Friday, October 31, 2008

Why the Foreclosure Crisis is Hard to Fix

The government has thrown billions at the foreclosure crisis, but as Sheila Bair, head of the Federal Deposit Insurance Corp., told the Senate last week, “There has been some progress, but it’s not enough.”

Until the sweeping foreclosure problem is resolved, mortgage system woes will persist.

Here are five reasons why the foreclosure crisis has proven difficult to fix:

  1. Falling home prices: More than 23 percent of home owners with a mortgage owe more on their loans than their homes are worth. Lenders won’t give new loans to people with negative equity and that leads to owners walking away, causing the lender to foreclose.

  2. Too many investors: More than 30 percent of properties in the foreclosure process are owned by someone who doesn’t live in the property, according to RealtyTrac Inc. Programs that help home owners in trouble are not designed to aid investors.

  3. Complex investments: Nearly all mortgages in the last decade have been packaged into securities and sold. Investors in these securities are hesitant to agree to loan modifications because it will mean a significant loss. U.S. Rep. Barney Frank, D-Mass., has accused hedge fund investors of blocking loan modifications. In a letter summoning hedge fund investors to a hearing, he wrote: "For the hedge fund industry, which has flourished for much of the past decade, to take steps so actively in opposition to what is currently in the national economic interest is deeply troubling.”

  4. Job losses: Unemployment is the main reason people can’t pay their mortgages. As the unemployment rate has risen above 6 percent, the percentage of mortgage delinquencies caused by job loss has risen to 45 percent.

  5. Small modifications don’t work: One third of all subprime loans modified in the third quarter of 2007 were delinquent again within 10 months, according to a Credit Suisse report.

Source: The Associated Press, Alan Zibel (10/27/08)

Saturday, October 25, 2008

Who Says Selling REO Properties Is Easy!

Being a seller of foreclosed properties isn't easy. “It’s more about the numbers, and less about the emotions,” says Michael Krein, president of the National REO Brokers Association.

Real estate pros trying to move foreclosures often must clean out properties that have been abused, pay past-due utility bills, arrange for repair of hard-to-ignore damages, and provide security in lousy neighborhoods.

Despite these issues, selling REO properties isn’t all that lucrative. Commissions are split with the associate who sells the property and after payment of the costs of maintenance and cleanup. Collecting money from slow-paying banks is also part of the job.

Professionals who specialize in these properties make money on volume. For instance, so far this year Christina Lazrak, owner of RE/MAX Prestige in Chelmsford, Mass., and her partner Ann Marie DuRoss, have sold 85 properties worth a total of $16.2 million in the Boston area. For the year, they expect to net less than $100,000 each.

It may not be big bucks or inspiring work, but there are rewards. “We’ve got job security into 2009,” DuRoss says.

Source: Newsweek, Daniel McGinn (10/20/08)

Monday, October 20, 2008

Despite the credit crunch, there's still plenty of mortgage money

Credit squeeze, credit freeze, credit system seizures: Everybody knows how severe and painful the global financial breakdown has been -- with banks unwilling to lend even to other banks.

But what about mortgages? Can you still get a home loan with less than a 20% or 30% down payment? Or with a credit score below 720?
Absolutely. It would be a big stretch to label housing the sunny side of the market at the moment, but there's more light there than in other financial sectors. Consider these facts:
  1. There is no shortage of money available for home mortgages, no freezing of credit to purchase or refinance a house. Why? Because the American mortgage market effectively has been federalized -- at least for the time being.
  2. More than 90% of new loans now are being made through the Federal Housing Administration insurance program, plus Fannie Mae and Freddie Mac. FHA is owned by the federal government, and Fannie and Freddie are operating under federal conservatorship. All three have unfettered access to global capital markets at rock-bottom costs because their borrowings are fully guaranteed by the Treasury. Ginnie Mae, which is FHA's pipeline to the bond market, recorded an all-time high of $29 billion in new mortgage-backed securities issued in August.
  3. Loan terms and credit underwriting standards have been toughened up, but you can still put down 3% (3.5% after Jan. 1) on an FHA-insured mortgage and 5% on certain Fannie Mae and Freddie Mac loan programs with private mortgage insurance. FHA's credit standards are generous and forgiving -- the agency exists to help people with less-than-spotless credit histories.
  4. Fannie and Freddie have raised their credit-score requirements over the last year, but buyers and refinancers with scores in the upper 600s can still qualify for loans carrying reasonable rates and fees.
  5. Despite the global financial system's quakes, mortgage rates not only remain low by historical standards but have actually declined recently. For the week that ended Oct. 8, according to the Mortgage Bankers Assn., 30-year fixed rates fell to an average 5.99%, and 15-year mortgages averaged 5.71%. Freddie Mac said 30-year rates dropped to an average 5.94%.
  6. Maximum loan amounts through FHA, Fannie and Freddie in high-cost local markets on the West and East coasts continue to be $729,750 through December. In January, the maximum is projected to drop to about $625,000.
  7. Home prices -- pushed by foreclosures and short sales -- have rolled back to 2003 and 2004 levels or lower in many former boom markets. As a result, growing numbers of buyers are coming off the sidelines. The pending home sales index jumped by 7.4% based on purchase contracts signed in August, according to the National Assn. of Realtors. The heaviest increases -- pointing to higher closed sales in the coming two to three months -- were in California, Florida, Nevada and the Washington, D.C., area.
Housing and mortgage leaders say consumer worries about the stock market have obscured positive developments underway in real estate, where pricing pain and downsizing have been facts of the life for the last 2 1/2 years.

David G. Kittle, president and chief executive of Principle Wholesale Lending Inc. and incoming chairman of the Mortgage Bankers Assn., says "the mortgage market has never shut down" despite the global financial crisis. Money is "clearly available as long as you can qualify for it."

Bottom line: Scary as the news has been about stocks and banks, this is not the case for mortgages. Besides shopping at large national lenders, home buyers should check with local banks and credit unions, which may be originating loans for their own portfolios -- not for Fannie, Freddie or FHA. Many of them are healthy and have plenty of cash to lend.

Bank of America Will Modify Troubled Loans

Bank of America on Monday said it is launching a "home retention program" on Dec. 1 to modify troubled mortgages for nearly 400,000 customers of Countrywide Financial Corp.

Bank of America acquired Countrywide on July 1.

The program, which can reduce up to $8.4 billion in interest payments and principal, was developed in partnership with state Attorneys General to help borrowers that financed their homes with subprime loans or adjustable rate mortgages.

The goal is to "help as many Countrywide customers as possible stay in their homes," says Barbara Desoer, president, Bank of America Mortgage, Home Equity and Insurance Services.

The centerpiece of the program is a proactive loan modification process to provide relief to borrowers who are seriously delinquent or are likely to become seriously delinquent as a result of rate resets or payment recasts. For more information, visit Bank of America's Web site.

Source: Bank of America

Sunday, October 19, 2008

Cities Where Your Buck Goes Furthest

Money goes further some places in the United States than it does in others.

Housing, in particular, has remained most affordable in the South and the Midwest. That’s because of less stringent building, an abundance of land and growing populations in the South, says Daniel McCue, a research analyst at Harvard’s Joint Center for Housing Studies.

To determine the cities that offer the best quality of life for the least amount of money, Forbes magazine calculated the ratios between a city’s median home price and its median household income. It also factored in projected job growth. And it compared median income to Moody’s’s cost of living index.

Here are the 10 cities that it found to offer the best value, and the cities that it believes offers the worst value.

Cities Where Residents Get the Most for Their Money:
  1. Austin, Texas
  2. San Antonio, Texas
  3. Indianapolis, Ind.
  4. Houston, Texas
  5. Charlotte, N.C.
  6. Columbus, Ohio
  7. Dallas
  8. Minneapolis/St. Paul
  9. Denver
  10. Portland, Ore.
Cities Where Residents Get the Least for Their Money:
  1. Los Angeles
  2. Providence, R.I.
  3. New Orleans
  4. Philadelphia
  5. Cleveland
  6. New York
  7. Milwaukee, Wisc.
  8. St. Louis, Mo.
  9. Washington, D.C.
  10. Sacramento, Calif.
Source: Forbes, Abha Bhattarai (10/10/2008)

Government Takes $250 Billion Stake in Banks

The U.S. Treasury announced plans today to purchase up to $250 billion in preferred stock from the nation's top banks. The move is part of a plan that President Bush says will help prevent recession and preserve the free market.

"Government owning a stake in any private U.S. company is objectionable to most Americans – me included," Treasury Secretary Henry Paulson said in a statement. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop."

Nine major financial institutions have already agreed to the voluntary plan. Combined, these institutions will receive $125 billion in capital from the government. The banks are:

  • Goldman Sachs Group Inc.
  • Morgan Stanley
  • J.P. Morgan Chase & Co.
  • Bank of America Corp.
  • Citigroup Inc.
  • Wells Fargo & Co.
  • Bank of New York Mellon
  • State Street Corp.
As part of the voluntary program, the government will buy stock "on attractive terms that protect the taxpayer," according to a joint statement by the Treasury, Federal Reserve, and FDIC.

The shares be non-voting, unless the matter directly affects the government's rights as a shareholder. Banks that agree to be part of the program will accept restrictions on executive compensation while the government is holding the stock.

Paulson said taxpayers should expect a "reasonable return" from the stock and said the government will also receive warrants to buy additional stock from institutions participating in the program.

"The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses," Federal Reserve Chairman Ben Bernanke said in a statement.

Source: U.S. Treasury, Wall Street Journal

Saturday, October 18, 2008

Tenant Screening Tips #2

When you take their application, tell them you will be checking all references, employment history and credit history...ask them if there will be any problems with that. Listen and don't interrupt them. Silence is a powerful thing, use it.

Sunday, October 12, 2008

Tenant Screening Tips #1

In your initial phone interview, be sure to ask "why" they are moving. If they fumble, stumble or complain about their current landlord, this may be a red flag.

Tuesday, October 7, 2008

I want the Government to Bail Me Out of Foreclosure!

The rescue package for the financial system includes measures designed to stem the rising tide of foreclosures. Here's a look at the specifics.

The $700-billion rescue package for the financial system includes measures designed to stem the rising tide of foreclosures. Here's a look at the specifics.

How does the bailout plan help homeowners facing foreclosure?

The plan provides the Treasury secretary as much as $700 billion to buy troubled mortgages, and securities tied to these mortgages, that are held by banks and other large investors. When these assets come under government control, federal officials are required to "implement a plan that seeks to maximize assistance for homeowners" and use their authority to minimize foreclosures.

Does that differ from what the government and lenders are already doing?

Federal officials have already been encouraging lenders to modify loan terms whenever possible. Mortgage industry experts say most lenders are willing to make modest changes to payment plans to avoid the time and expense of foreclosure but are reluctant to do so if they determine that the borrower lacks the income to make even modified payments or if their losses would be too great.

It sounds as if the plan doesn't do much more for troubled homeowners then.

There are different opinions on that. Steven Adamske, spokesman for the House Financial Services Committee, believes that the government -- by becoming an investor in mortgage-backed securities -- will have new clout to demand that loan servicers modify mortgages. "If servicers are an impediment [to loan workouts] we can take another look at the industry next year and see if there are other actions we can take to remove roadblocks," he said.

Unlike a private investor or lender, "the government is here to help. We want to rebuild neighborhoods from the ground up," Adamske said.

But Paul Leonard, California director of the Center for Responsible Lending, a nonprofit advocacy group, thinks the measure really won't help many homeowners. He believes the only way to ensure people stay in their homes is to allow bankruptcy judges to modify or forgive loan terms in bankruptcy cases, which he said could have prevented 600,000 foreclosures. Such a measure has been opposed by mortgage lenders, who say it would discourage banks from making loans.

How many people are currently facing foreclosure?

Nearly 2 million mortgages are delinquent by 60 days or more, putting them at risk of foreclosure. Industry experts say there have been more than 900,000 foreclosures since 2007.

How are loans modified to prevent foreclosures?

Foreclosure prevention is centered on two programs, both of which have "hope" in their name.

A new federal loan workout program called Hope for Homeowners begins this month, targeting those unable to pay their mortgages. It is for homeowners who bought their homes before 2008 and now have monthly payments exceeding 31% of their income.

Under the program, banks would in many cases write down mortgages to 90% of a home's current value. Such a provision would be important in California, where many recent home buyers have mortgages that now greatly exceed their property values.

The new 30-year fixed-rate loan would be insured by the Federal Housing Administration and could not exceed $550,440.

An existing voluntary effort to prevent foreclosures has been in place since last year. Called Hope Now, the program is a joint effort by lenders, mortgage servicers and nonprofit housing groups to help troubled homeowners renegotiate their mortgages. Through this program, borrowers have been able to defer or reschedule monthly payments or reduce their loan principal.

How will I know whether the government owns my loan?

This has yet to be determined. The Treasury secretary will have 45 days to implement a plan, and presumably these details will become available at that time.

Tom Deutsch, deputy executive director of the American Securitization Forum, a financial industry group, said that in many cases the loan servicer won't change even if the government has taken over a mortgage. You can ask your loan servicer who owns your mortgage, but if the government was one of many investors in a mortgage-backed security into which your loan is packaged, you might not be able to tell.

Deutsch said the government might also set up a method for borrowers to inquire about who holds their loans.

So what should I do if I want assistance?

Consumer advocates say you should first contact your lender to see whether you can adjust the terms to make the payments more affordable.

Monday, October 6, 2008

Government Bailout 101: What the new law says

Here's a rundown of key provisions of the financial rescue plan.

It took two tumultuous weeks of moral and fiscal debate, but Congress and the Bush administration on Friday finally put a capstone on the $700 billion bailout of the financial system.

President Bush signed the bill less than two hours after the plan, which had been amended and passed by the Senate on Wednesday, was approved by the House.

The changes the Senate made include the addition of a host of tax break extensions and some new provisions intended to help individuals and businesses.

Here's a breakdown of some of the economic rescue plan's main provisions:

Attacking credit crisis: The core of the plan the House voted on is the same as what it rejected on Monday: the Treasury's proposal to let financial institutions sell to the government their troubled assets, mostly mortgage-related. It will allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.

Protecting taxpayers: The final law is also similar to the original House bill in that it includes a number of provisions that supporters say will protect taxpayers. One will direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury will be allowed to take ownership stakes in participating companies.

In addition, over time, supporters say, taxpayers are likely to make back much if not all of the money the Treasury uses because it will be investing in assets with underlying value.

The law includes a stipulation that the Treasury set up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

Curbing executive pay: The law will place curbs on executive pay for companies selling assets or buying insurance from Uncle Sam. For example, any bonus or incentive paid to a senior executive officer for targets met will have to be repaid if it's later proven that earnings or profit statements were inaccurate.

Oversight: The rescue plan will set up two oversight committees.

A Financial Stability Board will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel, to which the Financial Stability Board will report, will have five members appointed by House and Senate leadership from both parties.

Tax breaks: The Senate-version of the bill that the House passed on Friday included three key tax elements designed to attract House Republican votes.

It extends a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels.

The law also continues a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns.

In addition, the law includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "income tax for the wealthy."

New accounting rules: The bailout plan underlines the Securities and Exchange Commission's power to change accounting rules on how banks and Wall Street firms value securities, and directs the agency to study the issue.

Some observers argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the so-called mark-to-market rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector.

Shielding bank deposits: The law temporarily raises the FDIC insurance cap to $250,000 from $100,000. It allows the FDIC to borrow from the Treasury to cover any losses that might occur as a result of the higher insurance limit.

Federal bank regulators, who first floated the idea to Congress late Tuesday, said that bumping up the insurance limits will help improve liquidity at banks across the country. It may also provide a much-needed dose of confidence for consumers who may be worried about the health of their bank.

The plan will also temporarily increase the level of federal insurance for credit union savings to $250,000.

Mitigating foreclosures: The new law calls on federal agencies to encourage loan servicers to modify mortgages by a number of means - including reducing the principal or interest rate. It also extends a temporary provision that exempts from federal income tax any debt forgiven by a bank to a borrower in a foreclosure.

Cost: The law's tax provisions - the bulk of which come from the addition of tax breaks from other legislation - may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the one-year extension of AMT relief.

The Congressional Budget Office said it cannot estimate the net budget effects of the troubled asset program because of the many unknowns about that piece of the bill. However, the agency noted in a letter to lawmakers on Wednesday, it expects the program "would entail some net budget cost" but that it would be "substantially smaller than $700 billion."

Overall, the CBO said, "the bill as a whole would increase the budget deficit over the next decade."

Friday, October 3, 2008

Bailout Impacts!

The federal government's multi-billion-dollar bailout of bad mortgage debt could be a game-changer for home buyers, sellers and real estate professionals. But how much may not be clear for months, maybe even a year.

In the short term, according to Jay Brinkmann, chief economist for the Mortgage Bankers Association, the government's plan to greatly expand purchases of mortgage backed securities by the Treasury, Fannie Mae and Freddie Mac, should "provide a signal to the market that there's going to be an underlying floor on (interest) rates."

That's because when the Treasury buys mortgage securities -- and it's pledging $10 billion for this month alone, plus lots more to come - it has the effect of pumping fresh capital into the mortgage market, allowing more home loans to be made at more favorable rates.

Now, although rates should remain low, currently they're close to 6 percent for 30-year fixed rate loans on average -- that doesn't mean it'll be easier to qualify for a home purchase if you've got damaged credit or an income too low to pay for what you want to buy.

Those days are over for years to come.

What about the larger economic impacts of the bailout plan? Again, we're at the earliest stages of this whole process, but if the plan brings a sense of stability to the financial markets, then, absolutely, the net effect should be to restore confidence.

And consumer confidence is an essential ingredient for a home buying recovery. People who are worried about the safety of their money market investments and bank deposits aren't good candidates for purchasing houses -- even at rock bottom prices.

But the reverse is true as well: Greater consumer confidence in the financial marketplace -- along with modest interest rates and attractive prices -- could kick the whole cycle into gear and get housing moving again.

There's another factor here too: Without the big bailout plan, hundreds of thousands of financially distressed homeowners were on a non-stop conveyor belt to foreclosure. But when the government takes over mortgage portfolios, it's likely there'll be at least temporary halts to foreclosures and massive efforts to "work out" the terms of delinquent loans to enable owners to make payments at levels they can afford.

For neighborhoods hard hit by foreclosures -- and the distressed owners themselves --that will definitely be a game changer.

President Signs $700 Billion Rescue Bill!

President George W. Bush signed a historic economic rescue bill on Friday, which sets out to revive the U.S. financial system by allowing the federal government to buy up to $700 billion in failed mortgaged from banks and other financial institutions.

The president signed the bill shortly after the U.S. House of Representatives voted 263-171 today to pass the far-reaching legislation.

"This legislation is critical to stopping the economic turmoil that millions of Americans are facing," NAR President Dick Gaylord said in a statement. "Today's action will go a long way toward ending the current economic crisis crippling the housing and financial markets."

The legislation will help restore liquidity to the mortgage market, which will stabilize the housing market and protect home owners, Gaylord said.

President George Bush, along with congressional members, had lobbied throughout the week for the support of spending billions of dollars to buy bad mortgage-related securities from troubled financial institutions, as a way to ease the credit crisis.

The bill was tossed a setback earlier in the week after the House voted it down, which sent stocks plunging 777 points, the biggest single-day drop in U.S. history.

The Senate revived the bill on Wednesday by making changes to the $700 billion measure, which was aimed at garnering more bipartisan support. The revised bill extended bank deposit insurance and expired tax breaks. The Senate passed its version of the bill in a 74-25 vote on Oct. 1.

Earlier in the week, NAR had called on its members to contact Congress to support the bill. NAR also teamed up with eight other business organizations to run an ad in major newspapers across the country that urged Congress to pass the recovery plan.

Source: REALTOR Magazine Online (10/3/08)

Greater Oversight Likely to Accompany Rescue Plan

Once a financial rescue plan is executed, legal and political observers expect Capitol Hill legislators to turn their attention to tightening the regulation of mortgage lending—an especially obvious target due to the fact that so much of the troubled debt handcuffing the nation's banks originated with the lax practices of mortgage brokers and lenders.

In addition, lawmakers may try to overhaul the patchwork of government authority over the nation's banks, which are currently regulated by four agencies with overlapping jurisdictions: the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision, and the Federal Reserve.

Finally, legislators may try to bring unregulated markets, such as those for credit default swaps, under control. The market for credit default swaps alone has mushroomed to $44 trillion in face value, so vast that a problem at any one of the major participants poses a global risk.

Source: Los Angeles Times, Michael A. Hiltzik (09/25/08)

Cities With Most Exposure to Financial Crisis

Wall Street's woes are going to have an impact on communities all over the country.

Not only because the $700 billion bailout will most likely result in higher taxes for most Americans, but because people who work in industries related to the financial sector will be vulnerable as companies make cutbacks.

The financial, insurance, and real estate sectors employ approximately 9.8 million people in the U.S., or nearly 7 percent of the entire American work force.

New York may be the center of the financial market, but people in small cities could feel the downturn even more.

BusinessWeek identified the top-10 communities across the country that are most likely to be most affected by the financial crisis, based on how many people are employed in finance, real estate, and insurance, and leasing.

  • Darien, Conn.: 27.23 percent employed in finance and real estate
  • Bloomington, Ill.: 26.31 percent
  • Hoboken, N.J.: 23.33 percent
  • West Des Moines, Iowa: 22.15 percent
  • Garden City, N.Y.: 20.22 percent
  • Summit, N.J.: 19.74
  • Westport, Conn.: 19.39 percent
  • University Park, Texas: 18.83 percent
  • Wethersfield, Conn.: 18.73 percent
  • Mountain Brook, Ala.: 18.66 percent

Source:Business Week (9/25/08)