InvestorCentric

On Friday federal regulators seized IndyMac Bank, making it the third largest bank failure in U.S. history according to the Wall Street Journal. The largest bank failure in U.S. history was the $40 billion failure of Continental Illinois Bank & Trust Co. back in 1984. IndyMac Bank held about $32 billion in assets, and it is estimated that the failure will cost the Federal Deposit Insurance Corp. (FDIC) between $4 and $8 billion, amounting to around 10 percent of the fund’s total reserves according to the Wall Street Journal.

If you were to ask why the bank failed you might get various answers, but here is what a couple key players had to say as reported by the Wall Street Journal:

“The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a ‘heart attack.’”

Schumer responded by saying, “’If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,’ Sen. Schumer said. ‘Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.’”

Personally, I prefer the idea that the bank is reaping the rewards of all the dumb loans they made. How can one possibly justify making high LTV loans to people without verifying their income? Do you think people might stretch the truth a bit if they know you aren’t going to double-check their numbers? Duh. If they actually had proof of their income, then they wouldn’t even need to come to IndyMac: They could get a better loan somewhere else.

The question now looms of whether IndyMac is just one more in a line of many banks which are to fail, or if the carnage is done. If the outlooks of banking regulators are any indication, it is worth noting that they are hiring more examiners and prepared to take a tougher line towards risky banks according to the Wall Street Journal.

I don’t believe that IndyMac will be the last bank to fall at the hands of the subprime crisis, but they very well may be the largest. If you start dealing with anything much larger than IndyMac, the government would likely get more involved in fixing problems before it came to this. I said it after the NetBank failure, and I’ll say it again: If you are depositing money in a bank right now, then make sure that it is an FDIC insured account. Not all deposit accounts are FDIC insured, and the insurance only covers the first $100,000 (and $250,000 for retirement accounts). About 10,000 depositors of IndyMac, with deposits of approximately $1 billion, learned that lesson the hard way, and may receive little if anything. If you have more than $100,000 sitting in a smaller bank deposit account, I would suggest transferring the excess over $100,000 to either a very large bank, or several insured accounts at different banks. Really though if you are going to put your money at risk, you might as well invest it in something that will return a little more than deposit accounts do.

Labels: Banks, economy, finance

Odds Of Recession At 45 Percent, Down From 90 Percent Last Month

Identifying a recession is a tricky thing, and that was never more apparent than in the flip-flopping of many economists’ opinions on the state of the economy and its odds for a recession. It wasn’t too long ago that 71 percent of economists believed we were already in a recession, and even more thought a recession inevitable. Wachovia, which last month put the odds of recession at 90 percent, just downgraded those odds to 45 percent, according to The Wall Street Journal. Is the economy really turning around, and can we begin to be a little optimistic about the future?

Recent data released by the government has been a little better than expected, but I think we are missing some things. Perhaps we are clinging to any last ray of hope we can find, but the bottom line is we should look at the facts for what they are, not coat them in sugar. One example is that yesterday everyone was elated that the CPI came in at only a 0.2 percent increase, compared to the expected 0.3 percent. This surely is good news--I don’t want to discount that--yet at the same time we can’t take this to mean that our inflation fears are over and that everything is peachy. First off, I have my concerns that the numbers being reported by the government aren’t all that accurate to begin with. In addition, while inflation might be taking a little break, so to speak, I don’t think it is gone.

Another piece of irrational exuberance in my book was how the market treated the recent earnings reports from Freddie Mac and Fannie Mae. Fannie Mae reported a loss of more than $2 billion, much more than was anticipated, yet their stock skyrocketed that same day. Something just doesn’t seem right about that. Then this week, Freddie Mac actually beat estimates and reported a loss of only around $150 million. That seems great compared to the $2 billion loss over at Fannie, but in order to cut their losses to only $150 million, Freddie Mac had to alter their accounting methods. I’m no accounting expert, but any time I hear of companies altering their accounting practices, and voila, their books suddenly look better, I get suspicious (if anyone has more knowledge about this, I’d love to hear your take). As we saw in the foreclosure numbers reported this week, the housing problems are far from gone. More and more people are losing their homes, and to me that doesn’t spell good news for Fannie and Freddie, or the housing market in general.

We also saw reports this week that more companies are laying workers off--typically not a positive sign at all--yet for the most part the markets shrugged off this news in favor of celebrating the fact that inflation was only at 0.2 percent last month. While it certainly is good news to see the economy rebounding somewhat, and for the economic news to come back better than we expect, I urge investors not to get their hopes up too much at this point. It is possible that the interest rate cuts and the economic stimulus package will come together to bring our economy out of the rut it’s been in, but I certainly wouldn’t put those chances as high as 55 percent. I still think a recession is coming, and whether it is officially here now, or whether we are able to delay it, it will surely come. Our economy has too many serious problems to fix with a few Band-Aids.

If Bernanke discovered the magic recession avoidance elixir, that is just fabulous, and we all should be ecstatic.

At the same time it has always been my belief that you plan for the worst, so that’s what I’m doing. Jump on the U.S. economy is great wagon if you will, but be careful, because I’m pretty sure the axel is loose.

Labels: economy, Fed, finance

Federal Reserve Meeting Today: BYOB, Pizza Will Be Served

The Fed is meeting again today and tomorrow. To mark this diminishingly historic occasion, I have composed the following ditty. Ahem...

There once was a man named Bernanke:

For the banks, an immaculate flunky.

When their assets all failed

with our money he bailed

them all out like a good little monkey

Thank you. Thank you.

As the Fed disappears behind the curtain yet again, ‘O we of little faith’ are bracing for yet another quarter percent drop in interest rates. Soon it will be official: You will likely see more appreciation on kitsch from the Franklin Mint than anything that comes out of the U.S. Mint. My friends all laughed when I plunked down 100 smackers for my Mystical Dreamcatcher Pocketwatch, but who’s laughing now?!

For those of you who didn’t have foresight enough to invest in chilling likenesses of dead royalty and zirconium encrusted daggers, allow me to predict what the Fed is planning to do. Just let me look into my Dragon of Lore Crystal Ball (a steal at 5 payments of only $39.99!)...

Abra-cadabra!

~~Ah yes...I scry a rather stoned-looking Bernanke telling the table that he knows exactly what needs to be done. Well! That’s good news!~~

~~Oh. He wasn’t talking about the economy. He was suggesting that they order pizza.

But still...based on his track record, that’s one of his more reasonable suggestions.~~

~~Now someone else at the table is telling him that no one there can afford to have a pizza delivered

because food and gas prices have soared again.~~

~~Bernanke insists that “Referendum Deepdish” be passed as they can just print more money

in the office next door. The motion is passed.~~

~~Someone raises a new motion: Will the Reserve lower interest rates again despite the fact that it has done nothing to mitigate the housing crisis or prevent a recession? They ask the chairman directly.~~

~~Bernanke teeters in his seat for a moment, opens his mouth...and then passes out on the floor.

The attendees concur with the chairman’s motion to drop the interest rate again. Motion is passed.~~

~~The pizza arrives. The delivery fellow receives a lousy tip.~~

As we can see, it’s all business as usual at the Federal Reserve. But before I go off to polish my collection of Elvis Head Silver Dollars, I leave the Fed with three bits of advice:

These are tough, confusing times, and I do in fact sympathize with anyone tasked with sorting this out, but your methods have proven to be the financial equivalent of bloodletting for the ailing economy. Try something new for once, PLEEEEEEEASE!
We know the banks own you (literally), but at least pretend that you have the interest of the American people in mind. You know, we love a good circus act. And if you piss us off, then...
Don’t stiff the pizza boy: He knows where you live.

Labels: Bernanke, Fed, finance, inflation, recession, stagflation

Money Markets Paying More Than CDs

Bank of America recently rolled out a money market savings account paying a higher interest rate than their four month CDs. What that tells me is that Bank of America is counting on further interest rate reductions from the Federal Reserve.

Perhaps now that B of A owns Countrywide, they have an ever better crystal ball for seeing the extent the subprime shakedown. They are casting their bet that the Fed will continue to drop rates. Where are you casting yours?

Labels: finance, investments

Hire A CPA: Life Is Too Short To Do Your Own Taxes

Those of you who recently completed the painstaking process of filing your income taxes might want to rethink that strategy next year and instead hire a CPA. According to an article by MSNBC, the average person spends more than $200 and 26.5 hours of their time because of tasks ranging from record keeping and studying the tax law to preparing and sending their tax forms. Obviously those numbers are just averages, and are likely influenced by extremes on both ends of the spectrum, but I think they make an interesting point.

Investors in particular are probably better off hiring a CPA than doing their own taxes because their tax returns can get complicated. Keeping up with the latest deductions and changes to tax law is probably better left to professionals anyway. Turbo Tax is great, but I would rather trust my taxes, finances and sanity to a CPA. For me, doing taxes is about up there with going to the dentist, and not having to deal with it is alone worth the $800 bucks a year I pay my CPA. Even if I liked doing my taxes (a twisted concept), it would probably take me the 26.5 hours, at least, to do them considering all the crazy things I’ve got going on. I can assure you that my CPA charges more than the $30 an hour equivalent here, but what takes me 26 hours to accomplish he can finish in just a few.

Instead of sitting at my desk, pulling my hair out and complaining to my wife that I can’t concentrate because the baby is crying, I can go to the park or on some other outing with my family which is worth way more than $30 an hour. Life is too short to spend it doing taxes, so next year spend a few bucks, hire a CPA and then go enjoy your life. If you aren’t a family person, then just think of it as an investment: If you can make more than $30 an hour (or whatever the equivalent hourly rate for a CPA would be in your case) doing something else, then do that instead of your taxes. You will make more money, and assuming that you enjoyed working on the other activity more than you did your taxes (shouldn’t be too hard), you also are adding to your overall happiness.

Labels: finance, taxes

Do We Really Want Increased Government Oversight Of The Mortgage Industry?

The Bush administration is calling for a major overhaul of how we monitor the financial industry in what would be the largest financial regulatory makeover since the Great Depression. It isn’t as much oversight as many Democrats are demanding, but it is fairly substantial.

I am generally against added government regulation, so this doesn’t sit well with me. The government has a way of making things more complicated and costly than they need to be, and it is taxpayers who bear the burden. Increased regulations in the financial and mortgage industries will only make lending tougher. It seems that people want the government to protect them from themselves and from lenders who might take advantage of them. If the government gets involved, some people may be protected, but fewer people will receive mortgages. In an already struggling market in which it is increasingly difficult to find funding, the last thing we need to do is to make it even more difficult.

I expect that the regulatory agency will, at a minimum, call for increased documentation and transparency on the part of the lenders. I’m all for transparency, but the documentation is already overdone. When I signed the docs for the last house I bought, my hand started to cramp halfway through signing all the paperwork. If increased paperwork is all they do, and they do not become too restrictive, then the legislation shouldn’t have much negative impact, though it will mean more work for the loan officers, processors, lenders and escrow agents. If they start modifying loan qualifications and guidelines, or imposing penalties on lenders, it might scare many lenders out of even remotely related programs. If lenders become even more hesitant and restrictive, this only spells more bad news for the housing market.

Labels: Fed, finance, housing bubble, mortgages, real estate

The Fed Cut Interest Rates Again; Prime Rate Down To 6 Percent

The Fed cut the key interest rates again yesterday, this time by 0.5 percent, following a 0.75 percent cut last week. For alternative investors that means a couple things:

1) The prime rate is now down to 6 percent, the lowest it has been in three years. Investors who are utilizing HELOCs and personal or business lines of credit are probably pretty happy right now, as borrowing is now much cheaper than before. Investors who were not utilizing this type of variable credit in favor of fixed rates are probably much less enthusiastic and might want to think about switching. The U.S. economy is not going to be recovering any time soon, so investors might as well take advantage of these low rates while they can. Chances are they will continue to go even lower before things turn around and the Fed starts hiking them back up again.

2) If you haven’t already started doing so, get out of the dollar now. What was left of the U.S. dollar was burned at the stake this week; the government has shown that they are willing to let the dollar die in favor of the chance that they might be able to fend off a recession. Things are likely only going to get worse though, as the U.S. is probably still going to see a recession, and inflation is going to start eating up people's U.S. dollar savings. If you want to learn more about the importance of the dollar's decline, see yesterday’s blog post: Ron Paul And The Fight To Save The U.S. Dollar.

If a recession does come, which it certainly appears it will, investors need to be prepared. There are profits to be made in good times, and even more profits to be made in times of recession--if investors know where to look. If you are trying to figure out some good places to put your money in the event of a recession, check out our Top 5 Recession Investments.

Labels: economy, finance, investments

Fannie Mae And Freddie Mac Loan Limits To Rise In Economic Stimulus Package

As part of the new economic stimulus package being pushed through the House, the loan limits for Fannie Mae and Freddie Mac are set to be raised substantially in certain areas across the U.S. The new limit--anywhere from $625,500 to $730,000, depending on how the finalized legislation turns out--would be set for one year, according to The Wall Street Journal.

Fannie Mae and Freddie Mac are government-sponsored mortgage buyers, the two largest such companies in the world. These new limits are likely to have a positive impact on the mortgage markets in the affected high-cost areas because they could enable many people in these areas to qualify for conforming loans. The difference between the pricing on a conforming loan and a jumbo loan (loans with values in excess of conforming limits) it is typically substantial.

Furthermore, in today’s mortgage environment, banks are becoming less and less willing to even do jumbo loans: They are considered risky, and risky loans are being avoided like the plague by many investors and subsequently by banks. The previous conforming limit of $417,000 is simply a joke in places such as San Francisco. A single-family home in the San Francisco-Oakland-Fremont metro area has a median price of $825,400, according to the National Association of Realtors.. While these new limits could very well help stimulate some of these high-cost stagnant, or even declining, real estate markets, it is no guarantee that it will end up helping significantly.

For the people who can now qualify for conforming loans, they will probably save money on their mortgage. In addition, some people who couldn’t otherwise qualify for a mortgage will now able to do so. Any time buyers can get more house for their money, the potential number of buyers is increased, which tends to reflect positively on real estate prices. Thus there is certainly potential for good things to happen in those markets. However, we must also remember that many of these high-cost markets have bigger problems that won’t be cured simply by raising these limits, especially considering the country's overall economic situation. While this news can only be seen as good thing for these high-cost markets, people in these markets shouldn’t get their hopes up for a dramatic turn around simply because of it.

Labels: finance, real estate

Fed Interest Rate Cut Unlikely To Make Borrowing Easier

When people hear that the Fed cut interest rates by 0.75 percent, many think it is a wonderful thing, and that now they will be able to borrow the money they need. Unfortunately, it doesn’t quite work out that way, especially in today’s financial climate. The Fed funds rate is simply the rate at which banks lend money to each other at the Federal Reserve Bank, that’s it. It is true that the prime rate goes up and down along with the Fed funds rate, but the problem right now is not that interest rates to customers are high, but that many customers who want credit can’t get it. These Fed interest rate cuts are unlikely to change that.

Right now, banks are turning their backs on any kind of loan that smells at all risky. That means low down payment, low documentation, small business and start up loans, along with others considered “risky,” are still unlikely to get funded.

Loans that have little risk, such as conventional real estate loans, should continue to get funded with little to no problem. The main thing to watch for with those loans is that traditional 30-year mortgages could possibly start seeing rates go up. Even though the Fed is lowering rates, the rates on long term mortgages can still go up because they are tied to bonds. Since these are long term bonds, inflation rates are more important than short term Fed interest rates, and inflationary pressure will begin to rise when the Fed drops interest rates this quickly.

The Wall Street Journal recently published an article that covered some problems that small business owners were having getting loans: “A recent survey by the National Federation of Independent Business found that 7 [percent] of the small-business owners surveyed in December said they were having problems getting financing, up from 4 [percent] in November. ‘I'm sure that everybody is being a little more careful. Certainly the banks that were aggressive are being more careful now,’ says William Dunkelberg, the federation's chief economist.”

So, while the Fed lowered the funds rate by 0.75 percent and is likely to cut the rate again at the next scheduled meeting, investors shouldn’t get overly excited. The stock market will do better than it would have otherwise, and the economy might get a slight overall boost; lending, however, is unlikely to get any easier. Interest rates aren’t the problems in this case, so dropping the rates won’t solve the problems. Instead of investors getting excited about the rate cut, they might want to start getting concerned about inflation. Inflation is already higher than it has been in recent memory, and it might only get worse from here. The Fed is making it clear that they are more concerned about appeasing the market and limiting recession fears than controlling inflation.

Labels: economy, finance

Wondering How The Latest Fed Interest Rate Cut Will Affect Your Mortgage?

The Fed just lowered interest rates by .75 percent, one of the single largest cuts in the history of the Fed. Naturally, many people are wondering just how this interest rate cut will affect their mortgages. Unfortunately most people are likely to be disappointed by how the system really works and are likely to receive little to no help with their mortgages. If you are curious about how this works, read through our previous blog post, “How do the Fed Interest Rates Really Affect Mortgages.”

Labels: economy, finance

Government Inflation Numbers Not Suitable for Retirement Calculations

If you are calculating your future retirement needs using the government’s inflation numbers, the consumer price index (CPI), or using the CPI for other calculations, you should keep reading. According to John Williams, an economist who runs a website called shadowstats.com, the government has been fudging the inflation numbers since the 1980s.

Since then, the government has changed how they calculate the CPI numbers several times, with each new method lowering the resulting numbers. The logic used in making these changes is flawed, and if people knew how the numbers were calculated, they would almost surely hesitate to use them.

Why would the government want to orchestrate this scam? Williams points to their Social Security obligations. The government’s Social Security payments to individuals are indexed to the CPI, and the higher the CPI, the more the government has to pay out. When one considers how huge the government’s Social Security debt is, along with the fact that there is little to no hope of them being able to pay it without some help, it makes complete sense.

People can choose whether to believe Williams or not, but he makes a convincing case that is certainly worth listening to. If you are looking for a better inflation number to base your calculations upon, Williams recommends that you add about 7 percent to the CPI. On shawdowstats.com, there is a CPI calculator tool that might be helpful. On the site Williams also discusses in more depth the various changes to the CPI calculation and their subsequent flaws.

To demonstrate the difference 7 percent can make during the course of a career, the value of the portfolio of a person contributing $5,000 a year for 40 years would take a hit of around $1,000,000 in terms of true buying power. Remember, this 7 percent is on top of the approximate 2 to 3 percent inflation number being published by the government. That means that you need to be making 9 to 10 percent in return on your money just to stay even with inflation.

Labels: finance, investments

How do the Fed Interest Rate Changes Really Affect Mortgage Rates?

Wondering why your mortgage payment hasn’t gone down even though the Fed has lowered rates? It is a common misconception that mortgage rates are directly tied to the federal funds rate. In fact, mortgages in general are not directly tied to the federal funds rate at all. Here are some quick pointers to keep in mind when considering how concerned you should or shouldn’t be about the decisions of the Federal Reserve Bank:

The market, not the federal funds rate, determines mortgage interest rates. Mortgage Backed Securities are bonds sold on public exchanges by Freddie Mac, Fannie Mae and the like. More than any other factor, the prices of these securities have the most impact upon mortgage rates.

Fixed rate mortgages are long term interest rates, while the fed funds rate is short term. Investors in fixed rate mortgages are much more concerned with factors such as inflation than they are with the short term federal funds rate. In some cases, mortgage rates will actually go up when the fed lowers the funds rate because the market fears future inflation may result from the cut.

Adjustable Rate Mortgages (ARMs) are tied to indexes, not the federal funds rate. The most common indexes are the London Inter Bank Offered Rate (LIBOR), the 11th District Cost of Funds Index (COFI), and the Constant Maturity Treasury (CMT). There are various factors that determine the movement of these various indexes. For example, the LIBOR is tied to interest rates in London, not the U.S.

Home Equity Lines of Credit (HELOC) are the mortgage type most closely tied to the fed funds rate. Most HELOCs are priced on some margin above the prime rate. While the prime rate is not the federal funds rate, it does track it almost exactly at 3 percent above.

In many cases the lowering of the federal funds eventually (albeit indirectly) makes its way to mortgages. However, this is far from a certainty and generally takes some time. As a holder of an ARM, or someone looking to get a new mortgage, don’t hold your breath expecting the looming fed rate decrease to save you money on your mortgage any time soon. In fact, it may cost you in the short term if investors in mortgage backed securities think more rate cuts will equal more inflation.

Labels: finance, real estate

Evaluating The Latest U.S. Jobs Report

From Bloomberg:

“Jobs proved to be one of the few bright spots in a year when home prices plunged the most in at least four decades, energy costs hit a record and mortgage-bond losses roiled financial markets. Gains in wages and employment may help prop up spending as the economy struggles to avoid its first recession since 2001.

‘It buys the economy time and allows the Fed to lower rates without panicking,’ said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who forecast payrolls would rise by 90,000. ‘The economy is slowing down in the fourth quarter, but not so rapidly that you're going to have a big down-draft in consumer spending.’”

From Forbes:

“By itself, the job growth will likely not be enough to dissuade the Federal Reserve from cutting interest rates. Peter Morici, a professor of business at the University of Maryland, explained that the November job growth still showed strains from spiking subprime defaults.

‘Residential construction, financial services, and manufacturing displayed weakness, indicating growth is slowing significantly in the fourth quarter and further raising prospects for an interest rate cut at the Dec. 11 meeting of the Federal Open Market Committee,’ said Morici. At the meeting, the Federal Reserve's policy-setting panel is widely expected to cut its federal funds target rate by at least 25 basis points from the current 4.5%.”

From The Daily Reckoning:

“ADP uses the same birth/death model that the Bureau of Labor Statistics uses, which automatically voids this report in my mind. You see even the BLS admits that the birth/death model exaggerates the wrong way when cycles turn.

And the ISM non-manufacturing (service sector) Index fell yesterday, and their jobs portion of the index fell to just above the expansion level of 50, to 50.8… So, the ISM doesn't agree with ADP either…

But, as I said, this information was quickly swept under the rug, and those that were betting on a 50 BPS cut from the Fed next week, quickly removed those bets, and bought dollars… And stocks thought this news was just marvelous, but then they thought bad employment numbers were marvelous too, which means… carry trades went back on yesterday!”

Labels: economy, finance

Subprime Rates To Be Locked For 5 Years

From the East Valley Tribune:

“The Bush administration has hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures, congressional aides said Wednesday.

…Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.”

From Bloomberg:

“Treasury Secretary Henry Paulson is finalizing the deal as the housing recession enters a third year, threatening the economic expansion. Paulson and Housing and Urban Development Secretary Alphonso Jackson will hold a press conference tomorrow at 1:45 p.m. in Washington to discuss the plan, Treasury said in a statement.”

From WNBC:

“Congressional aides said the Bush administration has worked out an agreement with the mortgage industry to freeze some mortgage rates.

Interest rates for certain subprime mortgages would be frozen for five years in an effort to deal with a rising number of foreclosures.

The sources said it's a compromise between banking regulators who wanted a longer time frame of as much as seven years and industry arguments that the freeze should just last a year or two.”

Labels: finance, real estate

Objections To Subprime Rate Freeze Legislation

From CNBC:

“Many hedge funds, along with other institutional investors such as mutual funds, money market funds and retirement plans, are invested heavily in mortgage securities. Some hedge funds in particular made strategic bets on the decline of the subprime mortgage market, and they could argue that the government-backed plan is unfair meddling that will cheat them out of money.”

From The Wall Street Journal:

“Even some subprime borrowers object to the plan. Justin Miller, a 27-year-old mortgage broker in Coral Springs, Fla., says he made a bad investment decision when he bought a $600,000 oceanfront home last December with two subprime loans. But he's committed to making the $6,000 in monthly payments -- and the higher payments once the rates go up.

‘A lot of people are trying to point fingers and get themselves out of something they put themselves into,’ he says. ‘I put myself in this position. I need to find a way to make it work.’

Mr. Miller says that the rate-freeze proposal reminds him of a television commercial: The announcer asks, ‘Do you owe back taxes?’ A client responds, ‘I settled for half of what I owe.’ Says Mr. Miller: ‘How's that fair? Everything seems to be backward.’”

From City Journal:

“The Paulson plan’s flaws are manifold—and fatal. First, it will reward and encourage irrational behavior by future home buyers. It wasn’t logical for people to take on mortgage obligations that they couldn’t afford, but it will become logical in the future if they can reasonably expect that the government and their lenders will bail them out when the going gets tough.

Second, the deal will thwart the market by keeping home prices artificially high. In recent years, laughably easy credit has allowed many people to ‘buy’ homes who otherwise couldn’t have. We’ve had ‘liar’ loans, in which people could claim a false annual income without fear that their mortgage lenders would confirm the figure. We’ve had ‘Nina’ loans (short for ‘No Income, No Assets’). And we’ve had ‘Ninja’ loans, for ‘No Income, No Job or Assets.’ Consumers, armed with the easy money provided by these lenient arrangements, have pushed home prices to record levels as measured against personal income. The decline of home prices, then, was both inevitable and healthy. But Hope Now, by placing an artificial floor under home prices, will penalize first-time buyers who did the right thing: not taking out mortgages that they knew they couldn’t afford, but renting instead until prices fell and they could afford homes with more conventional mortgages.”

Labels: finance, real estate

Dollar May Be Ready For A Turn Around

From The Wall Street Journal:

“If economies outside the U.S. slow, the U.S. may no longer seem like such a bad place for foreign investors to put their money, especially given how much further a euro or yen will go in the U.S. than they do at home. That could restrain the dollar's fall. More immediately, troubled U.S. financial firms may need to sell foreign-currency-denominated assets to shore up their balance sheets before they close their books at year end. Repatriating that money will mean buying dollars, and that could boost the currency.

Meantime, hedge funds and other speculative investors have placed heavy bets on the dollar continuing to lose ground against other currencies. If the dollar starts to rise, they will be forced to unwind those bets, and the dollar's rebound could be fierce.”

From International Herald Tribune:

“The U.S. budget and trade deficits are narrowing in tandem for the first time since 1995, when the dollar gained 8 percent as measured by the Federal Reserve's U.S. trade weighted dollar index. The economy will expand 2.4 percent in 2008, compared with 1.9 percent for Europe, according to surveys conducted last month by Bloomberg News.

‘I am confident that the dollar will have a significant rally next year, especially against the euro and the pound,’ said Stephen Jen in London, the head of currency research at Morgan Stanley. Jen said that he expected the U.S. currency to strengthen to $1.35 against the euro by December 2008 from $1.4633 last week. ‘The deficits are shrinking fast.’”

From Bloomberg:

“The median forecast of strategists is for a 5 percent gain to $1.40 against the euro in 2008. Redtower Ltd. in Aberdeen, Scotland, is the most bullish, calling for the dollar to gain to $1.23 by the end of next year.

Jim O'Neill, chief economist in London at Goldman Sachs Group Inc., the most profitable securities company, said last week the narrowing trade deficit will help revive the dollar's allure. Goldman had predicted that the dollar would weaken as U.S. growth slowed while the rest of the world expanded.”

Labels: economy, finance

Lenders And Bush Administration Are Getting Closer To Subprime Rate Freeze Agreement

From The Wall Street Journal:

“The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.”

From Conde Nast Portfolio:

“American Banker reports that the plan being discussed among Bush administration officials and the financial institutions involves extending the introductory interest rates for five years on nondelinquent subprime hybrid adjustable-rate mortgages. Financial institutions have been pressing for a three-year time frame, American Banker says.”

From Bloomberg:

“Paulson, who will address a housing conference on Dec. 3, presided over a one-hour gathering at the Treasury Department in Washington with federal regulators, bankers and lobbyists. Citigroup Inc., Wells Fargo & Co. and Washington Mutual Inc. executives attended, said a person present, who spoke on condition of anonymity.”

Labels: finance, real estate

Regulation On The Way For Mortgage Industry?

From Contra Costa Times:

“The bill, passed Thursday evening by a 291-127 vote, garnered support from 64 House Republicans. No Democrats were opposed.

Many other Republicans, though, echoed banking industry criticisms, calling the bill an overreaction to the mortgage market's woes and warning of a flood of lawsuits if it becomes law.

They also said the mortgage market has already pulled back from lax lending practices common during the tail end of the housing boom.

‘Have no doubt, this bill will limit credit availability and options for thousands of Americans who want to grab their share of the American dream of homeownership,’ Kieran Quinn, chairman of the Mortgage Bankers Association, said in a statement. The American Bankers Association said it has ‘serious concerns’ with the bill, arguing that it would add more regulations for banks.”

From The Wall Street Journal:

“Rep. Frank's bill creates a national registry for mortgage brokers and bank employees who originate mortgages. The bill stops loan originators who get in trouble with authorities in one state from setting up shop in another. It also sets standards for states to apply in licensing mortgage brokers. In addition, the measure makes investment firms that create mortgage securities liable if they fail to take reasonable steps to ensure that the loans they acquire comply with the law.

Trade groups for home lenders opposed the bill, arguing that it is too vague and exposes lenders to bigger legal risks. They also are unhappy because the bill doesn't set a national standard that would pre-empt states from passing their own tougher legislation.”

From CQ Politics:

“Still, the lending industry, many Republicans and the White House have concerns about the bill. They argue that increased federal oversight could hurt borrowers if it further dries up already tight credit. Critics also say the industry would be forced to deal with a patchwork of state-by-state regulations because the bill would not pre-empt tougher state mortgage laws.

On Wednesday, the White House said in a statement of administration policy that the measure would ‘unduly restrict access to credit for potential homebuyers and reduce refinancing opportunities for current homeowners.’”

Labels: finance, real estate

Fed Says No More Rate Cuts In 2007?

From Bloomburg:

“Federal Reserve policy makers won't cut their benchmark interest rate on Dec. 11, spurring a sell-off in U.S. stocks and a rebound in the dollar, according to Bear Stearns & Co.

Central bankers signaled in their Oct. 31 policy statement that the Fed `is most likely done cutting rates for the time being,’ Bear Stearns Chief Investment Strategist Jonathan Golub wrote in a research note today. Surging commodity prices and a weak U.S. currency will prompt the Fed to keep its rate target for overnight loans between banks at 4.5 percent to contain inflation, Golub wrote.”

From The Wall Street Journal:

“A Federal Reserve official sent one of the clearest signals yet the central bank isn't inclined to cut rates further, even when stocks sink and economic data turn sour.

‘The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate,’ Fed Governor Randall Kroszner said in prepared remarks before the Institute of International Finance in New York.”

From MSNBC:

“However, Vincent Reinhart, a fellow at the American Enterprise Institute, says investors may be misreading the Bernanke Fed. Mr Reinhart says the Bernanke Fed has taken a ‘principled decision’ not to talk directly about the likely path of interest rates.

Investors may be misinterpreting the lack of an explicit challenge to market expectations in a speech or leak to a newspaper as a sign that Mr Bernanke is happy with them, he says.

Yet it is also possible that the Fed itself is not being clear enough about its message, perhaps because between meetings there is not a single Fed position.”

Labels: economy, finance

Should the Loan Limits for Freddie Mac and Fannie Mae be Raised?

From Bend Weekly News:

"’Why should someone who lives in South Dakota be able to buy a 10,000-acre ranch for the same amount of money and get that subsidized, but I can't buy a 1,000-square-foot, three-bedroom, one-bath (home) in the (San Francisco) Bay Area?’ asked Colleen Badagliacco, president of the California Association of Realtors.

Sen. Charles Schumer, D-N.Y., is trying to revive the moribund Senate effort to force an increase in the loan limit. He would like to raise it as high as $625,500 in high-cost areas for one year as well as increase the size of the Fannie Mae and Freddie Mac mortgage portfolios.”

From Forbes:

“Federal Reserve Board Chairman Ben Bernanke today reiterated that Congress should be careful when considering whether to raise the non-conforming loan limit on mortgages that securitizers Fannie Mae and Freddie Mac can purchase.

Testifying before the House-Senate Joint Economic Committee, Bernanke indicated he does not support raising the loan limit, now at 417,000 usd, and said if this step is taken, it should only be temporary.”

From The Dallas Morning News:

“Fannie Mae is pushing federal regulators and lawmakers to allow it to provide funding for more and higher price loans to help overcome the credit crunch.

The Federal Housing Administration, which provides government-backed insurance for home loans, is also seeking federal approval to modernize and provide more financing.”

Labels: finance, real estate

Lenders are Ready to Make Concessions

From the Wall Street Journal:

“There is a loud effort by the Bush administration to cajole the industry into moving beyond case-by-case efforts and to enlist nonprofit groups to reach out to suspicious homeowners. With more vigor and specificity than others (enough to make some officials uneasy), the FDIC's Ms. Bair has urged the industry to extend the two- or three-year initial interest rate permanently for homeowners who are current and whose income indicates they can pay at that rate.

‘Public cajoling was needed to bring more pressure to bear, and we decided to come out with a specific example of how to do it,’ she explains. She says three of 10 top mortgage services are quietly doing what she suggested, although she won't name them.”

From Smart Money:

“So when Countrywide Financial, the U.S.'s largest mortgage lender, announced on Tuesday that it was launching a program aimed at helping cash-strapped homeowners by canceling rate resets or modifying their loans, you could almost hear a collective sigh of relief.

After all, lenders are facing a glut of foreclosures, so it's no surprise that they're warming up to the idea of helping delinquent borrowers by, for example, restructuring a mortgage so the homeowner can catch up on missed payments. However, the actual act of a lender like Countrywide reaching out to people who have yet to miss a payment — but are likely to do so because of a pending rate reset — is something new.”

From CNN Money:

“Some of the workouts would allow borrowers to make larger monthly payments until they catch up. For those deeper in trouble, modifications may include higher payments over the full term of the loan. Others could have their loan refinanced into a low cost, fixed-rate NACA loan, which recently carried a reasonable 5.25 percent interest rate.

Another, powerful, solution is loan restructuring. That could mean freezing an ARM interest rate at its initial level for several years.”

Labels: finance, real estate

Mortgage Fraud Problems in Southern Florida

From Reuters:

“But Doug Dewitt, a real estate broker contracted to work with several lenders on the valuation and disposal of foreclosed properties, said nearly 70 percent of the sales or closings at the Club over the last 18 months were questionable.

That works out to more than 200 possibly shady deals in a single building, he said.
The dubious transactions all fit a pattern that Theobald said should trigger ‘bells and whistles’ for law enforcement anywhere -- time and time again properties that failed to sell for months when listed at around $450,000 were pulled from the market and then suddenly sold for more than $800,000.

Florida leads the nation when it comes to mortgage fraud, according to the Virginia-based Mortgage Asset Research Institute, a group that works closely with the U.S. Mortgage Bankers Association.”

From South Florida Business Journal:

“The U.S. Attorney for the Southern District of Florida said investor Hugo Rodriguez, 52; Ronald Gordan Lichte, a 65-year-old mortgage broker; and his loan processor, Connie Marie Cullifer, 58, worked a scheme where Rodriguez would locate luxury condominiums and residential properties that were available for purchase, and Rodriguez and Lichte would then recruit and pay straw buyers and use their names, credit histories and signatures on mortgage loan documents to obtain financing to purchase the properties. John C. Kelley, 67, of Tampa, was also charged for allegedly acting as a straw buyer.”

From Miami Herald:

“Mayor Carlos Alvarez's Mortgage Fraud Task Force met Wednesday to discuss progress in the war on real estate fraud in South Florida, including draft legislation that would protect innocent homeowners from artificially high property taxes and the wiles of predatory lenders.”

Labels: finance, real estate

Mortgage Rates are Dropping, Offering Some Good News

From The Associated Press:

“Rates on 30-year mortgages fell for the third straight week, dropping to the lowest level in five months.

Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages dipped to 6.24 percent this week, down from 6.26 percent last week.

It was the third straight weekly decline after rates hit 6.40 percent. Analysts attributed the decreases to mounting evidence that the economy is starting to slow.”

From MarketWatch:

“’With mortgage rates remaining low, approximately 38% of applications were for refinance transactions in the third quarter, down from 42% in the second quarter of this year. According to Freddie Mac's third quarter cash-out refinance report, approximately 87% of refinanced loans were for loan amounts that were 5% or more higher than the original balances,’ he said.”

From Reuters:

“Short-term mortgage rates experienced more pronounced declines following the U.S. Federal Reserve's cut of the benchmark federal funds rate by a quarter-percentage point to 4.5 percent last week.”

Labels: finance, real estate

Inflation for Christmas

From the Wall Street Journal:

“If crude oil prices stay at current levels, U.S. consumer price inflation could hit a 16-year high of 5% by the end of the year, an analysis by London-based Capital Economics has concluded…”

“Inflation at that level, if sustained, could be both a wallop to consumer purchasing power, and a warning light to the Federal Reserve which has signaled it is paying more attention than usual to the inflationary implications of energy.”

From MSNBC:

“A number of regional Fed presidents feel particularly strongly about inflation risk. They acquiesced in the initial 50 basis point cut, but signalled serious reservations about the latest rate cut.

The October 31 Fed statement says ‘recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation’.”

Also from MSNBC:

“’The Fed is caught between a rock and a hard place as the dollar weakens and the economy faces headwinds from higher oil prices and financials tightening credit standards,’ said Gerald Lucas, at Deutsche Bank…”

“…’It puts the Fed in the box over cutting rates,’ said Marc Pado, chief market strategist at Cantor Fitzgerald. ‘How do you cut rates to save the financials when the dollar is getting killed? That's the crux of the whole matter.’”

From Forbes:

“… Warsh sees equally-real inflation threats. The recent readings have been 'favourable,' he said but the higher prices of crude oil and other commodities 'will likely put upward pressure on overall inflation in the short run.'”

Labels: economy, finance

The Latest Lending Bill

From The Wall Street Journal:

“Opponents said the legislation would make it harder for borrowers to obtain a house and increase the cost of credit. But supporters said the problems in the mortgage-finance system allowed excesses and abuses to hurt homeowners. They said lenders were able to exploit a patchwork of state and federal laws to trap borrowers in unaffordable loans using questionable underwriting practices.”

From Forbes:

“But the bill has a dark side: It could prevent people who would normally qualify for mortgages from getting one. How many? It's unknown. In addition, the legislation, if passed, may drastically increase the number of lawsuits surrounding the subprime mortgage industry if borrowers somehow prove lenders steered them into loans they couldn't repay.”

From Mortgage News Daily:

“HR3915, which is strongly opposed by some segments of the lending community, sets minimum standards for loans including a reasonable assumption that the borrower will be able to repay the loan. It also mandates a mechanism for licensing mortgage brokers who are not appropriately regulated by the states or by agencies such as the Comptroller of the Currency. The bill also proposes liabilities for those who securitize potentially risky loans.”

From ConsumerAffairs.com:

“Rep. Brad Miller (D-NC), one of the bill's co-authors along with Rep. Mel Watt (D-NC) and Committee chairman Barney Frank (D-MA), said the measure would ‘be the most significant consumer legislation in more than a dozen years.’‘Thousands of middle-class homeowners could be saved from foreclosures should the bill become law,’ Miller said.”

Labels: finance

Is the Euro Becoming the Favored Reserve Currency?

From The Wall Street Journal:

“Observers credit the ECB and its head, Jean-Claude Trichet, with making a trenchant decision that calmed markets. The move shored up confidence in the bank's ability to keep markets functioning for the U.S. dollar's most significant rival. With its boosted credibility, the ECB could enhance the euro's standing in world markets. Continued confidence in the currency could ultimately come at the expense of the dollar, the current favorite of big world investors thanks in part to the size, liquidity and stability of U.S. markets.”

From The Seattle Times:

“Gisele Bündchen wants to remain the world's richest model and is insisting she be paid in almost any currency but the U.S. dollar.

Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel is on a growing list of rich people who have concluded the currency can only depreciate because Americans led by President Bush are living beyond their means.”

Labels: finance

Mortgage Restructuring Encouraging the Wrong Behavior?

From The Wall Street Journal:

“Consider Sharon Cooper of Lynn, Mass., who wants to sell her home. The problem: She now owes more than the house is worth, so she asked her lender to allow a ‘short sale’ -- selling it for less than the amount due, and forgiving the rest -- to avoid foreclosure.

She says the lender, Countrywide Financial Corp., in August told her she would first need to fall two months behind on payments. So last month, she stopped paying. ‘I don't have any option but to stop paying,’ she says.”

From CNN Money:

“… one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.

Nelson feels cheated and has little sympathy for people who she believes weren't as careful as she was. ‘Everybody was seeing dollar signs,’ she said, ‘and let their greed get the better of them. So, no. No bail-out, no assistance with my tax dollars. Not one red cent.’"

From Forbes:

“Committee Chairman Barney Frank of Massachusetts agreed with this, saying that Congress would not appropriate money to bail out all lenders, and instead is focused on finding ways for qualified homeowners to restructure their mortgages and make them more affordable.”

Labels: finance

Fed Injects Cash into Financial System

From the AP:

“The Federal Reserve Bank of New York, which carries out the central bank's open market operations, moved Thursday to inject $41 billion in temporary reserves into the U.S financial system. It came as part of ongoing efforts designed to ensure that the markets -- which have suffered through a period of turbulence over the last few months -- function smoothly. The cash infusion came in three separate operations. A New York Fed spokesman said it was the largest single day of operations since $50.35 billion was pumped into the system on Sept. 19, 2001, following the terror strikes on New York and Washington. He declined further comment.”

From Reuters:

“The total on Thursday surpassed the $38 billion the Fed injected on Aug. 10, which was generally seen as the beginning of a global credit crisis. At the time, the Fed and the European Central Bank ramped up temporary liquidity operations with the intent of alleviating strains in short-term lending markets.”

From Bloomberg:

“The Fed today added $41 billion in temporary reserves to the banking system, the largest one-day cash infusion since the terrorist attacks of September 2001. The amount reflects the central bank's effort to push the effective rate lower after policy makers reduced their target yesterday.”

Labels: finance

Will a Fed Rate Cut Affect Mortgage Rates?

From the Seattle Times:

“Wall Street has experienced many scares lately, from a global credit crunch to big mortgage-related losses for top banks, so it's fitting the Federal Reserve's latest decision on interest rates comes on Halloween.

Many investors hope for a treat, in the form of another rate cut, rather than a trick.

The hope is a lower target for the benchmark federal funds rate would prompt banks to cut rates on mortgages — a boon to homeowners with adjustable rates due to reset — as well as credit cards.”

From The Wall Street Journal:

“…mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note… Lenders typically set their base mortgage rate around two percentage points higher than the 10-year bond yield.”

From the Associated Press:

"’The problems in the housing market, the problems in the credit markets are not easily solved by the Fed cutting rates,’ said Steve East, chief economist for investment bank Friedman Billings, Ramsey & Co. in Arlington, Va., who sees the Fed making three quarter-point cuts by January and puts the odds of a recession in 2008 at 60 percent.

The thinking is that lenders can improve battered balance sheets if they have to pay less for money they borrow short-term while the rate they charge borrowers for long-term loans holds steady or moves higher. Yet analysts say problems in the credit markets extend beyond the benefits of small rate cuts.”

From the New York Post:

“When the Fed attempted to rescue the housing industry in August by cutting its funds rate and reducing the discount rate for the second time in a month, the financial markets became spooked and punished mortgage seekers.

According to BankRate.com, the average rate on an adjustable rate mortgage went up from 6.53 percent right before the latest round of Fed rate cuts to 6.64 percent soon afterwards.”

Labels: finance

Is it Time to Refinance?

From Realty Times:

“We used to have a rule of thumb that one should refinance only when rates drop at least 2 percent from your current mortgage. With the tremendous volatility of the financial marketplace, this 2 percent rule of thumb does not always makes sense.

More importantly, there are many other reasons to refinance other than lower mortgage payments. As of January of this year, credit card companies increased their minimum monthly payment from 2 to 4 percent of the outstanding balance. Mortgage interest is deductible while credit card charges are not. If, for example, you currently owe $5000 on your charge card, consider increasing your refinance mortgage by that amount and pay off the credit card debt.”

From the Navato Advance:

“Refinance now. Lock in a low rate. Save yourself from crippling mortgage debt. Ever since the Federal Reserve cut the federal funds rate mid-September, mortgage companies have been encouraging homeowners to heed these calls. Meanwhile, consumer advocates are warning against debtors falling prey to predatory lending schemes, and financial and real-estate professionals caution that many people in trouble may not qualify for new fixed-rate loans.”

From The Sydney Morning Herald:

“As interest rates rise, some borrowers are seeking to fix their loans while others are looking to refinance, in hot pursuit of lower rates. Saving even half a per cent on your mortgage repayments may help you sleep easier at night. However, if your home loan is reasonably small, it may take some time before the savings of a lower interest rate actually make up for the cost of refinancing…

…Before you jump from one loan to another, make sure you understand just how much it will cost to refinance. Depending on the terms and conditions of your current home loan contract, this may be an expensive exercise.”

From The Austin-American Statesman:

“Subprime guidelines have been rolled back about three years… You're going to have to save up your money, document your income, maybe wait a little bit. Understand that it's going to be OK for someone to look at your bank statement. Depending on the loan amount, consider an FHA loan. That's not subprime, but their credit guidelines are relaxed. Of course, that is also a full-doc loan.”

Labels: finance