with having boosted the renewal of inner-city areas in recent years.

    "I think we can agree that a complex interplay of risky behaviors by lenders, borrowers and investors led to the current financial storm," Bair said in her speech. "To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: Not guilty."

    U.S. Comptroller of the Currency John Dugan, whose Treasury Department agency oversees national banks, made the same point as Bair about the CRA law in a speech last month.

    Only about one in four higher-priced home loans were made by banks subject to CRA in the subprime mortgage boom from 2004-2006, Bair said, with the rest coming from stand-alone mortgage companies and bank affiliates not covered by the law.

    The abusive lending practices at the root of the crisis were driven by the appetite for increased market share and revenue, Bair said.

  • #2
    Re: Home mortgage musings

    From my point of view this is the problem:

    "Getting mortgage rates down is ... positive, but it doesn't help people that currently have unaffordable mortgages because it doesn't help them refinance," Bair said. "Low interest rates help some consumers, but the ones that really need help and can't refinance are not helped."

    Once a homeowner falls behind 1 payment on their mortgage their credit score decreases by about 40 points. As they fall further behind, their credit is ruined. Lenders do not want to issue a new mortgage to persons who are currently delinquent on their mortgage.

    The most effective method to keep the most people in their homes is to modify existing loans with no qualifying conditions.

    I think all these predictions about where housing prices need to go are inaccurate. Housing prices are very localized and are a reflection of both interest rates and local employment conditions. Some areas are now "priced right". In other areas home prices are artificially depressed by the excess supply. In some areas hard hit by job loss, housing prices may decrease further.

    Comment


    • #3
      Re: Home mortgage musings

      Housing prices are very localized and are a reflection of both interest rates and local employment conditions.
      Here, in Elkhart, where unemployment was announced at over 12%, very little is selling in the city.

      Here is an example: one of my houses that I paid $48,000 in 2002 has been on the market for almost 6 months. We started at $76,900, which was a good price for the market, I reduced my price to $67,900 after 30 days, then to $56,900 30 days after that. I've had One showing. The interior has been almost completely redone and the location is relatively good.

      I talked to one of the top producers last week and asked if anything was selling and her reply was "nope." I don't think it's going to matter here if they lower interest rates or not. If there are no jobs, people cannot buy houses.

      It seems each day in my county, more business closings are announced. What is happening here may be a sign of things to come in other towns.
      The salvage of human life ought to be placed above barter and exchange ~ Louis Harris, 1918

      Comment


      • #4
        Re: Home mortgage musings

        What low prices.

        Here that wouldn't even buy the materials, let alone supply high-priced labor.

        One factor is that sales prices cannot go below the cost to build or it will be impossible to build a new house. Get the inflated prices lowered, but not below the cost to build.

        .
        "The next major advancement in the health of American people will be determined by what the individual is willing to do for himself"-- John Knowles, Former President of the Rockefeller Foundation

        Comment


        • #5
          Re: Home mortgage musings

          If the housing market has been overbuilt or just if things continue to go worse existing houses may need to sell below cost... It seems that a lot of expensive neighborhoods were developed in the last several years at the height of the bubble....


          Record 1 in 10 American Homeowners in Foreclosure or a Month Behind in Payments
          Friday, December 05, 2008

          WASHINGTON ? A record one in 10 American homeowners with a mortgage were either at least a month behind on their payments or in foreclosure at the end of September as the source of housing market pressure shifted to the crumbling U.S. economy.

          The Mortgage Bankers Association said Friday the percentage of loans at least a month overdue or in foreclosure was up from 9.2 percent in the April-June quarter, and up from 7.3 percent a year earlier.

          Distress in the home loan market started about two years ago as increasing numbers of adjustable-rate loans reset to higher interest rates. But the latest wave of delinquencies is coming from the surge in unemployment.

          Employers slashed 533,000 jobs in November, the most in 34 years, catapulting the unemployment rate to 6.7 percent, the Labor Department said Friday.

          "Now it's a case of job losses hitting more across the board," Jay Brinkmann, chief economist of the Mortgage Bankers Association. The U.S. tipped into recession last December, a panel of experts declared earlier this week. Since the start of the recession, the economy has lost 1.9 million jobs.

          Job losses are already having an impact in rising delinquency rates for traditional 30-year fixed rate loans made to borrowers with strong credit. Total delinquencies on those loans rose to 3.35 percent in September from 3.07 percent at the end of June, the Mortgage Bankers Association said.

          There were some modest signs of stabilization. The number of loans that entered the foreclosure process totaled 1.07 percent of all loans in the third quarter, flat from the second quarter.

          Though that number likely reflects changes in state laws that delay or extend the foreclosure process and efforts to work out or modify loans that could still fall back into foreclosure.

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