Mortgage Mania 26 - …And Henry Giveth Again

November 25, 2008

You would have to be living under a rock to have missed this today, so here is a newsflash for all you subterranian dwellers. Henry Paulson’s latest bailout plan now consists of borrowing $800 Billion from The Fed to buy up mortgage assets, consumer credit card debt and car loans.

In his article, “Fed bets $800 billion on consumers“ on CNNMoney today, writer Chris Isidore shares Uncle Henry’s latest plans:

“The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.

The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.

One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.

The Treasury Department will allocate $20 billion to back that lending in order to cover any losses that the New York Fed might suffer.

In addition, the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.”

Hmmm, buying mortgage backed securities . . . wasn’t that how TARP was sold to Congress in the first place? The idea of the US Government buying up toxic mortgage assets in an attempt to get the three remaining solvent banks to start underwriting mortgages is enough to get any red-blooded Realtor’s blood pumping again. If this restarts the housing market, let’s all be sure to thank the lobbyists working for NAR, and remember them on our Christmas lists.

The Fed goes the original plan one better by setting aside $200 Billion to buy securities backed by auto loan and credit card debt. Hmmm, let me see if I get this straight . . .

The idea behind mortgage backed securities was that they were safe because they were backed by the houses those mortgages were written against, and the logic was that those were APPRECIATING assets. This worked great until housing prices started falling, and the underlying assets were worth LESS than the loans on them.

A car drops 20% in value the minute you drive it off the lot, so you are already upside down on the loan if you put down less than 20%. The car ads are all touting $0 down, so let’s assume that most buyers today are putting down less than 20%. So . . . is this Groundhog Day?

Don’t get me started on buying credit card debt . . .

This is another reason I don’t work in the Treasury Department. That, and that pesky question about blog articles that would embarrass the President.

You can read the full text of the article HERE.

Thanks for reading . . .

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Written by Chris Iverson, Realtor · Filed Under * Type of Content, Consumer | 7 Comments 

McCain’s debate night bombshell

October 8, 2008

Town-Hall Debate October 7th, 2008Did you see the debate last night?

During one of the questions about the economy and the financial crisis, McCain dropped a bombshell!

When Tom Brokaw asked about what needs to be done to help the housing market, McCain suggested that Government should buy back all these defaulted loans and then give these people new loans at the current market value of the home. Hmmmm. Will this work? I think not. Why?

Well, let’s see how this would work…

  1. Joe Homeowner has a house that he bought for $500,000 with a loan from Fly-By-Night Subprime Lending, Inc.
  2. The house is now worth $400,000
  3. Joe, like everyone else, has lost a lot of equity in his home
  4. Unlike other Americans who are responsible and ARE paying their mortgage, Joe qualifies for the Government to buy back his subprime mortgage, because he’s NOT paying his mortgage.
  5. The Feds buy his mortgage for $500,000 and immediately give him a new mortgage at $400,000, which he may or may not be able to afford
  6. So now Joe is happy, but only until he can’t make his payments again…
  7. Good ole’ taxpayers absorb a $100,000 loss
  8. Multiply by millions of upside-down loans.

So let me ask one simple question - Does this make sense to you??  I suspect there will be a lot of responsible homeowners who are diligently paying their mortgage who will be awfully pissed off that they won’t be getting THEIR mortgage bought by Uncle Sam and reset to current market value.

Don’t get me wrong - I am not against McCain, and this isn’t about one presidential candidate or another.  I’m simply saying that this plan does not make sense.  However, I haven’t heard either candidate or anyone in congress or the treasury or the federal reserve or the private sector suggest something that might actually work to solve this mortgage mess.  Although today, Barack Obama rejected McCain’s plan, and his economic adviser said that McCain’s plan would cause the U.S. Government “to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don’t recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.”

Let’s hope that someone is smart enough to figure out how to use that $700,000,000,000 to get the housing market back on track.

In the meantime, I’m proceeding under the assumption that for the forseeable future, people will need to do a short sale and get their lender to take the loss.  So if you know of someone who is underwater and stuggling to keep up with their higher payments as their loan resets to a higher interest rate, tell them you know a foreclosure consultant who can help.  I’d be delighted to talk to them.

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Written by Bart Marchioni, Certified Foreclosure & Short Sale Specialist · Filed Under Consumer, Industry, Lenders, Mortgages, Real estate | 4 Comments 

Mortgage Mania 19 - The Jumbo Strikes Back

September 9, 2008

Amid all the celebration and hullabaloo associated with the recent drop in conforming interest rates as a result of the Treasury Department taking over management of GSE’s Fannie May and Freddie Mac, there has been scant analysis of the elephant in the room, namely Jumbo (aka non-conforming) loans that are part and parcel of home purchasing here in Silicon Valley.

The GSEs hold or have securitized nearly half — roughly $5 trillion — of all mortgages in the U.S., and in the current environment with private lender constraints, they account for the vast majority of all new mortgages in California.

 This bailout (oops, did I say bailout?) removes much of the risk to lenders of writing mortgages for under $729,000 locally, decreasing to $649,000 next year, because they can resell these loans to the government backed and now managed GSE’s.

But what about loans over $729,000? Well, Wall Street and the secondary market will still be willing to buy those that are considered low risk (excellent credit score, low loan-to-value ratio, verifiable income), but they will demand a risk premium for those loans, meaning that rates are likely to go up, taking us back to the bifurcated market for rates that we have seen in previous years.

 On his way to the SILVAR Golf Tournament yesterday, co-contributor and local mortgage banking hotshot Eric Trailer of Absolute Mortgage Bank in Palo Alto gave this quick analysis of where he sees rates going (paraphrased here):

If you know you can sell off a loan to a government backed agency, you have very low risk, so you demand a low interest rate. However, as risk increases you will demand a greater “risk premium” to hedge against not being able to sell that loan, or the buyer defaulting on that loan. Right now we are seeing investors who are willing to lend the 20% to take a buyer from a 20% down, 80% loan to a 100% loan, but at 15% with 5 or 6 points. That’s expensive money, which is why it is dubbed “hard money”, but it offsets the risk to the lender.

 Eric thinks we could see Jumbo rates heading to the 8 - 9% region, which is still lower than in the 80’s, but the difference between a 6% loan and a 9% loan on $1,000,000 is $2500 a month just in interest.

 Let’s do some math. If you have an 80% mortgage on a median priced home in Palo Alto ($1,921,214, source Altos Research). That is a mortgage of $1,536,971, and payments increasing from $7685 @ 6% to $11,527 @ 9%. That’s a lot of $4.25 a gallon gas!

 So, if you are planning on buying a new home and you need to borrow more than $729,000 you may want to get out there looking sooner rather than later.

 To learn more about the takeover of Fannie Mae and Freddie Mac and what it means to your home purchase, check out a new video featuring California Association of Realtors Executive Vice President Joel Singer at http://www.car.org/newsstand/video-js-gse. In “Fannie and Freddie: Why They Matter to You,” Joel explains the often confusing but critical role Fannie Mae and Freddie Mac play in the housing market in clear and concise terms.

Thanks for reading . . .

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Written by Chris Iverson, Realtor · Filed Under California Association of Realtors, Consumer, For buyers, Industry, Mortgage, Mortgages, Palo Alto, Real estate | 1 Comment