What Recession?

The Bureau of Economic Analysis reported this morning that the GDP rose 3.3% in the 2nd quarter, which is .60% higher than the already revised estimate of 2.7%. And it is 2.4% higher than the 1st quarter (.9% growth).

Yeah, I know it's rough out there. But 3.3% growth? That's stunning. And, honestly, a bit hard to believe.

Mortgage News Daily reports that exports rose 13.2% while imports fell 7.6%. And personal consumption increased 1.7%, above expectations.

Ed Lazear, chairman of the Council of Economic Advisors



(CNBC video)

So will the Fed see this as a change in direction for the economy? Don't rule it out. Reuters reports that the short term interest rate futures are showing an increased chance of a Fed rate hike by the end of the year.

Trouble with HELOCS

Wachovia has become the latest bank to curtail home equity loans (HELOCS).  It has begun sending out letters to homeowners who have not tapped out their secured lines of credit informing them that their accounts are now frozen or closed.  The Charlotte-based thrift has joined the trend of big banks putting breaks on their home equity portfolios.

Home equity line borrowing flourished during the housing boom.  Homeowners who had seen a dramatic increase in property values became a market for second mortgages.  These lines of credit promised a painless way to tap the homeowner’s paper wealth.

Banks made it easy.  They used computer evaluations of the property, stated income and easy documentation.  The second mortgage industry flourished.

But the HELOCS were also easy to default on.  Many homeowners maxed out their lines on consumer debt to maintain their lifestyle.  And as the economy faltered, their ability to meet all their monthly obligations tightened, as well.  Presented with a choice between what bills to pay, a lot of homeowners chose to pay their first mortgage before the second.

Massive losses from defaults on these portfolio products have made thrifts rethink the whole market.  In value-depressed areas, the institutions are freezing the lines they can.  They don’t want to be caught foreclosing on houses that are now worth 10-30% less than the time when the HELOCS were opened.

As a result, surprised homeowners have found themselves suddenly without the cash to finish their home improvement projects.  Others have lost the ability to pay for their child’s fall tuition to college. 

Spurred by consumer complaints, the Office of Thrift Supervision has issued a letter of its own to banks.  The Federal agency warns of the legal causes necessary to terminate contractual lending obligations.

You can read more about Wachovia here and the Office of Thrift’s actions here. 

I wouldn't want to attend a movie with Chuck Schumer

It’s against the law to scream, “Fire!” in a crowded theater — at least most of the time.  If you are a U.S. Senator, you don’t have to worry about it.  You can scream all you want with impunity.

That seems to be the result of this week’s decision of the California Attorney General’s office in rebuffing requests to investigate Chuck Schumer. 

On June 26^th this year, Schumer’s office released a letter to the Federal Office of Thrift Management wanting to know what they were going to do to protect investors and borrowers in preventing a run on the then teetering Indymac Bank.

Terrified by this communiqué, depositors withdrew 1.3 billion dollars out of their Indymac accounts over the next eleven business days, sending the bank into insolvency.   On July 11, the FDIC took over what was left of the bank.

The Office of Thrift Management publicly blamed Schumer for this mess, which is going to cost the U.S. taxpayer almost $8 billion dollars.  The agency director called the public airing of the letter, “reckless and grossly irresponsible.”

The Senator denied any responsibility, claiming that he was only rehashing public information on Indymac’s troubles. 

A group of former Indymac employees, now jobless because of the bank closing, squarely blame Schumer for causing the very thing he was “concerned” about.  In their words, “Because of a malicious and politically motivated act of Charles Schumer, our lives have been shattered.”

Seeking justice in the state where the bank had been headquartered, the former employees petitioned the Attorney General, former California Governor Jerry Brown, to prosecute him “under a state law making it a misdemeanor to spread false and damaging rumors about a bank.”

But the A.G.’s office has refused to investigate the matter any more for two reasons.  The first, they believe that showing a causal relationship between Schumer’s letter and the bank run would be difficult, if not impossible.  Secondly, the U.S. Constitution protects members of Congress for being sued or prosecuted for statements made in their official capacity.

L.A. Times and Forbes have more.

Worth Watching

Buffett on CNBC

The Wisdom of Warren Buffett
(8:52)

Recap

Oracle of Omaha
(3:09)

Death Watch

Investors continue to watch nervously as the moribund GSE’s (Government Sponsored Enterprises) teeter on the brink of insolvency.

Shares for Freddie (52 week high was $65.88) plummeted yesterday by 20% to $3.35.  Shares for Fannie (52 week high was $70.57) fared only slightly better with a 13% decline to $5.23.  Stockholders reacted to the prospect of the government stepping in to rescue the two giant agencies.  In such event, common shares will be rendered worthless.

Treasury would love for Freddie Mac and Fannie Mae to save themselves from their present liquidity crisis.  But that hope seems to be fading every day. 

What's putting these two agencies on critical?

The Wall Street Journal reports how Freddie was forced to sweeten a bond offering this week to complete a $3 billion auction of its debt.  Investors, especially foreign ones, want more incentive to buy these bonds.   They aren’t convinced of the health of Freddie, nor the US housing market.

The Federal Government cannot allow these two giants to fail.  Doing so would bring a grinding halt to the mortgage industry.  The two agencies play the dominant role in financing conventional mortgages.  Without their part, what life remains in the housing market would die.

Market conditions can change faster than the weather.  And you could wake up tomorrow and find that you, the U.S. taxpayer, are now an owner of these once mighty enterprises.  

FDIC to modify IndyMac loans

The FDIC announced today that will start to systematically modify existing IndyMac mortgage loans. According to the press release:

"The program is designed to achieve affordable and sustainable mortgage payments for borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans. This in turn will maximize value for the FDIC, as well as improve returns to the creditors of the former IndyMac Bank and to investors in those mortgages."

"Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance."

Chairman Blair, since last year, has been calling on mortgage servicers and banks to modify loans by converting the loans (Subprime ARMs) to fixed rates mortgages. But, in her own words, "Renegotiating terms loan by loan is too costly and time consuming." Hmm...

Not only am I curious to see if other banks follow her lead, but I'm really wondering if this will work. How will the owners of these loans (banks, investors, etc) react?

A New Weapon Against Mortgage Fraud?

This is a perfect example of why a national loan originator licensing/registry system is long overdue.

Portrait of a scam artist (Orange County Register, 08/15)

He received 10 years in state prison - 1 year for each of the families he caused to go into foreclosure. Light sentence, it seems to me.

"Osborn got sales leads from his employers, who bought them through sites like LendingTree.com and LowerMyBills.com", said George McFetridge, a deputy district attorney in Orange County who prosecuted Osborn. Osborn seemed to have a knack for finding folks he could manipulate."

HR3221, the recently signed Housing and Economic Recovery Act of 2008 (highlights here), includes an originator licensing & registry provision. The question is, how well will it be enforced?

VibeAgent - C'ville's own hotel search site

Okay, so it's not mortgage or real estate related, but you have to admit it's cool. And their employees need to live somewhere, right?

Hotel search site shows there's room in the city (Daily Progress, 08/16)

Interesting concept, too - an impressive search tool combined w/ social networking. But I'm still curious about how they make money.
From a press release: "Serving as a consumer’s best advocate, VibeAgent.com’s search results are completely unbiased and influenced only by personal preferences and the reviews of compatible travelers. Unlike other hotel sites, VibeAgent.com does not accept advertising or partnership agreements that might influence the order of a hotel search, ensuring travelers get the best possible results."

It's exciting to consider what kind of impact VibeAgent could have on our area. Could you imagine Charlottesville as the Silicon Valley of the South?

Are We in a Feedback Loop?

CNN Money has an article about the latest wave of mortgage defaults.  First there were problems with subprime loans, those borrowers with credit scores below 62o.  Next there were problems with Alt-A, those borrowers with good credit but hard to prove income.  Now there are rising defaults coming from prime borrowers.  Delinquencies for this class almost doubled in May, as opposed to a year ago.

The percentage is small 2.44% in May 2008.  But the impact can be huge.  

"Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price Index.  

And there's a strong inverse correlation between home prices and defaults, accouding to Lawrence Yun, chief economist for the National Association of Realtors.

'It's a feedback loop,' he said. 'Price declines lead to more defaults, which leads to more price declines.'"

Time will shake us out of this cycle.  But at least in the near term, banks are going to be even more cautious in lending.  The bottom line:  money will be harder and more expensive to come by. 

You can read more here.

More program changes

One of our (national) lenders has just issued an announcement of program changes. Keep in mind, this is one lender - others may or may not follow suit. A few highlights:

Rate/Term refis on investment properties capped at 80% LTV. Although Fannie Mae and Freddie Mac will still go to 90%, this lender states that "LTVs greater than 80% are no longer allowed as a result of mortgage insurance retractions."

Florida condo products & LTVs. Only conventional (Fannie Mae/Freddie Mac & Govt) loans for condos in FL. Also, the LTV limit on those conventional mortgages will be 80%, effective next week. Could this trend spread to other states? Condo guidelines are becoming much more restrictive.

FHA 1yr Treasury ARM no longer allowed. Yeah, good thing. Begs the question: Why did FHA offer a 1yr ARM anyway?!

Veteran Affairs ARMs discontinued. For good reason - com September 30, 2008, the VA's authority to make adjustable rate mortgages will expire unless Congress extends it. Information on this is sparse and the VA is certainly not advertising it, but National Mortgage News has a one liner about it in a short piece re: the VA loan limit increase.


I'll make this a regular post - mortgage guidelines are changing constantly (mostly more restrictive).

Friday Links

Mortgage rates remained steady this week compared to last. However, Fannie Mae's recent decision to increase fees will likely bump up rates in the next several weeks.

Could the HELOC freezes being implemented at major banks across the country backfire?

Paulson and Co.'s quick action to put together the Fannie/Freddie bailout plan had good reason: The perception of our creditworthiness by Asian investors.

Finally, this is just shocking: Almost Half of Indiana's Brokers See Licenses Yanked.

The Hook, 1/24/2008

GIMME SHELTER- Fearing foreclosure: How can I avoid losing my house?

published January 24, 2008

Jason Crigler
Crown Mortgage Services

Q: Lately, I've been having trouble making my mortgage payments, and my lender keeps calling me. One of the houses in my neighborhood was foreclosed recently, and I'm worried the same thing could happen to me. How can I avoid a foreclosure? If I can't, how would one affect me as a buyer in the future?

A: Real estate foreclosure occurs when a borrower is unable to meet the obligations of a loan, and the lender claims and sells the property used to secure the mortgage. The most important thing to do if you believe you may not be able to make your monthly payments and are falling behind is to be proactive about the problem.

First of all, do not avoid calls from you lender. With such a large and important asset as your home at stake, it is essential that you face the lender and work together to find a solution.

When you do call your lender, you may hit a brick wall and get sent directly to the collections office. If you can break through this department and actually speak with someone who makes decisions, however, perhaps you and you lender can come up with a solution that will mutually benefit both parties.

If your lender is unable to help, there are also several local and national organizations that specialize in credit counseling services. If for some reason you are unable to contact your lender or do not have the time to work with them, you should contact an approved HUD counselor or real estate lawyer.

Typically, foreclosure is a last resort, and lenders wish to avoid it as much as homeowners. In fact, a foreclosure costs lenders and investors an average of $58,000 per home, according to the Homeownership Preservation Foundation. Lenders often go through several steps before considering foreclosure.

If you do suffer a foreclosure on your home, it will have an extremely negative impact on your credit report. Today, credit scoring has become an integral part of the lending process, and a bad credit score often diminishes your chances of securing a loan or mortgage in the future.

Fortunately, a foreclosure does not remain on your credit report forever; it often falls off the report in about seven years. As you re-establish good credit through a record of timely payments and responsible borrowing, it may even be possible to own your own home again one day.

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