Thursday, July 31, 2008

New Rules and Laws for Homeowners

More and more information about what is really inside the new homeowners' law is coming out. Earlier in the week we posted about the $300 billion allocated to prevent foreclosures. Last week we discussed the GSE bailout giving Fannie Mae and Freddie Mac access to an unlimited amount of taxpayer funds . Today in the Boston Globe we will look at some other parts of the law from an article called Inside Congress's Housing Repair Kit.

Here are some of the other provisions regarding new disclosure requirements -

  • Lenders will have to provide copies of mortgage documents to borrowers at least seven days prior to the loan closing.
  • Mortgage documents must completely disclose the full costs of the loan over its lifetime, including future increases in payments, for subprime or other types of adjustable-rate mortgages.
  • The first provision sounds great. It will give people a chance to review the documents at their leisure. Unfortunately many times the lenders do not have the documents readily that early. For refinances with interest and other provisions it will be hard to have documents that are 100% accurate produced seven days prior. Also are those 7 business days or just a regular week? That will also make a big difference.

    As for the second this also sounds great too - but since adjustable rates adjust we are not sure how the full costs can be disclosed. How can the 120th payment be determined now? We can not find anything more on this provision.

    Some other parts of the article include the following -
    • First-time buyers can receive a $7,500 tax credit for buying a home by next July 1, a provision aimed at recharging sales in slumping markets. Eligibility requirements include that a buyer has not owned a home within the past three years. The credit is effectively a no-interest loan since the taxpayer must pay it back at a rate of $500 a year over 15 years. The credit begins to be phased out for single taxpayers earning $75,000 and ends at $95,000, and for couples earning $150,000 to $170,000, said Linda Goold, lawyer for the National Association of Realtors.
    • Senior citizens will be allowed to tap into larger reverse mortgages. Currently, owners are permitted to receive monthly payments based on between $200,000 and $362,790 of their home's equity, depending on their age, said Tjarko Leifer, managing director of Rex & Co., a San Francisco firm that sells an alternative to reverse mortgages. Residents of high-cost cities such as Boston could benefit under the new law, which raises those limits to between $417,000 and $625,500, he said.
    • Lenders and investors will be barred from starting foreclosure proceedings against veterans until nine months after they return from service, up from three months previously.

    The first one sounds questionable. More government incentive to buy homes. This was the cause of the problem. A tax credit to be paid back over 15 years. Sounds great only for the first year. And what happens when the property is sold or foreclosed after a few years?

    The second one is mixed. Raising the levels of reverse mortgages is great - for those that understand what they are getting into. With honest brokers who make sure that they customers understand the loans this can be very helpful. We have heard about other reverse mortgage provisions that we will address in a future post.

    The last one sounds good but are there any other provisions to help. Are there programs that will help veterans resolve the issues that pushed them into foreclosure? Or is this just a measure to forestall the inevitable and make lawmakers feel good about themselves?

    The new law sounds like a mixed bag so far. But overall it really just reads like a giveaway to the lenders and the GSEs with some feelgood provisions to show the voters.

    Wednesday, July 30, 2008

    Crime in the Mortgage Industry Part 2

    There is a three part series in the Miami Herald regarding Borrowers Betrayed by the mortgage industry during the Great Housing Bubble. Our review of the first part about criminals infiltrating the ranks of mortgage brokers can be found here.

    The second part of the series focuses on the loan originators. These are the unlicensed counter-parts to the mortgage brokers. In Florida mortgage originators do basically the same job as the brokers but do not need the licenses. Criminals figured this out very quickly, some headed straight to Florida right out of prison.

    More than half the mortgage professionals registered in Florida -- 120,563 -- entered the industry this decade without being licensed by the state, The Miami Herald found.

    Known as loan originators, they perform the same job as mortgage brokers but aren't bound by the same rules.


    The state has the highest level of fraud in the nation but the lawmakers did not want any to put up any impediments. Instead of preventing crime, state lawmakers condoned it. Leaders within the mortgage industry repeatedly asked for stricter regulations and more oversight and yet the state did nothing. It is little surprise that Florida ended up being the number one state for mortgage fraud. Another area where being number one has very, very dire consequences.

    Here are some of the Miami Herald shocking findings regarding loan originators for the years 2000-2007 -

    • 5,306 people with criminal histories became loan originators -- a rate of nearly two a day. Worse, those include 2,201 who had committed financial crimes, such as fraud, money laundering and grand theft.

    • Even large lenders hired loan originators with criminal backgrounds. The Miami Herald found that in at least 30 companies with 50 or more employees, more than one in five originators had a criminal record.

    • Nearly two dozen people stripped of their licenses as mortgage brokers were able to sidestep regulators by becoming loan originators. Nine others who were denied licenses because of prior crimes or regulatory violations were able to do the same.

    Former and current criminals could make a quick dollar in the unregulated loan originator position. Unlicensed and unregulated but still having readily access to any buyer and/or refinancers personal information.

    And it gets worse. The state has laws that they are supposed to monitor the originators through their lenders - but that was not being done. Once again Florida regulators were not doing their jobs and the public was paying the price.

    If a lender refuses to act on complaints against a loan originator, the state can discipline the lender, said Terry Straub, recently appointed director of the Office of Financial Regulation's Division of Finance.

    ''We hold them accountable,'' he said. But The Miami Herald found that in at least nine major cases when originators were arrested for mortgage fraud, no action was taken against their lenders.

    While Florida requires lenders to report the names of their loan originators every quarter, the newspaper found that hundreds of companies don't follow the law. In the first half of 2005 -- during the peak of the boom -- 355 didn't file required reports, according to the state's own records.

    The regulators were not monitoring the industry. What exactly were they doing? Either they were so short staffed that everything was falling through the cracks or they were just not bothering. It is obvious no one was looking over their shoulder to make sure the work was getting done.

    Unfortunately it sounds like the tax payer received very little return on the salaries for the regulators. Giving licenses to criminals who never would have been allowed in the industry before the boom. Not following up on loan originators and the companies they work for. It sounds like it was a free-for-all in Florida during the bubble and the most vulnerable payed the price.

    The third part of the series - The Probe is not yet available. When its posted we will review the last part in this devastating series. In the meantime we recommend visiting the Borrowers Betrayed main page to check out the video and slide show to hear and see the victims stories.

    Crime in the Mortgage Industry

    Wow! The Miami Herald has a jaw-dropping series on how borrowers were betrayed in Florida. They were betrayed by the mortgage brokers, loan originators and the authorities who were supposed to monitor the industry.

    This is a not to be missed story - and hopefully other blogs will pick it up too. As of this writing the first two sections have been posted with the third still to come. The first part discusses the mortgage brokers. This post the infiltration of criminals as mortgage brokers and the regulators that let them slip through. The second part on loan originators will be the feature of our next post.

    The Miami Herald article features criminals with long rap sheets were becoming licensed brokers. Applicants that in the 1990s would have been quickly shown the door were getting approved with no questions asked. Too much work for the regulators to bother to find out who they were licensing. Numerous examples are given throughout the original article. Lets take a look at some of the shocking info regarding borrowers betrayed: mortgage brokers -

    State regulators allowed thousands of ex-convicts to enter a profession that gave them access to the most sensitive and personal financial information: credit cards, bank accounts and Social Security numbers.

    Those criminals went on to commit nearly $85 million in mortgage fraud, the newspaper found. They stole their customers' identities. They stole their money. They even stole their homes.

    Through licensing ex-convicts Florida readily approved this type of activity. Some of the ex-cons went right from prisoners directly to mortgage broker. The lack of oversight by the regulators was appalling. While it may be negligence, it is still unbelievable and unacceptable. Wonder what is happening throughout the other 49 states. And now lets take a look at what the Miami Herald found -

    • From 2000 to 2007, regulators allowed at least 10,529 people with criminal records to work in the mortgage profession. Of those, 4,065 cleared background checks after committing crimes that state law specifically requires regulators to screen, including fraud, bank robbery, racketeering and extortion.
    • More than half the people who wrote mortgages in Florida during that period were not subject to any criminal background check. Despite repeated pleas from industry leaders to screen them, Florida regulators have refused.

    • Confronted with a growing epidemic of mortgage fraud -- Florida now has the highest rate in the nation -- the number of license revocations declined over the last five years, leaving borrowers at the mercy of predatory brokers.

    • During the peak of the housing boom, the Office of Financial Regulation ignored a state law enacted in 2006 that compelled it to perform nationwide criminal background checks on applicants. That failure allowed people convicted in other states -- and in federal court -- to peddle loans in Florida without any scrutiny.

    • Regulators allowed at least 20 brokers to keep their licenses even after committing the one crime that seemed sure to get them banned from the industry: mortgage fraud.

    The ones who were supposed to enforce the laws were readily breaking them. This is evident with the 2006 requirement to conduct national background checks and the lack of enforcement. No one was enforcing the regulators, and the regulators were obviously not doing their jobs. The regulators were supposed to be screening but instead they become the problem. Here's more shocking on the state regulators -

    Through it all, state regulators were the only line of defense, empowered to keep criminals out of the mortgage industry and revoke licenses to protect consumers from fraud.

    ...
    Sometimes state officials themselves broke the law.

    In 2006, the year license applications and home-sale prices peaked, the Florida Legislature changed the law to close a significant gap.

    The new provision required state officials to send would-be brokers' fingerprints to the FBI to screen for convictions in other states and in federal court, where serious financial crimes and drug-trafficking cases are often prosecuted.

    But state officials didn't follow the law. Last February, more than a year after the statute was changed, Greg Oaks, chief of the OFR's Bureau of Regulatory Review, told The Miami Herald that running the FBI checks using the old-fashioned hard-copy fingerprint cards took too long.

    Take too long? That is the excuse for not following the law? And these regulators still have their jobs? First they allowed criminals that would be normally screened out. Then the regulators had complete disregard about who became licensed as long as it did not take "too long". Some of these criminals applied for their positions upon being released. One day prisoner, the next day mortgage brokers - and not just metaphorically! These were not Frank Abagnale Jr. (Catch me if you Can) reformed criminals, many went into the industry and remained criminals with no real oversight.

    Very scary news. We wonder what the standards and practices are in New Jersey and the rest of the country. Are they all this bad?

    Tuesday, July 29, 2008

    Still Falling

    House prices are still falling. Equity is disappearing. More people are underwater. And people are still worried. This article from the New York Times titled Home Prices Fall in May; Consumer Confidence is Flat. reviews two reports that show us where we are today. First the is the Case-Shiller index for home prices in May. Let's take a look -

    Prices were down 15.8 percent from May 2007, including a 0.9 percent one-month drop in May alone. The 10-city price index, which dates to 1988, dropped 16.9 percent, its sharpest decline on record.

    All 20 cities measured by the index showed annual declines in home values, and 10 cities have suffered double-digit percentage declines in the last year. Miami and Las Vegas have fared the worst, with prices in each city dropping more than 28 percent since May 2007.

    There were some signs that the decline has started to abate. Prices in seven regions, including Boston, Dallas and Charlotte, improved in May, some for the second straight month. Boston, for example, was up 1.05 percent in May, though values are still 6.2 percent below where they were a year prior.

    The report “does seem to suggest the rate of decline of existing home prices is slowing,” Ian Shepherdson of High Frequency Economics wrote in a note. “To be sure, prices are still falling very rapidly, and there is no prospect of any rebound this year and probably next, but a slower rate of fall is welcome nonetheless.”


    Huge declines in some areas of the country sounds like it should be devastating. So the good news, not sure that is an accurate description but certainly not bad news, is that the consumer confidence did not decline with the house prices. Rather it remained the same.

    The [Confidence Board, a private research] group’s consumer confidence index rose to 51.9 from 51 in June, and a measure of expectations about the economy’s prospects rose to 43 from 41.4. Those figures are historically very low.


    The numbers are low but did not decline further. Rather there was a bit of an uptick. Not great but much better than it could be, especially after the Case-Shiller report.

    Hype or Hope for Homeowners

    There are some great posts on how good or bad the new mortgage relief/housing rescue bill is. Check out Bergen Foreclosures insight onto this long, long bill here.

    But now we are at a different point - now that the the huge 700 page housing rescue bill is about to become the law of the land - we need to know what is in it. Is it really going to help? Let's take a look at an article form the Hartford Courant called Tips For Homeowners on Understanding Sweeping Mortgage Bill.
    The most sweeping mortgage relief legislation since the Great Depression is expected to be signed by President Bush now that it has been passed by Congress. The centerpiece of the housing package — HOPE for Homeowners — could provide as much as $300 billion in government-backed refinanced mortgages.

    The program could help as many as 400,000 homeowners across the country facing foreclosure — more than 3,700 of them in Connecticut.

    Wow, that sounds huge. $300 billion to help 400,000 - but that averages out to only $750 per homeowner. Is that really going to help? It seems like it is designed to help lenders unload $300 billion of mortgages rather than homeowners.

    Just our take but lets move on -
    HOPE for Homeowners is voluntary, however, and both lender and borrower must agree to participate.

    So everything is voluntary? We can see why the lender wants to dump loans - especially ones that look like they will be in trouble soon. Other than another $300 billion to dump onto the government what is so different with this part and our wonderful HOPE Now . And if a lender does volunteer what do they have to do?

    Lenders must agree to take a loss comprising the difference between the mortgage balance and 90 percent of the home's current value. Lenders also must make an upfront payment to FHA amounting to 3 percent of the principal, to get out of the loan.

    So lenders can sell a loan of up to 90% of the current price (wonder who will be appraising the "current" price with the housing values still in freefall). Then they pay 3% of that principal to get out of a loan. So lets look make up an example house currently valued at $100,000 in Camden. The lender can sell a mortgage valued up to $90,000. Now the lender has to pay the FHA $2,700 to dump the loan onto the FHA. Hmmm. Not a bad deal to dump houses in areas that are projected to decline significantly. There will be a line of lenders to do this. Get those projected future foreclosures off the books now rather than dealing with an REO. There is definitely some incentive for lenders.

    Now lets take a look at the positives for the borrowers -
    Borrowers must live in the home, and the mortgage must have been originated on or before Jan. 1, 2008. Borrowers must demonstrate they can't afford the mortgage and certify that they have not intentionally defaulted. Monthly mortgage payments, including principal, interest, taxes and insurance, must be at least 31 percent of monthly income, as of March 1, 2008.

    All loans will be 30-year, fixed-rate mortgages and must be made through FHA-approved lenders. A borrower can choose to refinance through a different lender. Borrowers' income must be deemed sufficient to cover the new loan. They must provide verification of income and cannot have any additional mortgage debt, such as a home-equity loan.

    If the home is sold or refinanced within one year, the homeowner must pay the FHA all of the profit. The borrower gets to gradually keep a larger share of the profits until, after five years, the borrower's share is capped at 50 percent.

    Borrowers must pay an annual insurance premium, amounting to 1.5 percent of the principal. The payment must be rolled into the monthly payment.

    First the lenders has to pay 3%, now the borrower has to pay a 1.5 premium insurance, annually. So for our Camden example the $90,000 loan has to pay another $1350 per year, averaging out to $112.50 per month, for the life of the loan. That is on top of regular insurance, taxes and the new principal and interest payments. From our example this new insurance is the equivalent of paying an interest rate of 1.83 points more per month. Wonder where this insurance money is going?

    While we like the idea of having homeowners in the standard 30 year fixed mortgage. Safe and reliable monthly payment is a good thing for many homeowners. This new insurance premium sounds pretty expensive. Much more to this than meets the eye.

    From everything we know so far it just looks like a convoluted method to bailout the lenders with a few happy homeowners to show as examples. What do you think?

    Monday, July 28, 2008

    Another Problem - Equity Theft

    The New York Times has an article regarding the increasing amount of equity theft that has been occurring. While it seems equity theft was at its height during the Great Housing Bubble with easy access to equity and requiring very little proof and paperwork.


    The theft became so lucrative that it has not been abandoned - it just adapted to fit the current rules. First lets take a look at the crime -

    A home equity line of credit is an ideal vehicle for criminals, according to Steve Bartlett, chief executive of the Financial Services Roundtable, a consortium of banking-related companies that offers financial support to the Identity Theft Assistance Center.

    Mr. Bartlett said such credit lines are typically “big pools of money,” and if consumers do not regularly check their accounts, that pool can drain quickly.

    The Federal Bureau of Investigation’s annual mortgage fraud report, which was released in April, cited home equity credit fraud as an “emerging scheme” in the slumping real estate and mortgage market.

    Those with poor credit have been preyed upon by identity thieves in recent years, because thieves who pretend to be such owners could easily obtain mortgages from subprime lenders with little documentation.

    ....
    Home equity lines are a favorite option because they are almost as easy to open as a credit card account, as long as a criminal has the proper financial information.


    Then lets take a look at New Jersey's rates -

    The F.B.I. does not break out various types of mortgage fraud by state, but in general, mortgage fraud is a bigger problem in New York, New Jersey and Connecticut than in many other states. New York is among the 10 states with the highest rate of mortgage fraud, while New Jersey and Connecticut rank in the top 20.

    Some methods recommended are tracking of your credit reports - either by yourself or with one of the firms that specialize in these services - like Identity Theft Assistance Center.

    Perhaps this is one area that people should not have such easy access to anyways. Short term needs can usually be taken care of through a credit card - does equity need to be drained with such immediacy?

    The ease of HELOCing a house was too easy during the bubble - no docs needed for 100% or more of equity withdrawal. This was just looking for trouble. Since most HELOCs are in the tens of thousands to hundreds of thousands why not make the borrower jump through a few hoops first - actual appraisals not computer generated and requiring financial documentation that the loans can actually be paid back. These loans should be based on more than just a FICO score.

    Sunday, July 27, 2008

    Problems with Reverse Mortgages are starting

    Today we come across our first Reverse Mortgage horror story. We expect this to grow quite common in the next few years. Since it seems to be one area that lenders are still pushing very heavily. One of our first rules of thumb - if sellers are pushing it heavily it is usually in their best interest not yours.


    It is not really that surprising that the story comes from Las Vegas - one of the hardest hit areas. This article comes to us from the Review Journal and it titled Reverse mortgage leaves borrower stunned and stuck.

    His wife is deceased, he just underwent back surgery and now William Lancaster is told he owes $170,000 on a reverse mortgage for a home that's worth $130,000 tops.


    ...
    Lancaster is stuck in Las Vegas with a financial disaster created when he took out a home equity conversion mortgage, also known as a reverse mortgage, on his east Las Vegas home in 2005.


    ...
    The Realtor found "ridiculous" closing costs in documents from Financial Freedom, including $2,600 for mortgage insurance and $4,800 set aside for a service fee.


    San Francisco-based Financial Freedom Senior Funding Corp. paid off his $54,000 mortgage and gave him a $60,000 line of credit, which now has a balance of less than $1,000. The latest monthly statement from the lender shows a payoff of more than $170,000.


    ...

    "So approximately $50,000 to $60,000 in interest in two years? That's insane," Berard said. "If mortgage companies are going to do these, why can't they set aside money for an attorney and let the attorney go over this (contract)?"


    These numbers sound very suspicious. The money loaned out totaled $114,000 plus assorted fees and interest and just two years later the loan amount is $56,000 more.


    A few other areas of concern regarding reverse mortgages. These loans are going to people in later stages of life. Some may only be familiar with nothing more complicated than the 30 year fixed. There also seems to be little in regards to make sure the borrower has the faculties to understand these loans and all the complexities involved. People in the prime of their lives and working in related industries seem to have problems understanding all of the complexities involving mortgages.


    "They trust you," he said. "Even in my business, people just sign, even people in their 40s and 30s. When they're 65, they're not going to read it. 'You can live in your house debt-free,' and then you get this (Lancaster's case). I'm a little negative on reverse mortgages.


    "We may see in the future we may have another minor catastrophe going on, not subprime mortgages, but reverse mortgages."


    We have to strongly agree with that last sentiment. There could easily be a crisis coming down the road. With house pricing still falling the number of people owing more than their property is worth is also growing.


    How many of these reverse mortgages will also be underwater? How many of those underwater will need to leave their property for health related reasons? What will they do when they find they are like William Lancaster and owe more than they could ever expect to pay back?


    This could easily turn into a very messy and heart-wrenching problem.

    Trouble in Mount Arlington

    Mount Arlington seems like such a nice place. The new train station just off Route 80. But not everyone is doing great. Today's featured property was purchased at the end of the bubble. The former property owner purchased a brand new dream house. However it took look less than a year for the dream to turn into a nightmare. The nightmare of foreclosure became realty for this Mount Arlington Colonial. In addition was the nightmare of thousands of dollars lost. Something that could have been so wonderful turned into so much trouble.

    Let's take a look at the property -


    The front of the house.

    The gourmet kitchen.


    Either family room or living room.

    Now let's take a look at the property info -

    • Single Family Property
    • Status: Active
    • County: Morris
    • Subdivision: NOLANS RIDGE
    • Year Built: 2006
    • 2 total bedroom(s)
    • 2.5 total bath(s)
    • 2 total full bath(s)
    • 1 total half bath(s)
    • 8 total rooms
    • Style: Colonial
    • Living room
    • Family room
    • Kitchen
    • Basement
    • Laundry room
    • Bathroom(s) on main floor
    • Bedroom(s) on main floor
    • Basement is Full, Unfinished
    • 2 car garage
    • Parking features: Built-In Garage
    • Heating features: Multi-Zone,Gas-Natural
    • Forced air heat
    • Central air conditioning
    • Interior features: Dishwasher, Range/Oven-Gas, Center Island, Country Kitchen, Pantry, Basement Level Rooms: Walkout, First Level Rooms: 1 Bedroom, Bath Main, Bath(s) Other, Breakfast Room, Dining Room, Family Room, Kitchen, Laundry Room, Living Room, Second Level Rooms: 1 Bedroom, Attic, Bath(s) Other
    • Exterior construction: Brick, Vinyl Siding
    • Roofing: Asphalt Shingle
    Finally, here are the financials -
    • The house was purchased directly from the builder in May 2006 for $820,000.
    • The original mortgage made on the same day as the purchase was an ARM for $574,000 with Fairmont Funding.
    • A second mortgage was taken the three days later for $204,000 also with Fairmont Funding.
    • A Lis Pendens was filed February 2007 which started the foreclosure process.

    • The property is currently an REO for sale with a realtor for $699,900.
    • Finally, our featured property is also part of the Horizons at Pennington Woods Condominium Association which appears to require a monthly fee of $292.
    From the various paperwork it looks like the buyer put a downpayment of $246,000 which was 30% of the property price. This is an excellent start. However within three days the owner pulled out 204,000 which made the real downpayment really just above 5% or $42,000.

    The trouble hit shortly after the purchase since just 9 months later the property started in the foreclosure process. Another important part to note is that it appears from the county records that the Condo Association never received a payment for the property.

    Now the former owner is out their $42,000. The lender is out $120,094 if they get the full asking price for the property. The total loss is at least $162,094 for this property so far. Not the biggest one we have come across (that would be this one) but still a significant loss.

    Saturday, July 26, 2008

    Falling Like Dominoes

    We are waking up to the blaring headlines that regulators have taken over an additional 2 more banks. This brings us back to our February post regarding banks failures. The FDIC was gearing up and getting staff ready for approximately 100 bank failures over 12 to 24 months. That was five months ago today. Adding 2 more to the list makes seven. But these do not seem quite as substantial as the IndyMac collapse. But as we know the bigger they are the harder they fall.

    Now lets look at an article from the Washington Post regarding today's news regarding two national banks failing -

    First National Bank of Nevada and First Heritage Bank were closed by U.S. regulators yesterday, the first institutions to fail since regulators seized IndyMac Bancorp two weeks ago following a run by depositors.

    ...
    The banks, owned by First National Bank Holding Co. of Scottsdale, Ariz., are the sixth and seventh to fail this year as the financial-services industry grapples with failed loans stemming from the worst housing slump since the Depression.

    ...
    Lenders on the FDIC's "problem list" grew to 90 in the first quarter from 76 in the fourth quarter of 2007, the FDIC said in May. The FDIC insures deposits at 8,494 institutions with $13.4 trillion in assets. The OCC is an agency of the Treasury Department that regulates national banks.

    U.S. bank regulators closed First Integrity Bank, based in Minnesota, and ANB Financial in Arkansas in May; Hume Bank in Missouri in March; and Douglass National Bank in Missouri in January. The four lenders had $2.2 billion in assets and losses estimated at $225 million.


    These two banks were from the super bubble states - Nevada and Arizona. It sounds like it is going from bad to worse out west. This was predicted but still is discomforting. The type of predictions people would prefer to be wrong about.

    Some addition info form the article is the rise in expected failures from 76 last fall to 90 this spring. Meanwhile, the Guardian is predicting 300 in the next three years. Unfortunately, as things deteriorate this list will probably grow.

    And we also have to watch out for the other list to grow - the list of bank failures. We are currently at 7 for the year. How high will this number climb?

    Friday, July 25, 2008

    New Jersey Foreclosure Rates

    This article from Bloomberg regarding US Foreclosures double as prices decline is similar to the previous post regarding rising foreclosure rates. But it does have some other important data we want to share -

    Subprime mortgages were available to borrowers with bad or incomplete credit histories and default at five times the rate of prime mortgages, according to the Mortgage Bankers Association in Washington.

    ...
    Forty-eight of 50 states and 95 of the 100 largest U.S. metropolitan areas had year-over-year increases in foreclosure filings in the second quarter, RealtyTrac said.
    ...
    Foreclosures push all home values down by an estimated 6 percent, and will contribute to national prices declining another 15 percent by the end of 2009, Ethan Harris and Michelle Meyer , Lehman Brothers Holdings Inc. economists in New York, said in a report yesterday.

    ...
    New York filings increased 62 percent from a year earlier to 16,025, with one in every 493 households in a stage of foreclosure, the 30th-highest rate.

    New Jersey filings rose 140 percent. One in every 201 households in the state received notice, the 12th-highest rate in the U.S.


    This is one rating where last is best. We do not want to be number one or even close. It looks like the New Jersey downward spiral is picking up speed. Here is the list for the top ten foreclosure states -
    1. Nevada
    2. California
    3. Arizona
    4. Florida
    5. Colorado
    6. Ohio
    7. Michigan
    8. Georgia
    9. Massachusetts
    10. Illinois

    Rising Foreclosure Rates

    Lets just go to the absolute worst part of a depressing article -

    "We've been saying foreclosures will total 1.9 million to 2 million this year," [RealtyTrac spokesman Rick Sharga.] said. "But midway through the year, we're already at 1.4 million so we're going to be raising our projections."

    Not exactly a TGIF you want to wake up to. Just CNN Money's article title More Foreclosure Gloom lets you know things are bad and getting worse. Foreclosure filings are skyrocketing. The situation is deteriorating. Hopefully we hit the bottom soon. Lets take a look -

    Foreclosures continue to soar, with 220,000 homes lost to bank repossessions in the second quarter of this year, according to the latest statistics from RealtyTrac, an online marketer of foreclosed homes. That's nearly triple the number from the same period in 2007.

    There were a total of 739,714 foreclosure filings recorded during that three month period, up 14% from the first quarter, and up a whopping 121% from the same period in 2007. That means that out of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

    "Most areas of the country are seeing at least some increase in foreclosure activity," said RealtyTrac CEO James Saccadic. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity."

    ...
    "I don't think that's a surprise if you look at the general conditions out there," said Brian Bethune, chief financial economist for Global Insight. "There have been six straight moves of weaker employment this year. The ongoing problems in the housing market are compounded by a generally weaker economy. Foreclosures won't go down until we start to see employment move up again."

    ...
    The report came as more negative news for the housing market this week. On Thursday, a report form the National Association of Realtors revealed that existing home sales had declined again as the number of homes for sale continued to rise. On Tuesday, a government agency reported home prices registered another drop in May.

    We are rising in areas that will hurt - foreclosures rising, unemployment rising, homes for sale rising (wonder what percentage is short sales?). And dropping in areas that hurt as well - property values, selling prices, which from the previous post also means drops in HELOC and equity availability.

    What do you need in order to take a HELOC?

    You need equity. Among a list of other things. But no equity means no equity line.

    With property values deteriorating, equity is evaporating. That equity you had two years ago is probably not all there anymore. No or little equity means no chance of getting a HELOC.

    Another big change is that during the Great Housing Bubble lenders were allowing access of up to 110% of a properties equity to be withdrawn.

    But that was then and this is now. Now lenders are only allowing mortgage equity withdrawal to be 80-90% of a property value. In some areas with house values falling substantially the values may be even stricter. These are some of the reason that this article from Reuters regarding home equity cash-outs fade as prices slide is not that surprising. Lets take a look -

    The share of homeowners who tapped home equity for extra spending money when refinancing fell in the first half of 2008 to the lowest level in several years, mortgage financier Freddie Mac said on Thursday.

    The dollar amount of money borrowed also sank in the first six months, to the lowest in four years.

    Maybe because there is no money/equity left. And those that can borrow must have significant equity with a good credit score.

    "Declining home values across much of the nation have curtailed the amount of home equity available to be cashed out by homeowners," Frank Nothaft, chief economist at the second largest U.S. home funding company, said in a release.

    Home prices through April fell about 18 percent from their July 2006 peak, according to the 20-city Standard & Poor's/Case-Shiller index.

    That is an average of 18% equity cut from all houses across the board. That is alot of money gone.
    ...
    In the second quarter, about $38 billion in home equity was taken by homeowners when they refinanced conventional loans made to prime borrowers, Freddie Mac said. That was less than half of the $79 billion cashed out in the same period last year.
    Other parts of the equation are people were getting equity based on their asset not the ability to pay. These practices have stopped. Compound that with the fact that there is just less equity, and this report comes as no real surprise. It is not good news by any means but it really is no surprise.

    It may even be a silver lining - people less in debt so less chance of being underwater and all that follows.

    Thursday, July 24, 2008

    No, Not the Granite Countertops

    What will we do without Pergraniteel? What represents a gourmet kitchen more than those beautiful and expensive countertops? This was one of the most popular and sought after improvements of the flipping and upgrading side of the Great Housing Bubble. We really can not handle any more problems from the Great Housing Bubble, can we?

    First the equity has evaporated. House prices are plummeting. Exotic loans are disappaering. Now we are being told that some granite countertops are giving off toxic levels of radon. In an article from the New York Times called What's Lurking in Your Counterop? delves into this topic.
    Shortly before Lynn Sugarman of Teaneck, N.J., bought her summer home in Lake George, N.Y., two years ago, a routine inspection revealed it had elevated levels of radon, a radioactive gas that can cause lung cancer. So she called a radon measurement and mitigation technician to find the source.

    “He went from room to room,” said Dr. Sugarman, a pediatrician. But he stopped in his tracks in the kitchen, which had richly grained cream, brown and burgundy granite countertops. His Geiger counter indicated that the granite was emitting radiation at levels 10 times higher than those he had measured elsewhere in the house.

    “My first thought was, my pregnant daughter was coming for the weekend,” Dr. Sugarman said. When the technician told her to keep her daughter several feet from the countertops just to be safe, she said, “I had them ripped out that very day,” and sent to the state Department of Health for analysis. The granite, it turned out, contained high levels of uranium, which is not only radioactive but releases radon gas as it decays. “The health risk to me and my family was probably small,” Dr. Sugarman said, “but I felt it was an unnecessary risk.”
    It is great for people that can easily afford to replace these expensive countertops. But with the reduction in allowance for mortgage equity withdrawals there will be many people scared and scrambling to replace these countertops.

    Now lets take a look at the potential problems and remedies -

    Radon is the second leading cause of lung cancer after smoking and is considered especially dangerous to smokers, whose lungs are already compromised. Children and developing fetuses are vulnerable to radiation, which can cause other forms of cancer. Mr. Witt said the E.P.A. is not studying health risks associated with granite countertops because of a “lack of resources.

    ...
    Personal injury lawyers are already advertising on the Web for clients who think they may have been injured by countertops. “I think it will be like the mold litigation a few years back, where some cases were legitimate and a whole lot were not,” said Ernest P. Chiodo, a physician and lawyer in Detroit who specializes in toxic tort law. His kitchen counters are granite, he said, “but I don’t spend much time in the kitchen.”

    Cancer or countertops? This is such another strange and fitting example of the excesses from the Great Housing Bubble. First we read that imported Pakistani marble is supporting the Taliban. Now this. Our excesses are really catching up to us in some very unexpected ways.

    Our Battered Wallets

    Money seems to be tight and getting tighter - at least for the average person. Food and gas prices have risen substantially the last few years there is not alot of extra money in the average person's paycheck. As foreclosures and bankruptcy get more commonplace they will also be more acceptable. Today we find a portrayal from the USA Today regarding how much consumers are financially falling. Let's take a look -

    Consumers are behind schedule in payments or have walked away from nearly $800 billion in household debt of all kinds — mortgages, credit cards, car loans, says Mark Zandi, chief economist for economy.com. "Household credit quality has arguably never been worse," he says.

    That is a lot of write-offs. And we are still in decline mode. This still has a way to go before leveling off. What is propagating this downward spiral - job losses, equity losses and rising prices, as per the article -

    •The housing downturn. Projected declines in house prices, home sales and housing starts are all worse than the housing collapses of the 1980s and 1990s, Zandi says. He projects a nationwide home price decline of 26% from the peak in 2006.

    ...
    •A weakening job market. The unemployment rate has risen to 5.5% from 4.6% 12 months earlier.

    •Higher prices. For people in the bottom third of the nation's income distribution, energy costs were about 11% of consumer spending in 2006 when oil averaged about $75 a barrel. Now, with oil around $125 a barrel, "You could argue that nearly half of their disposable income is now going to food and energy," Zandi says.

    During the Great Housing Bubble credit was easy to obtain, people who never would have normally qualified for a house normally were somehow getting 100% financing. People were getting loans with payments that they could never afford. Lenders were giving loans based on valued assets with a mind frame that housing would never decline and people would never default.

    Just for the counter-point argument to the state of the economy, the article threw in this closing paragraph -

    Other economists are more optimistic. "Yes, we're seeing this erosion of household balance sheets," says Brian Bethune, chief financial economist for Global Insight. But, he says, consumers are making good choices: paying down debts, using less fuel and shopping at discount stores.

    Consumers are not really making these choices - they do not have the funds to do other things. Many people are adapting to the new market rules - less credit, no access to equity, and higher prices. These are not necessarily choices, rather external market forces.

    Wednesday, July 23, 2008

    Saving the GSEs

    Well, as we predicted yesterday the Congressional Budget Office gave cover to politicians to vote in favor of the GSE bail out. Obviously no time was wasted - with the headlines blaring that U.S. House Approves Fannie-Freddie Bill by 272-152. Lets take a look at what Bloomberg describes -

    The U.S. House of Representatives approved legislation designed to shore up confidence in Fannie Mae and Freddie Mac and stem the record surge in mortgage foreclosures, sending the bill to the Senate.

    House members voted 272-152 in favor of the measure, which lawmakers and administration officials expect will be passed in the Senate and signed into law by President George W. Bush. The bill gives Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Freddie Mac and provides for a federal agency to insure refinanced home loans.

    Paulson overcame opposition within his own party after some Republicans said the bill risked taxpayer funds and fell short on overhauling the mortgage-finance firms. The Treasury chief said the measure was critical to U.S. financial-market stability and persuaded Bush to drop a veto threat.

    ...
    The Treasury secretary would get power to make unlimited equity purchases in and lend to Fannie Mae and Freddie Mac to prevent a collapse in the firms that account for 70 percent of new U.S. mortgages. The bill also provides for a federal agency to insure as much as $300 billion of refinanced mortgages for struggling homeowners

    So we basically just gave unlimited authority to prop up Fannie Mae and Freddie Mac. But hopefully it is around the $25 billion projected by the CBO. Add the $300 billion to help refinance mortgages that is also in the bill. This could easily add up to one expensive bill.

    3 Banks in 3 Different Positions

    News is being generated about earnings and losses from various lenders. Today we find three stories with 3 different banks in 3 very different positions. But the one common thread is the affect that Mortgages and HELOCs are having on the companies' bottom lines. Lets start with the hardest hit, Washington Mutual which is reporting the loss of $3.3 Billion. as posted in CNN Money.

    "I still think there is more to come in the way of provisions because of the increasing rate of non-performing loans in the home loan, home equity, and subprime categories," said Stephanie Hall, a senior analyst with the Scottsdale, Ariz.-based research firm Gradient Analytics. "But they have taken a step in the right direction by increasing the loan loss accrual."

    Yet, the company offered some signs of encouragement as delinquencies in its troubled subprime and home equity portfolios showed "early signs of stabilization" during the quarter, according to the company.


    Next is E-Trade with losses that appear to be $94.6 million. Let's take a look at the BusinessWeek report -

    Provisions for losses were primarily tied to increasing charge-offs in E-Trade's home equity portfolio. Charge-offs are loans that are written off as not being repaid.

    The brokerage firm has been actively reducing its exposure to home equity products in recent quarters as part of a broader turnaround plan to return to profitability and refocus itself on its core retail brokerage business.

    Undrawn home equity lines of credit in E-Trade's portfolio were reduced to about $3.7 billion at the end of June, compared with more than $7 billion at the same time last year.

    But there does seem to be some good news on this front - and from of all places the New Jersey based Valley National Bank. Let's take a look at MarketWatch -

    Valley National Bancorp, the holding company for Valley National Bank, announced that SNL Financial ranked Valley's home equity loan portfolio the 8th best-performing portfolio among publicly traded banks and thrifts with more than $100 million in home equity lines of credit on their books during the twelve months ended March 31, 2008 based on a combination of low delinquency rates and net charge-offs.

    At June 30, 2008, Valley's $538 million home equity portfolio consisting of over 14,200 loans continued to perform well, with only 11 loans past due 30 days or more. These delinquent loans totaled $727 thousand or 0.14 percent of the total home equity portfolio at June 30, 2008 as compared to $1.1 million or 0.21 percent of the portfolio at March 31, 2008. Gerald H. Lipkin, Chairman, President and CEO of Valley noted that, "These numbers continue to demonstrate the strong performance of our loan portfolio and management's dedication to high loan underwriting standards in a time when many bank analysts are anticipating more bad news about home equity losses and delinquencies from the financial sector."
    It seems that a few years back everyone thought they could make a bundle from mortgages and home equity loans. Now only those who made prudent, conservative choices are in good financial standing. Look at the differences between E-Trade and Valley. E-Trade had to cut the value of their equity lines in half - and have significant writedowns. In the meantime Valley is less than 0.1% of its loans non-performing. Pretty stark contrasts in running a bank.

    Tuesday, July 22, 2008

    Politics and the GSE Bailouts

    Asking for unlimited authority seems like one way to assure people you will be given no authority. That is what the Secretary of the Treasury asked for last week in reference to help out Freddie Mac and Fannie Mae. Today we find that Fannie, Freddie Rescue May Cost $25 Billion, CBO Says, as reported from Bloomberg.

    Fannie Mae and Freddie Mac would cost U.S. taxpayers an estimated $25 billion over two years under a Bush administration plan to rescue the mortgage-finance companies, the Congressional Budget Office said.

    While the assessment is more pessimistic than Treasury Secretary Henry Paulson's prediction that a bailout is unlikely, the CBO report may quell concerns among some lawmakers that the price tag would be higher.

    There is probably a ``better than 50 percent'' chance taxpayer funds won't be needed to save the two largest mortgage- finance providers, though ``that scenario is far from the only possible result,'' said the CBO, a nonpartisan agency in Washington that provides economic and budget analysis for lawmakers, said in a report today.

    ``Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected'' in the companies' finances, the CBO said. ``Such continuing problems would increase the probability that this new authority would have to be used.''

    While neither the Treasury nor the White House budget office has estimated publicly the cost of a bailout, lawmakers including Senators Jon Tester of Montana and Richard Shelby of Alabama said last week they were concerned the cost could reach $1 trillion. The CBO said it reached its assessment by taking into account the probability of various outcomes.


    It sounds as if the CBO study is giving the congress the cover it needs to give Paulson the authority he asked for. We are going to hear alot of complaining about the bill - but it sounds like everyone thinks it will be inevitable. The markets are trading as if the deal is already done. Between the markets and the CBO report there is little from preventing this from becoming a reality. Hopefully Paulson original declaration that no funds will be needed is reality - rather than the Tester/Shelby prediction of $1 trillion of taxpayer funds.

    A combover will help things

    Hopefully congress does not act until after the books have been looked over. And hopefully they do not believe everything they are told. And hopefully we have another set of impartial eyes also combing over the books. However, just how is the Fed's analysis of Fannie Maes and Freddie macs books going to be. It seems the bailout is imminent and that the only numbers to be generated will be ones that push towards the bailout.

    Here is an article from the New York Times regarding Treasury Secretary Paulson's comments to the New York Times. The article is titled As Financers Are Inspected, Bush Prods Congress. It sounds to us as if the inspection is for justification and pressure purposes, rather than an honest investigation. What do you think?

    Bank examiners from the Federal Reserve and the Comptroller of the Currency are inspecting the books of the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, as the Bush administration prods Congress to approve a plan that would enable it to inject billions of dollars into the companies.

    Treasury Secretary Henry M. Paulson Jr., in a meeting on Monday with reporters and editors of The New York Times, said the Fed and the comptroller’s office began combing the books of the two companies after their declining stock prices caused widespread anxiety in the market. The two companies guarantee or own almost half of the home mortgages in the United States. The Bush administration is hoping they can be the engine that pulls the housing market out of its yearlong slide.

    ...
    Some lawmakers and critics are concerned that a further sharp erosion in housing prices could lead to more foreclosures than Fannie and Freddie could absorb without a large investment or loan from the government, which would involve committing taxpayer funds.

    ...
    Mr. Paulson said he expected that the conclusion of the examination by the Fed and the comptroller would provide an important signal of confidence to the markets.

    ...

    For the Fed, the assignment is the latest expansion in recent months of its role in the markets. As investment banks have made use of the Fed’s lending programs after the rescue of Bear Stearns, Fed officials have been more heavily involved in supervising those institutions than any time in its history.

    The government has been adopting new measures to help the various finance industries. Aside from the Bear Sterns "rescue" how more tax payer monies should go into propping up irresponsible entities. We saw from yesterday that the government was just as negligent as other institutions. But now we should trust them with a blank check for 18 months? Will they really fix things or rob us blind?

    Monday, July 21, 2008

    It was the best of times

    At the end of the Great Housing Bubble it really seemed that house prices only went one way. Prices were rising so fast. New developments were springing up overnight. The smart investors were buying properties up then raking in the dough when a development was finished. It seemed like a safe bet - actually even better than a bet - a sure thing!

    That was about three years ago. And boy have things changed. Prices have plummeted. The new developments seem to be getting hit worse than most other places. Foreclosure after foreclosure lining the streets. The Orlando Sentinel has an article on Foreclosures shuttering a Sorrento Springs Development. Let's take a look -

    This is Terragona Drive in Sorrento Springs, an upscale development amid the lush, rolling pastureland of rural Lake County. It has an 18-hole golf course, a resortlike clubhouse, tennis courts, walking trails and neat rows of two-story, earth-toned homes with architectural flourishes.

    But like dozens of developments throughout Central Florida, Sorrento Springs blossomed circa 2005, just as the housing market began to wither. Now it is rife with foreclosures.

    There are investors who gambled on ever-rising housing prices -- and lost. There are families whose breadwinners lost their jobs -- and now face losing their homes. There are kids who have lost friends; moms who've lost support networks; renters who have been booted out because the banks are foreclosing on their landlords.

    ...
    A perfect storm of liberal lending policies, inflated home values, aggressive developers and investors and a faltering economy has fueled a foreclosure rate in Florida more than twice the national average. Last month alone, lenders foreclosed on 40,351 homes throughout the state -- one for every 211 households.

    Terragona Drive is just a microcosm of the problem. And without a major interstate or expressway running through the area, it faces a particularly tough time competing in the rental market, given the current cost of gas.

    "When we bought, there was this rumor going around that there was going to be a highway through there that would connect to Interstate 4," says Raza Dhanji, a 38-year-old Lake Mary businessman who bought four homes in the subdivision as investments. "We were told two years -- max."

    Promises of great wealth made illusions seem real. The article profiles several people from the development. Some are able to stay but have seen their equity disappear. Another invested at the peak and is now losing $10,000 per month. Another family bought at the peak - but a job move with a house that would not sell eventually led them to foreclosure. Sorrento Springs sounded like it would be paradise, but things did not turned out as planned.

    The FDIC will make everything OK

    Or maybe just exacerbate the problems.

    While we know that there is a still run at IndyMac, people assume that having the FDIC run it everything will work out. Bad lending practices will be discontinued. Only the highest standards will be implemented. Everything will be on the up and up.

    The only problem is that things do not always work out so well. The Wall Street Journal has an article showing how the FDIC can use some some of the shady practices used by the worst of them. Here is a very interesting article regarding the FDIC Facing a mortgage mess after running a failed bank -

    The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.
    The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.
    ...
    In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior.
    In a statement, FDIC spokesman Andrew Gray said the agency was "prepared to immediately work with Beal" to fix any additional mortgages originated under its watch that violated consumer-protection laws or the FDIC's own subprime-lending guidelines. As for the loans it has already acknowledged were predatory, Mr. Gray said the FDIC has provided recompense to affected borrowers and instructed its servicing contractor to avoid foreclosing.

    ...
    Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. -- which the bank in turn sold to investors -- also has been troubled. As of April, investors had suffered "realized losses" -- which generally occur after foreclosures -- on 511 of the 3,964 loans in that pool, according to data provided to investors. The vast majority of the loans were originated when the FDIC was running the bank, the data show. In May and June, two ratings agencies downgraded some securities backed by the mortgages, with one citing a large number of severely delinquent loans and other problems. A Bank of America spokesman declined to comment.

    Almost makes the current situation seem even worse. The ones who are supposed to alleviate the problems and watch the situation were contributing to it. Over 28% of the loans sold to Beal Bank the FDIC generated were not performing. Meanwhile almost 13% of the loans sold to Bank of America have gone into foreclosure. And most of the 13% came from when the FDIC was in charge. Not good, not good at all. And not the way to instill public confidence.

    Sunday, July 20, 2008

    Serial Refinancing in Lake Hopatcong

    Times were interesting during the Great Housing Bubble. Home prices were going up, interest rates were going down, and exotic loans became the norm. It was easy to take more and more equity out of a property while paying the same or even lower monthly payments. To most people that magic monthly number was the only number they needed to hear. What if the monthly payment doubled in 3 years - well just refinance and you will be all set. Common sense evolved into - there was so much more important things to do with your money than pay off your home. Everyone felt they were financial geniuses. But were we really investing our money wisely? Was that Hummer a wise investment? What about those ubiquitous Coach tote bags? How are those paying off now?

    Most people like to view people who have face foreclosure in 2 ways - either 1) they are victims of health problems, divorce, death or shady lenders or 2) they are manipulators taking out more money then they could ever repay and have caused problems for the rest of us. There is probably a little of both to most stories - but will we ever know the truth? Does the truth even matter at this point? Owners have properties foreclosed. Home values are declining. The economy is hurting. Are we really going to spend the time and money to find and prosecute all of the guilty parties?

    Maybe we can glean a little knowledge and understanding by looking at a serial refinanced property in the Beautiful Lake Hopatcong area. Here is the Property -

    Here is the property info -
    Single Family Property, County: Morris, Approximately 0.34 acre(s), Year Built: 1950, Parking space(s): 1, Basement

    Property Features

    • Single Family Property
    • Status: Active
    • County: Morris
    • Year Built: 1950
    • 2 total bedroom(s)
    • 1 total bath(s)
    • 1 total full bath(s)
    • 5 total rooms
    • Style: Colonial



    Here is the financials -
    • The property was purchased for $103,200 in Dec., 1999.
    • The original mortgage from Dec. 1999 is not available on the internet database.
    • A the mortgage was refinanced in October 2001 for $103,530 with Allied Mortgage Capital Corp.
    • The property was refinanced with cash-out in May 2003 for $170,000 with Chase Manhattan Mortgage Corp.
    • A cash-out refi with First Interstate Financial was taken in April 2004 for $196,000.
    • A HELOC was opened in June 2005 for $34,000 with Countrywide.
    • A Lis Pendens started the foreclosure process in May 2007.
    • Currently for sale from a realtor for $185,900.

    First thing we know is that the property was purchased before the bubble. It was also a time before 100% financing and exotic loans were easy to be found. So it is safe to assume that some percentage (maybe as low as 3%) was invested in the property at the time of purchase. We do know that 2 years later any down payment had been pulled out. We also can see that pulling equity out became a ritual - first $66,800 followed by another $26,000 then $34,000.

    The owner pulled out a grand total of $126,800 during the 8 plus years of ownership. That totals a second income the house provided of approximately $15,850.
    Not bad for a second income. Remember not only is this money not taxed but the interest is tax deductible. During the bubble the owner did pretty well. Maybe not so much now - no house and bad credit.

    So how did the lenders do? It looks like the various lenders will lose a total of approximately $54,454 if the property sells for the full asking price. Plus of course the other related costs that lenders lose during the foreclosure process. Not a huge loss, but still a loss none-the-less. Do we need to know why the losses occurred? It would probably make us feel better if we had a villain to blame. But what would that solve or rectify? Anything?

    Saturday, July 19, 2008

    Trading Equity for a Lawnmower

    There were some crazy things happening during the Great Housing Bubble. If you owned a home it seemed that you could get money for nothing. We all turned into rock stars and Rockefellers. Using our house - or what we owned of it - to buy things we could not otherwise afford. From luxorious cars to lawn tractors - yes lawn tractors. This brings us to an article from the Washington Post called Deere John: It's Been A Good Ride. Let's take a look -


    The riding lawn mower has long been a barometer of the American dream, been a symbol of having arrived in the suburban middle class. It says, "I have so much lawn to mow, I need to sit down."

    It says, I've made it, I've escaped that funky old rowhouse neighborhood with the asbestos siding and yards like dirt-scabs. My land, my spread, not enough to plow, but way too much to mow the old-fashioned way. It says, I'm Jefferson's dream of the yeoman farmer. It says, I'm rich enough to not only raise a worthless crop, but to pay money for the privilege. It says, I'm a boy with a boy's rightful toys; a real American man.

    ...

    Now it's saying something else. It may be a measure of the forces lined up against us. The riding mower seems to be on the wrong end of every headline. If economic news -- from gas prices to shrinking nest eggs -- is like the magnifying glass focused by an 8-year-old to fry a bug with sunlight, riding mowers are the bug.

    The news: The riding mower industry "is deeply troubled by the decline in housing starts," says Kris Kiser, spokesman for the Outdoor Power Equipment Institute in Alexandria. "New home construction is a good barometer for us. But you add foreclosures, decline in housing starts and the decline in housing sales, and you have the trifecta."

    ...

    "There were a lot of people using up home equity to buy Lexuses and $8,000 lawn mowers," he says. His sales of these mowers are down by a third.

    While that does seem a bit excessive - at least they are the owners of their lawnmowers. The people who are spending the equivalent amount on lawn service will not even own their mowers in the end. There is nothing wrong with lawn service - if it fits within a budget. However if home equity lines need to be used to afford things like lawn service, nail salons, designer clothes and eating out - then current choices and life styles are not sustainable.

    Friday, July 18, 2008

    And then the work stopped

    When construction projects stop negative reverberations are felt throughout a community. Jobs are lost. Revenues are lost. The project becomes an eyesore to those around. Wire fences usually outline the perimeter. People worry about vandals and kids getting inside the barrier. Police need to be on extra patrol. Not good. Not good at all.

    Unfortunately this is a common problem on the down cycle of a building boom. The New York Times highlights some of the problems of construction stopping in Asbury cycle due to the economic downturn. The article is called Deferred Hopes, Stalled Projects. Let's take a look -

    WHEN word came last December that work had stopped at the Esperanza, the centerpiece of Asbury Park’s long-awaited beachside redevelopment, even the project’s name — “hope” in Spanish — seemed to mock the city’s aspirations.

    “I know a lot of people were very much stunned, and upset,” said Dean Geibel, the principal of Metro Homes, the developer of the double-tower condominium, for which only the foundation has been completed.

    The Esperanza was starting to rise on the site of a previous failure, where a steel skeleton had stood for two decades, menacing prospects for revitalization. “And we were sort of the first big project in New Jersey to take a hit when the financial market turned sour,” Mr. Geibel said.

    Since then, destructive market forces have slowed progress on other large projects around the state. Work has sputtered to a stop at two of them — the $1.5 billion Centuria development at the foot of the George Washington Bridge in Fort Lee, and the $66 million Town Center development in Somerville — before foundations have even been laid.

    ...
    Meanwhile, in Asbury Park, Mr. Geibel is working feverishly on a scaled-down plan — and on securing reduced financing — with the goal of beginning work afresh by the end of the year.

    The article also discusses projects that have been stopped or scaled down in Fort Lee and Somerville. With the current economic problems developers are having trouble getting loans. Without the loans and investors the work can not get done. Hopefully the turn-around will be quicker than the last one and these shells will not stand uncompleted for another 2 decades.

    Thursday, July 17, 2008

    Show Me The Money

    New issues arising at the Wachovia Securities. Here is an article from CNN Money about Regulators raiding Wachovia Securities. And the apparent problems in the "Show Me" State. Let's take a gander -

    Securities regulators from several U.S. states on Thursday raided the St. Louis headquarters of Wachovia Securities, seeking documents and records on the company's sales practices.

    The move is part of a broad investigation into questionable practices involving auction rate securities, Missouri officials said.

    ...
    "Hundreds of Missouri investors have called my office because of inability to access their money," Carnahan said in a statement. She added that she aims to take actions to "to make these investors whole."

    The action, which also sought information on internal evaluations and marketing strategies, comes after more than 70 formal complaints were filed with the Missouri Securities Division over the last four months, representing more than $40 million of frozen investments.

    This does not sound like good news. Even it turns out to be nothing in the wake of bank runs and scares this will not instill public confidence.

    But the biggest thing that stands out is that Wachovia is one of the companies "tossed to the dogs." Was Wachovia and Washington Mutual left off the restricted short sale list for a reason ? It is starting to look that way.

    Economic Fairy Tales

    Even though it would be wonderful, there is no one with a magic wand that can wave it and make all of our current financial problems go away. Instead of turning our pumpkin into a carriage, the carriage is turning into a lemon. Our ball-gowns are now rags. Many people view really want our fairy godmother - or in our economic case - our fairy godfather to fix things and make them the way we want them to be. Unfortunately no one has that power. We spent too long in our fairy tale and now we are paying the price. This article form the Economist, titled Boxed-in Ben, illustrates how there is little that the Fed chairman can do to resolve things.

    JITTERY investors and anxious politicians have often relied on Federal Reserve chairmen to conjure up something to steady their nerves. But when Ben Bernanke gave his twice-yearly monetary testimony to Congress this week he had little to offer but unvarnished and uncomfortable truths. There were “significant downside risks” to the economy’s outlook, he said, and the chances that high inflation would persist had “intensified”. Mr Bernanke did not specify which was the bigger threat: recession or inflation. This lack of a clear policy bias invited the conclusion that, for the time being at least, the Fed thinks it cannot safely move interest rates in either direction.

    ...
    The Fed’s trouble is that, although the economy has avoided recession so far, it may not do so for much longer. Indeed Mr Bernanke acknowledged that some of the demand that the Fed had hoped for later this year may have already come and gone. So the economy’s first-half resilience may be of more concern than comfort.

    ...
    Consumer spending seems likely to flag too. A jump in retail sales in April and May owed something to the tax rebates first sent out at the end of April. But a slim rise in retail sales in June is a hint that the effects of this one-off stimulus may already be fading. Another crutch for consumers has been the home-equity loan. Borrowing from this source rose by 3.8% between March and June, despite a big fall in overall bank credit. This increase came about partly because access is blocked to other forms of borrowing, such as mortgage refinancing. It may also be a sign of distress borrowing, as consumers battle with rising living costs. That battle will become harder if, as anecdotal evidence suggests, banks are cutting pre-arranged credit lines.

    ...
    The good news in the first half may even make the Fed’s job harder. If consumers have already used up much of their tax rebates and credit lines, spending is likely to flag soon. A first-half recession followed by a sluggish recovery—the standard forecast until recently—could well have enabled the Fed to raise rates in the autumn. But with the worst news on the economy yet to come, Mr Bernanke can only keep his fingers crossed that inflation does not become ingrained.

    Unfortunately sometimes there is little that can be done other than just letting things work themselves out. Well, there may be a run on pixie dust - but that really won't change much. The last round of pixie dust was called a stimulus check - and instead of resolving problems it just delayed them. Hopefully the methods they are adopting and implementing do not exacerbate the current problems.

    Wednesday, July 16, 2008

    Too much debt with no oversight

    During the Great Housing Bubble people were buying everything they wanted. Everyday our equity was growing. Where did all the money go? But was it really money? It sounds as if it were debt - and it is still there. A great video to watch is Money as Debt. It is long but worth the time.

    During the bubble people believed the equity was theirs to spend when they wanted and how they wanted. Now they find the money is not available. During the bubble it seemed as if anyone could get 100% financing regardless of income, debt or credit scores. Now they find financing (and refinancing) is limited. During the bubble it seemed as regulators were forgotten about peripherals. Now they are major players running the show. How things have changed!

    That brings us to an article in the US Today titled Economic Pain: 'payback' for debt-fueled growth. Lets take a look -


    If it wasn't clear before Tuesday, it is now: This is no ordinary economic crisis, and it won't be over anytime soon. In fact, problems are multiplying. A year ago, the financial virus seemed confined to subprime mortgages, defaults on loans given to those with less-than-perfect credit. Now, much of the banking system appears rickety, and the U.S. economy has slowed to a crawl. But thanks to robust demand from still-growing countries such as China, the prices of commodities from oil to food have soared — hitting Americans from the gas pump to the grocery checkout.

    ...
    Between now and then, the business pages won't make for happy reading. The economy is going through what analysts call "deleveraging," a fancy way of saying debt repayment. During the housing boom, Americans and their financial institutions borrowed way too much money. Now the bills are coming due — economywide. And that's what is making things so tough in so many different ways.

    ...
    How bad might it get? Perennial doomsayer Nouriel Roubini, who calls this "by far the worst financial crisis since the Great Depression," predicts stocks will fall 40% from their peaks. That translates into a Dow of 8568 — a level not seen since 2003.

    ...
    Major global banks now need to reload by raising money — lots of it. Even after scraping together $350 billion over the past 12 months, the U.S. and European financial systems remain undercapitalized, says Mohamed El-Erian, co-CEO of Pimco in Newport Beach, Calif. He calls the current predicament "a crisis at the core of the global capitalist system" and likens the banking sector's woes to a car running desperately short of oil.

    ...
    An era marked by regulators' light touch is at an end. "The system got carried away with financial innovation or financial engineering," El-Erian says. "Regulators didn't recognize how quickly things were moving. Now they're catching up."
    There is a big difference between having money and having debt. Having money means freedom - but debt is in imprisoned. Currently our ulcerated and battered financial selves are trying to heal from all the debt we have consumed. That will take time. That will require changes. Hopefully we are smart enough to internalize and make the necessary changes so we can break out of our self-made debt burdens and re-enter the world again.

    Tuesday, July 15, 2008

    Subprime Lending - What went wrong?

    Interesting article on things that were going wrong during the Great Housing Bubble. In this CNN article titled Confessions of a subprime lender: 3 bad loans are profiled. The loans profiled are basically loans that the lender ended up being responsible for.

    We have the supposed "villain" with a heart of gold turned hero - the subprime lender who got into the business to make money but also helped people along the way. But who noticed things were not working appropriately. By trying to help people, many people were worse off then before the loans. Read the article for the examples. Let's take a look at the author -

    Richard Bitner opened his own mortgage shop in 2000, and had the good fortune to bail out of the business in 2005, before the housing crisis hit.

    He saw the shoddy lending practices that got us into this crisis first hand, and has chronicled them in his book, "Confessions of a Subprime Lender." By the time he quit, said Bitner, "Lending practices had gone from borderline questionable to almost ludicrous."

    He and his two partners ran Dallas-based Kellner Mortgage Investment, a small subprime lender that issued about $250 million in loans annually. The firm worked through independent mortgage brokers, and then sold the loans it closed to investors or to larger lenders, such as Countrywide Financial, which was recently bought by Bank of America (BAC, Fortune 500).

    Bitner, like so many other subprime lenders, was drawn to the field by the fat profits it promised - these loans paid three to five times more than prime loans. But, says the 41 year-old married father of two, he also took pride in the idea that he was helping people with damaged credit become homeowners.

    ...
    The lack of professionalism, the crazy loans, the finagle factor and the open fraud finally drove Bitner from the business. Although he escaped the worst of the mortgage meltdown, the company he founded did not; it folded in early 2007.

    This is the first in the mortgage lender "tell-alls." There will be more to follow - maybe not books, but articles, television shows, and if we are really lucky a Lifetime movie. But the more documentation on what went wrong, the better.