Foreclosure Summary

We knew that yesterday's numbers were bad, overall. But reading a summary of the numbers makes things seem even worse. This New York Times article titled Foreclosures Rise puts thing into perspective. Let's take a look -

One in 84 American housing units received at least one foreclosure filing in the first half of the year, according to RealtyTrac, the online marketplace for foreclosure properties.

Altogether, that makes for a total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — reported on 1,528,364 American properties in the first six months of 2009. Compared to the same period last year, the number of total foreclosed properties rose nearly 15 percent.

No green shoots in this direction. And not for some time to come. Almost 2 million homes in distress. With unemployment numbers still rising. And since there is a lag time from when people stop paying their mortgage to when the default notices start this will continue to rise for some time.

Gloomy indeed!

Where is the Recession At?

Everyday we seem to hear about the green shoots. Shouts that the recovery is here. The recession is over. The recession is over. Then some hard numbers come out and everyone stops to ponder where exactly we are on the road to recovery. Are we past the turning point? Or is this just a lull and everyone is getting very comfortable? One argument often made is that since there has been no real fundamental changes to the banking system that we are not on the road to out of the recession. This week US News gives us an article titled 4 Ways to Tell Whether A Real Recovery Has Begun. Let's take a look -

The danger of hyping a technical recovery is that it will arrive, with much fanfare—but fail to make ordinary consumers feel better off. Many economists, for example, are predicting that the recession will officially end by this summer or fall. The only problem is that when a technical recovery begins, a lot of companies fail to get the memo. They don't play along; they keep payrolls lean and maybe even continuing to lay off workers. So to guard against false optimism, here's how to tell when a real recovery is finally kicking into gear:

Unemployment improves. The single best indicator of the health of the economy is the job market. People who have lost their job, or worry that they might, obviously hoard their money and don't spend. That spells doom for an economy driven by consumer spending, as ours is. But once it's clear that jobs are coming back, consumers are more likely to relax and open their wallets.

...

Housing prices stabilize. This has become a mantra by now: For the economy to get healthy, housing prices must stop falling. Problem is, the houses haven't been listening.

Housing matters for two reasons: It represents a big chunk of the economy, and it's the largest single repository of Americans' household wealth. With prices falling, buyers are scarce, since nobody wants to buy an expensive good today if it's going to be worth less tomorrow. With few buyers, all the other economic activity that swirls around real estate—remodeling, appliance and furniture sales, relocation services—is depressed. Homeowners are worse off, too, because the value of one of their vital assets is eroding.

...

Household wealth increases. The housing bust and the volatile stock market have hammered the traditional investment tools that most Americans use, causing epic declines in the wealth of Americans. Since 2006, household net worth has declined by about $12 trillion, which equates to about $107,000 of lost wealth for each of America's 112 million households. That's partly because of the 40 percent plunge in the stock market since October 2007 and partly because of the steep declines in real estate values.

...

President Obama stops fudging on the economy. There's still a lot that could go wrong, and Obama knows it. Yet part of the president's job is to reassure skittish Americans, even as his economic lieutenants are fighting battles in the war room. That's why Obama has been making half-hearted pronouncements, like saying that the economy shows "some return to normalcy" and that "we expect there'll be some stabilization of the economy." Virtually all of Obama's remarks on the economy contain modifiers and future tense and a not-quite-there-yet quality, since he'll blow his own credibility if he tries to convince Americans that they're better off than they actually are. When Obama starts hedging less, be happy. That will signal better days. Finally.

Well - there we have it. And by these 4 signs - unemployment, housing value stabilization, personal savings, and political posturing - we still have a long way to go. Sounds like a few more years. Maybe by that time lending institutions will have made fundamental changes to take care of that measurement as well.

Recasts and Foreclosures

Over at Calculated Risk there is a great post regarding the upcoming wave of foreclosure due to option arm recasts. Just the posts title is shocking - Option ARMs: Paying $98 a month on a $350 Thousand Mortgage! Lets take a look at the post -

From Bloomberg: Option ARMs Threaten U.S. Housing Rebound as 2011 Resets Peak

Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

Her payments started at 3/8 of 1 percent, or less than $100 a month ... The 73-year-old widow may see it jump to $3,500 a month in two years ... She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.

[CR Note: the 145% recast level is much higher than normal. This is now a GMAC loan]
...
About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

[CR Note: recast, not reset. This article uses the two terms interchangeably]
...
“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

And compare these two comments:

“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” [Cameron Pannabecker, the owner of Cal-Pro Mortgage] said. “The consumer had a product pushed on them that they had no hope of understanding.”
...
“The problem is, real estate values went down,” [Peter Paul of Paul Financial, the loan orginator] said.

We always compare these to reverse mortgages. They are both complex and new financial instruments where the vast majority of owners will not understand the details and get in trouble down the road. This is going to be a big mess since in the meantime the mortgages are increasing the property values are plummeting. We will see a wave of walkaways and foreclosures in the next few years.

Savings and Debt

One quarter of homeowners do have no savings. We would imagine that when the non-homeowners are factored in the savings level is even lower. And we really wonder of the three-quarters that claim to have savings have enough to carry them over for any substantial time period. Probably very few. Homeowner savings and some other interesting statistics are covered in an article from The Albany Business Review titled Survey: 25% of homeowners have no savings. Let's take a look -

Twenty-five percent of U.S. homeowners have no savings to cover their living expenses if they lose their job, according to a survey by Wells Fargo & Co.

The quarterly survey discovered that to cut costs, homeowners are taking extreme actions; 34 percent say they have had family members or friends move in with them in the past year.

It also says 42 percent of the respondents are spending less on their children in the weak economy.

Of those who have debt other than a mortgage, 43 percent say they think about their debt every day. And 24 percent think about it at least once a week.

Because of their debt, 36 percent say they’re cutting back on expenditures such as dining out and buying clothes.

Interesting information. Notice that those cutting back are due to debt. We wonder if you added the number of people who are cutting back out of fear for their jobs - probably brings that 36% up significantly higher. Then add in the number of people who have had their credit cut and just do not have the means to have additional expenditures. Since we all know that there are many who will spend that credit regardless of the debt piled up.

Neither the money nor the incentive to spend it there. And it looks like neither one will be there for some time to come.

FICO Score Concerns

With the credit drying up and lenders reducing the amount available some of the FICO procedures are causing problems for even the best of consumers. While the full FICO methodology is a proprietary secret, we do know that part of the calculations are based on the amount of credit used as a percent of the consumer's available credit. So when a lender arbitrarily halves your credit card limit a ding will be left on your credit score. And since most of the universe seems to revolve around the FICO score - from auto insurance to potential employment - a couple dings from lenders could create real life problems for many people. Today we find we are not alone in our FICO concerns with this post titled Freedom From FICO over at SavingAdvice.com. Lets take a look -

One of the benefits of a life without debt is (some) freedom from the gods at FICO. Because I don’t do debt, my FICO score is not as important to me as it is to some and that takes a lot of worry out of my life. I see many people freaking out about their FICO scores because they know they will need a loan in the near future.

...

And it’s a good thing that I don’t worry about it too much. Just the other day, I got a notice from a credit card that they were lowering my limit. ... More and more credit cards are closing cards and lowering limits and even the debt free are not immune to the madness. My score will no doubt drop a few points in the coming months, and not because of actions I take. But I can live with it.

I know many people who are at their wits end because their scores are dropping through no fault of their own as credit lines are slashed and even eliminated. This practice dings the all important “utilization of debt” ratio that comprises a large part of a credit score. When you have lower credit limits and your outstanding debt creeps closer to the maximum, your score goes down. And it’s happening all over the country right now. Some people, desperate for a car loan or a home equity loan are being denied because their scores have dropped, even though they have done nothing to deserve it. It’s cause for concern if you require debt to get through life.

I don’t agree with FICO’s methods for determining a score and I don’t agree with the way a lot of insurance companies, employers, and others use the score to determine who gets what. It’s a flawed system that takes away the human element and places all the control on a computer algorithm that has no concern for you as a person, your special circumstances, or that the credit card companies jacked you around. But it’s the system that the world uses and, like it or not, they’ve managed to make it so that even those of us who don’t use debt have to concern ourselves with this score.

It does seem pretty scary how one company can have so much influence. And since the algorithms are trade secrets it can be even more worrisome. We hope they have layers and layers of securities in place - even from their own employees. One mad FICO employee doing some random havoc could ruin numerous people's lives. With great power comes great responsibility. Oh, that is not working out so well for our best and our brightest. Let's hope things are better in Minneapolis then on Wall Street.

Storms and Earthquakes

The first thing we try to do is stay out of harm's way. We try to protect ourselves from financial problems. Most of the time we think we are making prudent decisions, only to have crisis occur around. In this current financial storm many people have had their quality of life deteriorate through no fault of their own. Houses worth only half of their purchase value. Medical bills forcing everything else to collapse. 401ks losing more than half of their value. The things we had set up to protect ourselves are too damaged to do any good.

And even worse is having your whole life shaken up through no fault or doing of our own. In some cases the financial world had changed faster than some could keep up with. Other cases involve people chasing down dreams and being left in nightmares. Even those who are doing the right thing are anxious and nervous. An article in USA Today titled 'Perfect storm' puts all types in financial peril illustrates many of these examples, and more. Lets take a look -

With every furlough, layoff or stock market drop, Americans of all ages and backgrounds are seeing their incomes dwindle, bills pile up and financial options disappear.

The number who are suffering has increased by 3 million the past year, according to a recent Gallup-Healthways survey. Some 37% of us said we were worried about money last week. Last year, 3.2 million consumers contacted the National Foundation for Credit Counseling, up from 2.2 million in 2007 and 1.4 million in 2006.

...

The personal stories illustrate how unemployment, health problems, shrinking retirement savings, unaffordable mortgages and other financial stressors lead to unprecedented challenges, worry and consequences. Recent history has shown periods when one area of concern consumed a family — a lost job for six weeks, for example — but nothing like this. And while people once could piece together solutions to recover financially or prevent outright financial ruin, fewer options exist today.

...

Whether you're in a financial crisis depends on your debt problem, says Steve Bucci, president of the Money Management International Financial Education Foundation, a non-profit organization. If you are less than 90 days late on a credit card bill, that's not a crisis. But if you are 90 days late on your mortgage, that's an earthquake, and if you are one month late on your car loan you might lose the car, Bucci says.

...

The elderly have been harder hit than most. Personal bankruptcy filings among those 65 and older jumped 150% from 1991 through 2007, according to a study released last year by AARP. Although they have been known as the most frugal savers, today, many of them are deep in debt and without a safety net.

Howard Zynkian, 89, filed for Chapter 13 bankruptcy more than a year ago to help him save his home. Unlike Chapter 7 bankruptcy, which allows people to have most unsecured debts discharged, Chapter 13 sets up a plan for the filer to repay most debts over several years.

But Zynkian, who lives in El Cajon, Calif., refinanced his home five years ago and didn't understand that he was getting into a risky, alternative mortgage. After his monthly mortgage payment had jumped from $1,500 to $2,700, he was facing foreclosure.

The article is chock full of story after story of people in financial peril. We know these are tough times, but to read the stories really can put things into perspective. It also helps those of us who are worried but not on the edge get a better perspective of our own situation. And while all the stories are sad, the one we chose about the 89 year old man who did not understand his mortgage or his financial situation. We imagine after this publication the Reverse Mortgage industry will be at his door helping him plan for his financial future. trying to extract the little he has left...

Credit Games

Things we know - those with lower credit scores pay higher interest rates. Using up more of your available credit lowers ones credit scores, which will then bump up interest rates. Lowering available credit makes your current used credit larger in relation to available credit which can bump up your score. See, all that has to be done is lower available credit, which may lower credit ratings below that magical 750 threshold to raise interest rates. It basically looks like anything (or nothing) one tries to do - other than keep make keeping up with their credit score a full time job - will negatively impact one's credit score. This article from the News Tribune titled Banks' shifting credit terms can hurt your score explains it all. Let's take a look -

As the worldwide credit crunch has hit home in the form of reduced credit-card limits and home-equity lines, not all of this curbing is fair. In many cases, you may be targeted by zip code or other invisible criteria.

It’s not hard to get steamed about their spurious practices. Card issuers can legally raise or lower your limits and terms at any time. Most cardholders don’t know how to fight back and get better terms.

If banks clip your credit limit, it can hurt your chance to borrow at the best rates, especially if your record is spotty or you are a small business.

The chill is reaching consumers as banks are expected to cut credit lines by some $2.7 trillion, according to Meredith Whitney, a well-known Wall Street banking analyst. Some $2 trillion out of $5 trillion available may be “removed from the system by the end of 2009.”

...
The bottom line in personal credit is to maintain the highest credit score possible. While there are several scoring systems, the best known is the FICO program. Unfortunately, the details of how credit bureaus calculate scores, mostly determined by Fair Isaac Corp.’s system, are a trade secret.

Generally, any FICO score of more than 750 translates into the lowest finance rates on everything from cars to mortgages. But a good credit rating means some maintenance on your part, and some of the advice is counterintuitive.

For many it is a lose-lose situation. With the tightening of credit goes the lowering of credit scores. With the lowering of credit scores goes the tightening of credit. Pay more and get less. Our whole system seems to run on FICO - yet everything they do are trade secrets. One company that is not accountable has a lot of power over our lives...

Which Bottom Will We Hit First?

There are two bottoms to the housing crisis - the bottom for prices and the bottom for sales (in number of sales). Each month we hope that we have reached bottom, and the next months number roll in showing us an even lower bottom. In some areas of the country the only reason the number of sales has bounced back up from bottom is due to the record number of foreclosures at bargain basement prices. But hey, they increase on set of numbers. In an article from The Record titled Where's the bottom? shows how much things have fallen. First lets take a look at the chart they put together of current median prices in municipalities that had at least 30 sales in the 4th quarter of 2008 -

	Highest-ever median	Quarter	4th quarter 2008 median	Percent change
Bergen
Englewood	$425,000	3rd, 2006	$364,000	-14
Fort Lee	$599,500	4th, 2005	$453,000	-24
Hackensack	$345,000	2nd, 2006	$307,500	-11
Mahwah	$494,000	4th, 2006	$379,000	-23
Paramus	$635,000	2nd, 2007	$606,000	-5
Ridgewood	$791,000	3rd, 2006	$631,000	-20
Passaic
Clifton	$400,000	2nd, 2006	$320,000	-20
Wanaque	$371,500	3rd, 2005	$325,900	-12
West Milford	$331,000	4th, 2005	$300,000	-9

Pretty mixed results - big hits in Fort Lee, Clifton, Mahwah and Ridgewood, but just moderate declines in Paramus and West Milford.

Now lets take a look at the accompanying article -

Mounting economic woes worsened conditions in North Jersey's stumbling housing market at the end of 2008, sending prices down another 8 percent and the number of sales down to levels not seen in nearly 20 years.

Amid a deepening recession and a banking crisis that squeezed the flow of mortgage money, the median price for a single-family home in Bergen and Passaic counties slipped to $390,000 in the fourth quarter, from $425,000 in the same period of 2007.

...

An analysis by The Record of data obtained from county and state agencies found that:

* The median price for single-family homes in Bergen County sank from $455,000 in the fourth quarter of 2007 to $425,000 in the fourth quarter of 2008. In Passaic County, the decline was steeper, from a median of $370,000 to $335,000.

* Since the all-time peaks of $495,000 in Bergen County and $390,000 in Passaic County, medians in the two counties both are down 14 percent. While substantial, those drops are nowhere near the dips of 30 percent or more felt in other parts of the country.

* An estimated 1,600 to 1,700 homes sold in Bergen and Passaic counties from October through December. That is down nearly two-thirds since the all-time fourth-quarter high of 4,713 in 2004 and the first time since 1990 that fewer than 2,000 homes sold in any fourth-quarter period. The Record used past years' trends to reach this estimate; the available data did not include all sales through the end of 2008 because of a lag in deed recordings.

* The downturn not only cut into potential profits for people who bought before the real estate boom of the 2000s, but it forced losses onto sellers who bought when prices were at their highest. Among the 185 homes that sold during the peak of the real estate boom and sold again in 2008, two-thirds lost value.

...

"Is it turning around tomorrow? No. But will it turn around? Absolutely," said Karen Lampiasi, manager of Coldwell Banker Residential Brokerage in Mahwah. "When it will happen is hard for anybody to predict."

The Coldwell Banker may be right that is will someday turn around, but where the numbers end is as important question for many of us as well as the when. How low can the number of sales go down before things turn around? How much below peak prices before the prices bottom out? In some parts of the country areas have are less than 50% of peak price. We have seen a local foreclosure sell for 80% off peak price. Those foreclosures are helping drive down prices in other areas of the country, but they are helping the number of sales increase. Perhaps that is not the model we should look to follow.

American's Economic Confidence Declines

Shocking news that in the midst of a recession, now referred as The Great Recession people are not as confident about their economic stability as they used to be! Could the banking crisis, the soaring unemployment levels and ever-rising foreclosure numbers really make people worry about their financial stability? It may take a poll to validate it, but it really is something we already knew. Why else would Depression Era Cooking be all the rage? Well, lets take a look at this CNN article titled Poll: Americans fear losing their quality of life to see the what the public-at-large feels -

Thirty-nine percent of people questioned in a CNN/Opinion Research Corporation survey released Thursday morning say they're very confident they'll be able to maintain their standard of living over the next year. That's down 6 points from last year.

Half of all homeowners with a mortgage say they are very confident that they can continue to meet their mortgage payments, but that is also down, by 8 points, since last year. Americans' confidence in their ability to pay other debts, such as credit cards and car loans, has also dropped in the past year.

...
"As the nation's economy has gotten worse, Americans' confidence in their own economic prospects has slipped, and it is lowest when it comes to long-term goals such as saving for college or retirement," said CNN Polling Director Keating Holland. "The public is fairly confident on personal matters such as paying off mortgages or other debts and on maintaining their standard of living, but the last year has seen a worrisome erosion of confidence."

The polls show a decline in keeping the current (read housing bubble) standard of living, keeping up with the mortgage payments and well as other debts.

Long term goals are even worse. Maybe referring to 401Ks and 201Ks is helping to erode that confidence. Also the fear of opening quarterly retirement statements that appear to be in continuous free-fall is also helping to erode that long-term comfort.

Debt Advice

It is good to see that not every bank only see profit from debt. On the other side of the country, one bank see its long term viability of people having money and savings. They offer a free service to customers called Debt Savvy where they help people cut their expenses, live within their means, and save money. The bank realizes it can make a profit off of savings, rather than just debt. This innovative financial planning is discussed in the Bellingham (WA) Herald in an article titled Take Control of Your Finances. Lets take a look -

My No. 1 piece of financial advice in this economy is to take control of your finances: Examine your spending. Pay down your debt, however slowly. Set realistic financial goals. Take calculated risks.

...

When home values and stocks were on the rise and unemployment was low, customers didn't have time to shore up their personal balance sheets between trips to the mall. Banks were focused on refinancing mortgages and opening home-equity lines of credit. Some financial planners - shudder to think - were advising clients to cash out home equity to invest in the stock market.

(Remember when that equity was your money and you could invest it better than having it sit in the house? Some do.)

...

Thrivent Financial Bank, for example, recently trained all of its employees to be so-called "debt guides" for the bank's Debt Savvy program. The concept, tested in February 2008 and begun bankwide this year, is to analyze whether customers are in the right loans for their current situations.

Debt Savvy, which is free and available to the public, begins with a quiz. Thrivent's debt guides analyze the responses and make personalized recommendations. Guides explain how stretching out a loan to get the lowest payment will result in more money paid over time. They steer people with little willpower away from lines of credit toward loans with set terms.

...

Wells Fargo's Debt Pay Down Solution, begun in December, is a program with a three-pronged strategy. First, customers consolidate debt through a personal loan. Then they look for ways to spend less using the online tool, My Spending Report with Budget Watch. If the online tool finds extra cash lying around, the customer is urged to apply it to the loan's principal.

...

There is one place where getting out of debt is in vogue in every economic cycle. I'm talking about the financial counseling agencies whose business is to show clients the way out of hock. The good counselors out there aren't pushing pricey debt management plans. They're pushing realistic budgets.

This is a good article with good financial planning and management advice. Pay off your debts. Examine and reduce your spending. All simple techniques that do not take a lot of skill - but some personal analysis and reflection that did not occur during the bubble. Since money is not so free flowing to come our way, it is good to realize how it flows away from us. There are alot of little areas that can be cut without much impact.

Underwater Retirements

What happens to the group of homeowners were planning to use their home to fund their retirements. Forget 401ks, IRAs or CDs. Home investment and equity was seen as a sure thing to fund ones golden years. Now many of these potential equity retirees are finding themselves underwater. The golden years are looking a lot less golden for many people, especially a large group of boomers. In an article from the New York Times titled Baby Boomers Underwater illustrates how bad the financial future looks for some. Lets take a look -

The Center for Economic and Policy Research in Washington, which released the report last month, estimated that 30 percent of homeowners aged 45 to 54 were in this predicament, known as being “under water.” (About 15 percent of older baby boomers, 55 to 64, fell into that category as well.)

So, if these people were forced to sell their homes now, they would have to bring cash to the closing.

...

Another factor that has led to a decline in personal wealth is what the report calls “the near zero level of savings nationally” from 2004 to 2009.

“As a result of the bubble-inflated values of their homes, tens of millions of families opted not to save during what would typically be their peak saving years,” the report said.

...

Mr. Baker said he suspected that fewer baby boomer homeowners were under water in the New York metropolitan region than in other parts of the country, particularly areas where prices have fallen sharply, like Florida, Arizona and Rust Belt states like Michigan and Ohio. But he said that because of the financial industry’s persistent woes, owners in the New York area could see more significant declines in home prices this year.

Indeed, many areas in the region are already suffering. According to a report this month by Integrated Asset Services, a Denver-based real estate consulting firm, prices in Fairfield County, Conn., have dropped 42 percent since their peak in 2006, while prices in Passaic County, N.J., have dropped 26 percent.

Hard times may get even harder. This could easily reduce spending for years as a large group of the population is worried about their future.

Welcome To The "Poor Effect" Era

Everyday we are seeing our wealth decline. 401Ks are now referred to as 201Ks. Personal savings have been steadily increasing. People are holding onto their money rather then spending. So many people are more worried about keeping their home and/or their job, keeping up with the Joneses is the least of the concerns. We have left the era of the "Wealth Effect" and entered the "Poor Effect." And what a change it has been. This article from the Minneapolis-St. Paul Star Tribune titled Household net: Worth-less Feeling describes how things have changed. Lets take a look -

Most of us have been feeling poorer. On Thursday, the Federal Reserve released numbers to support the sentiment. At the end of 2008, Americans' net worth fell $11.2 trillion, or 18 percent from 2007, to $51.5 trillion; $5.1 trillion of that decline was felt in the fourth quarter alone.

Net worth soared from 2003 through the third quarter of 2007 as stocks and real estate hit record highs. But the Fed's numbers show that net worth -- which measures the difference between a household's real estate and financial assets and its liabilities -- has been on the decline for six quarters in a row and puts Americans' total wealth back to 2004 levels, when net worth was $51.8 trillion.

Overall, the data confirm that the "wealth effect," the tendency for people to spend more money as their asset values rise, is over.

...

There are bright spots: After years of next to no savings, Americans are fluffing up their cash cushions again.

Taking on less debt, we are weary of the consequences. During the Great Housing Bubble the "wealth effect" became so great and there seemed to be very few consequences. Remember the times when people would used their HELOCs to pay the mortgage? Remember the time you could afford anything you needed through a refinance? Remember the time when flippers were glamorized on TV? Most of these are memories now (unless you can catch Montelongo reruns, but that itself is another story.)

Although we did not want it we are now in the "poor effect" era where even those who can afford things are choosing not to. This new era will be characterized with the coolness of frugality and depression era cooking shows. How things have changed!

The Credit Score Glitch

Everyone relies on FICO - but there are glitches. We have noted before the lenders choice of reporting and coding can actually have a bigger impact in your credit score than the actual activity by a consumer. For instance a short sale can have a bigger impact than a foreclosure depending on how things are coded. This seems to make no sense. Now we learn that banks randomly deciding to close inactive accounts or trying to reduce exposure so they lower the amount available. This can drive down a person's credit score through no fault of the borrower.

So a lenders arbitrary decisions - that have nothing to do with the lenders activity, influence or decisions can have a huge impact and possibly affect things like jobs, rental decisions, and everything in between. Then we hear that credit scores are basically a black hole determined by Fair Issac and a few others. This gets pretty scary how much how company - not really accountable or regulated can have on a person's life.

This article from the USA Today shows how the falling economy is revealing some of the problems of the current credit scoring procedures. The article is titled Sliding economy raises questions about credit scores. They may not be the most respected news organization in the country, but we have to acknowledge the good investigative reporting USA Today has done on the credit crisis. Not lets take a look at the article -

Banks and lenders are shoring up risks — closing a record number of credit card accounts and reducing millions of dollars in credit lines. As they clamp down, even some consumers with excellent credit and spotless payment records are seeing their credit scores reduced because of the diminished credit lines. That, in turn, can hamper consumers' ability to get credit elsewhere.

...
The cycle concerns consumer advocates and some legislators. Some wonder whether restrictions should be imposed on lenders' ability to slash credit limits and close accounts. And if scores can drop even if consumers do nothing wrong, they say, it raises the question of whether there's a flaw in the credit scoring formulas relied upon by the nation's lenders, insurers, and increasingly employers and landlords.

...
Bank officials also say they have no control over credit score calculations — and, like consumers, they don't know exactly how such scores are determined.

"It's tough to connect any one action (by the lender) to consumers' credit score," says Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, which represents large banks.

Even so, banks are concerned enough about the issue that they've asked Fair Isaac, the creator of the widely used FICO score, to study whether — and to what extent — their tightening of credit affects scores. Fair Isaac plans to complete its preliminary study in the next few weeks.

...

Seth J. Chandler, a law professor at the University of Houston, says although credit scores are "incredibly powerful, lenders might start to revise the importance they put on (them) if they no longer reflect reality."

...

Fair Isaac and the credit bureaus don't disclose exactly how credit scores are calculated. But a key factor in the score is what the industry calls "open to buy," basically how much of a consumer's credit line is drawn down on plastic. Also called the credit utilization ratio, this — along with a handful of other variables — makes up a combined 30% of your FICO score, Fair Isaac says. Other important components include overall payment history, how long a consumer has had credit, and the types of credit.

When lenders close accounts or slash credit limits, it often boosts the percentage of available credit consumers are using. That's the key reason scores could fall.

We have given a huge amount of control to one company. The article further states that -

Today, 90 of the largest 100 financial institutions rely on FICO scores, according to Fair Isaac. Credit bureaus also sell proprietary credit scores, and team up to put out the VantageScore, a competitor to FICO.

FICO has a lot of control. While there is little control and understanding about how credit scores are derived. Yes we know the basics, but even bankers acknowledge they do not know the specifics.

Imagine how much damage and problems FICO has can have on the country if something goes wrong. Could one lethal computer virus at FICO could damage the country? Or the financial World? When we are seeing the havoc a few large companies can have when they dominate the markets, it is surprising there is not more regulatory pressure on FICO.

Perhaps this USA Today article will help bring some guidelines, industry wide procedures for something that affects so many but is only understood and controlled by a few.

Just when we thought things could not get any scarier, they do.

Home Equity Troubles Vol. 2

Not only are the credit-worthy in trouble but those that serve the credit-worthy are taking the hit. Talk about a double whammy at Chase. In an article from the Washington Business Journal titled Chase to cut 14,000 jobs as it braces for losses show the relationship between the lenders losing money and the employees then losing their jobs. Now we can a new batch of unemployed that will have HELOC and housing troubles down the road. Lets take a look at the article -

J.P. Morgan Chase expects to eliminate 14,000 jobs, including 2,000 from its investment banking operations and 12,000 from its Washington Mutual unit, the company told investors last week.

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The bank is seeking to cut costs as the deepening recession fuels unemployment and loan losses. The bank anticipates quarterly losses this year of $1 billion to $1.4 billion just on its home equity loans to more creditworthy borrowers. Those figures exclude loans Chase picked up in its purchase last September of the failed banking operations of Washington Mutual.

The bank expects up to 41 percent of these borrowers will be underwater, or owing more on their homes than the homes are worth, at the end of 2010, up from 27 percent at the end of last year.

And the downward spiral continues. More underwaters. More job losses. More write-offs.

Do tears falling onto granite counter-tops sound any different from those falling onto old Formica? No wonder they call it a depression - a perfect graphical and emotional description of the despair!

A House for a Buck - In America?

Houses for a dollar? Real houses made of bricks and wood? A house with a roof? With real property underneath? In the United States? Not a current where the per capita is a couple hundred dollars? Can it be true that houses selling for less than $1000 in the once great city of Detroit? Prices for properties between $1 and $1,000 do not seem possible anywhere in the United States in 2009. Our reaction to this video from CBS News titled Buy A Home For A Dollar was disbelief. Take a look -


Watch CBS Videos Online

Shocking! In 2009 properties, real properties, for one dollar? Could this be true? Not in the motor city? So we took a stroll over to Realtor.com and found 187 houses in Detroit listed under $1000! With 4 of those listed for only $1! Yes that is $1.00!!!

Sure most are boarded up. And it looks like almost all are bank owned. And who knows what the neighborhood and the properties look like now if lenders can not dump them for any real amount of money. But that is still 187 properties with domiciles for sale today, February 25, 2009, for less than $1000 in a major city in United States of America!

Motor city is hurting, severely. Lets hope the old adage "as GM goes, so goes the nation" is no longer true. For if it is, we fear, we are definitely in midst of Depression 2.0 after hearing this story...

Note - We were already contacted by a fellow Garden Stater interested in our opinion about buying up some of these properties and and becoming a landlord. We can not endorse buying sight unseen properties over the internet. We then questioned about whether they knew about rent and tenant laws for Detroit - the answer was no. We also questioned who was responsible for back taxes - this easily can turn out to be the new owner. So while it may be exciting to pick up cheap properties, there could still be disaster ahead. We have already lived through this once - office workers with no experience in real estate issues becoming landlords and speculators on properties half a country away. It did not work out well during the bubble and we would be shocked if it worked now, even for a buck a property. Remember another old adage - "if it looks too good to be true, it probably is."

Foreclosure Bailout Issues

People have seem to have bailout amnesia. People are angry about the state of what is going on. People are angry seeing their 401Ks and IRAs worth less than 1/4 to 1/2 as it was last year. People are angry that their home prices seem to be in perpetual free-fall. People are angry that their pay is stagnant and their jobs may be in jeopardy. People are angry that the housing bubble party is over and the hangover is much worse than most anticipated. So to find people angry about the foreclosure program is not hard.

Angry over the entire situation may not be the same as anger at the program. Dislike of the program may not mean that you do not want it to work. Disliking the situation one is in is not synonymous with not liking the current plan, or any plan. There is a group of people who want to do nothing and let the system sort itself out without any intervention. If that is ones feelings and it is consistent that is one thing - like Ron Paul's position. But if people are voicing anger at the plan are they angry at the situation the United States finds ourselves in or are they angry at the particulars? Or are people just so angry at the current situation they can not distinguish between the causes. Many of the voices just focus on the anger, not the reasons why. This brings us to an article from MSNBC titled Bailout for homeowners stirs up strong feelings which lets people vent. Lets take a look -

"I feel like I'm doing the right thing paying my mortgage, and now apparently I have to pay my neighbor's mortgage, too. People are really angry," said Kim Sansom Guymon, a stay-at-home mom who bought a three-bedroom home with her husband in suburban Seattle in 2001 and has watched it drop $150,000 in value since last summer.

Rescuing distressed homeowners does not sit well with Robert Bechler, either. Still, the 37-year-old flooring contractor said he sees little choice.

"If they don't bail those people out, it's just going to get worse. It's a necessary evil, I suppose," said Bechler, who with his fiancee just bought a house in Cape Coral, Florida, for $92,000 after waiting years for prices to fall.

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O.B. Brock of Charleston, West Virginia, opposes bailing out people who got in over their heads and the banks that helped them.

"It's just rewarding crooks," said 38-year-old single mother, who said she turned down a bank's $100,000 mortgage offer five years ago because she knew she couldn't afford it.

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"I could sit back and say, 'Hey, I'm not getting anything and that's not fair.' But I've been fortunate enough that I don't need a bailout," [Debra Rodriguez, of Tucson]said.

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"Does it reward bad behavior? Absolutely, it does. But no more than the banks who offered these loans rewarding themselves for their own bad behavior," said [Chris Grande of suburban Dayton, Ohio], 26.

No one wants to pay someone else's mortgage. Just as no one wants to see their home value continuously fall. People are angry at the entire housing and economic deterioration. Finding ourselves in the middle of one of the worse recessions in decades, perhaps the worst economic crisis since the Great Depression is making everyone angry. But being angry at the situation is different from being angry with the plan - and from the article we can not tell what the strong feelings in the article are derived from.

What Are The Details

A big part of the Obama foreclosure relief plan was unveiled a few days ago. Unfortunately the guidelines are not coming out until March 4th. The guidelines will help determine eligibility and also allow for a more thorough review of the plan. The Boston Globe discussed some of the issues concerned homeowners are waiting to hear about in an article titled Homeowners anxious for details. Lets take a look -

Obama's three-part plan unveiled this week has sparked hope - but also many questions - for millions of homeowners nationwide who are trying to save their homes or gain access to attractive lower interest rates.

The Obama administration plans to issue guidelines March 4 when the program starts. Included in the plan is a change in lending rules to help as many as 5 million homeowners refinance, $75 billion to help up to 4 million homeowners most at risk of foreclosure, and a pledge of $200 billion to mortgage giants Fannie Mae and Freddie Mac to help keep mortgage rates low.

While the plan is the most aggressive yet to attack the housing crisis, many people on the front lines remain skeptical. They've witnessed a series of highly touted plans that have done little to stop the downward plunge in housing prices and the wave of foreclosures that has left neighborhoods with vacant and boarded-up buildings. More than 950 foreclosures were recorded in Massachusetts in January alone - a 22 percent increase from the same month in 2008, according to data released yesterday by Warren Group, a real estate data firm.

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The program requires that the owner of a second lien agree to the deal, but many lenders already have balked at similar requests.

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For the most troubled borrowers - most at risk of losing their homes - Obama has set aside $75 billion to give incentives to mortgage servicers to negotiate more affordable loans, and money to borrowers to keep current on those loans. To encourage such loan modifications, the Treasury Department will issue guidelines for lenders and require those accepting federal bank bailout funds to implement those guidelines.

Terry Moore, a managing director for the consulting firm Accenture, said the incentives will be helpful in spurring more loan modifications. But he said many servicers are under equipped and understaffed and face a myriad of challenges to helping troubled borrowers.

When the program starts there will be numerous issues that will have to be worked out and resolved to have any real impact. Between new buyers with piggybacks and older homeowners that HELOCed all of their equity the number of second liens will be troublesome.

Another point that we have discussed is that the lenders have not adapted to the new requirements of renegotiating existing loans. There already was a process in place for those that defaulted on their loans - foreclosure. Lenders were set up to make money not figure out how to lose the least amount. The new mind frame has to be adopted by the lenders to make an impact.

Hopefully March 4th brings about a good plan that will stabilize the housing market....

Foreclosure Plan Reactions

Even more prevalent than articles about the foreclosure plan are the reactions to it. First we will take a look at our favorite bloggers. From Calculated Risk's post Comments on Housing Plan -

[ Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices] is fine, although it is kind of like winning the lottery. If a loan was sold to Fannie or Freddie (or guaranteed by them), then the homeowner has the ability to refinance with a higher LTV - but if the lender decided to keep the loan (not guaranteed by Fannie or Freddie) or sold the loan to Wall Street to be securitized (not by Fannie/Freddie), then the homeowner is not included.


This program is fine for Fannie and Freddie - they are lowering their default risk. And this is obvious good for the borrower. The new maximum LTV will be 105%, so this will help some homeowners who are "underwater". This is for refinancing only.

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For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.


This is not so good. The Obama administration doesn't understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key

[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.


Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

We totally agree with Calculated Risk. Out take on the program was exactly the same. Probably anyone who took a Pick-A-Payment and did not or could not pay anything other than the lowest payment should be left out of the program. Also anyone who received 100% financing or more should also be left out. This group was speculative whether that was their intent or not.

Now onto Mish's Global Economic Forum post titled Obama commits $275 Billion to Slow Foreclosures -

I do not buy this "acted responsibly" nonsense. If a person took out a loan greater than 38% of their income they most assuredly did not act responsibly.


Furthermore, the Obama plan increases the size of Fannie and Freddie, rewards servicers for no reason, giving them an incentive actually to waste taxpayer money, and rewards those who acted irresponsibly. Is this a good thing?


Addendum:
One question I have was not answered by either article. I am very concerned for the borrower's sake about loan modifications turning non-recourse loans into recourse loans.


How many people will become unwitting interest slaves for the rest of their lives by signing up for one of these "loan modifications"? That is likely to happen if non-recourse loans become recourse loans.

Wow - a twofer! We agree with Mish that those who are paying too high of a percentage of their income should be left out of the program. We recommended that anything higher than 45% should be left out of the program. Perhaps some of these people were making large incomes during the bubble days - like brokers, realtors, builders and contractors - but those incomes are also inflated due to the bubble.

Now onto an article from the Philadelphia Inquirer in an article titled Industry reaction to Obama plan lukewarm -

"Doing nothing is not an option," said Philadelphia economist Kevin Gillen. "But doing anything and everything isn't necessarily better than doing nothing."

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"We can all debate the fairness of this, but ultimately, we have to stabilize the housing market, and this is one part of the process," said [TD Bank N.A. chief economist Joel L.] Naroff, who is based in Cherry Hill.

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[Philadelphia mortgage broker Fred] Glick cannot see incentivizing bad behavior by riding to the rescue of the people who caused the problems: bankers who made bad loans, and borrowers who borrowed more than they could afford.

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If the program targets homeowners whose mortgages now exceed the value of their houses - referred to as "under water" - "then simply let Fannie Mae and Freddie Mac refinance these loans without requiring an appraisal," Glick said.

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[Bruce M. Sattin, a Lawrenceville, N.J., lawyer, said] a positive step Obama's willingness to change the law to permit bankruptcy judges to modify home loans.

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Economist Gillen maintains that both mortgages and the homes that securitize them must be marked to market, meaning "that the values of both need to drop, but not by too much."

Second, the government needs to distinguish between deserving households and undeserving households, not just between flippers and primary buyers.

That is the big issue - that the people whose lenders sold their mortgages to Freddie and Fannie will have an advantage over those whose lenders held their mortgages or sold them to someone else. There are alot of areas where fairness is completely out of the picture. Perhaps that is the best part of the "do nothing" option is that fairness is applied equally to all! But the do nothing option will bring alot of negatives with it that would be much more detrimental than the do nothing option.

Now onto the politicians responses which the USA compiled in a sidebar titled Reactions To Obama's Housing Rescue Plan -

"This plan will start to rebuild the communities hurt by foreclosures because we all have a stake in curing this epidemic."
-- Senate Majority Leader Harry Reid, D-Nev.

"The Obama Administration gets it foreclosure prevention not only provides relief to middle class families struggling to make ends meet, but also is critical to getting our economy back on track."
-- Sen. Chris Dodd, D-Conn., chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

"The President's plan appears to help those who least need it, and doesn't help those that do."
-- Sen. Richard Shelby, R-Ala., the top Republican on the Senate Committee on Banking, Housing, and Urban Affairs.

"I applaud the president for his commitment to help keep American families in their homes. However, I strongly urge him to ensure that borrowers and lenders who made bad decisions are not rewarded at the expense of the more than 90% of working-class American families that are still making their mortgage payments without government assistance."
-- Rep. Spencer Bachus, R-Ala., the top Republican on the House Financial Services Committee.

Shocking - D's support the plan and the R's do not. But good for Rep. Bachus to support keeping people in their homes and warn about helping people that should not be helped.

As we pointed out in previous posts - there will always be some level of foreclosures due to job losses, death, medical issues, etc. However the epidemic foreclosure wave due to bad lending practices are beyond the normal scope and unfortunately they are also hurting the 90% who are paying the mortgages. Plus do not forget the forgotten victims of foreclosure - renters.

Obama's Foreclosure Plan

Yesterday The President outlined his new foreclosure prevention program. First lets take a look at the plan from the USA Today's article titled $75B anti-foreclosure plan is a "chance to rebuild," Obama says. Here is a snippet -

President Obama added the nation's housing foreclosure crisis to his economic recovery agenda Wednesday with a $75 billion plan to help up to 9 million troubled homeowners stay in their homes.

The program is tailored so up to 4 million homeowners can reduce their mortgage payment so it is no more than 31% of their income. As many as 5 million more facing foreclosure or who owe more on their mortgages than their homes are worth would have a chance to refinance, as long as their mortgage is not excessively higher than their home is worth.

The plan "will give millions of families resigned to financial ruin a chance to rebuild," Obama said before a packed high school auditorium in a state that's been racked by the housing crisis. But the president said the plan won't help every distressed homeowner. "All of us must learn to live within our means again."

Fannie Mae and Freddie Mac, the two mortgage giants, could receive an additional $100 billion each from the government. As a result, the plan's cost could be as much as $275 billion.

Homeowners whose total monthly debt payment is more than 55% of their income would have to go to credit counseling to get help from the plan.

Housing Secretary Shaun Donovan said help would not be available to homeowners whose mortgages are more than 50% above what their homes are worth because lenders would probably not approve new financing for people so far underwater.

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Obama said it "focuses on rescuing families who have played by the rules and acted responsibly," rather than speculators, home flippers and people who bought far more than they could afford.

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The plan earmarks $75 billion, mostly from financial rescue funds already approved by Congress. Lenders would be responsible for lowering interest rates so a borrower's monthly payment is no more than 38% of their income. The government would then help pay for the costs of reducing a borrower's loan payment so it becomes 31% of income.

The two interesting things we would point out from this article is that those who hare spending more than 55% of their income will never afford their houses. There should be some cut-off point. Perhaps 45% but definitely nothing above 50%. If you bought a property having to spend more than 50% of your income on housing you were basically a speculator of sorts and should not be allowed to be part of the program.

The second part is that if properties that have lost half of their value are not included in the program places like Nevada, Arizona, Florida and California will continue having problems. If the remaining residents can not get a reprieve due to the falling prices some areas in these states will be literal ghost towns.

In our next post we will look at some reactions to the plan.

Mortgage Industry Implosion

One favorite response regarding the mortgage industry implosion is the who could have known attitude. Everything was working perfectly. The industry started giving loans on assets not for what could be repaid. The industry started giving loans where people could have several options, one being to pay only a portion of the interest. The industry stopped requiring people to prove the money they had or they made - a good credit score was enough. Why would anyone ever envision anything wrong with these business models?

The Feb. 15th episode of 60 Minutes provides a great story about the fact that people did know in their story titled World Of Trouble. People did know that there was something wrong with the bubble business practices but they were dismissed or ignored. The money coming in was more important than using good business practices. From the video below it shows that the better the business practice the less money one would make. The story focused on World Savings that was bought by Wachovia (Wachovia now folded into Wells Fargo). Lets take a look at the story -

Watch CBS Videos Online

For those that can not watch here are some snippets from the accompanying article -

But Paul Bishop says he watched the bank famous for quality begin to emphasize quantity. World relied on outside mortgage brokers to bring in 60 percent of its customers. The more loans that were approved, the more the brokers, and World Savings, made in fees.

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By 2005, 38% of World's clients had subprime credit scores. And customers were shown fliers that told them their income would not be checked by the bank.

"So I don't really need to know what you make. I don't need proof. You tell me you make $200,000 a year? You make $200,000 a year," Bishop said.

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"When one lender dropped standards, another lender felt that they had to do the same," [Bob Simpson, whose company, IMARC, investigates failed mortgages] told Pelley.

Simpson says World and other lenders were in a ruinous competition for customers. "There are people inside of every institution that have been screaming for years about these terrible loans. Don't fund these. These are horrible loans. And they were routinely ignored inside of their own institutions."

Asked why they were ignored, Simpson said, "Because there's no money in common sense. There's no money in stopping a loan. There's only a payday when that loan closes."

The short term closing was the only part of the loan that mattered during the bubble. Whether the loan was viable was of least importance. As long as housing prices continued to have double digit gains year after year no one would get stuck with over priced houses or bad loans. But values did not only stop increasing, they went down. Business practices that made no sense but were highly profitable brought giant companies and industry leaders down in one fell swoop.

As in many cases the best line of the story is left for last -

"We have talked to some former executives of the bank who tell us that they listened to your complaints, they investigated your complaints, and they found that there was nothing to them," Pelley told Bishop.

"Are they employed today?" Bishop asked.

"No," Pelley said.

"Surprise. They lost their job. The bank went bust. They took down the fourth largest bank in the country with them. But there was no problem," Bishop replied.

Classic. Hopefully some governmental agency hires Bishop to help sort out the issues. He has the background and the insight to help straighten some of the issues out.