Waiting for the FED meeting on Tuesday?

Investors, clients and borrowers in general are looking forward to the FED meeting on Tuesday for a rate cut. The market has priced in a 50bps reduction. Any less and we could see major declines in stock markets. I would think that the FED will cut only 25bps. I think we can gather the overall thinking in these two quotes:

"It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford." - President Bush

"It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions."- Fed Chairman Ben Bernanke

Investors love resetting ARM rates, who knew people couldn't afford the rate jump?

National Mortgage News will run an interview Monday with Countrywide CEO Angelo Mozilo. In the interview, conducted Thursday, Mozilo tries to "clarify misconceptions in the media about why consumers are going delinquent on their mortgages. He blames a majority of the problem on job losses and sagging home prices -- not ARM resets," says NMN editor Paul Muolo."Resets are not the issue," Mozilo told NMN.
Well, yeah... resets weren't an issue as long as home prices kept going up -- you just refinanced into another loan. Hopefully, NMN asked Mozilo why Countrywide cutback ARM production from $19.3 billion in August 2006 to $8.3 billion last month. (Turn sarcasm on.) The resets can't possibly be a problem. Investors love a solid reset from 5% to 7% on their loan portfolio, nothing lines the pockets better. The real problem is these borrowers. They can't pay the higher rates. In the 2-3 years their loan was fixed, all was well. Then property started to decline and many of these folks can't refinance or haven't boosted their 'stated income' the 20-40k to handle the payment increase.(Sarcasm off) If they can the rates are between 6-8% depending on FICO, loan to value, document type, their preference in music, etc To break it down in real terms, clients resetting are moving from 4-5% for prime clients to 6-7%. The annual cap on increases is 2%. Most folks mortgages are based on a 2 or 2.5% spread against LIBOR. LIBOR stands at 5.275% today. On a 500k mortgage loan amount the payment increase is about $800 a month in interest. Here is a chart of LIBOR the last few years:

As you can see global markets are demanding higher rates. All major financing is based against LIBOR. As an example the First Data Corporation private equity buyout deal is pricing $5B worth of loans at LIBOR plus 2.75%. Bloomberg piece here. Client's should carefully evaluate whether they want to keep their loan till the reset or look at a fixed rate. For prime conforming loans they are right at 6% for a 30Y fixed and jumbo mortgage rates are right about 7%. I think these rates are very attractive relative to the prospect of floating against an index that may take years to drop as the global economy slows down.

Mortgage Brokers say 57% of clients couldn't refi in AUG.

NEW YORK, Sept 11 (Reuters) - Some 57 percent of mortgage broker customers with adjustable-rate loans were unable to refinance into a new loan to avoid higher monthly payments in August, a national survey reported on Tuesday.
The poll of 1,744 brokers in the last week of August found that subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a statement from Campbell Communications, the Washington-based research firm that conducted the survey. Prime borrowers were impeded by appraisals and high loan-to-value ratios, it said. Original Article

The fear within the industry has risen dramatically. Many banks and lenders have resorted to cutting appraisal reports from reputable firms 50-100k to deny loans or to limit their risk. This is happening especially in CA. The lenders that are standing have tightened guidelines and leaned on the appraisal review department to knock down values. I have seen appraisals with 5-6 comparables from sales in the last 45 days cut down in value because the lenders appraisal review department thinks values aren't there anymore. The comments note that it is a soft market and they point to the amount of inventory in the area.

These are not high risk refinances. They are 75-80% loan to value refinances for home owners with perfect credit. Appraisal review has often been a mechanism that lenders use to limit risk. World Savings is notorious for having very low appraised value reports from their in house group, which is all they allow under their loan products. They are owned by Wachovia and the CEO commented recently that their pay option arm(read:NEGAM) loans are fine and the business is working well for them. Well, of course it is, they only loan to 80% of their fire sale appraised value number to prime credit levels. We would have to have a depression for Wachovia to worry about their loans.

The practice of having standard prime lenders cut appraisals as a protection method is creating a vicious loop. I would strongly advise anyone that has an adjustable loan to seriously review their financial situation and loan terms.

If values are falling in your neighborhood and you have a large balance vs your CURRENT home value you need to evaluate if you can handle your current loan and any future adjustments throughout the credit storm which could last for several years. Most adjustables are made with a margin against the 1Y LIBOR index(definition below). Which as of today was 5.23%. Most loans max at a 2% adjustment per year. They usually cap at 9.95%. The majority of folks that purchased or refinanced with an adjustable in 02-05 will start to adjust this year and into 2010. For a view of the reset please review older posts.

If adjustments would make things difficult in a year or two. I would advise looking at your refinance options now or consider selling your home. It should be a home not a modern debtors prison.

What it means: LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate.
How it's used: It's an index that is used to set the cost of various variable-rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Although it is increasingly used for consumer loans, it has traditionally been a reference figure for corporate financial transactions.

Incredible Price Cuts for Countrywide REO

Have you seen the CA Countrywide REO list recently? Wow, some huge price cuts in the last two weeks. I can't even imagine what is going on in some of these neighborhoods with home prices on their REO getting dropped by 15-20% since they were listed just 6-8 weeks ago. On most of these Countrywide is taking a bath. Your thoughts if you know these areas well would be appreciated. National list here.

Why it all matters.

It is well understand that the credit crunch has effected real estate in the last six months and especially so with the tightening of programs for the jumbo market. The impact of the dramatic change in the mortgage industry will have far reaching effects on clients now and for years to come. Many people don't think they have any involvement with the 'Subprime' problem as the media likes to refer to the credit situation within real estate. The effects are wide ranging and people won't realize the impact on their own pocket book until they have to sell, refinance or purchase. For people looking to sell now or anytime in the next few years need to face the reality of today's market not the fantasy land of what a friend sold for in May. I believe values in bubble markets will continue to adjust lower each month as the inventory increases, closed transactions decline, and the tight money environment reduces the available pool of buyers. As an example, a client could have perfect credit, excellent income, but 100% financing for a purchase over 417k on a single family home is no longer available. That could delay the purchase as the client has to save the minimum 5% down payment, plus have six months of PITI on deposit as well. Every purchase scenario is different as you have people upgrading, downgrading, first time home buyers, and investors all within the marketplace buying/selling homes. But, overall you can see the stress the market is under with the changes that occurred since April when all the subprime lenders began to fold. The impact of the changes in prime mortgage lending really has just begun as it wasn't until the first week of August that the jumbo mortgage market began to change guidelines and move up rates to compensate for the added risk. This won't be seen in the numbers until the Sept numbers are reported in Oct.

Make no mistake, this isn't a liquidity crisis. Money is available to lend, but its available at lower risk levels or much higher rates than the public has become accustomed to over the last few years. In looking at listings throughout the hot areas you can start to see the smart sellers capitulate and move their asking prices down. Buyers are searching for a deal and seem to think prices will move lower so they are very patient. They often are bidding well below asking prices because they are conditioned by watching listings fall in price throughout the bubble markets. We have moved into a period of slowly declining prices in the hot areas, notice the deals that are closing are priced right for today's market. Not what a neighbor sold at in July. The market is different and once all participants understand the changes that have occurred you will see inventory decline and sales volume pick up. This could take several years. A lot of mortgage debt is resetting to higher(unaffordable) rates in the next two years. This could put a lot more homes on the market further pressuring prices. Homes are selling on their fundamentals and buyers are not counting on property appreciation to bail out a poor decision. So they are buying carefully and are often requesting very safe 30Y fixed loan scenarios.

In my next article I will highlight why falling real estate prices will have an enormous effect on people refinancing. After all, one of the tenants of mortgage lending is loan to value. If your neighborhoods values are falling, that will absolutely have an effect on the rates available come the time to refinance. Has the real estate environment changed your plans for selling, buying or refinancing? Please comment.

An option for today's home sellers:Lease-Options

The subprime fallout has made the once-slam-dunk home loans more difficult to obtain. While some neighborhoods continue to be very active, other areas have slowed considerably.
In addition, the first notion of "back to school" already has hit many second-home owners who are beginning to schedule the "winterization" of the family cabin. Instead of going through another off-season with little use and significant maintenance, some owners will use the last few weeks of the summer season to show -- and hopefully sell -- the family getaway, raising for-sale real estate inventory levels in popular areas.
If your house or cabin already has been sitting for sale long enough to bite into your comfort and affordability zones, you might want to consider a lease-option.
A lease with an option to buy often can solve a two-mortgage problem for a seller, and provide a cash-poor buyer with an opportunity to "try out" a house while getting a portion on the monthly rent credited toward a down payment.
Many sellers make a commitment to purchase another house contingent on selling the one they're already in. But when it comes time to purchase the second house, or lose it, the prospective buyer can be faced with making payments on two homes if the first one has not sold.
A 12- to 18-month lease agreement, with an option to buy within the lease period, can solve problems. Here's how a typical lease-option works:
1. The buyer and seller agree on a purchase price, usually a figure somewhere between today's market value and the anticipated market value 12 months down the road.
2. The seller gives up tomorrow's presumably higher value for money in hand today. The buyer pays a bit more than today's value in exchange for very little cash down. Let's say buyer and seller agree the price will be $335,000.
3. The seller charges the buyer a nonrefundable fee for agreeing to this option. The amount can vary depending on factors such as how eager the seller is to move and the size and quality of the house. Typically, the higher the fee, the better the buyer maintains the property.
4. Let's use $3,000 for the fee in our hypothetical transaction. The fee is in addition to the monthly lease payments. And we'll have the seller give the buyer the right to purchase the property for $335,000 at any time within the 12-month lease period. If the option is exercised, the fee could be considered part of the down payment.
5. The lessee has made no down payment, hence the monthly option fee is typically higher than rental market rates. The two parties agree on what portion of the rent will be applied to the down payment. Any amount can be credited. For example, if the monthly fee is $2,000, $800 could be credited to the down payment. (If the seller really is not eager to sell, he may not agree to a higher rent credit.)
6. Buyer and seller must be sure to specify both lease and sale terms in the agreement. For example, when the time comes for the buyer to exercise the option, if the interest rates are at 8 percent, the buyer may not be able to qualify for a loan. It's a good idea to set an interest-rate ceiling in the agreement, or ask the seller to finance the home when conventional rates hit a certain level.
Sellers should read their mortgage agreements carefully before entering a lease-option agreement. Some lenders may activate a "due-on-sale" clause if the seller enters into a lease-option with another party. Many times, lenders will permit a specific lease-option period if notified in advance. And, lenders usually are more willing to participate when they are assured of future business -- like the seller's or buyer's new mortgage loan.
Some realty agents have been reluctant to seek lease-options for clients because they have been unwilling to gamble their commissions on whether the option would be exercised. Others are skittish about deferring their commission until a deal is solidified. However, when open-minded agents understand a lease-option could keep a deal together and result in future business, the concept is readily accepted. A small piece of something is better than a large piece of nothing?

Job Losses Heaviest in months.

What's the trickle down from these job cuts? Many of these have occured in the hottest job areas. Have you heard any stories or any anecdotial evidence of this affecting your local economy?

Property Speculators first to default.

The Mortgage Bankers Association (MBA) has released a report showing that as many as 1 in 5 mortgages currently in default in California belongs to borrowers who are not living in the homes with the defaulted loans. The default rates for investor loans were even worse in Nevada, Arizona and Florida, where one-quarter to one-third of all defaulted mortgages as of the end of June were related to investor loans, according to the report. The MBA defines "defaulted mortgages" as those that are 90 days or more past due or in foreclosure. The rapid rise in default rates has led some members of Congress to call for urgent action to aid borrowers who are threatened with the loss of their homes. But the MBA report suggests that some of these borrowers do not deserve to be helped. Many of the vacant foreclosed homes popping up throughout the U.S. these days were bought by speculators who planned to "flip" their investments for a quick profit but got trapped with the market took a sudden down-turn. "Defaults are on the rise in most parts of the country, but it should be recognized that it is not always the case of a homeowner losing his or her home but is often the case of an investor gambling on a continued increase in home values and losing that gamble," said Doug Duncan, the MBA's chief economist. Many of these investors have "simply walked away from the mortgages," Duncan said.

This is the moral hazard regulators and bankers speak of. People don't want to bail out property speculators that are a large part of the foreclosure problem in the previously hot markets.

"When should I buy a home?" The quick answer.

Thousands of numbers, graphs, charts and economic reports can be boiled down for the first time home buyer looking in the previously smoking hot markets for the quick explaination to the question of "When should I buy a home?" When you see this chart of Countrywide's total national foreclosure inventory that they own and are trying to sell via thousands of realtors across the country start to stabilize and then move down again things are getting better. I don't think that will happen until 2010-11 as the amount of loans resetting to much higher rates is just starting in earnest this Oct/Nov, right before Christmas. These are homes that went to the auction step and Countrywide was the high bidder and won because they were trying to protect their skin in the game. Chart courtesy of the good guys at Countrywide Foreclosure Blog. Here is a recent scheduled adjustable mortgage reset chart also:

FHA Plan:Bring a water gun to fight a fire.

The markets waited with baited breath for the announcement of the Bush adminstration's plan to rescue subprime home owners from foreclosure:

"Traders seem to have packed away concerns regarding a speech by Federal Reserve Chairman Ben Bernanke, focusing instead on aid for subprime lenders being hinted at by the Bush administration. According to The Wall Street Journal, about an hour after Bernanke's speech, Bush is expected to announce plans for a change in the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, the Journal reported."

This helps very few people in California, Nevada, Florida, etc. The states most affected by the resetting of subprime loans and the rising wave of foreclosure filings. As an example visit the Countrywide Foreclosed Home Blog. Notice how many foreclosed homes are above the FHA limit of 417k? Another point is that these folks could have received a number of different mortgage loans from Fannie Mae and FHA over the last few years but they wouldn't have qualified because their debt to income numbers are too high. The mortgage payment with taxes, insurance and all their debt(cars, credit cards,etc.) can't be over 50% of their gross income. They couldn't make the payments on time with a 5-6% 2Y or 3Y adjustable rate mortgage with interest only in the majority of cases. What makes people believe these folks can be helped? This is political grand standing at it's finest. This isn't a rescue plan nor should we allow one to happen. Unless fraud was involved on the part of the mortgage bank or lender these folks signed loan documents and commited to house payments that were beyond their means. They had ample opportunity to refinance throughout the last two years when subprime and ALT-A was available. They received an unbelievable amount of calls and junk mail to refinance.

More often than not they were hoping against hope that they could refinance into even lower rates. The back up plan was to sell the house and pocket 100-200k of their "equity" that they had earned for being a home owner in the great housing boom. Believe me, you couldn't get these folks to get a fixed rate mortgage during the boom years of 03-06. Because the rate was .25-.50% higher. All the subprime shops offered a 30Y fixed, and even had an interest only option available. They all qualified for it. They always opted for the cheapest payment. People need to downsize their home and/or lifestyle, work more or relocate to a city or state with more affordable housing. Taxpayers shouldn't bailout the home owners and the lenders who made foolish decisions.

Don't believe for a minute that all subprime borrowers were screwed over. Sure just like anything their was fraud and ignorance. But, in California, I witnessed a lot of people driving Hummer's and buying plasmas at Best Buy with the cashout from their Ameriquest ineterest only 2Y fixed adjustable rate mortgage. I work in the industry and have a million stories. What's your take, it might be your money on your 2008 or 2009 taxes?

Senators and Bankers beg for Jumbo Loan Changes

In response to a tightening of credit in the jumbo-loan market, lawmakers are calling on Congress to let Fannie Mae and Freddie Mac purchase substantially larger loans on homes in high-cost metro areas. Currently, Fannie and Freddie can purchase single-family homes for up to $417,000 in the continental U.S. In May, the House passed a bill that would let Fannie and Freddie purchase and securitize bigger mortgages in high-cost areas within the continental U.S. In areas where the median price exceeds to $417,000 cap, the current proposal would permit Fannie and Freddie to purchase loans up to that region's median price or $625,000, whichever is lower. Now Reps. Barney Frank, D-Mass, and Gary Miller, R-Diamond Bar, have called on the Senate to raise the conforming loan limits even higher. "It now is clear that we underestimated in the House bill how far we should raise the conforming loan limit, and the current crises in the mortgage market demonstrate we should raise it to a higher level," said Frank, chairman of the House Financial Services Committee and sponsor of the House bill, HR1427. However, neither Frank nor Miller would say exactly how much higher they would like the limit raised. In the past few weeks, several large lenders have cut back or ceased making loans that can't be sold to Fannie and Freddie, primarily because investor demand for these jumbo-mortgages has dried up. Investors are still willing to buy securities from Fannie and Freddie because these securities come with guarantees that investors will get cash flows - principal and interest - from the mortgages in their pool. The decrease in investor demand for jumbo mortgages has pushed up the rates relative to conforming loans. At this point, the difference in rates on jumbos as compared to conforming loans is almost three-quarters of a percentage point, about three time as wide as normal.It is still not clear whether Congress will agree to the increase in the limits. The California Association of Realtors and others have been lobbying Congress for at least 4 years to raise the loan limits in high-cost areas. Last year, the House passed a similar bill to the one now before Congress, but it never got far in the Senate. The Mortgage Bankers Association (MBA) has declined to endorse higher loan limits. One reason is that some of the MBA's large members make and securitize jumbo loans and don't like the idea of two giants such as Fannie and Freddie entering into their market. Another concern is that investors might get cold feet if Fannie and Freddie started putting jumbo loans into conforming-loan securities. The MBA believes a faster way to add liquidity to the mortgage market would be to let Fannie and Freddie keep more mortgages in their portfolios. Both companies are still operating under the portfolio caps imposed after accounting deficiencies were uncovered. The agency that regulates the companies has said that it is still unwilling to lift these caps for the time being. However, if the mortgage crises does not ease up soon, the MBA says it might reconsider its neutral stance on higher loan limits.

Should congress raise the conforming loan limits to ease the crunch?

Jumbo definition: "The term jumbo mortgage loan refers to any loan that is higher that the maximum dollar amount established in Fannie Mae and Freddie Mac's guidelines. At this time, any loan for a single family property greater than $417,000 is considered a jumbo loan. The limits increase to $533,850 for two-unit properties, $645,300 for triplexes and $801,950 for 4-unit homes. There are also some areas of the Country where the limits are higher including Alaska and Hawaii."

A Distorted View:Existing Home Sales.

Today we received the existing home sales from the National Association of Realtors and I wanted to comment on these a bit. The headline numbers are off 9% from last year and the median price is down only 0.6% nationally. The median is being distorted by sales volumes above the median in each area propping up what would otherwise show falling home prices in these areas. The greatest decimation in the market has been in middle class housing. Homes priced below 500k have seen the largest price declines and volume decreases. Sales at the high end of the market continues to stabilize the median value. The western region has a median home value of $349,400. The median in Los Angeles for example is about $575k. I think median values are pointless as a forecasting tool. What would be the point of knowing the median price of stock on the NYSE? What's the point in knowing the median price of gas nationally? The price of gas in CA is higher than most other markets because of taxes and a lack of refining capacity boosting the price at the pump. The price you pay in your market matters. Real estate is a locally priced good. It doesn't matter if a similar home is $250k in Chicago and $400k Los Angeles. A home is only worth what a buyer in that local market is able to pay vs other comparable properties in that immediate surrounding market. This is largely dependent on available financing. As the financing has become tighter and more expensive because of higher rates across the board the volume has dramatically declined from prior years.

You can't compare the median value in Malibu to Compton. Pointless. Those markets are at the opposite ends of the spectrum. The only value in my opinion in the NAR home sales numbers are volume and the amount of existing inventory. Volume leads price. The amount of available homes for sale allows the potential home buyer to have more choices and bargaining power. This pressures asking prices. Then as properties languish on the market sellers realize they are above the market and often lower their prices or remove their home from the market altogether. The amount of homes on the market locally and nationally leads me to believe that we will continue to see price declines across the country but especially so in bubble markets for years to come. Notice the big drop off in sales around Mar 2007. That's the start of the implosion of subprime lending. The July numbers are barely reflecting the implosion of ALT-A lending that started in mid July and ran throughout August. I believe the August numbers will post an all new low as financing has become much tighter in the last few weeks. Bar chart courtesy of Calculated Risk.