How to Fix The Water Problem….

What?  Are we now talking about plumbing problems here on Straight Talk?   Nope.

We’re talking about underwater mortgages.    You know, the situation where people owe more than what their house is worth.

So what’s the scoop and how do we deal with it?

• The scoop – the property values were vastly over inflated by the housing bubble of the last 5 years.
• Many people took advantage of the low downpayment programs and bought houses with little or no money down.
• Those people are now looking at a situation where they owe more on their house, in many cases substantially more, than their house is worth.

So what are the options?

Frankly, none of them are good, but there are some options:

• A government bailout – like it says in the article from the Free Press – the only thing people dislike more than bailing out the banks is bailing out their neighbors.   So, using substantial amounts of taxpayer money to reduce the principal amounts of the mortgages for underwater borrowers would be politically extremely challenging to get through.
• Do Nothing – let the markets work things through.   What would that mean?   A couple of things:  1) a long slow protracted recovery for the housing market.  2) additional pressure on the banking and mortgage environment with additional losses for the banking world and tightening mortgage guidelines.   3) an ongoing drag on the overall economy – the housing market typically leads the economy out of the woods but if it’s going to linger in the doldrums, that will be a drag on the economy  4) An ongoing drag on the jobs market – why a drag on the jobs market?   Geographic mobility will be limited because people can’t sell their houses to pursue jobs in other locations.
• A “combination” bailout – this is an idea that I’ve discussed before and I’ll attempt to write more on it some additional time.   I call it a combination bailout because it would allow for a couple of different things.

What’s a combination bailout?

• An acknowledgment that the mortgages on the books of the banks, Fannie Mae, Freddie Mac and the other financial institutions are not worth their “book value.”    A $100,000 mortgage on a $70,000 house is not worth $100,000.   The sooner this fact is faced, the better off we’ll be.
• So, I’m proposing that the financial institutions take an immediate 15% adjustment to the value of their mortgage backed securities and mortgage loans.   How did I come up with that number?  I pulled it out of a hat but it’s somewhere close to 10% less than the amount that property values have actually fallen.
• At the same time that happens, all mortgages (first and second liens that are NOT credit lines) will see both the principal balance and the corresponding payment reduced by the same 15%.     This will provide both monthly payment relief for all borrowers and will also allow many of them to sell who couldn’t otherwise.
• The reduction in values will significantly impact many financial institutions balance statements.   Some of them will be weakened to the point of needing to be “merged” into other organizations.    Some will close.     That’s painful but it’s okay.
• At the same time, all homeowners will benefit because they will see a drop in their monthly payments and they will have reduced monthly payments.
• What about non-homeowners?   Or people who have their houses paid for?   They would receive a tax credit (not a deduction) equal to 15% of the median house price in their state.

So what would that give us?

• A smaller banking system but one with a more realistic valuation of it’s assets and therefore a healthy banking system.
• Homeowners who are in a better shape financially because they have either less negative equity, they have enough equity that they can move if they want or need to, and their monthly cash flow is better.
• Those who don’t have mortgages will see a boost to their cash flow so they can either: 1) Save the money and help the banking system or 2) Spend the money and stimulate the economy.

How much would it cost the government?

Frankly, I don’t know but I expect that it wouldn’t be as much as many of the bailout things that have been proposed in the past for a couple of reasons:

1. If we are removing the assets from the banks books and at the same time removing the debt from the consumer’s side, that should balance out.   The only thing it would require is FDIC money to cover any banks that go under because of the falling of their book values.
2. The tax credit would cost some substantial dollars but at the same time, the money would spur the economy and would therefore increase tax revenues.

So, what do you think?  I know the logistics of it have a lot to be worked out but it seems to me that this would work better than giving the banks and the sellers $1000 each on a short sale (see the next post I’ve got going up for some thoughts about that).

Let me know your thoughts….

TV

Solutions aren’t easy for underwater mortgages | freep.com | Detroit Free Press

If there is anything the American public dislikes more than bailing out the bank, it’s (bailing out) their neighbor,” Gordon said.

Still, she said, the problem of underwater mortgages — where the homeowner owes a lender more than the house is worth — should concern everyone. “If your neighbor goes into foreclosure, it brings your home value down,” she said.

Some experts advocate for a federal bailout for underwater mortgages. That would cost about $801 billion, more than the original 2008 bank bailout, according to First American CoreLogic, a real estate data firm.

It will take time, money to heal housing market

In Michigan — where home prices have dropped more than 35% from their 2005 peak — home values are expected to fall another 22% statewide over the next five years.

In the same period, they’re forecast to drop 30% in metro Detroit, according to Dennis Capozza, a University of Michigan finance professor. Capozza also is a principal in University Financial Associates, a mortgage-risk advisory firm in Ann Arbor, which sells quarterly house price forecasts to its clients, including lenders and rating agencies.

Technorati Tags: Underwater Mortgages, Straight Talk About Mortgages

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Kenny H.

The Advantages of Refinancing

An interesting article at HousingWire about how people are saving money by refinancing.   It’s interesting for what it says and what it doesn’t say.

What it says:

• On an annual basis, those who have refinanced recently are going to save approximately $3 Billion on their monthly payments.
• The average interest rate dropped by 17%.   Not from 19% to 2%, but from 6% to just under 5%.

What it doesn’t say:

• If they are saving $3 Billion, who’s losing that money?   How much would/could Fannie and Freddie have made/lost if they hadn’t refinanced?  
• What sort of impact has that $3 Billion had on the overall economy?   Has it increased consumer spending?
• What have the borrowers done with that savings?   Have they paid down extra on their principal?   Put the money in savings?   Used it to pay off other debt?  
• How many of the 94,000 borrowers who have refinanced were “saved” from foreclosure by means of the refinance?   If we assume a $200,000 mortgage amount, a 1% drop in rate payment equals $125 per month in savings.   Is that enough to make a difference?

Makes you wonder, doesn’t it?

Tom Vanderwell

Refinancing in Q309 Saves Borrowers $3bn in 12 Months: Freddie : HousingWire || financial news for the mortgage market

Half of all borrowers that refinanced their conventional loans in Q309 saw their annual mortgage interest rate drop by at least 17%, according to a quarterly report by mortgage giant Freddie Mac (FRE: 1.15 0.00%).

Although the new interest rate was only about 1.1 percentage points below the old rate, in aggregate the interest rate reduction adds up to around $3bn in savings for these borrowers over the first 12 months of the new loan, according to a survey of a sample of properties on which Feddie funded at least two successive loans.

Technorati Tags: Refinancing, Mortgages

The Jobs Report – what’s it going to mean for mortgage rates?

Okay, it’s hard to believe but tomorrow morning is the first Friday of the month again.    Where has the year gone?   In some ways it has flown by and in other ways it seems like it’s been about two or three years.   Know what I mean?

Any way, tomorrow morning is the jobs report that shows the statistics for the month of September.   I’ve had a lot of people asking me what I think it’s going to show and what I think it’s going to do to mortgage rates.    I’m going to lay out what I think are the three most likely outcomes and their potential impact on mortgage rates.  At the end of the piece, I’ll put my “projections” on which one is most likely to occur.

The Jobs Report Comes In Better Than Expected – Remember, it’s not so much the actual number as it is the difference between market expectations and the actual numbers.   But, if the jobs report comes in better than expected, here’s what I expect will happen:

• People will feel better than they did about the prospects for a recovery in the economy.
• People and institutional investors will move money (lots of it – how much depends on how much better) from the bond market and cash and put it into the stock market.
• The stock market will have a very nice upward swing.
• The bond market and mortgage backed securities will suffer from the movement of money.
• Mortgage Rates will go up.

The Jobs Report Comes in about as expected – status quo, mediocre, we just sort of limp along.   If that’s the case, I expect we’d see a “non-reaction” in the markets.

The Jobs Report Comes in Worse Than Expected – a little bit worse, but not a huge amount worse.   If that’s what happens, here’s what I expect:

• People will feel worse about the prospects for recovery in the economy and we’re going to struggle for a while.
• People and institutional investors will move money (lots of it – how much depends on how much worse) from the stock market, it will sell off and the bond market and mortgage backed securities will rally.
• I put this one in bold because it’s important – While the bond market will rally, mortgage rates might fall a little bit, but they won’t fall substantially.   Why?  A couple of reasons:  1) Fannie Mae and Freddie Mac (and FHA) all need money, desperately.   They are going to attempt to pad their profit margins (actually, reduce their losses.)  2)  Banks and mortgage lenders are also going to use the opportunity to reduce losses or increase profitability.  

The Jobs Report Comes in SIGNIFICANTLY Worse Than Expected – I’m talking a really bad miss.   That would spark, in my mind, a couple of things:

• A selloff in the stock market.
• A sell off in the bond and mortgage backed securities.
• Stocks fall, interest rates rise.   Investors (not actual investors, but speculators) pull their money out of the markets and into cash.

Now look at the four possible outcomes.   Two of them would result in higher rates.   One would result in stable rates, and one would result in lower rates (but only slightly.)

I’m going to go on record and say that I think the likelihood of a downward movement in rates is significantly less than the likelihood of an upward turn in rates.   Therefore, I’m recommending that if you have the opportunity, lock now.   The risk on the upward side is greater than it is on the downward side.

I’ll have more on it tomorrow once we get the report.

Tom Vanderwell

Hello Freddie? I’d like to apply for a job!

Okay, this is just too much.   Supposedly when the government (meaning you and me!) bought/bailed out Fannie Mae and Freddie Mac, they gave all of the top executives a major pay cut.   I mean after all, they were going from being private citizens to being civil servants.

Well, guess what, Freddie just hired a new CFO.  And guess what, they are paying him $3.5 Million a year.   That’s right, $3.5 Million per year.   Oh, and that works out to almost a 400% increase from what he was making last year.

Oh, Freddie?   Are you out there?   If you are offering 400% pay increases, I’d like to apply for a job!

Tom VanderwellFreddie Mac hands out big bonus to new CFO | footnoted.org

Last we checked, Freddie Mac (FRE) was still operating under a conservatorship, having received over $51 billion in taxpayer money. And, we seem to recall lots of chest-beating last year about sharply lower salaries and fewer perks for the new group of top executives charged with setting Freddie (and Fannie Mae) back on the path to prosperity.

So you can imagine our surprise when we came across this employment contract yesterday for Freddie’s newly named CFO, Ross J. Kari. Here’s a few key bullets:

* annual compensation of $3.5 million (this includes $675K in salary, $1.6 million in something called “additional annual salary” and $1.1 million in a target incentive
* a $1.95 million signing bonus
* immediate buyout of Kari’s house (or perhaps houses)
* reimbursement for travel between Washington D.C. and Kari’s residences in Ohio, Washington and Oregon

Needless to say, none of this — and certainly not the ridiculous sounding additional annual salary — was included in the press release that Freddie put out earlier this week.

Technorati Tags: Freddie Mac, Government Bailout, Executive Compensation

Searching for Direction – in Mortgage Rates….

Technorati Tags: Mortgage Rates

Produce Price Index – does it matter for mortgages?

The answer is, not as much as the Consumer Price Index.   Let me explain:

• Producer price index is prices on the wholesale level.
• Those price increases don’t always get passed on to consumers.   Due to competition, increased productivity, cost cutting, etc., businesses are able to absorb those price increases and not pass them on to the consumer.

Tomorrow, we’ll get the Consumer Price Index.   That’s going to be the much more influential economic report in it’s impact on mortgages.

Tom Vanderwell

U.S. August producer price index rises 1.7% – MarketWatch

WASHINGTON (MarketWatch) — U.S. producer prices rose by 1.7% in August, the Labor Department reported Tuesday, powered by the biggest gain in energy prices since November 2007. Minus volatile energy and food prices, however, the producer price index rose just 0.2%.

Economists surveyed by MarketWatch were expecting producer prices to climb by 1.5% in August. They estimated core prices would rise by 0.1%

Producer Price Index

What’s the Mortgage Market Doing Today?

It’s getting a little nervous……

Let me explain:

• Retail sales were up and they weren’t up strictly because of the “Cash for Clunkers” program.   That’s a good thing economically but not so much from an inflation standpoint.
• The Producer Price Index was higher than expected.
• A relatively minor manufacturing report came in better than expected.

All three of them are not “market moving reports” in themselves.   But all three of them provide insight into a chain of events that might be building up.   Let me lay out that scenario:

• Retail sales are up.
• Inflation on the wholesale level is up.
• Manufacturing is up.
• All of these could potentially be signs of inflation.
• Inflation brings higher rates.

Have rates changed today?   Very little.   But the nerves are a little more “jumpy.”

So, with the Consumer Price Index coming out tomorrow morning, what’s my recommendation?   I’ve adjusted it a little.   I’m changing from “cautiously floating” to VERY Cautiously floating.   Why’s that?

Basically, the news that came out today is tipping the scales slightly towards higher rates rather than lower rates.   Not enough to make me recommend “lock” but closer than we were yesterday.

I’ll continue to keep you informed, call me at (616) 292-7559 or e-mail me at tvanderwell@straighttalkaboutmortgages.com if I can be of help.

Thanks!

Tom Vanderwell

Mortgage Rates

Mortgage Market Update

So what’s driving the  market today?  A couple of main things are impacting them today:

• Mergers and Acquistions – there are a few deals (mainly involving food) out there that are suggesting that the stock market isn’t dead.   This is pushing money into the stock market and away from bonds.
• On the “flip” side, oil prices, gold prices and other commodities are all higher, predominantly due to the value of the dollar falling.

So we’ve got a “point/counter point” pressure on mortgage rates going on.   One is pushing down, the other is pushing up.    This afternoon there’s another Treasury auction, but it’s the very short term Treasuries, so I don’t anticipate it having much impact on the mortgage world.

Recommendation for this morning is to carefully float.   At any time, the pressures could flip one way or the other and send rates up or down, but my feeling is that today could be a fairly decent one for mortgage rates.

I’ll continue to keep you informed, let me know how I can be of help.

Thanks!

Tom Vanderwell

Mortgage Rates

Is this one of those barn door type of regulations?

You know, like, “The horses are in the next county, let’s shut the barn door now?”   Those type of regulations?

I mean yeah, it’s good that they put these things in place, but really, how much of a different result would we have had to this mess if advertisements had said, “Fixed rate and payments for 5 years and then the rate and payment probably will change” rather than just “fixed rate loan?

A little, but not that much….

Tom Vanderwell

FDIC Informs Consumers of New Federal Mortgage Policy : HousingWire || financial news for the mortgage market

Beginning October 1, mortgage lenders cannot advertise a mortgage product as having a “fixed” rate or payment if in fact the rate or payment is subject to change. Lenders must also disclose in advertisements whether minimum payments on specific mortgage products result in a lump-sum “balloon payment” due at the end of the loan term.

Fixed Rate Loans

Mortgage Market Update

Mortgage Rates, Mortgage Market Update

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