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September 21, 2008

$700 Billion Bailout – Is it a good idea for the Mortgage Industry?

Category: Home Loan News – admin – 7:12 pm

Paulson yesterday asked Congress for unfettered authority to buy devalued mortgage-related securities from investment firms in an effort to keep the financial system from coming to a standstill. The proposal would prevent courts from reviewing the Treasury’s actions while raising the nation’s debt ceiling.

The U.S. Treasury late yesterday modified its proposal to allow for purchases from institutions outside of the U.S., a step Paulson today said was needed to mute the impact of the credit crisis in the U.S.

Bush said Saturday the White House is ready to work with Congress to quickly enact legislation to allow the government to purchase hundreds of billions of dollars worth of bad debt linked to the collapse of the housing market. This marks the biggest government intervention since the Great Depression.

Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said that what Congress was being asked to approve was the “mother of all bailouts” which Shelby said would end up costing more like $1 trillion rather than $700 billion when the costs of the government taking over mortgage giants Fannie Mae and Freddie Mac and insurance giant American International Group Inc. were added. The credit markets are still very fragile right now and frozen,” Paulson said in an interview on NBC’s Meet the Press. “We need to deal with this and deal with it quickly.”

“I don’t want the American taxpayer to get this bad debt and then the guy (whose company once held the bad loans) gets millions of dollars on his way out the door,” said House Financial Services Chairman Barney Frank, D-Mass.  “This is not a position where I like to see the taxpayer, but it is far better than the alternative,” Paulson said on NBC’s “Meet the Press.”

 Two weeks ago, the government seized control of the nation’s two largest mortgage companies, Fannie Mae and Freddie Mac, and then last week, it took control of the country’s largest insurance company, American International Group Inc.  The legislation Congress passed this summer that gave the authority to rescue Fannie and Freddie boosted the limit on the national debt by $800 billion to $10.6 trillion. The legislation the administration is now seeking to authorize the financial system bailout, according to a draft obtained by The Associated Press, would boost that debt limit to $11.3 trillion, up another $700 billion.

The economists think the bailout is a good idea. “This could go a long way toward solving these problems,” said Mark Zandi, chief economist at Moody’s Economy.com, who has written a book on the mortgage meltdown.  No one knows for sure how much it’s going to end up costing, but Zandi said if the experience with cleaning up all the assets left over from the savings and loan mess is any guide, it should be less than the $700 billion that the administration is seeking.  Homeowners are looking for help with Foreclosure Prevention. “There is a risk that there will be bank failures to come,” said Vincent R. Reinhart, former director of the Federal Reserve’s monetary affairs division.

Another risk is that if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules, Reinhart said. Mark-to-market rules involve adjusting the price of an asset to reflect its current market value. “If the auctions don’t go well, it will drag down everybody’s balance sheet who marks to market,” Reinhart said.  Right now, it looks like the ones benefiting are the investment banks that bought into these bad home loans. It appears that the taxpayers are left holding the bag on bad decisions made by greedy investment banks. But, it is being called a “necessary evil” to keep the economy from collapsing. Once the dust settles, it will be a matter of time to see exactly who benefits. Right now, credit is still frozen, making it very hard for anyone who wants to buy or refinance a home with a conventional loan. FHA, VA and other government-backed loans are still by far the best option for mortgage loans.

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September 14, 2008

Yet Another Credit Storm Brewing by Cynthia Long

Category: Home Loan News – admin – 6:45 am

Fannie Mae and Freddie Mac own or guarantee about half of the nation’s home loans totaling around $5 trillion, have been ailing for months. The bailout plan, which calls for the government to inject up to $100 billion in each of the U.S.-sponsored mortgage financiers to keep them operating, was in response to the roughly $14 billion of combined losses over the past year.

“These companies are so big and so interwoven into the financial markets and our financial system, we had no choice,” Treasury Secretary Henry Paulson said Monday in a round of TV interviews. “A failure by either one of these companies would cause great havoc in the economic system.”

Fannie, Freddie and the Federal Housing Administration (FHA) now account for backing or issuing roughly three-quarters of the nation’s mortgages, with commercial banks playing a decreasing role since the start of the housing-credit crisis.

Unfortunately, the bailout announced last Sunday hasn’t done much for easing other credit concerns. There is growing worry about other credit problems leading to more big losses and write-downs at banks and other financial institutions in the months ahead.  The latest data on the job market shows that unemployment rate shot to a five-year high in August and payrolls are being cut at an alarming rate. Unemployed people can’t pay bills, which could possibly lead to a surge in defaults not only in mortgages, but also other bills like credit cards and auto loans.

“There is no silver bullet here. This is certainly a positive step, but is not the absolute answer,” said Mark Zandi, chief economist at Moody’s Economy.com. “They’ve made progress in residential mortgage assets but have yet to deal with other problematic loans.”

New data released Monday by the Federal Reserve show that consumer borrowing on credit cards grew at an annual rate of 4.8 percent in July, up from a growth rate of 3.5 percent in June. But, payments on those cards have fallen despite the $106.7 billion Americans received from the economic stimulus package. Card payment rates fell 6.2 percent on a year-over-year basis in July, the ninth consecutive monthly decline.

More and more, economists are talking about an emerging “negative feedback loop,” whereby a slowing economy generates higher credit losses at banks, which leads to more restrictive lending, weakening the economy even further, and round and round. “It’s already happening,” says New York University Prof. Nouriel Roubini. For an economy already struggling to grow, the result could be the nastiest recession in a generation.

“Credit availability is needed before housing can recover,” says Vince Farrell, chief investment officer of the Soleil Group in New York. But, credit isn’t going to be available unless these credit concerns can be addressed.

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September 12, 2008

How the Mortgage Market has Changed Lenders and Brokers by Larry Nielsen

Category: FHA,Home Loan News,Mortgage Brokers,Mortgage Lenders – admin – 9:08 am

How the Mortgage Market has Changed Lenders and Brokers

 

The current mortgage market mess is a direct result of the subprime mortgage meltdown and foreclosure phenomenon. It all began with the bursting of the U.S. housing bubble, which launched the high default rates on subprime adjustable rate mortgages (ARMs) and spread to the exotic hybrid ARM (negative amortization and interest-only loans). Now, even the prime mortgage market is experiencing high default rates.

 

Loan incentives, such as easy initial terms, in conjunction with an acceleration in rising housing prices encouraged borrowers to assume difficult mortgages on the belief they would be able to quickly refinance at more favorable terms. But, when housing prices started dropping in 2006, refinancing these loans became difficult. The default and foreclosure rate started rising dramatically upon expiration of the initial teaser rates and upon ARM interest rates adjusting higher as home prices failed to appreciate. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.

 

Subprime mortgage lenders were the first to be affected by the borrowers unable or unwilling to make their payments. Major banks and other financial institutions around the world have reported losses of approximately U.S. $435 billion as of July 17, 2008. But, as the securitized loans sold in the form of mortgage-backed securities (MBS) and collateralized debt obligations (CDO) declined in value, Corporate, individual and institutional investors holding MBS or CDO started getting hit with heavy losses, and stock markets in many countries declined.

 

Countrywide almost going under before being bailed out by BOFA (Bank of America) and IndyMac going under seemed to spark off a trend of mortgage companies going bankrupt that seems to be continuing. As a result of the significantly increased credit risk and decreased confidence in the financial market, lending activity decreased, credit standards tightened down and the spread on higher interest rates widened–the current “credit crunch”.

 

Now, in order to get a conventional mortgage loan, whether you’re looking to buy or refinance, you now have to have excellent credit. Down payment and equity requirements are now tighter, as well. And, while the interest rates have now dropped below 6%, the lending standards haven’t loosened up at all. To purchase a home with a conforming Fannie Mae or Freddie Mac loan, you need a credit score of at least 660 if you’re putting 20% down and a score of at least 700 if you’re starting with less than 20% equity. Refinancing has similar standards–you need an excellent credit score and low loan to value (LTV), typically around 75% to 80%.

 

As a result of the conventional loan tightened lending standards, and the new increased lending limits under the Economic Stimulus package passed earlier this year, FHA loans have been making a serious comeback. The lower interest rates that resulted from Freddie Mac and Fannie Mae being taken over by the government has also benefitted FHA because FHA rates have also decreased. But, the advantage that a home buyer has with FHA loans is that the credit standards are nowhere near as stringent for FHA loans as they are for conventional loans. You’re eligible if you have a score of around 580 and a good 12-month payment history on your bills. Plus, if you don’t have credit, FHA accepts non-traditional forms of credit like a positive rent paying history and positive payment histories with your utilities and cell phone.

 

For those looking to refinance, FHA allows you to refinance up to 95%, which is a lot better than the 75-80% LTV on conventional loans. Credit standards are reasonable for refinance loans, as well. As long as you have a positive 12-month payment history (particularly on your mortgage) and you are current on your mortgage, you’re eligible.

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VA Home Loan Updates

Category: VA – admin – 7:36 am
The House of Representatives finally approved to adjust the veterans’ cost-of-living adjustment bill, sending it to the White House for President Bush’s signature with debt relief for thousands of service members and veterans who are facing increasing home loan payments.
The VA announced it will begin implementing a geo-targeted approach in elevating the ceilings on its no-downpayment home loans from the current $417,000 limit up to $729,000 in some regions.   The raised loan limits in the general VA home loan program for all veterans’ home purchases or construction will be based on local housing costs, tied to the similar locality adjustments of Freddie Mac.
The recent drop in interest rates has caused many veterans to reconsider their mortgage.  The VA streamline enables borrowers to refinance with no appraisal and in some cases borrowers are allowed to skip mortgage payments.
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