As most people know by now, the government has seized control of Fannie Mae and Freddie Mac. While seizing any company comes as a bit of a shocker, in this instance it was not completely without warrant. One of the nice ramifications of the government seizure for homebuyers is that interest rates have fallen substantially, down around 0.5 percent so far. This translates into almost $100 a month in savings on a $300,000 loan. Savings like this could have an obvious impact on the real estate market.

The fact that people can now buy more house for the same monthly payment is definitely helpful for the market. As we learned in the housing boom, people don’t pay attention to the price they are paying for the house, but rather their monthly payment. This dynamic has likely changed some as people have become more cognizant of the fact that housing prices don’t always go up, but I would still venture to say that the monthly payment is still the primary focus for most residential home buyers.

The tricky thing with this new lower conforming rate is that a good portion of the population isn’t going to qualify. The new lending environment has changed greatly from a few years ago. It used to be that practically anyone could get a mortgage, but that just isn’t the case anymore. Credit score requirements are higher and income qualifications tighter. The net effect in all this is that fewer people can buy homes. Let’s now take into account the record levels of debt and late payments; one could venture to say that credit scores across the population are not as good as they could be. Again, this is a bad sign and it appears to only be getting worse.

The government appears to be pulling out all the stops to fix this housing problem. The new Housing Bill initiatives will become effective October 1, and they include several measures which should provide assistance to the market. Will lower mortgage rates and the Housing Bill be enough to right this failing market? Will job losses continue to increase and economic hardships make matters worse?

I don’t have the answers, and I don’t think anyone truthfully does. There are so many variables at play here that the best predictions are sure to be wrong. We will have to wait and see how this all plays out. As an investor, my advice to you is to stay diversified and keep a good portion of your funds in cash equivalents. This will allow you the flexibility to pounce on great opportunities when they present themselves.

Labels: Fannie Mae, Freddie Mac, mortgages, real estate

In a bit of bright news for the ever-gloomy housing market, Freddie Mac’s debt sale yesterday went better than planned. Freddie was able to sell $1 billion of 3 month bills and $1 billion of 6 month bills with relative ease, according to Reuters. This debt sale went over much better than the company’s last offering earlier this month, despite all the talk about a possible nationalization. This is great news for the real estate market because a poor showing at this debt offering would have led to higher mortgage rates for borrowers, which would have led to even more pressure on the floundering market. Fannie Mae’s debt offering is scheduled for tomorrow, so we shall see soon if they share a similar success.

Personally I have not been very high on Freddie Mac or Fannie Mae, and while it is a good sign for the companies that their debt offerings are still attractive, It does not cure the bigger problems plaguing the companies. The own a lot of mortgages on properties that are losing value. If values don’t correct soon, then they are going to face a huge number of defaults. I think we’ve seen pretty clearly that when people are upside down on their houses, they lose the incentive to pay their mortgages. The trend of how many people are going under is alarming, as evidenced in yesterday’s post about underwater homebuyers.

As long as the companies can continue to sell their debt at cheap rates, they should be able to weather the storm. The question is, how much longer will investors be willing to buy their debt? It is certainly encouraging for the companies that investors seem as confident in the debt offerings as they are despite the negative publicity, as this latest offering has shown. Investors must be under the assumption that the government will step in and save the companies if need be while still honoring each company’s debt obligations. The majority consensus about financial minds seems to be that if the government ends up nationalizing the companies it will indeed honor the debt, but would probably wipe out shareholders.

The result of this latest debt offering was definitely a positive for the housing market, but we will have to see if investor sentiment remains strong through the next wave of bad news.

Labels: Fannie Mae, Freddie Mac, housing bubble, mortgages, real estate

Mortgage rates have been low for many years, but if things continue at their current pace, that isn’t going to last much longer. The biggest factor controlling the rates charged for standard 30-year mortgages is the price of bonds (called mortgage-backed securities) sold by Fannie Mae and Freddie Mac. Over the past few years, these bonds have been selling with an interest rate just a little higher than U.S. treasuries. Now, with all the problems being talked about surrounding Fannie and Freddie, investors are becoming more cautious. In case you need help connecting the dots, that means investors are requiring a higher spread on these notes. The more Fannie and Freddie have to pay to secure funds, the more they are going to have to charge to their borrowers; it’s that simple. The bigger question to think about is how these higher mortgage rates will affect an already suffering real estate market.

Probably the biggest single factor behind the housing bubble was the abundant access to cheap credit. More people than ever were buying homes because more people than ever could qualify for loans. This was in part because of law borrower credit standards required by lenders, but it was also in part because of the low interest rates offered. Homebuyers tend to focus more on the monthly payment than the actual purchase price of a home. If they know they can afford $2,000 a month, then they are willing to buy a home for up to that payment, whether it costs $250,000 or $400,000. With all these new buyers entering the market, and people now able to afford more home than ever before, this scenario created the perfect atmosphere for a run-up in housing prices. Now let’s look at present circumstances.

On a historical scale interest rates are still low, but compared to the interest rates during the height of the bubble, they are substantially higher. While interest rates are low compared to historical averages, housing prices are high compared to historical averages. With mortgage rates rising, along with the credit standards of lenders, we are getting the opposite effect of what we had during the bubble run-up. This means that we are decreasing the number of people who can buy homes in addition to decreasing the amount of home for which people can qualify. Obviously this is going to negatively affect the housing market. While we certainly have seen a sharp contraction in the housing market compared to what existed during the bubble’s peak, if mortgage rates continue to rise, you can bet that the contraction will continue and become even sharper.

Keep an eye on the investor confidence in Fannie Mae and Freddie Mac. If somehow the companies can regain this confidence, then mortgage rates could stabilize, but at this point that doesn’t appear likely to happen anytime soon.

Labels: Fannie Mae, Fed, Freddie Mac, housing bubble, mortgages, real estate

Last Friday the Orange County Register published an article that uncovered the details of a recent real estate transaction which was blatant mortgage fraud and will likely be left on taxpayer’s plates. Reading this article just made me shake my head because it is apparent that banks have learned nothing from the mortgage mess we are in today. If you haven’t read the article I suggest you do so, but I will attempt to summarize it below.

An investor purchased the home on Camile St. in Santa Ana at a foreclosure auction for $304,500, about half of what the home had sold for in 2006. This investor then fixed the home up and flipped it to a Hispanic family for $625,000. On a street where homes are selling in the mid $300,000s, this sales price should be an immediate red flag. However, Wells Fargo which issued a $500,000 loan on the property, didn’t bother looking deeper into the deal. The investor sold the home as a for sale by owner and had a plan in place where he could offer a potential home buyer 100 percent financing, even though that is all but unheard of right now. As part of the sale, the seller paid the $125,000 down payment for the buyer, but that’s not all. The seller also agreed to pay the buyer $30,000 in cash, pay the first 3 months of the mortgage and buy them a 52-inch LCD TV. So the real sales price was around $460,000 once the seller concessions are taken into account.

The author of this article went so far as to call up the mortgage broker, escrow officer, appraiser and even Wells Fargo to get their reaction to the deal; it's no surprise, though, that they all brushed it off, saying the details weren’t their business and that it was between the buyer and seller. Wells Fargo declined to commit on this loan in particular because of privacy issues, but beyond that, the best they could come up with was that they have tightened their lending standards. I don’t know about you, but if this is their idea of tightened lending standards, then they have some problems. I sure hope that Wells Fargo uses this information to take some action against this sort of practice, but I’m not holding my breath.

It gets better though, the Hispanic couple who bought the home claim they were lied to. They said that they were told they were buying the home for $500,000 and that they were going to get 100 percent financing. They didn’t know about the $625,000 sales price till the end when they signed the papers. Translation: Either this couple didn’t bother to read the purchase and sale agreement when they signed it, or else they are lying in order to protect themselves now that this information is on the public radar. My take is it is probably option #2. This couple already owns another home on the same street, so this is not their first time buying a property. In addition, they admitted to noticing the price at closing, but agreed to sign anyway. I think an honest person would have questioned that then and there.

If you ask me, these buyers were in on the deal, along with the seller, mortgage broker, appraiser and escrow officer. They were wooed by the prospects of $30,000 in cash. All they had to do was sacrifice their credit. The investor would pay the mortgage for 3 months, taking away the chance of the bank red flagging the deal for further investigation if the loan goes non-performing right away. After that, the buyers don’t even need to bother paying the mortgage, they can just let it fall back into foreclosure and get lost in the crowd. After all, Camile St. is already a foreclosure haven; what's one more?

So the next question is, who is going to be stuck with the final bill when all is said and done? The buyer? The lender? That would be a no and a no. The buyer has nothing at stake in this deal; in fact, they were paid to buy the home. If you thought the lender, you are also mistaken, because guess what? This was likely a conforming loan. That means it is going to be guaranteed by Fannie Mae or Freddie Mac. Thanks to the new housing bill that President Bush signed into law yesterday, taxpayers are likely going to be the ones to take the hit on this one, as well as for other mortgage frauds out there. It is disheartening to see that obvious cases of mortgage fraud are still occurring. But now that we as taxpayers are ultimately responsible for the bill, this just makes me mad.

Labels: Bush, economy, Fannie Mae, Freddie Mac, housing bubble, mortgages, real estate

The Fed approved some new measures Monday meant to crack down on what they deem to be deceptive lending practices. Because most of these problems have already worked themselves out, thanks to the whole credit crisis thing going on, these measures likely will have little impact. But just for fun, let’s take a look at what the changes are.

The following summary was collected from the San Francisco Chronicle:

Rules for all mortgages

- Prohibit creditors and mortgage brokers from coercing appraisers into misstating a home's value.

- Require additional information about rates, monthly payments and other loan features in all advertising.

- Ban seven deceptive or misleading advertising practices, including calling a rate or payment "fixed" when it can change.

New lending rules

- Force lenders to consider a borrower's ability to repay loans from income and assets other than the home's value.

- Require lenders to document a borrower's income and assets.

- Ban penalties for borrowers who pay off loans early if the payment can change in the first four years. In certain cases, a prepayment penalty period can't exceed two years.

- Mandate that creditors ensure certain borrowers set aside money to pay for property taxes and insurance by establishing escrow accounts.

The “new” rules for all mortgages are welcome additions, I guess, and really should be no brainers. I’m pretty sure coercing appraisers into misstating home value was already a no-no, but now it is “official,” for whatever that’s worth.

The new subprime lending rules are, for the most part, already being followed. At this point in time a borrower is going to be hard-pressed to get a loan if they can’t document their income (unless they are putting down a large down payment). Also, on almost all loans now--and in recent memory--lenders have required escrow accounts to pay for taxes and insurance. Since this was the norm even during the subprime heyday, I’m not sure exactly what they were trying to accomplish, but I guess we can now use that “official” word again. The biggest change that I can see is with the pre-payment penalties. In the past, having a two year pre-payment penalty was pretty much the norm, and borrowers who wanted to get that waived had to buy it off. From the lender's perspective it made complete sense: They wanted to ensure that they were able to make at least X dollars on the loan even if the borrower sold the house the next day. This is one that I think could backfire for borrowers. Now that lenders are not going to be able to add a pre-payment penalty, they are going to make the loan more expensive because they have to ensure that they are able to make their profit no matter what the borrowing time frame. So we can expect that buy-down pricing will now be included in every loan--whether the borrower wants it or not. The borrower who knows that they are going to be in the property for at least two years will now have to pay a little more on their loan. I think a better solution might have been to make the pre-payment penalty opt in rather than opt out--that way people who do want it can still have it.

All in all, I think these new regulations were more for show than for function. The government needed to appear like they were trying to do something about the problem, so they put together a list of things that look good on paper, but in practice are pretty much useless.

Labels: Fed, mortgages, real estate

Yesterday, former St. Louis Federal Reserve President William Poole was quoted by Bloomberg as saying Freddie Mac and Fannie Mae were insolvent, followed by reports that the Bush administration was working on a possible bailout—the culmination of a very bad day for the two companies. Freddie saw their shares fall 23.2 percent, and Fannie’s shares shed 15.4 percent. The government will certainly come to the aid of the two companies if push comes to shove, but there is speculation that a government bailout could leave shareholders with little to nothing according to the Associated Press.

I’ve been harping the potential fallout of a Freddie and Fannie failure for some time, and it is a scary to contemplate. A failure of one or both of these companies would have serious consequences in the real estate market, the economy and of course tax payers. Some estimates have put the price tag on a potential bailout at over $1 trillion. With the current state of the economy as well as the national debt (over $9.5 trillion) this is a number that could cripple us.

Now that I have painted this doom and gloom picture, you should know that most people still think a bailout is unlikely. Here is a quote from a Wall Street Journal article this morning: “The government doesn't expect the entities to fail and no rescue plan is imminent. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily.” The two companies have been raising billions of dollars in additional capital to shore up their balance sheets, and analysts believe that they will continue to do just that if necessary. This strategy will dilute the holdings of existing owners of the company, but it appears to be the best strategy at this time.

I’m certainly not daring enough at this stage to invest in Freddie Mac or Fannie Mae, and though I do think the chances of a government bailout are increasing I don’t think it is the most likely scenario. Readers of this blog know that I like to plan for the worst and hope for the best, and I think this falls right in line with that. I’m starting to consider what might happen if the two giants were to fall, and specifically how it would affect my investments. I wouldn’t take any drastic measures at this point, but it doesn’t hurt to have a plan, just in case.

Labels: credit crisis, Fannie Mae, Freddie Mac, mortgages, real estate

In the latest of what seems like bad report after bad report for Countrywide, now Governor Chris Gregoire of Washington state is looking to revoke Countrywide’s lending license in the state. Charges were filed June 23 by the DFI accusing Countrywide of unfair dealings with minorities in addition to $5 million of assessments the state says the company short-changed them. Countrywide now has 20 days to respond to the charges and request a hearing, according to a blog post from the Seattle Post-Intelligencer.

This matter is increasingly complicated considering that Countrywide is set to be acquired by Bank of America. However, according to the blog post from the Seattle PI, Gregoire is planning to see these charges through regardless of the takeover. Considering that other states, such as California and Illinois, are also working on lawsuits against Countrywide, if I were Bank of America, I certainly would not be feeling too good about the acquisition right now, and would be looking for an out.

Beyond the Bank of America ordeal, the larger underlying factor that needs to be considered is whether or not these states are looking at serious unintended consequences by revoking Countrywide’s license since Countrywide is one of the largest home lenders in the nation, and in fact largest lender in some markets. With today’s tightening credit markets, acquiring a loan to buy a home is getting harder and harder--now take out the top lender and just think how things may become.

Last August I put one of my houses, which happened to be a prime candidate for a knock-down and rebuild, on the market in Bellevue, Wash. During the process of selling the home, I had three different deals fall through because of financing, specifically the inability of the buyers to acquire the necessary construction financing. It turns out that the lenders they were working with kept closing up shop (or at least closing the construction lending side of their business) in the middle of their loans; in the end the only lender left doing construction loans in the area was Countrywide. Needless to say, they were pretty busy--so busy in fact that the last buyer’s loan rep said they would be lucky to get into underwriting within 30 days after submission, even with a full package. In the end I decided to sell the house to an investor who wanted to keep the home as a rental. I lost a few grand off what the builders were willing to pay, but the deal got done. I’m not sure if it would have got done through Countrywide or not, but I do know that without Countrywide, there wouldn’t have been anyone even willing to do the construction loan (at least according to these loan reps I spoke with). So that is one example of how Washington real estate may be impacted by the loss of Countrywide as a lender, and of course construction loans are just one of the loan types they offer.

Labels: mortgages, real estate

There has been a lot of talk recently about down payment assistance programs, and specifically whether or not they should be banned. Politicians and these down payment assistance companies have been fighting for some time on the subject, and so far the down payment assistance companies have won. Many believe that these programs are simply taking advantage of a loop hole in the FHA system and contributing to a huge number of foreclosures, while supporters proclaim that the companies are providing a vital service that is allowing low income and minorities the opportunity to enjoy homeownership for the first time. But what are we to believe? Are these programs really good or bad?

Ultimately, proclaiming whether these programs are good or bad is tough because in the end, it is subjective. On one hand, they are providing a way for people to own their own home; on the other, we have to ask ourselves, first off, whether or not owning a home is really the best thing for these people if they have no money? Are they, and are we as a country, better off with these individuals as homeowners? A tough question, but let’s take a stab at it.

The main objections to down payment assistance programs are that they have an unusually high default rate and put undue pressure on the homeowners and the FHA; they really aren’t non-profits; and they violate the intent of FHA regulations.

The unusually high default rate is most certainly a valid point. According to data on FHA loans, the down payment assistance loans result in around 3 times the normal level of default. In addition, I used a quote from FHA commissioner Brian Montgomery in a previous post in which he said, “…no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.” This quote was directly aimed at increased losses stemming from down payment assistance programs which now comprise around 35 percent of FHA loans. Supporters of the down payment assistance programs prefer to take the glass is half full approach and focus on the fact that 94 percent of these homeowners pay their mortgages with no problem, but it is hard to argue that the default is a serious problem when the FHA chief is on record saying that it could be the FHA’s downfall if they are not stopped.

The next complaint against these companies is that they aren’t really non-profits. In fact, the IRS has a big beef with the way many of these companies have been operating, and has revoked the charitable status of a number of these companies. That being said, as you can see the big players in the field have yet to be shut down and appear (at least in the IRS’s mind) to be operating within the guidelines set for charities.

The last point is the big one in my book: These companies are clearly violating the intent of the FHA’s guidelines. To qualify for an FHA loan, buyers have to be able to provide at least a 3 percent down payment--the catch is they do allow for gift funds to cover the 3 percent. However, it is expressly forbidden for those funds to come from the seller. In a typical down payment assistance arrangement, that is precisely what happens, only the down payment money is “cleaned” by passing through the non-profit (sounds kind of like money laundering, huh).

These deal work like this: The buyer and seller come to an agreement on price (typically bumped up enough to account for the following contribution), the seller donates 3 percent of the purchase price to XYZ non-profit and the non-profit issues a grant to the buyer for the 3 percent they need to buy the home--minus a handling fee, of course. Now how doesn’t that violate the intent of the FHA guidelines? The down payment assistance companies can spin this all sorts of ways, but at the end of the day they need to be able to answer this question: If the seller didn’t donate that 3 percent, would you still make that grant to the buyer? If they can truthfully answer that question, yes, then so be it; however, I’m pretty sure that is not usually the case. So it doesn't matter whether one seller’s funds are technically supporting some other buyer, and this buyer is being supported by some other seller. If the only way the deal is getting done is by the seller making the 3 percent donation, then it is a violation of the true intent of the guideline.

I’m not going to argue that these programs provide zero benefit, because I think in certain circumstances they can prove to be a valuable resource for people. But these programs are a blatant attempt to circumvent established FHA guidelines and should be put to an end. If we want to legitimize these programs then we need to change the guidelines to allow for them, and in my mind if we are going to do it, we need to create a box around it as well. I don’t think people should ever be buying a home if they have no money. What happens if the roof fails, or if they are out of work for a couple months? Everyone should have some savings, but homeowners need to have a substantial amount. Now if these people have some money, but want to keep it in reserve instead of putting it as a down payment on a house, then that is where I see down payment assistance programs as useful. Maybe the new guideline should be that buyers have at least 3 percent of the homes’ value in savings.

Labels: mortgages, real estate

Senators Christopher Dodd (D-Conn.) and Kent Conrad (D-N.D.) have been implicated in a mortgage scandal involving Countrywide bank. This is obviously a touchy issue considering that Dodd is the chairman of the Senate banking committee, it is an election year and a $300 billion lender bailout is supposed to be voted on today in the Senate.

In Dodd's case, the accusations basically boil down to whether or not he was given special pricing in relation to a couple refinance loans he got from Countrywide in 2003. Dodd denies receiving any special rates and adamantly claims that the rates were at market, but he does admit that he was likely on Countrywide’s VIP list.

Dodd's accusers have e-mail evidence apparently showing that Countrywide did, in fact, give Dodd preferential treatment. Countrywide sent an internal e-mail message that said to give Dodd a 0.5 discount on his rates because he was a U.S. senator, according to Portfolio.com.

Dodd denies any wrongdoing and is prepared to fight all allegations against him. Considering the facts that I have read, I don’t think they will ultimately find him guilty, yet the effects could be hard-felt nevertheless. The major $300 billion mortgage bailout bill has already been delayed while this investigation is underway, according to the New York Times. In a time when Democrats are trying to support their presidential candidate, Barack Obama, any bad press for the party certainly affects him. Dodd is a high-ranking Democrat who was a candidate in the 2008 presidential election himself, and whether or not Obama has anything to do with Dodd, it won’t change how the Democratic party in general is perceived by some.

Personally, I’m all for the investigation. If Dodd did, in fact, take advantage of his position, then he should have to pay the consequences. More importantly, this has held up the $300 billion bailout bill. Since I am adamantly opposed to a mortgage bailout, I hope that this bill gets delayed permanently.

Labels: Barack Obama, mortgages, politics

The first quarter of 2008 saw commercial real estate sales of $39.2 billion in the U.S., a 69 percent drop from 2007, according to a report by Jones Lang LaSalle as reported by National Real Estate Investor. According to the same report, commercial real estate sales worldwide declined 46 percent.

These significant drops vividly indicate the impact that the many and various economic crises have had on the commercial sector. The biggest hits have come from tighter lending standards, a substantially smaller and more narrowly focused conduit lending market and sharply higher lending spreads according to Earl Webb, CEO of capital markets at Jones Lang LaSalle as reported by National Real Estate Investor.

Analysts at Jones Lang LaSalle estimate that the markets won’t return to normal until sometime in 2009, but even that estimate might be a tad optimistic. Just as with residential real estate, many of these commercial real estate transactions just didn’t make sense financially during the bubble. We saw record sale after record sale, especially in markets like New York. Investors were paying way too much for property that offered measly returns. In the past, they wouldn’t have even been able to buy those buildings at the debt coverage ratios they were, but during the real estate bubble investors had lenders throwing money at their feet. All these property funds had to buy something in order to appease their investors, so they bought whatever they could for whatever price. Some of these investors had grand plans to increase revenue, many of which included raising rents in the building. However, with many businesses suffering at the hands of the economy, it is doubtful that these investors will be able to raise rents as planned.

In the end, I foresee many of these investors stuck with assets producing negative cash flow. An even bigger potential problem is that many of these investors originally secured loans which were only meant to be only short-term solutions. The investors had planned to use these higher-interest short-term loans as temporary financing until they could increase revenues and refinance with more traditional loans, but unable to raise revenue in many cases, and with the refinance market dried up, these lenders are stuck with bad loans and negative cash flow properties.

This situation has not been overlooked by opportunistic investors who are patiently awaiting desperate sellers to come calling. “In anticipation of that seller distress, a number of investment groups are building funds to buy up distressed properties and distressed commercial real estate debt. For now, those funds are still waiting for opportunities to appear,” according to Josh Scoville, director of strategic research at Property & Portfolio Research as reported by National Real Estate Investor.

Labels: housing bubble, mortgages, real estate

Several months ago the Bush administration came up with a great plan to fix the foreclosure problems plaguing the U.S.: The FHA Secure Loan. This loan was to be made available to homeowners who were having, or had, their variable interest rates adjusted and needed to refinance in order to keep making payments. So just how many people has the FHA Secure program helped avoid foreclosure since its inception? Try 3,000, according to an article from CNNMoney.

Though only 3,000 people have been saved from foreclosure, the FHA Secure program has become widely popular, with over 200,000 loans issued to date according to CNNMoney. While the program was meant to help people avoid foreclosure it has turned out to be a great program for people looking to refinance. The average homeowner refinancing with an FHA Secure loan is saving approximately $400 a month, according to the article.

Many of the people using the FHA Secure program could continue to make their payments without a problem, and additionally many of them even had other options for refinancing out of their existing mortgages. For a program that was meant to help prevent foreclosure, I’m just not sure how effective it is. It is certainly helping people save money, but when the time comes that the government has to start coming good on these guarantees, taxpayers are going to have to foot the bill. Lending out at high LTVs to high risk homeowners is not appealing to banks for a reason, so if we think we are going to avoid having to pay up when all is said and done, we are sadly mistaken.

In my mind if the government is trying to help those who are on the ropes (which I didn’t agree with in the first place), then they can do that, but they shouldn't also offer up resources to those who have other options. This program should be reserved for those who have nowhere else to turn, not those who are just looking to save 0.25 points over what the bank’s other loan program will offer them. Taxpayers shouldn’t have to front the bill when there are others willing and able to do so.

Labels: Bush, mortgages, real estate

Mortgage giant Fannie Mae today reported first a first quarter loss of nearly $2.2 billion, or $2.57 a share, much higher than the expected loss of $0.81 analysts were expecting, according to The New York Times.

Those who are regular readers of this blog know that one of my biggest fears is that one of these mortgage giants will fail. The impact of a Fannie Mae or Freddie Mac failure would be felt hard and fast, and would likely send the already precarious economy into a colossal tail spin. Not only would the housing market tank, but so would the entire U.S. economy. I am not excited about those prospects and the new-found power given to these companies by the government is not increasing my confidence level at all.

I understand why the government loosened the guidelines for the companies, yet at the same time it scares me. While the possibility remains that these changes will help the credit markets, and in turn the housing market and economy, they also increase the chances of these companies failing and the potential impact of a failure. According to The New York Times, Fannie Mae and Freddie Mac now control more than 80 percent of the mortgage market--more than double their market share of just a couple years ago. If these companies fail, the mortgage market is for all intents and purposes dead--a scary possibility. Of course, the government won’t let these companies fail, but how much would a bail out cost taxpayers? Some estimates put the number over a $1 trillion, a number that would have serious consequences to a nation already over $9 trillion in debt.

I have my fingers crossed that we won’t have to witness the failure of either of these mortgage industry giants, but as the losses continue to mount, I get more and more fearful. America has a lot riding on these two companies, so let's hope that they are able to keep it together.

Labels: economy, mortgages, real estate

Homebuyers who thought mortgage rates were heading down because of all the Fed interest rate cuts need to think again. According to Freddie Mac, 30-year mortgages rates increased 0.15 percent this week, despite all the rate cuts from the Fed. If you think that is strange, remember that 30-year mortgage rates are not tied to the Fed interest rates, but instead are controlled by the mortgage-backed securities market. Read our previous post: How Do Fed Interest Rate Cuts Really Affect Mortgage Rates? for more background on that. The bottom line is that when 30-year mortgage rates go up, despite the lowering of key Fed interest rates, it is typically because of inflationary fears.

It seems that mortgage rates won't be going down until the Fed can get inflation under control. The Fed is likely to only cut rates by 0.25 percent at their next meeting because they are concerned about inflation, according to the Associated Press. My thought is that if they were truly concerned about inflation they wouldn’t be dropping interest rates, even by the quarter point. Considering past actions from the Fed, I would say that inflation concerns are not at the top of their list.

I’m not sure who in their right mind is buying these mortgage backed securities anyway. I wouldn’t touch these, or even U.S. treasuries, at this point in time. Considering that the returns they offer are barely above inflation--that is, if you believe the government’s CPI numbers are accurate (I think they are much higher than that)--they just aren’t worth it…but that is a post for another day.

The moral of the story is that if you are in the market to buy a home, don’t wait in anticipation of mortgage rates going down. You can wait because of the market and you can wait for better opportunities, but don’t wait because you think mortgage rates are going down, because they just might not.

Labels: inflation, mortgages, real estate

I read an article this morning in CNNMoney that discussed the potential for a Fannie Mae and Freddie Mac bailout that I thought I’d share. For those who aren’t familiar with the companies, Fannie Mae and Freddie Mac are government-sponsored entities which help stabilize the mortgage market by purchasing mass quantities of loans and packaging them into securities. With the credit markets in disrepair, the importance of these two companies has increased dramatically. According to the article, 82 percent of U.S. mortgages are being backed by one of the companies, up from 46 percent in the second quarter of 2007. With the value of real estate continuing to decline, the mounting losses and increased exposure of the two companies could lead to disaster. The government can’t and won’t let these companies fail--and will come to their rescue if necessary. The price tag of a potential bailout could be more than $1 trillion dollars, along with additional ramifications to the U.S. economy. Let’s look at some of the warning signs and potential outcomes as described in the CNNMoney article:

Risks and warning signs

“...other experts expect that declining home values will force more borrowers who have a Fannie- or Freddie-backed loan to stop making payments in the coming months, rather than continuing to make payments on a home now worth less than their loan balance.”

“Rising job losses may also make it difficult for other borrowers who formerly had good credit to stay current on their mortgage payments.”

“Some economists suggest that if investors start to see problems in the performance of loans backed by Fannie and Freddie, they'll dump them. And that would force the federal government to step in.”

“’I would say there's at least a 50-50 chance of some sort of bailout. I'm not saying it will necessarily cost $1 trillion, but they'll need some kind of help, and it very well could happen this year,’ said Dean Baker, co-director of the Center for Economic and Policy Research”

“The yield premium for securities backed by Freddie and Fannie compared to the yield on Treasury bills has grown to about 2.25 percentage points from 1.7 percentage points at the beginning of the year. That's a sign that the investors see a greater risk of Fannie and Freddie running into bigger problems.”

“OFHEO, in its annual report this week, said that while Fannie and Freddie have made progress clearing up accounting problems that had dogged both firms, they remain ‘a significant supervisory risk.’”

“...since current home price declines are without precedent, the firms will have a difficult time correctly pricing the risk of the mortgages they're backing.”

“...Fannie and Freddie's role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.”

“The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets.”

“The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts.”

“The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines. And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business.”

Potential costs for a bailout

According to the article, Standard and Poor’s predicted a bailout out of the companies could cost between $420 billion and $1.1 trillion dollars of taxpayer money—a cost so high that it puts the U.S. government’s AAA credit rating at risk. This has potentially enormous ramifications, because the lowering of the government’s credit rating would mean the cost of borrowing money would go up and the number of potential investors interested in buying U.S. treasuries would go down. Since the U.S. is financing its extravagant lifestyle with debt, if our ability to borrow decreases significantly we are going to have to make serious changes as a nation.

Labels: economy, housing bubble, mortgages, real estate

Many people have set up a home equity line of credit (HELOC) to use in case of emergency or as a cash flow buffer for their businesses. Many investors even use their HELOC to buy foreclosures or international properties. All of these individuals may need to rethink their strategies. Several lenders have recently begun freezing borrowers' HELOC accounts without warning and without disclosing the reason for the freeze to the homeowners, according to an article in the New York Times. Washington Mutual, Indy Mac and the GreenPoint Mortgage unit of Capital One are specifically mentioned in the article.

According to the banks, the measures are being taken to protect themselves from declining property values, but even homeowners in markets which have not seen declines in value have been affected. These markets include: Yakima, Wash.; Appleton, Wisc.; Raleigh-Cary, N.C.; and Champaign-Urbana, Ill. So if you think you are protected because you are in a market thus far unaffected by the housing bubble, think again.

This news will be hard on those who were banking on using their HELOC for their business, investments or tax payment, who are now simply out of luck. The banks are within their rights to do this, and considering the housing market it is surprising they didn’t do it sooner, but the negative impact on the economy will surely be felt.

Let this also be a warning to those who were counting on the equity in their home to save them in the event something bad was to happen: Home equity is not a substitute for savings.

Labels: investments, mortgages, real estate

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

New higher conforming loan limits (See New Conforming loan limits post) created by temporary federal legislation have resulted in a new type of loan: The conforming-jumbo loan. Strange as it may be to say those two words together, the conforming-jumbo loan amount is above the previous conforming loan limit, but less than or equal to the temporary limit which will last until at least the end of this year.

The conforming-jumbo is being treated differently than the previous conforming or jumbo loans. Fannie Mae and Freddie Mac add on a .25 percent rate adjustment for conforming-jumbo loans, and they require a minimum credit score of 660 to qualify. There are other requirements, and if you are interested, you should read this post from Rain City Guide.

It is important to note that those are only the standard adjustments from Freddie and Fannie, and each individual lender then decides whether they should make additional ones. One loan officer commented on a Rain City Guide post that Plaza (a mortgage lender) is adding a 2.5 price hit on FHA loans above the previous conforming limit. Many other loan officers suspect that several other lenders will be making similar adjustments, although it is not certain that they will be as extreme.

In order for the new loan limits to work, they need to be an available and sensible option. If they turn out to be just as difficult and/or expensive as jumbo loans, then this all will become a big waste of time. It doesn’t seem that this will be entirely the case; they should help high-cost markets somewhat, and they won’t be as bad as jumbo loans, but it does seem that these loans will be more expensive and of less help than many people anticipated.

Labels: mortgages, real estate

HUD officially rolled out the new higher limits for FHA loans yesterday, and the conforming loan limits for Fannie Mae and Freddie Mac were also increased. The government is hoping that these new limits will help an estimated 250,000 new people become homeowners and benefit areas with high real estate values. The cap increases max out at $729,750 for single family homes, $934,200 for duplexes, $1,129,250 for triplexes, and $1,403,400 for fourplexes.

The maximum levels were reached in several counties across California, as well as places like Washington D.C. and the metro New York City area. To see the new conforming loan cap in your county check out the FHA mortgage limits tool on HUD’s website. The tool also has the new Fannie Mae and Freddie Mac conforming loan limits, although they are basically the same as the FHA ones.

These new loan limits last only for the rest of the year and revert to the old levels in January 2009, barring any legislative changes. For more details about the new limits you can find out more on HUD’s website.

Labels: mortgages, real estate