The Standard & Poor's/Case-Shiller home price index for October, released on Wednesday, fell again for what is the 10th consecutive month. The 6.7 percent drop from figures a year earlier was the largest recorded by the index since April, 1991 when prices declined 6.3 percent.
The S&P/Case-Shiller report uses methodology similar to that of the quarterly Housing Market Index report from the Office of Federal Housing Enterprise Oversight (OFHEO) - that is comparing repeated sales of the same property. In fact, Case-Shiller developed the system which was adopted by the federal agency. Case-Shiller, however, reports on a much smaller universe than OFHEO. The former looks at existing single-family homes in 20 metropolitan statistical areas (MSAs.) These areas are then aggregated to form two distinct indices - one a 10 city index, another for the entire 20 MSA sample. OFHEO's quarterly report separately evaluates all of the states and the District of Columbia and several hundred metropolitan areas.
It also takes a less in-depth look at several dozen smaller markets.In the Case-Shiller study, the index for the 20 metropolitan areas reported that 11 MSAs posted recorded declines during the study period and all 20 were down from September 2007 to October 2007 with San Diego showing the largest decline in a single month; 2.6 percent.
Miami was the biggest loser in the broad index with a decline of 12.4 percent in October, 2007 compared to October, 2006. Tampa, Florida was off 11.8 percent year over year while Detroit, Las Vegas, Phoenix, and San Diego also posted double digit declines.
Charlotte, North Carolina; Portland, Oregon; and Seattle, Washington each pulled out a price increase for October, 2007 over October 2006 with Charlotte leading the pack with an increase of 4.3 percent. Charlotte has become the home base of many major financial institutions including two of the nation's largest banks; Bank of America and Wachovia and has seen an enormous increase in employment over the last few years.
Robert Shiller, one of the designers of the study and chief economist at MacroMarkets, LLC commented that, "No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim."
Data is due on the last two business days of the year regarding November sales of both existing houses and new houses coming, respectively, from the National Association of Realtors and the U.S. Census Bureau/Department of Housing and Urban Development and will be reported here on Thursday and Friday. Information on interest rates and mortgage activity during the pre-Christmas week has been embargoed by the Mortgage Bankers Association and will thus have to be reported tomorrow.
Friday, December 28, 2007
Monday, December 24, 2007
Merry Christmas to All!
We at 78Homes.com, The Short Sale Group and The Investor News Blog wish you and yours a Happy Holiday Season and a Prosperous and Healthy New Year!
Friday, December 21, 2007
Credit Worthy being Hurt Too
Subprime Debacle TrapsEven Very Credit-Worthy
Reprinted with Permission
By Rick Brooks and Ruth Simon From The Wall Street Journal Online
One common assumption about the subprime mortgage crisis is that it revolves around borrowers with sketchy credit who couldn't have bought a home without paying punitively high interest rates. But it turns out that plenty of people with seemingly good credit are also caught in the subprime trap.
An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.
In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.
The numbers could have dramatic implications for how banks and U.S. regulators address the meltdown in subprime loans. Major banks, mortgage companies and investment firms have been rocked by billions of dollars in losses as shaky subprime loans -- which typically carry much higher, or rising, rates and other potentially onerous costs -- have increasingly gone into default. Many analysts expect hundreds of thousands more loans could go bad over the next several years. The Bush administration and major financial institutions are working on a plan to freeze interest rates of certain subprime loans in hopes of avoiding an even bigger meltdown.
The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy -- including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans -- perhaps foolishly -- with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.
The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals -- and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms.
Sales Pitch
The subprime sales pitch sometimes was fueled with faxes and emails from lenders to brokers touting easier qualification for borrowers and attractive payouts for mortgage brokers who brought in business. One of the biggest weapons: a compensation structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for.
There isn't a hard-and-fast rule on what makes a loan subprime. But generally they are riskier than regular mortgages because lenders are more willing to bend traditional underwriting standards to accommodate borrowers. Besides having a lower credit score, borrowers might wind up with a subprime loan if the mortgage was considered risky for other reasons -- such as borrowing a higher percentage of income or home value than normal, or borrowing without documenting income or assets. The resulting interest rates tend to be substantially higher than for conventional mortgages.
One key factor in determining what kind of loan a borrower gets is his credit score. Credit scores can run from 300 to 850, and many involved in the business view a credit score of 620 as a historic rough dividing line between borrowers who are unlikely to qualify for a conventional, or prime loan, and those who may be able to. Above that score, borrowers may qualify for a conventional loan if other considerations are in their favor. Above 720, most borrowers would expect to usually qualify for conventional loans, unless they are seeking to spend more than they can afford, or don't want to have to document their income or assets -- or are steered to a subprime product.
But rising home prices, and the growth of an industry of lenders specializing in subprime loans, led to an increase in all kinds of reasons for borrowers with good credit scores to sign up for subprime loans.
"Every single day ... I saw prime borrowers coming through my desk with 660, 680 [and] 720 credit scores," says Thomas Rudden, a former senior account executive at Mercantile Mortgage Co., a now-defunct subprime lender. Some were taking out loans as speculators, he believes, while in other cases he thinks brokers put borrowers into these loans because they thought it was easier.
Many borrowers figured they would refinance in a few years before the rate on their loan moved higher -- but falling home prices and tighter credit standards in the past year have suddenly made that unrealistic in many cases. "Brokers and agents were telling" borrowers with high credit scores for the past several years "that it was OK" to get subprime loans, "and borrowers were wanting to take on more debt," says Mark Carrington, director, analytical sales and support at First American LoanPerformance.
Confused Borrowers
A study done in 2004 and 2005 by the Federal Trade Commission found that many borrowers were confused by current mortgage cost disclosures and "did not understand important costs and terms of their own recently obtained mortgages. Many had loans that were significantly more costly than they believed, or contained significant restrictions, such as prepayment penalties, of which they were unaware."
Lending advocates have long alleged that minority and poor borrowers are often steered into subprime loans that carry excessively high interest rates and steep prepayment penalties. But the growing use of subprime loans by people with higher credit scores suggests that such problems exist among a much wider swath of borrowers than previously thought and may have little to do with the ethnicity of borrowers.
Doug Duncan, chief economist of the Mortgage Bankers Association, says the line between borrowers who can qualify for a conventional loan and those who can't is blurry. "This perception that 620 is a break between prime and subprime ... is certainly not the view of the industry," he says.
Lenders make their decisions according to a variety of factors, including their own policies about risk, he says. Credit scores themselves are based on a variety of factors, including a consumer's payment history and debt load, how long the consumer has had credit, how actively the consumer is looking for new credit and the types of credit the consumer uses.
Lenders say they aren't responsible for borrowers who may have been reckless in their real-estate investments or their finances, or who have their own reasons for considering loans with subprime terms. "There are many borrower requests and situations, and multiple risk factors in addition to credit grading that go into loan underwriting decisions and often do result in borrowers with good credit grades accepting subprime loans," Countrywide Financial Corp. spokesman Rick Simon says.
Credit-worthy borrowers holding subprime loans may turn out to serve as a sort of shock absorber for the current mortgage crisis. They may be more likely than traditional subprime borrowers to withstand the double whammy of declining home prices and adjustable-rate mortgages soon due to reset at higher interest rates. The data perhaps explain why, so far, nearly 80% of the borrowers with subprime loans have continued to keep their loan payments current, according to some analysts. That could indicate the crisis won't continue to deepen as much as some fear.
But the situation also means that many otherwise credit-worthy borrowers are stuck with subprime loans whose costs may rise, which could harm them financially and further tighten pressure on the U.S. economy. Delinquency rates for subprime loans have been climbing in part because many of these loans included risky attributes such as no documentation of the borrower's income or assets. Many were made to first-time home buyers or to speculators who planned to quickly flip the homes. An analysis by Fitch Ratings of 45 subprime loans that went delinquent early in their lives -- even though the borrowers had an average credit score of 686 -- concluded last week that "these loans suffered in many instances from poor lending decisions and misrepresentations by borrowers, brokers and other parties in the origination process."
During the housing boom, the lower introductory rate on adjustable-rate mortgages made them feel closer in cost to regular loans to many subprime borrowers, but those rates can jump after two or three years. Brokers had extra incentives to sell those loans, which have terms that often are confusing to borrowers.
For instance, according to a March 2007 "rate sheet" distributed by New Century Financial Corp., now in bankruptcy-court protection and no longer making subprime loans, brokers could earn a "yield spread premium" equal to 2% of the loan amount -- or $8,000 on a $400,000 loan -- if a borrower's interest rate was an extra 1.25 percentage points higher than the Irvine, Calif., lender's listed rates.
Borrowers weren't supposed to see the information. Tiny print at the bottom of the document warned: "For wholesale use only. Not for distribution to the general public."
On average, U.S. mortgage brokers collected 1.88% of the loan amount for originating a subprime loan, compared with 1.48% for conforming loans, according to Wholesale Access, a mortgage research firm. Payouts for subprime loans have traditionally been higher, in part because these loans sometimes took more work and the approval rate could be lower. Brokers have sometimes used the money to help the borrower complete the loan, by reducing closing costs. But there is "a lot of play in the system," says A.W. Pickel III, a past president of the National Association of Mortgage Brokers, and president and chief executive of LeaderOne Financial Corp., a mortgage lender and broker in Overland Park, Kan. "You have to operate with
an ethical basis."
Critics claim that yield-spread premiums encourage brokers to steer borrowers into loans that cost far more than they should and create excessive financial risk. In October, Massachusetts Attorney General Martha Coakley filed a lawsuit against subprime lender Fremont Investment & Loan and its parent, Fremont General Corp., alleging that the payments were unfair and deceptive.
Fremont, which quit making subprime mortgages in March, denies any wrongdoing. In a court filing last month, the Brea, Calif., bank said that without access to its loans -- often requiring a lower standard of proof of income, assets and credit history than traditional lenders -- "many Massachusetts residents who are homeowners today would never have been able to purchase homes." Fremont declined to make additional comment.
In most states, mortgage brokers and loan officers aren't under any legal obligation to put borrowers in the mortgage that best suits them. A provision outlawing yield-spread premiums was dropped last month from a mortgage-reform bill now working its way through Congress.
'Duped Into Loans'
Tom Pool, an assistant commissioner for the California Department of Real Estate, says his office has seen a number of cases involving "totally ignorant and unsophisticated borrowers who had good credit, but were duped into loans they had no hope of repaying." But experienced borrowers with high credit scores are often too casual about the loan process.
A study published last year in the Journal of Consumer Affairs concluded that some borrowers pay higher rates than they should because they don't shop around enough. An earlier survey by the Mortgage Bankers Association of borrowers who had bought a house within the previous 12 months found that half couldn't recall the terms of their mortgage, says the association's Mr. Duncan.
Often such loans involve fraud, says Peter Fredman, a California attorney who has two clients who wound up with loans with high interest rates despite good credit scores. "Because these people had decent credit scores, the lenders said they would do a 100% no-documentation loan and that opened the door for mortgage brokers to do whatever they wanted to do," he says.
Mr. Fredman is representing a couple in their sixties with a monthly income of less than $2,500 but mortgage payments of roughly $3,400, not including taxes and insurance. The husband and wife, first-time home buyers with credit scores of 680 and 667, expected payments of $1,500 a month. They tried refinancing to lower the cost, to little effect. They haven't made a mortgage payment since January.
Reprinted with Permission
By Rick Brooks and Ruth Simon From The Wall Street Journal Online
One common assumption about the subprime mortgage crisis is that it revolves around borrowers with sketchy credit who couldn't have bought a home without paying punitively high interest rates. But it turns out that plenty of people with seemingly good credit are also caught in the subprime trap.
An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.
In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.
The numbers could have dramatic implications for how banks and U.S. regulators address the meltdown in subprime loans. Major banks, mortgage companies and investment firms have been rocked by billions of dollars in losses as shaky subprime loans -- which typically carry much higher, or rising, rates and other potentially onerous costs -- have increasingly gone into default. Many analysts expect hundreds of thousands more loans could go bad over the next several years. The Bush administration and major financial institutions are working on a plan to freeze interest rates of certain subprime loans in hopes of avoiding an even bigger meltdown.
The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy -- including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans -- perhaps foolishly -- with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.
The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals -- and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms.
Sales Pitch
The subprime sales pitch sometimes was fueled with faxes and emails from lenders to brokers touting easier qualification for borrowers and attractive payouts for mortgage brokers who brought in business. One of the biggest weapons: a compensation structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for.
There isn't a hard-and-fast rule on what makes a loan subprime. But generally they are riskier than regular mortgages because lenders are more willing to bend traditional underwriting standards to accommodate borrowers. Besides having a lower credit score, borrowers might wind up with a subprime loan if the mortgage was considered risky for other reasons -- such as borrowing a higher percentage of income or home value than normal, or borrowing without documenting income or assets. The resulting interest rates tend to be substantially higher than for conventional mortgages.
One key factor in determining what kind of loan a borrower gets is his credit score. Credit scores can run from 300 to 850, and many involved in the business view a credit score of 620 as a historic rough dividing line between borrowers who are unlikely to qualify for a conventional, or prime loan, and those who may be able to. Above that score, borrowers may qualify for a conventional loan if other considerations are in their favor. Above 720, most borrowers would expect to usually qualify for conventional loans, unless they are seeking to spend more than they can afford, or don't want to have to document their income or assets -- or are steered to a subprime product.
But rising home prices, and the growth of an industry of lenders specializing in subprime loans, led to an increase in all kinds of reasons for borrowers with good credit scores to sign up for subprime loans.
"Every single day ... I saw prime borrowers coming through my desk with 660, 680 [and] 720 credit scores," says Thomas Rudden, a former senior account executive at Mercantile Mortgage Co., a now-defunct subprime lender. Some were taking out loans as speculators, he believes, while in other cases he thinks brokers put borrowers into these loans because they thought it was easier.
Many borrowers figured they would refinance in a few years before the rate on their loan moved higher -- but falling home prices and tighter credit standards in the past year have suddenly made that unrealistic in many cases. "Brokers and agents were telling" borrowers with high credit scores for the past several years "that it was OK" to get subprime loans, "and borrowers were wanting to take on more debt," says Mark Carrington, director, analytical sales and support at First American LoanPerformance.
Confused Borrowers
A study done in 2004 and 2005 by the Federal Trade Commission found that many borrowers were confused by current mortgage cost disclosures and "did not understand important costs and terms of their own recently obtained mortgages. Many had loans that were significantly more costly than they believed, or contained significant restrictions, such as prepayment penalties, of which they were unaware."
Lending advocates have long alleged that minority and poor borrowers are often steered into subprime loans that carry excessively high interest rates and steep prepayment penalties. But the growing use of subprime loans by people with higher credit scores suggests that such problems exist among a much wider swath of borrowers than previously thought and may have little to do with the ethnicity of borrowers.
Doug Duncan, chief economist of the Mortgage Bankers Association, says the line between borrowers who can qualify for a conventional loan and those who can't is blurry. "This perception that 620 is a break between prime and subprime ... is certainly not the view of the industry," he says.
Lenders make their decisions according to a variety of factors, including their own policies about risk, he says. Credit scores themselves are based on a variety of factors, including a consumer's payment history and debt load, how long the consumer has had credit, how actively the consumer is looking for new credit and the types of credit the consumer uses.
Lenders say they aren't responsible for borrowers who may have been reckless in their real-estate investments or their finances, or who have their own reasons for considering loans with subprime terms. "There are many borrower requests and situations, and multiple risk factors in addition to credit grading that go into loan underwriting decisions and often do result in borrowers with good credit grades accepting subprime loans," Countrywide Financial Corp. spokesman Rick Simon says.
Credit-worthy borrowers holding subprime loans may turn out to serve as a sort of shock absorber for the current mortgage crisis. They may be more likely than traditional subprime borrowers to withstand the double whammy of declining home prices and adjustable-rate mortgages soon due to reset at higher interest rates. The data perhaps explain why, so far, nearly 80% of the borrowers with subprime loans have continued to keep their loan payments current, according to some analysts. That could indicate the crisis won't continue to deepen as much as some fear.
But the situation also means that many otherwise credit-worthy borrowers are stuck with subprime loans whose costs may rise, which could harm them financially and further tighten pressure on the U.S. economy. Delinquency rates for subprime loans have been climbing in part because many of these loans included risky attributes such as no documentation of the borrower's income or assets. Many were made to first-time home buyers or to speculators who planned to quickly flip the homes. An analysis by Fitch Ratings of 45 subprime loans that went delinquent early in their lives -- even though the borrowers had an average credit score of 686 -- concluded last week that "these loans suffered in many instances from poor lending decisions and misrepresentations by borrowers, brokers and other parties in the origination process."
During the housing boom, the lower introductory rate on adjustable-rate mortgages made them feel closer in cost to regular loans to many subprime borrowers, but those rates can jump after two or three years. Brokers had extra incentives to sell those loans, which have terms that often are confusing to borrowers.
For instance, according to a March 2007 "rate sheet" distributed by New Century Financial Corp., now in bankruptcy-court protection and no longer making subprime loans, brokers could earn a "yield spread premium" equal to 2% of the loan amount -- or $8,000 on a $400,000 loan -- if a borrower's interest rate was an extra 1.25 percentage points higher than the Irvine, Calif., lender's listed rates.
Borrowers weren't supposed to see the information. Tiny print at the bottom of the document warned: "For wholesale use only. Not for distribution to the general public."
On average, U.S. mortgage brokers collected 1.88% of the loan amount for originating a subprime loan, compared with 1.48% for conforming loans, according to Wholesale Access, a mortgage research firm. Payouts for subprime loans have traditionally been higher, in part because these loans sometimes took more work and the approval rate could be lower. Brokers have sometimes used the money to help the borrower complete the loan, by reducing closing costs. But there is "a lot of play in the system," says A.W. Pickel III, a past president of the National Association of Mortgage Brokers, and president and chief executive of LeaderOne Financial Corp., a mortgage lender and broker in Overland Park, Kan. "You have to operate with
an ethical basis."
Critics claim that yield-spread premiums encourage brokers to steer borrowers into loans that cost far more than they should and create excessive financial risk. In October, Massachusetts Attorney General Martha Coakley filed a lawsuit against subprime lender Fremont Investment & Loan and its parent, Fremont General Corp., alleging that the payments were unfair and deceptive.
Fremont, which quit making subprime mortgages in March, denies any wrongdoing. In a court filing last month, the Brea, Calif., bank said that without access to its loans -- often requiring a lower standard of proof of income, assets and credit history than traditional lenders -- "many Massachusetts residents who are homeowners today would never have been able to purchase homes." Fremont declined to make additional comment.
In most states, mortgage brokers and loan officers aren't under any legal obligation to put borrowers in the mortgage that best suits them. A provision outlawing yield-spread premiums was dropped last month from a mortgage-reform bill now working its way through Congress.
'Duped Into Loans'
Tom Pool, an assistant commissioner for the California Department of Real Estate, says his office has seen a number of cases involving "totally ignorant and unsophisticated borrowers who had good credit, but were duped into loans they had no hope of repaying." But experienced borrowers with high credit scores are often too casual about the loan process.
A study published last year in the Journal of Consumer Affairs concluded that some borrowers pay higher rates than they should because they don't shop around enough. An earlier survey by the Mortgage Bankers Association of borrowers who had bought a house within the previous 12 months found that half couldn't recall the terms of their mortgage, says the association's Mr. Duncan.
Often such loans involve fraud, says Peter Fredman, a California attorney who has two clients who wound up with loans with high interest rates despite good credit scores. "Because these people had decent credit scores, the lenders said they would do a 100% no-documentation loan and that opened the door for mortgage brokers to do whatever they wanted to do," he says.
Mr. Fredman is representing a couple in their sixties with a monthly income of less than $2,500 but mortgage payments of roughly $3,400, not including taxes and insurance. The husband and wife, first-time home buyers with credit scores of 680 and 667, expected payments of $1,500 a month. They tried refinancing to lower the cost, to little effect. They haven't made a mortgage payment since January.
Monday, December 17, 2007
Congress Trying to Help!
Senate Raises FHA Loan Limit
From Mortgage News Daily
So-called FHA reform reached an important milestone on Friday when the U.S. Senate overwhelmingly approved its version of the legislation.
The bill, which passed by a vote of 93-1, seeks to make the Federal Housing Administration more relevant in the current housing and mortgage lending environment by expanding the agency, loosening some underwriting standards, and raising its current restrictive loan limit.
The FHA was established in 1934 to help borrowers, particularly those with low incomes, purchase homes by guaranteeing banks that those loans would be repaid should the borrower default. But the agency's loan limits have generally lagged behind those of Freddie Mac and Fannie Mae and as home prices climbed dramatically and lenders with looser underwriting standards proliferated the agency became less and less of a player in the mortgage market.Over a ten year period ending last December the FHA's share of new mortgages fell from 9.1 percent to 1.8 percent according to Inside Mortgage Finance. A major reason for the slide is the FHA loan cap which, in many parts of the country such as both coasts, falls short of covering the purchase price of even a low end house.
FHA insured loans have been mentioned as a possible escape hatch for borrowers who may be unable to make payments on their current adjustable rate mortgages when their interest rates reset over the next year. The restrictive loan limits, however, make that impossible for many of those borrowers. There is also a theory that a more widely available federal guarantee would encourage lenders to make more loans in the current tight credit environment.
The Senate version of FHA reform would raise the limit on FHA loans from $362,000 to at least $417,000 which is the current limit on Freddie Mac, Fannie Mae, and Veterans Administration loans.
The FHA estimates that it may be able to help some 200,000 borrowers who are facing foreclosure with the new limits coupled with loosened underwriting standards which were announced by the president several months ago.
In October the House of Representatives passed legislation similar to that passed in the Senate but some differences between the two bills will have to be hammered out before a final version is sent to the president for his signature.
The House bill would raise the loan limit as high as $829,750 in certain areas of the country but the biggest stumbling block to a compromise is a feature of the House bill which establishes a new housing trust fund for troubled borrowers and would require FHA to contribute to it.
Also on Friday the Senate passed a separate borrower relief bill which would end, for three years, a provision in the tax code which has bitten many a homeowner after foreclosure or a loan workout. Under current rules the Internal Revenue Service requires lenders to send borrowers and the IRS a form detailing any loan amounts written off by the lender after a foreclosure, short sale, or loan restructure. The IRS treats that forgiven debt as ordinary income and taxes the borrower accordingly.
The House had earlier passed similar legislation but without the three year sunset provision.
In other mortgage news, Reuters reported on Friday that the hotline established by the HOPE NOW alliance had received 45,000 calls in the three days after its establishment was announced by President Bush. The hot-line provides foreclosure prevention counseling to borrowers who qualify for an interest rate freeze worked out between the Treasury Department and major lenders. The telephone number for the program is 1-888-995-HOPE.
From Mortgage News Daily
So-called FHA reform reached an important milestone on Friday when the U.S. Senate overwhelmingly approved its version of the legislation.
The bill, which passed by a vote of 93-1, seeks to make the Federal Housing Administration more relevant in the current housing and mortgage lending environment by expanding the agency, loosening some underwriting standards, and raising its current restrictive loan limit.
The FHA was established in 1934 to help borrowers, particularly those with low incomes, purchase homes by guaranteeing banks that those loans would be repaid should the borrower default. But the agency's loan limits have generally lagged behind those of Freddie Mac and Fannie Mae and as home prices climbed dramatically and lenders with looser underwriting standards proliferated the agency became less and less of a player in the mortgage market.Over a ten year period ending last December the FHA's share of new mortgages fell from 9.1 percent to 1.8 percent according to Inside Mortgage Finance. A major reason for the slide is the FHA loan cap which, in many parts of the country such as both coasts, falls short of covering the purchase price of even a low end house.
FHA insured loans have been mentioned as a possible escape hatch for borrowers who may be unable to make payments on their current adjustable rate mortgages when their interest rates reset over the next year. The restrictive loan limits, however, make that impossible for many of those borrowers. There is also a theory that a more widely available federal guarantee would encourage lenders to make more loans in the current tight credit environment.
The Senate version of FHA reform would raise the limit on FHA loans from $362,000 to at least $417,000 which is the current limit on Freddie Mac, Fannie Mae, and Veterans Administration loans.
The FHA estimates that it may be able to help some 200,000 borrowers who are facing foreclosure with the new limits coupled with loosened underwriting standards which were announced by the president several months ago.
In October the House of Representatives passed legislation similar to that passed in the Senate but some differences between the two bills will have to be hammered out before a final version is sent to the president for his signature.
The House bill would raise the loan limit as high as $829,750 in certain areas of the country but the biggest stumbling block to a compromise is a feature of the House bill which establishes a new housing trust fund for troubled borrowers and would require FHA to contribute to it.
Also on Friday the Senate passed a separate borrower relief bill which would end, for three years, a provision in the tax code which has bitten many a homeowner after foreclosure or a loan workout. Under current rules the Internal Revenue Service requires lenders to send borrowers and the IRS a form detailing any loan amounts written off by the lender after a foreclosure, short sale, or loan restructure. The IRS treats that forgiven debt as ordinary income and taxes the borrower accordingly.
The House had earlier passed similar legislation but without the three year sunset provision.
In other mortgage news, Reuters reported on Friday that the hotline established by the HOPE NOW alliance had received 45,000 calls in the three days after its establishment was announced by President Bush. The hot-line provides foreclosure prevention counseling to borrowers who qualify for an interest rate freeze worked out between the Treasury Department and major lenders. The telephone number for the program is 1-888-995-HOPE.
Friday, December 14, 2007
Start Business Planning for '08 Now!
This is the busiest time of the year, with Christmas shopping and family events taking priority - as they should. But make a little time for business planning too. Even if you don't make a formal plan for the year, take note of what worked for you this past year and increase your efforts there. Also take note of the things that were negative or counter-productive, and eliminate those things forever.
Wednesday, December 12, 2007
Seller Financing Tips
HOW TO CONVINCE HOME SELLERS TO FINANCE YOUR PURCHASE.
Even after explaining all the seller benefits of financing the home sale, some unmotivated sellers are hesitant to carry back a mortgage on the house they are selling.
When that happens, I have resorted to desperate measures when I realize a carryback mortgage is in the best interests of both the seller and the buyer (me!). "Convincer methods" that work include
(1) offering to prepay six to 12 months of mortgage payments at the closing (instead of a large down payment);
(2) providing a year's post-dated checks so the seller can deposit a check on the first day of each month; and/or
(3) giving the seller a copy of my credit reports and FICO (Fair Isaac Corp.) score obtained at http://www.myfico.com/.
SUMMARY: Especially in the current buyer's market for homes in most cities, seller mortgage financing is the easiest way to pay for a house or condo purchase with no institutional loan application hassles.
Home sellers and their agents need to understand all the seller benefits, including monthly income secured by a mortgage on the home being sold. The best seller finance candidates are free-and-clear homes, especially vacant houses. Not every home can be purchased with seller financing. But all you need is one!
Even after explaining all the seller benefits of financing the home sale, some unmotivated sellers are hesitant to carry back a mortgage on the house they are selling.
When that happens, I have resorted to desperate measures when I realize a carryback mortgage is in the best interests of both the seller and the buyer (me!). "Convincer methods" that work include
(1) offering to prepay six to 12 months of mortgage payments at the closing (instead of a large down payment);
(2) providing a year's post-dated checks so the seller can deposit a check on the first day of each month; and/or
(3) giving the seller a copy of my credit reports and FICO (Fair Isaac Corp.) score obtained at http://www.myfico.com/.
SUMMARY: Especially in the current buyer's market for homes in most cities, seller mortgage financing is the easiest way to pay for a house or condo purchase with no institutional loan application hassles.
Home sellers and their agents need to understand all the seller benefits, including monthly income secured by a mortgage on the home being sold. The best seller finance candidates are free-and-clear homes, especially vacant houses. Not every home can be purchased with seller financing. But all you need is one!
Tuesday, December 11, 2007
Closing the Barn Door...
Washington Mutual Announces Major Layoffs and Closings
Years and years ago when the aerospace industry was in a tailspin and Washington-based Boeing was particularly hard hit with cancelled contracts and layoffs someone paid to have a billboard erected on a busy highway that said:
WILL THE LAST PERSON TO LEAVE SEATTLE PLEASE TURN OUT THE LIGHTS
Just can't imagine why that memory surfaced last night as yet another financial institution, this one the nation's largest savings and loan, announced that it too was more massively wounded by its recent enthusiasm for subprime lending than it had previously admitted.
Late Monday, after the market closed of course, Washington Mutual announced that, in an attempt to raise cash, it will conduct a $2.5 billion convertible preferred stock offering. It will also close 190 of its 336 loan centers and sales offices, lay off more than 3,000 employees and set aside up to $1.6 billion for loan losses in the fourth quarter.The company also announced that it was getting out of the subprime business entirely and would close the division that markets its mortgage-backed securities, relying instead on third-party brokers.
And it is slashing its dividend 73 percent, from $.56 to $.15 for the quarter.
In September WaMu admitted to some potential problems when it announced it was laying off 1,000 employees and curtailing much of its subprime lending. However, as recently as November spokespersons were saying the company had no plans to reevaluate its dividend until after the first of the year.
In the latest round of job cuts 2,600 positions will be eliminated from the home loan category and 550 will come from corporate and support positions. The company hopes that the job reductions and office closings will eliminate $500 million in non-interest expenses.
The company also said that during the first quarter of 2008 it expects loan losses to total $1.8 billion to $2 billion and that its losses will continue to remain high throughout the whole of next year.
In a Form 8-K filing with the Securities and Exchange Commission WaMu said that, from its announced public offering, it intends to contribute up to $1.0 billion of the proceeds to Washington Mutual Bank, its principal bank subsidiary, as additional capital and retain the remaining net proceeds for general corporate purposes.
According to The Wall Street Journal, WaMu's portfolio has the most exposure to risky loans of any of the top five mortgage lenders. 29% of its 2006 loans are in the high-cost category, mostly subprime, and 15% are backed by homes other than the owner's primary residence. Mortgages on second homes and speculative properties are considered more vulnerable to default.
The proposed stock offering came only hours after European mega-bank UBS AG, also battered in the subprime market, said it would sell $11.5 billion in stock to the Government of Singapore Investment Corporation and an unidentified investor in the Middle east. This was only the latest in cash infusions from investors intended to shore up troubled financial institutions. Citigroup recently received $7.5 billion from Abu Dhabi investors in return for 4.9 percent of its value and both Freddie Mac and Fannie Mae have planned or implemented huge stock sales.
The Associated Press said that, while WaMu's offering has not been priced, the company is hardly sitting in the catbird seat when it comes to dictating terms. Citigroup will be giving its Abu Dhabi investors an 11 percent annual yield and Freddie Mac's new stock has a fixed dividend of 8.375 percent - nearly 2 points higher than a previous sale of preferred stock in September.
WaMu closed out the trading day at $19.88, up $.85. In overnight trading the stock lost 10 percent on the Frankfort Market.
Several investor services including Moody's and Fitch downgraded rates for WaMu. Moody's said their action was "based on its view that credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated" and that the company might not return to profitability until 2010.
Within hours of the announcement of cuts and cash raising analysts were speculating that WaMu might be sold.
One wonders who may be left to buy it.
Years and years ago when the aerospace industry was in a tailspin and Washington-based Boeing was particularly hard hit with cancelled contracts and layoffs someone paid to have a billboard erected on a busy highway that said:
WILL THE LAST PERSON TO LEAVE SEATTLE PLEASE TURN OUT THE LIGHTS
Just can't imagine why that memory surfaced last night as yet another financial institution, this one the nation's largest savings and loan, announced that it too was more massively wounded by its recent enthusiasm for subprime lending than it had previously admitted.
Late Monday, after the market closed of course, Washington Mutual announced that, in an attempt to raise cash, it will conduct a $2.5 billion convertible preferred stock offering. It will also close 190 of its 336 loan centers and sales offices, lay off more than 3,000 employees and set aside up to $1.6 billion for loan losses in the fourth quarter.The company also announced that it was getting out of the subprime business entirely and would close the division that markets its mortgage-backed securities, relying instead on third-party brokers.
And it is slashing its dividend 73 percent, from $.56 to $.15 for the quarter.
In September WaMu admitted to some potential problems when it announced it was laying off 1,000 employees and curtailing much of its subprime lending. However, as recently as November spokespersons were saying the company had no plans to reevaluate its dividend until after the first of the year.
In the latest round of job cuts 2,600 positions will be eliminated from the home loan category and 550 will come from corporate and support positions. The company hopes that the job reductions and office closings will eliminate $500 million in non-interest expenses.
The company also said that during the first quarter of 2008 it expects loan losses to total $1.8 billion to $2 billion and that its losses will continue to remain high throughout the whole of next year.
In a Form 8-K filing with the Securities and Exchange Commission WaMu said that, from its announced public offering, it intends to contribute up to $1.0 billion of the proceeds to Washington Mutual Bank, its principal bank subsidiary, as additional capital and retain the remaining net proceeds for general corporate purposes.
According to The Wall Street Journal, WaMu's portfolio has the most exposure to risky loans of any of the top five mortgage lenders. 29% of its 2006 loans are in the high-cost category, mostly subprime, and 15% are backed by homes other than the owner's primary residence. Mortgages on second homes and speculative properties are considered more vulnerable to default.
The proposed stock offering came only hours after European mega-bank UBS AG, also battered in the subprime market, said it would sell $11.5 billion in stock to the Government of Singapore Investment Corporation and an unidentified investor in the Middle east. This was only the latest in cash infusions from investors intended to shore up troubled financial institutions. Citigroup recently received $7.5 billion from Abu Dhabi investors in return for 4.9 percent of its value and both Freddie Mac and Fannie Mae have planned or implemented huge stock sales.
The Associated Press said that, while WaMu's offering has not been priced, the company is hardly sitting in the catbird seat when it comes to dictating terms. Citigroup will be giving its Abu Dhabi investors an 11 percent annual yield and Freddie Mac's new stock has a fixed dividend of 8.375 percent - nearly 2 points higher than a previous sale of preferred stock in September.
WaMu closed out the trading day at $19.88, up $.85. In overnight trading the stock lost 10 percent on the Frankfort Market.
Several investor services including Moody's and Fitch downgraded rates for WaMu. Moody's said their action was "based on its view that credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated" and that the company might not return to profitability until 2010.
Within hours of the announcement of cuts and cash raising analysts were speculating that WaMu might be sold.
One wonders who may be left to buy it.
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