The Bail Out Wont Help Foreclosure Rates

Congress will be adopting a plan and proposing legislation to isolate and liquidate bad mortgages. hers what the last real estate crises looked like....

The S&L Crises

As many as 1,500 savings and loans went under during the country's last financial crises and real estate mess. We the people lost 160 billion on that one and Of course this is already at 1.1 trillion and climbing. Ultimately, a government-created entity, the Resolution Trust Corp. (RTC), sold off the bad real estate for as little as 10 cents on the dollar. This sell off was done over a four year period and may not have been the best return on investment possible.

Once taxpayers are in charge of these assets, will distressed borrowers be more likely to get loan modifications or workouts to keep them in their homes? If the government becomes the owner of hundreds of thousands of foreclosed homes, will it sell them quickly at fire-sale prices to investors?

The Center for Responsible Lending issued a press release which I am passing on because its a well thought out position. This is a word for word copy of the press release

Bailout Won’t Stop Foreclosures that Push Prices Down

September 20, 2008

The government plan announced by Treasury Secretary Paulson and Fed Chairman Bernanke fails to deal with the root cause of the crisis---families in foreclosure----and instead is purely and simply a bailout of the lenders who created this disaster. The bailout will not solve our economic problems because it will do virtually nothing to stop the foreclosure epidemic. Continuing foreclosures will drag down the economy even further.

A truly comprehensive plan must also benefit ordinary, hard-working Americans, the ones who already are bearing the brunt of Wall Street’s excesses. If it doesn't, then any new plan is more of the same----only with more taxpayer money at stake.

By forcing taxpayers to buy abusive and reckless loans from irresponsible lenders,taxpayers are funding a multi-billion dollar subsidy to private corporations. Yet the millions of families who have been unfairly pushed to the financial brink by these mortgages get nothing. Only by preventing the 6.5 million foreclosures expected in the next few years---and the $356 billion drop in surrounding property values that will result for an additional 46 million families----will the economy begin to recover.

Don't let anyone tell you the government will be able to prevent foreclosures by buying this troubled debt. Wrong. Mortgages of questionable value have been sold into highly complex securities, which have been carved up and sold to thousands of investors around the world. The government can't put these Humpty Dumpty slices back together again because it won't own or even control them all. Bailing out financial institutions is NOT the same thing as providing relief to foreclosure-plagued American families.

Regulators and lawmakers must implement solutions that benefit American families at least as much as banks, or nothing will change. Stopping the flood of foreclosures and adopting common-sense protections against predatory lending are the only lasting solutions.
A plan that addresses root causes must:

Lift the ban on judicial loan modifications. Voluntary loan modifications are not working, as the as mounting crisis attests. Today homeowners are barred from applying for loan changes through the bankruptcy courts if the loan is on their one and only home. Bankruptcy courts provide an existing infrastructure for supervising court-ordered loan modifications and addressing the many hurdles that prevent voluntary modifications. Judicial modifications are the best solution for preventing foreclosures that will drag down the economy further. This provides a fair, targeted way to make a real impact without requiring any tax dollars.

Cap consumer loans at 36% interest. This stops abusive interest rates that push vulnerable families back even further, and it also protects responsible lenders from unfair competition from abusive payday lenders charging 400% interest. This action alone would save America’s working middle class billions of dollars.

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Howard Bell
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Freddie Mac: Reversing Trend Mortgage Rates Shoot Up

This wont Help

30-year fixed-rate mortgage: Averaged 6.09 percent with an average 0.7 point for the week ending September 25, 2008, up from last week when it averaged 5.78 percent. Last year at this time, the 30-year FRM averaged 6.42 percent.
The 15-year fixed-rate mortgage: Averaged 5.77 percent with an average 0.6 point, up from last week when it averaged 5.35 percent. A year ago at this time, the 15-year FRM averaged 6.09 percent.

Five-year Treasury-indexed adjustable-rate mortgages ARMs: Averaged 6.02 percent this week, with an average 0.6 point, up from last week when it averaged 5.67 percent. A year ago, the 5-year ARM averaged 6.15 percent.
One-year Treasury-indexed ARMs: Averaged 5.16 percent this week with an average 0.5 point, up from last week when it averaged 5.03 percent. At this time last year, the 1-year ARM averaged 5.60 percent.

From the Freddie Mac site:
"Mortgage rates followed Treasury bond yields higher this week amid market uncertainty over the current state of the economy," said Frank Nothaft, Freddie Mac vice president and chief economist. "Compared with last Thursday, 10-year Treasury yields are up about 0.3 percentage points, and 30-year fixed-rate loans moved up about the same amount. And while up, interest rates for 30-year FRMs are still more than 0.5 percentage points below this year's peak of 6.63 percent set the week of July 24th.

"The latest housing information for the third quarter continues to show some softness in prices and sales activity. House prices fell 5.3 percent over the twelve months ending in July – weaker than the market consensus – according to the Federal Housing Finance Agency's purchase-only house price index. During August, the median sales price of existing single-family homes (excluding condominiums and co-ops) fell 9.7 percent in August over August 2007, the largest 12-month drop since records began in 1968, according the National Association of Realtors (NAR). Overall resales dipped by 2.2 percent between July and August, on a seasonally-adjusted basis."

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Foreign investors have invested in America largely through buying American corporate bonds and US Treasuries. ow these assets lose value when the US prints money or causes the dollar to drop. Our foreign investors realize that it makes its debt a little less burdensome and renders the foreigners' holdings less valuable.

If you owned a lot of dollars and thought that the US might be taking on inflationary actions, like printing money to cover all of our new obligations. What would you do. Well, you could sell, but if you sold a lot you might drive down the price because you own so much.

With the new crises unfolding,smart foreign investors will hedge with hard assets - your homes and apartments look very good to them.

The number of overseas buyers has jumped. A study conducted last year by the Florida Association of Realtors and the National Association of Realtors found that 15 percent of the homes sold by almost 1,000 Florida agents in the past 12 months had been purchased by overseas buyers. Almost 60 percent of those buyers were Europeans taking advantage of the euro's continued strength against the dollar, up 33% since 2002.

Large Market Still Untapped

The number of agents certified as international specialists by the National Association of Realtors has grown to more than 2,000, a 30 percent increase in three years.

The NAR Study

What Did They Buy

NAR has been looking into this for quite a while and here is what they have found. What did they buy? The NAR says that like domestic buyers, international clients prefer single-family detached homes or town homes, but they also showed a stronger preference for condominiums and apartments compared to home buyers in general.

Here Are The Numbers

• Eighty-eight percent of existing home buyers bought detached homes, while 12 percent purchased multi-family housing (condos, co-ops, attached town homes, row homes, etc.) Seventy-eight percent of international homebuyers purchased in the multi-family category
• Forty-seven percent of all international buyers purchased homes exclusively for vacation, while 22 percent were motivated primarily by investment.
• Nearly a third of foreign buyers cited both vacation and investment as reasons for their purchase.
• International homeowners spent an average of 4.2 months of the year in their U.S. property in 2006.
• A third of all international buyers are from Europe,
• Buyers from Asia and North America (outside the United States) each represent about one-fourth of the total market.
• Sixteen percent of all international buyers are from Latin America. By individual country, most buyers come from Mexico (13 percent), the United Kingdom (12 percent) and Canada (11 percent).

The Survey Association of Foreign Investors in Real Estate

The Association of Foreign Investors in Real Estate (AFIRE) represents the interests of nearly 200 investing organizations from 21 different countries. AFIRE, a not-for-profit association of international real estate investors with headquarters in DC. I dont know this organization, it seems that the membership is largely institutional and investment property orientated.

Top Five Global Cities for Foreign Dollars
1. New York; up from #2 in 2006
2. Washington, DC; up from #4 in 2006
2. London; down from #1 in 2006
4. Paris; down from #3 in 2006
5. Shanghai; up from #9 in 2006

Top U.S. Property Types
Within the U.S. property market, the most dramatic change was a total reversal of investors’ preferred U.S. property types, with every property category shifting and, most dramatically, office properties falling into fifth place and retail properties rising to first.
1. Retail – from 5th place in 2006
2. Hotels – from 3rd place in 2006
3. Industrial – from 4th place in 2006
4. Multi-family – from 2nd place in 2006
5. Office – from 1st place in 2006

The Internet has been the key.

1. Search the internet for sites that provide bi-lingual listing of properties for sale
2. Find multi -lingual agents in your area. Often they will have a relationship to an agency that represents foreign buyers
3. Try any of the largest agencies for their overseas listing partners.Log on to sites from other English speaking countries and find agents that represent buyers looking for US investment properties or vacation homes. Condos in the sun belt areas are preferred.

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Howard Bell
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Posted by Howard at 11:42 AM 0 comments

Bush Proposal

The plan allows the government to buy the bad debt of U.S. financial institutions for the next two years. less than three pages, it would raise the national debt ceiling to $11.3 trillion, an $800-billion increase in the national debt limit.

And it would place no restrictions on the administration other than requiring semiannual reports to Congress, allowing the Treasury to buy and resell mortgage debt as it sees fit.

The proposal asks Congress for $700 billion, more than the Pentagon’s total yearly budget appropriation. The risk of steep declines in worldwide markets posed a grave risk to all Americans, especially their retirement plans and college savings for children but also their access to consumer credit including auto loans.

The free market system is temporarily suspended, while it gets fixed. It will never be the same, more regulation, less speculation and all those math and science PHd's that populated wall street creating financial instruments that no one understood will be going back to the campuses they came from. We will never see the likes of this kind of Frankenfinance again. Its not the first time its destroyed real wealth and real people. lets hope its the last.

Im for plain vanilla from now on.

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Bail Out: Our Well Being is at Stake

An enormous, taxpayer-financed program to buy up bad mortgages and other distressed debt is necessary to protect the savings and aspirations of millions of Americans

Resolving the financial problems is not just for major corporations, Our retirement, savings, homes and college for our kids and their chance to find and keep good jobs depend on it.

In 1989, the Resolution Trust Corporation disposed of bad assets held by hundreds of crippled savings institutions. The agency closed or reorganized 747 institutions holding $400 billion. It took six years for this one to resolve itself. By 1995, the S.& L. crisis had abated

Why Do This

Commercial and residential real estate deals are, for the most part, on hold these days as buyers and sellers wait for the credit crunch to ease. If we dont provide liquidity we wont have an economy that can function. Even the sovereign funds of China and some Arab nations would not step in and buy Lehman assets. Its our mess and we must fix the problem....our well being is at stake.

No Winners

Job growth, or more recently, the lack of job growth has reestablished itself as the operative factor determining the real estate sector's growth since sales and rent rates are most effected by the ability to pay

So far this year, the U.S. has lost 463,000 jobs, as unemployment hit 5.7 percent in July, its highest rate in four years. The outlook for jobs and the real estate sector will likely worsen. This collapse is expected to cost us another 400,000 jobs. The major financial hubs are on landlords' watch list. The high tech centers of Seattle, San Francisco and Austin look like a good bet from here.


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30 Fixed Mortgage Rates Fall For Fifth Straight Week

Freddie Mac updates for the week of Sept 18 2008

30-year fixed-rate mortgage: Averaged 5.78 percent with an average 0.6 point for the week ending September 18, 2008, down from last week when it averaged 5.93 percent. Last year at this time, the 30-year FRM averaged 6.34 percent. The last time the 30-year FRM was lower was the week ending February 14, 2008, when it averaged 5.72 percent.

15-year fixed-rate mortgage: Averaged 5.35 percent with an average 0.6 point, down from last week when it averaged 5.54 percent. A year ago at this time, the 15-year FRM averaged 5.98 percent. The last time the 15-year FRM was lower was the week ending March 27, 2008, when it averaged 5.34 percent.

Five-year Treasury-indexed ARMs: Averaged 5.67 percent this week, with an average 0.7 point, down from last week when it averaged 5.87 percent. A year ago, the 5-year ARM averaged 6.21 percent.

One-year Treasury-indexed ARMs: Averaged 5.03 percent this week with an average 0.5 point, down from last week when it averaged 5.21 percent. At this time last year, the 1-year ARM averaged 5.65 percent.

Commentary

Rates dropped almost 3/4 of a basis point. I'm not sure that will help home sales significantly, but its good news. As long as these bad loans accumulate and banks are forced to off load inventory, we will continue to see falling prices. Outside of some bargain hunting producing sales we are still building supply. Its anyones guess as to how the Govt plan will affect supply, but if it keeps people in their homes then thats a good thing.

The banking industry and the mortgage industry clearly do not want to significantly re negotiate mortgages that no longer reflect the value of the home. perhaps the plan will buy these bad debts at such a discount it can afford to do so and still see positive cash flow.

If the US buys wisely, we can see people stay in their homes reducing housing supply over time. Banks with bad debt off their balance sheets will be more comfortable making loans and perhaps a small profit for the US, since it has the where-with-all to wait out the crises. Remember, the US did bail out Chrysler years ago and in the end it profited.

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Foreclosures Rise: But Behind the Numbers

The national numbers are clouding the fact the the number of foreclosures is actually declining in many parts of the country. "Jay Brinkmann, MBA's chief economist and senior vice president for research and economics. Increases in foreclosures seen in California and Florida overshadow improvements seen in states including Texas, Massachusetts and Maryland, he said." (via MarketWatch.com)

Amazingly, California and Florida account for almost 40% of all foreclosures nationwide. If you remove those states you find states where improvement in the declines are starting to show. Maryland showed improvements as well as Michigan and other states.

Heres the Catch

According to the Mortgage Banking Association, its seems that these foreclosure rates are being driven by housing related issues. High prices and unqualified buyers without enough at the margins to withstand a downturn without losing their homes.

Now the mortgage problem is working its way through the entire financial services industry. First the banks, then the investement banks and now the insurers. The loss of jobs from these mergers and break ups will be staggering. We could we see another wave of foreclosures due to economic rather than housing related issues. I would think the hardest hit areas would be the large financial centers of the Northeast. I wonder if this will significantly harm Fabled San Francisco. As the financial center of the west, we could expect to see some loss there too. Any thoughts?

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The Option Pay: Mortgage: The Next Wave

With option pays, borrowers have four separate payment choices every single month. Yes one month you can choose to pay interest and principle and another month partial interest, in case you wanted to live above your means. hmmm...how many did that do you think

The option arm mortgage adjusts frequently, every few months or even every month, based on the London Interbank Rate (LIBOR) plus a little for the lender

Used as a 30/15 Year Fixed
A payment based on a 30 year amortization table, if made every month, will pay off the mortgage, in 30 years of course. You could treat this as a 15 year mortgage as well.

Interest Only Payment
The principal balance remains unchanged after the payment is applied.

Negative Amortization
A partial interest payment where part of the interest is deferred and added to the principal balance. This is negative amortization. Your mortgage balance is actually increasing, not being paid down

Here is a chart from Credit Suisse showing us that the increase from the orignal teaser rates are just in front of us.


Billions in total Pay Option ARMs outstanding, 60% issued in California reseting in 2010 and 2011.

Another Tsunami
This is the second wave of foreclosures and home auctions that the resets trigger beginnig mid to late 2009 into 2010-2011.

If you have one of these and want some reliable info, go to the Federal reserve board and pick up this pamphlet.

The reason why WAMU is on the ropes and why Country Wide failed is because the 2003 - 2004 pay option arm loans are recasting and then going 90 days late. But all you need to know is pay option arm loans have a teaser payment that will last until the loan goes 110%-125% of original value and then the loan recasts to a fully amortizing loan.Im afraid to look...

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Freddie Mac Update: Rates Plunge

30-year fixed-rate mortgage: Averaged 5.93 percent with an average 0.7 point for the week ending September 11, 2008, down from last week when it averaged 6.35 percent. Last year at this time, the 30-year FRM averaged 6.31 percent.

15-year fixed-rate mortgage: Averaged 5.54 percent with an average 0.7 point, down from last week when it averaged 5.90 percent. A year ago at this time, the 15-year FRM averaged 5.97 percent.

Five-year Treasury-indexed ARMs: Averaged 5.87 percent this week, with an average 0.7 point, down from last week when it averaged 5.97 percent. A year ago, the 5-year ARM averaged 6.17 percent.

One-year Treasury-indexed ARMs: Averaged 5.21 percent this week with an average 0.6 point, up from last week when it averaged 5.15 percent. At this time last year, the 1-year ARM averaged 5.66 percent

Commentary:

I dont know what to make of all of this.....on one hand we have a broken and close to bankrupt financial system. We have just increased the national debt by 50%. This is an admission that the fail safes and the institutional expertise has failed us and the lender of last resort (us) is stepping up.

The world has voted this a plus given the circumstances. Rates are down and this might possibly bring the end of the supply problem in view. Still, I wonder about the long term implications of such a collapse. This is real money that will never come back. If we were headed for a bi-polar world with new economic leaders sharing our space with us....we have certainly hurried that along quite a bit. We didnt even have to lose a war....

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The Worlds Reaction to the Biggest Bailout Ever

Well, the Dow is up 290 points. Thats a healthy move and it means that the consensus is overwhelmingly a two thumbs up. Of course, there is a lot of work to do, but this may begin to be the inflection point that begins to create a slow recovery in 2009. At least thats the thinking of Susan Wachter, real estate professor at the Wharton school of business. Ms. Wachter seems to think this is likely to stabilize the markets. That will go a long way towards bring some credibility back to the game.

Fannie plummeted more than $6.00 dollars as dividends on the preferred will be suspended. Freddie didnt fare much better. Not much point in owning a company whose assets are in serious trouble and now no dividend.

Lehmans's international analyst says that this will trickle down to all the stakeholders and will be a slight improvement world wide.

International Herald tribune notes that the US did look the other way when choosing a decidedly non capitalist answer to a very capitalist problem. Its not the first time we socialized a big problem and Im not sure its wqrong. Our financial credibility is at stake, and when you are a debtor nation your IOU better look good.

Well...so much for the talking heads.

Whats Changed

Mortgage rates went from 6.5% to 6% quite quickly and more of that to come. Couldnt be better...

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Biggest Financial Bailout in US History

Secty of the Treasury Paulson said then that Washington would buy up shares in the two companies and underwrite their ballooning debt ($800bln). The two companies have lent or underwritten about $5.3 trillion of the total $12tn of all outstanding mortgage debt. Something like 4 million homes or 9% of all existing mortgages were behind or in foreclosure

McCain gave it his immediate backing but Obama said he would reserve judgment. Obama said " We have to protect taxpayers and not bail out the shareholders and management". Obama focuses on a good point, its not just the real estate industry that tanks on this but all those 401K programs funded with Fannie and Freddie stock. Its just a shame.

Whats the Strategy

The move will also replace the chief executives of both Fannie and Freddie. The stocks were up modestly on the news, meaning that investors have voted up, but certainly are lacking enthusiasm.

The Treasury will buy up to $100 billion in each company to ensure a cash infusion and maintain a positive net worth. It will also buy mortgage-backed securities from the firms in the open market. Hopefully that will put a floor under the shares....its not possible for them to go completely belly up or get de-listed.

One of the problems that led to the Govt taking it into conservatorship was an accounting trick that was unacceptable. Normally, assets of these two companies were marked to the market every 90 days. Meaning that the asset was given a fairly current and accurate value. Fannie and Freddie changed the rules and decided to mark to the market every two years trying to wait out the crises without having to admit they my be insolvent and further freaking us out.

The bottom line is they didnt have the capital base they claimed they had and couldnt continue to buy loans to keep other lenders in the game. When big banks make home loans, they sell them to Fannie and Freddie, who then package and resell them to investors, or hold them themselves. Now there will be tens of thousands more loans in question...even more defaults and foreclosures then we thought.

Global Problem Now

The rise of the securitization market means some of the most debt securities backed by riskier loans have made their way around the global banking system.

That is why this is a global problem. The American financial system was once rock solid and we drew investors from around the globe. Now its different. For example, the Bank of China said in late August that it cut back its portfolio of the Fannie and Freddie's debt by about one quarter since the end of June.

The US had little choice after discovering the accounting smoke screen. After all, this is the reputation of the US Govt and its solvency cannot be put in doubt.

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Fannie & Freddie Govt. Takeover

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend. Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to the New York times.

he proposal to place Fannie and Freddie into a government-run conservatorship grew as the fear that foreign investors might not be repaid. Much of the securitized debt is sold to foreing investors. Asia is a big investor and the United States cannot afford to have its debt considered risky.

The NY Times reports that the consensus is that common stock holders may be virtually wiped out (Didnt that already happen) and the Preferred holders may not fare that much better.

McCain and Obama have already stepped up with support for a government take-over.

My understanding is that the total Fannie and Freddie mortgage debt is equal to the National Debt. The big question in my mind is how will this be structured and will it effectively double the nation debt overnight.

Oversight

Where was it. According to the Times the companies have been fooling with accounting procedure since 2003.

For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value.

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Freddie Mac Update: Rates Drift Lower on Reports of Economic Weakness

Other Reports Point to Progress IN Housing Market

McLean, VA Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® in which the 30-year fixed-rate mortgage averaged 6.40 percent with an average 0.6 point for the week ending August 21, 2008, down from last week when it averaged 6.47 percent. Last year at this time, the 30-year FRM averaged 6.67 percent.

30-year fixed-rate mortgage: Averaged 6.40 percent with an average 0.6 point for the week ending August 21, 2008, down from last week when it averaged 6.47 percent. Last year at this time, the 30-year FRM averaged 6.67 percent.

The 15-year fixed-rate mortgage: Averaged 5.93 percent with an average 0.6 point, down from last week when it averaged 6.00 percent. A year ago at this time, the 15-year FRM averaged 6.12 percent.

Five-year adjustable-rate mortgages ARMs: Averaged 6.03 percent this week, with an average 0.6 point, down from last week when it averaged 5.99 percent. A year ago, the 5-year ARM averaged 6.35 percent.

One-year Treasury-indexed ARM: Averaged 5.33 percent this week with an average 0.7 point, up from last week when it averaged 5.29 percent. At this time last year, the 1-year ARM averaged 5.84 percent.

Commentary

Freddie Mac notes: The housing front is providing some encouraging signs. The pace of home price declines slowed down for the fourth straight month in June and the number of metro areas exhibiting monthly gains rose from seven to nine, according to the S&P/Case-Shiller® 20-city composite index. There are also signs more buyers may be getting ready to return to the market. The Conference Board says the share of households planning to buy a home within six months is now at its highest level since March. At the same time, the supply for unsold new homes is down to 10.1 months, the lowest since February, as single-family existing homes (excluding condos and co-ops) start to sell more quickly. Although, when condos and co-ops are included, the resale inventory did edge up."

We think that its possible that the downward spiral is slowing for now. But there are other mrpotgage segments that are even bigger and showing signs of serious collapse. Scroll down to my blog just below this: How Long Will We See Declines: Try 2011. Im afraid there is much more to come. We may have to resort, as a nation, to the kind of creative accounting that the Japanese used during there huge real estate bubble.

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How Long Will We See Declines: Try 2011

Housing Wire, one of the better blogs, has a scary article on ARM resets. Fitch is a highly respected credit rating service, similar to the work of Moody's or Standard and Poors. A rating agency providing ndependent credit opinions. According to Housing Wire, Fitch is reporting that this will not end and perhaps be worse for the next 36 months.

"The majority of option ARM borrowers have elected to make the monthly minimum payment over the past 24 months,” Fitch said in the report. “As a result, a large number of these loans, especially those with 40-year amortization and 110% principal caps are expected to reach their recasts before the end of the five-year mark.”

We are talking about a lot of money involved in the options ARM's market: $29 billion recasting in 2009 and additional $67 billion to recast in 2010; of this, approximately $53 billion is attributed to early recasts.

Fitch said it expects 90-day plus delinquencies — already ranging from 10 percent to 24 percent, depending on vintage — to more than double after recast for 2004-2007 vintage loans. It gets worse: Fitch also estimated that the potential average payment increase on the re-casting loans to be 63 percent, representing on average an additional $1,053 due each month. Via housingwire.com

We are generally blown away when we see double or even triple whammy's. But this is a combo of declining values, higher monthly costs, refi's harder than ever, negative amortization and job losses. Whew! Do I stay or do I go.....

Thanks for Reading
Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

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