Waiting for the FED to refi? Your loan options might be gone.

If your mortgage is more than 3 years old, it's really likely that your mortgage rate is higher than it needs to be. It may be time to refinance. Don't wait for the FED to drop rates as we often hear from fence sitting clients. As you can clearly see from the chart the FED has little if any influence on mortgage rates.

Relative to any point in time since August 2005, mortgage rates are extremely low. If your mortgage is being professionally managed for you, your loan officer has already called you to start the refinance process. If he hasn't called, it may be time to find a new loan officer. But besides low rates, though, there's another major reason to check in with your loan officer.

In a down market, product innovation stops and the process of contraction begins. Mortgage lenders are constantly eliminating "fringe" mortgage products .

Now, "fringe" is a non-specific word because its definition changes constantly. What was "fringe" in 2005, for example, is somewhere in the nightmares and the enormous losses of the banks. This is why a home loan that gets approved today is not promised to be approved tomorrow.

And today's low mortgage rates don't mean a thing if you can't get a mortgage that uses them.

The Mortgage Fringe List is growing along with the number of mortgage defaults nationwide. More defaults = bigger list and as of January 2008, the list includes:

1.Mortgages that don't verify income and/or assets

2.Jumbo mortgages where the applicant's credit scores is below 660

3.Special mortgage products for low-income or first-time home buyer programs, including HomePossible and MyCommunity programs

4.Mortgages on investment properties with less than 20% equity in the home

This is a very different-looking list from the one of Summer 2007 which included home equity lines of credit to 100% and 90% investment property mortgages. These loans have since been discontinued and cast away by investors.


And, like those that inhabited the list before them, the mortgage products on today's Fringe List are very near to the same fate.

This is terrible news for a lot of people including:

1.Homeowners with adjusting ARMs, especially jumbo loans.

2.Home buyers with a 6-9 month time frame

3.Home sellers in declining markets

4.Homeowners in condominiums

5.Homeowners with "life changes" requiring mortgage planning

By Spring 2008, mortgage investors will have already added more restrictions on what they will lend and to whom. Some of the members of the Fringe List will be discontinued; many more will be added to it. Today's fringe borrower is tomorrow's mortgage market casualty so the best time to get a move on is now. If for no other reason that to hear about your options.

Left alone, homeowners will ignore their mortgage. It's the Law of Inertia. Unfortunately, that can have devasting results in a down-turning economy. By the time the homeowner recognizes a need for a new mortgage plan, many will discover the unpleasant truth that mortgage markets no longer serve them.
Mortgage rates are low and it's a terrific reason to check in with your loan officer. While you're on the phone, ask if you're "fringe" and -- if it makes sense -- take steps to protect yourself.

What will happen to jumbo loan rates in 08?

Broadly, jumbo loan mortgage rates fell in 2007. It's befuddling because there are two major reasons why mortgage rates should have increased in 2007:
The U.S. dollar took a precipitous decline against world currencies, devaluing mortgage bonds
Inflation ran beyond the top of the Fed's comfort zone for most of the year, devaluing mortgage bonds
When mortgage bonds get devalued, there should be less demand for them. But that wasn't the case. If mortgage rates are lower now than they were a year ago, it means that demand for mortgage bonds must be higher.

There is an inverse relationship between the demand for mortgage bonds and mortgage rates. As demand increases, mortgage rates fall. As demand wanes, mortgage rates increase.
So, in 2007, mortgage rates fell because global investors' desire to hold U.S. mortgage bonds outweighed their desire to sell them -- despite the constant drag against their value.
We can hypothesize that mortgage rates would have fallen much, much more had the dollar been stronger, or inflationary pressures been weaker.
One way to envision this is to think of a runner with a parachute apparatus attached to his back.
The athlete is moving forward but the parachute is adding a tremendous amount of drag. Once the parachute detaches, the athlete picks up a lot of speed.
In this sense, a stronger dollar or weaker inflation could dramatically drop mortgage rates in 2008. It would be like cutting the parachute loose and letting mortgage markets run at full-speed.
The U.S. dollar is another hot spot. A weaker dollar should discourage foreign investment in mortgage bonds. In this sense, the U.S. dollar represents the parachute and the weaker it gets, the larger the canopy.

The "Recession versus Inflation" should be a hot topic through June 2008.
With every sign that recession is winning, expect mortgage rates to fall. When inflation grabs the lead, expect mortgage rates to rise. And watch out for world events that can change the landscape in an instant.

ARMs, I have one. How do they work?

Possibly one of the most popular, yet misunderstood forms of alternate financing is the adjustable-rate mortgage. Usually referred to as an ARM, its popularity with borrowers is due to a lower interest rate than a fixed-rate jumbo loan. It is popular with the lenders because the ARM shifts the risk of interest rate fluctuations to the borrower.
Although borrowers would rather have the security of a fixed-rate loan provided the rate is not too high, the ARM has maintained its popularity in the market despite competitively priced mortgage loan rates.

An ARM is a loan that allows the lender to adjust the interest rate so it reflects fluctuations in the cost of money more accurately. However, with an ARM, the borrower is the one who is affected by interest rate movements, not the lender. If interest rates rise, the borrowers payments also go up - if the rates fall, the borrowers monthly payments will drop along with the declining rates.


HOW AN ARM WORKS
The borrower’s interest rate is determined by the cost of money at the time the loan is made. Then the rate is tied to a recognized index your lender is currently using for this loan. Your future interest adjustments are then based on the upward or downward movements of this index. An index is a reliable statistical report that reflects the approximate change in the cost of money. Some examples of this would be the monthly average yield on three year treasury securities, or the national average mortgage contract rate for purchases on previously occupied homes. The rise and fall of your payments will fluctuate with the index preferred by the lender for this loan program when your loan was made.
To insure that the expenses of administration and profit are included in the payments to the lender, it is necessary for the lender to add a margin to the index. Different lenders use different margins which explains the variation in interest rates offered for the same loan program. Margins range from 2% to 4% and are added to the index to come up with the interest rate you pay (margin + index = interest rate). It’s the fluctuation of the index rate that causes the borrowers interest rate to increase or decrease.


ELEMENTS OF AN ARM
INDEX:
Lenders generally use an index that will be responsive to fluctuations in our economy - usually a Treasury security or the LIBOR index. The treasury index and the LIBOR index generally move together, but opportunities go come about to lock in a better rate on one index.

MARGIN:
The margin is the difference between the index rate and the interest charged to the borrower. The margin doesn’t change throughout the loan term.

“TEASER RATES”
A “teaser rate” is a reduced, first-year introductory interest rate designed to attract borrowers to ARM’s. In the past, lenders were losing money on fixed-rate mortgages because these loans were yielding less than the prevailing cost of money. Offering the adjustable-rate mortgage allowed lenders to insulate themselves from these losses and increase earnings by passing the risk of interest rate fluctuations on to the borrower. To make the ARM attractive to borrowers, a low beginning interest rate was offered and through time these introductory rates became known as “teaser rates”. The interest rate would then rise at each rate adjustment period until the rate equaled the index rate + the margin. For example, let’s say that the introductory rate (”teaser rate”) for your adjustable-rate loan started at 4.5% interest and would adjust upward 1.0% every six months. If your index for this loan was 5.0% and the lenders margin was 3.0%, then the interest on your loan for the first six months would be 4.5%. Six months later, it would increase to 5.5% and so on until the fully-indexed rate was reached. To find the fully-indexed rate, you would add the index to the margin (5.0% + 3.0%). After the fully-indexed rate was reached, your loan would then fluctuate with the index on your loan. If the index goes up or down, your payment would increase or decrease with the rise or fall of the index on your adjustment period change date.


RATE ADJUSTMENT PERIOD:
The borrowers interest rates on an adjustable-rate mortgage are allowed to be adjusted at certain intervals during the loan term. Depending on the type of adjustable loan you have, this interval could be six months, one year, three years or more.


INTEREST RATE CAP:
There are limits on just how much your payments can go up if you have an ARM. Usually these caps are in the form of interest rate caps and/or payment caps. An interest rate cap determines the maximum number of percentage points your interest can increase over the life of the loan.


MORTGAGE PAYMENT ADJUSTMENT PERIOD:
The mortgage payment adjustment period is the agreed upon intervals at which the payments of principal and interest are changed. The lender can either adjust the rate periodically and adjust the mortgage payment to reflect the change, or the lender can adjust the rate more frequently than the mortgage payment is adjusted. For example, the loan agreement may call for the interest to be adjusted every six months, but the payment to be adjusted every three years. This scenario could be a problem. If in the interim between payment periods (3 years), interest rates have gone up or down too much, there will have been too much or too little interest paid on the loan by the borrower over that period of time, and the difference will be added to or subtracted from the loan balance. When unpaid interest is added to the loan balance, it is called negative amortization.


MORTGAGE PAYMENT CAP:
A mortgage payment cap is the maximum allowable interest rate the lender can charge on your loan regardless of what happens in the market. Depending on your particular loan program, this is a percentage (usually 5% to 7.5% annually) that can be added to your fully indexed rate if the market warrants moving that high. For example, if your fully indexed rate is 8% and your annual cap is 6%, your loans life cap would be 14%.
Mortgage payment caps were designed to limit unrestricted increases by lenders and keep the borrowers payments at a manageable level. Some lenders impose payment caps, some impose interest rate caps and some lenders use both.


NEGATIVE AMORTIZATION CAP:
A negative amortization cap limits the amount of negative amortization that can be reached on a loan. When the cap is reached, the loan is re-amortized to a level sufficient to pay off the loan over the remaining term of the loan. These are also known as pick-a-pay.


CONVERSION OPTION:
A conversion option on an adjustable rate mortgage is called a Convertible ARM. A conversion option gives the borrower the option to convert their adjustable-rate mortgage to a fixed-rate loan. Convertible Arm’s normally have a higher initial interest rate (even the converted fixed rate will usually be higher). You will usually have a time frame in which to convert the loan to a fixed rate. For example, you might have to make your decision to convert the loan sometime after the first year and before the fifth year ends. In most cases, there is also a conversion fee imposed on the borrower (for instance 1% of the total loan amount).
There are many different ARM programs to choose from with many available options. If you are considering an adjustable-rate mortgage, we will be happy to explain your options to you and make sure you have the right program to meet your needs.

LIBOR: London's calling and your rates will be higher.

It's that time of year -- the news media is unleashing a horde of year end/year ahead stories on the public in an attempt to digest recent history and put it into a context that sheds some light on the road ahead. These stories can provide an opportunity to step back and look at the big picture, but they're also a newsroom staple because there's usually a dearth of news over the holdidays.
That's not the case this year, where the forces tearing apart credit markets aren't taking time off for the holidays. Bear Stearns Companies Inc. this week reported its first quarterly loss ever, thanks to $1.9 billion in writedowns on securities tied to subprime loans.
But stocks were up sharply today, in part because consumers weren't afraid to go Christmas shopping in November. While Americans were getting out their credit cards to buy gas and cheap imported goods, countries that have been making a good living exporting oil and manufactured goods to the U.S. have been busy buying stakes in Bear Stearns and other investment banks that are in dire need of capital because of their exposure to bad mortgage loans.

Back in October, Bear Stearns announced that an investment bank controlled by the Chinese government, Citic Securities, was buying a 6 percent stake in the company, with rights to increase its ownership to nearly 10 percent.
Another government-controlled investment fund, China Investment Corp. is putting up $5 billion fro a 10 percent stake in Morgan Stanley, which just reported $9.4 billion in writedowns on investments linked to bad mortgages. Citigroup said in November it would sell the Abu Dhabi Investment Authority a 4.9 percent stake in the company for $7.5 billion.
The Wall Street Journal reports Merrill Lynch is looking to sell a $5 billion stake in the company to Singapore's state-run investment fund, Temasek Holdings Ltd. Singapore has already taken a $10 billion stake in Swiss bank UBS through Singapore Investment Corporation.
All this foreign investment in Western banks is not necessarily a bad thing, by the way, at least if you believe the Financial Times, whose editors say it wouldn't be happening if these banks didn't look like profitable investments. They may also be looking after their own interests and trying to assist the Fed and European Central Bank in preventing a total collapse of credit markets.

Credit markets could be the canary in the coal mine indicator of a U.S. recession in 2008, according to one of the more insightful year-end/year-ahead stories out so far, "Seven economic warning signs" by MarketWatch's Rex Nutting.
"The biggest unknown in the economy right now is the condition of short-term credit markets that big businesses rely on for their immediate funding needs. Some of those markets are functioning well, but others are clogged up," Nutting writes. "Some firms, especially those in the mortgage business, can't sell commercial paper at any price. Other companies can't get funding from banks because banks are hoarding their reserves."

Nutting says to watch what happens to the spread between the London Interbank Overnight Rate(LIBOR) and the 3-month Treasury bill, which used to be comfortable right around 10 basis points but has been more like 75 lately (indicating just how tight credit has become).
"The Federal Reserve and other central banks have been trying to Roto-Rooter the system, flushing it with cash too cheap to pass up," Nutting says. "The Libor rate should show how successful they are."

This is an extremely important matter as almost 90% of the adjustable mortgages are based on either the 6-month or 1Y LIBOR. The majority of adjustables were done when the LIBOR rates were in the 1-2% range. LIBOR as of today is trading around 4.45%. So client's looking at adjustables are finding that it makes more sense to go with a fixed jumbo loan. The fixed mortgage products are more closely tied to the movement of the 10Y US Treasury rate which is hovering around 4.28% today. In general, I advise clients to carefully consider the numerous benefits of using a fixed rate loan structure for their jumbo loans. The new year brings a lot of hope and opportunity for the credit markets to sort out the mess. I expect "money good" clients to have easy access to the jumbo loan structures they need and would expect LIBOR to settle down given the orchestrated action of the major central banks to ease the credit pressures. Have a wonderful holiday shortened week.

Credit Crunch Didn't Kill The Homeownership Dream.

So you heard that loans are harder to get. But, you still want/need to buy a home. Is there any program that you can qualify for a home with little or no down payment?
Lots of them. We may not be talking number of grains of sand on the beach or drops of water in the ocean, but there are more ways to get get into a property with no down payment than most laypersons would believe.

Many loan officers would have you believe that it is a hard loan or that takes something special to get 100 percent financing. It doesn't. In 95 percent plus of all cases, that's just setting you up for three points of origination, setting them up to ask you for referrals, and trying to get you to not shop around. Nor is it a difficult loan to do. As long as you meet the guidelines, 100% financing is routine. Many lenders are begging for these loans, even today. When I wrote the original article, I talked about how in my humble opinion, some of these lax underwriting processes were setting the lenders up for unbelievable losses, but as long as I and my clients are telling the truth and playing by the rules, there was no reason why my clients should not benefit.

The first way to get 100% financing is obviously to have a lender loan you 100%. However, the best way to structure it, in the vast majority all cases, is the 80/20 "piggyback" loan. Unfortunately, right now lenders aren't doing piggybacks above 90% of purchase price. This will likely change when the market is restored to rationality, but we have to live with lender rules, good or bad. He who has the money/power makes the rules, and all that. One rule that I have learned the hard way is never apply for a first and a second from different lenders, even if it looks like the rates will be better applying that way. Even if both wholesalers swear on the name of the big JC, don't do it. You are wasting your time.

If the lender who wants to do the first won't do the second, there is a reason, and the reason is that this person is unlikely to be approved for the second, and the transaction doesn't close until both loans are ready. If I've got the first with the lender, that's leverage that a mortgage banker can use to get them to approve marginal seconds. Not so with lenders who are just doing the second. Not to mention that there is ten times the potential for confusion and several times the work coordinating between lenders.

What do you need in order to get 100% financing, you ask? Well, that's a variable. If you have can prove you make enough money to justify the loan, a credit score of 600 to 620 is still sufficient. The higher the credit score the better the loan, but if you've got a 620 and can prove you make enough money to qualify, the loan can be done. The possibility does not vanish completely until you are below a 580 credit score, although comparatively few lenders will go below 600 for 100 percent financing, and they're all high interest subprimes, competing for loans no one else will do.

If you can't prove you make enough money, some subprime lenders may currently do 100% financing on a stated income basis down to 680 credit score, and maybe down as low as 660. A paper 100% stated income is a thing of the past, and I don't anticipate it returning soon, if ever. Be very careful about overstating your income as you are still going to have to make that payment every month. Stated income loans are a good way to get in serious financial difficulties if you don't understand their limitations. Therefore, despite the ability to inflate your income, I strongly advise against it. Furthermore, as I've said elsewhere, the rates for stated income loans are higher than for full documentation loans, and they become progressively more so the worse the credit score gets. Plus, sub-prime loans aren't as good as A paper in the first place, having higher rates and pre-payment penalties which can only be bought off by accepting much higher rates. Not only is it difficult to get 100% stated income financing, but it will be 1% or more higher than the rate that the person who can prove they can make enough money will get. For all of these reasons, I strongly advise you to stay within a budget where you can prove you make enough money, even (especially!) if it means you have to settle for a lesser property.
Now things like being 30 days late on your rent, and how long of a rental history you have will also influence your ability to get 100% financing, not to mention the rate you will be offered. As with so many other things, take care of your credit and it will take care of you. Make payments of whatever nature, in full and on time. Better yet, don't incur any debts you don't have to. The number one obstacle to being able to afford the loan, and therefore the property, is for most people existing debt.

Suppose your credit is so bad that you do not qualify for 100% financing from any lender? Well, not all hope is lost, although it really does constrain your choices. Most lenders will permit seller carrybacks, so long as they are subordinate to lender financing. So if the lender is willing to give you 90% financing, you can do one of the things that called 80/10/10 financing: 80% first, 10% second, 10% third that is a carryback with the seller. There are a multitude of ways to structure a deal if you know your limitations in advance, but you do have to know them.

Now not every seller is going to be willing or able to carry back money. They are selling the property because they want money, or something that money can buy but the property won't get them. If the seller doesn't have enough equity to cover the costs of selling plus what you're asking to borrow, your offer is probably not going to appeal to that seller. A good buyer's agent will steer you away from properties where the seller doesn't have the equity to work with you. Another thing is that sellers may want you to offer more money in order to accept your offer. Furthermore, they might charge you a really hideous interest rate as an incentive to pay them off ASAP. And they may realize that the reason the lenders won't give you 100% financing is because you are not the best credit risk out there. Given the current buyer's market, some sellers are willing to carry back financing in order to get rid of the property, particularly if the offer is for top dollar. Once the market turns back towards the sellers at all, the ability to do this is likely to vanish. There are many advantages to being willing to shop in a buyer's markets, of which that is only one.

So obviously, you need to know if 100% financing through the lender is possible or likely for someone in your particular situation. You need to know this before you go making any offers to purchase property - and there are types of property where 100% financing is only an option with a seller carryback.

Now, a couple of final points: Just because you can get 100% financing does not mean it's a good idea, or that you should. You get better rates from lenders if you put money down, and writing offers that include having money for a down payment shows a seller that you are serious about buying the property. Other things being equal, I'm going to counsel my sellers that an offer that comes in with even a 5% down payment is a much stronger offer than anything that comes in wanting 100% financing. As a mortgage banker, I've dealt with enough of these that I know the questions to ask to determine if it is likely to work, possible, or ain't gonna happen.

Furthermore, speaking of strong offers: You will need a decent deposit to convince the seller that you're serious about buying the place. Most 100% financing escrows are currently failing, a fact most listing agents are painfully aware of without having any clue as to how to tell if the buyer is qualified. The seller is going to spend a lot of money on the escrow for your attempt to purchase that property, and has to give you sole shot for however long an escrow period you agree to. This means they can't work with other offers while they're working with you, and time is money to a seller. They want to know that if you can't consummate this contract in a timely fashion, they are going to have some compensation for the trouble and expense. Prospective buyers with 100% financing can expect to have to put a larger deposit down. Somebody offers a $500 deposit on a $500,000 property, that's going to be rejected so fast and so thoroughly that your fax machine will spin.

So if you really have no money, even though you can obtain 100% financing, trying to buy a property in this fashion is likely to be a waste of time. Also, 100% financing isn't available for the McMansion market above 417k. A jumbo loan requires a minimum of 5% down. For the buyers in the inflated markets you may have to put some dough away in the old savings account. Cheers and enjoy your holiday festivities.

Sanity returns to mortgage lending.

While each day seems to bring more bad housing-related news, there is still money available at reasonable rates to finance the purchase of a home or refinance the loan on an existing home -- for the right borrowers.

Rather than exiting the market, lenders have simply retooled their guidelines, turning their backs on riskier lending as they actively court qualified buyers. Banks still need to make loans if they want to make money. The key is in the creditworthiness of the borrower. If you can prove income and have good credit, there should be no problem for you. We're just going back to sane underwriting. Prove that you make the money to qualify for the house and pay your bills on time, and you will qualify for the loan.

It's a shift, lenders want to see employed people, pay stubs, they want to see assets in the bank and FICO (Fair Isaac & Co. credit rating) scores of about 650, 660 and up. Over half the population has scores in that range. With jumbo mortgage loans, we have a lot more stated income money coming back to the market, but they have to score generally above 700. For stated mortgage loans, investors want to see reserve assets of at least 6-12 months of the payment to provide a cushion in the event of any financial difficulty.

For qualified first-mortgage borrowers, the loan products available have stayed basically unchanged since the market slowdown started at the beginning of the year. Lenders are still writing adjustable-rate loans of five and seven years, after which rates shift to the prevailing market rates; 30-year mortgages are also being written.
Rates for seven-year jumbo mortgage loans were close to 6% for borrowers with solid credit who put 10% equity into the purchase, provided they could document their income history.

The jumbo is maybe even better than it was -- rates have come down since their summer highes. Banks and other lenders need to lend to somebody, and the subprime collapse took away the taste for risky loans. The availability of both jumbo and conforming loans for qualified buyers reflects a flight to quality. If someone puts 20% down on a $1 million house they have an incentive not to screw up.

FED Matters Little in Housing Meltdown.

Well, you’ve probably heard by now that the Fed lowered rates by .25. So what does that mean? A couple of points to think about:
1. What the Fed lowers is the shortest of the short term rates and it typically helps home equity loans but doesn’t matter much to mortgage rates.
2. Why did they lower rates? Because the financial markets are hurting and they needed to at least appear to help out the economy and the markets. Just this week (and it’s only Tuesday at 5:00) we’ve seen UBS announce $10 BILLION in writedowns (losses) and Washington Mutual announced $1.4 billion in write downs, laid off 3150 people and said, (I’m paraphrasing,) “We expect industry-wide volume in 2008 to be off 40% from 2006.” Both banks sought additional investments to shore up the balance sheets this weekend. UBS went to the Singapore Sovereign Wealth fund and an middle eastern investor for 10 billion and WAMU did a preferred stock offering at 2.5 billion. That shows you the degree of financial stress the world's largest banks are facing.
3. Will what the Fed did today help matters at all? I think the best way to describe it is sort of like putting a Mickey Mouse band-aid on a 6 inch gash in your arm. It doesn’t hurt, but it really doesn’t do much. The business world will benefit from cheaper borrowings (since prime is dropping) but the big problem in the economy (housing) won’t really be impacted.
4. Did the market like what it got, ahh, that would be a resounding no. Sort of like a little kid crying to his Mama, the Dow dropped almost 300 points in less than 2 hours.
Have you ever tried to push a string across the table? It’s hard to get it to move unless you are pulling it, isn’t it. Well, that’s sort of what The Fed is doing. They are using the tools that they have to try to save the market, but the tools that they have aren’t what the market needs, so they aren’t able to be very effective.

Mortgage Bailout Cost Will Hit Everyone

Yesterday, Mrs. Clinton wrote the Secretary of the Treasury about her bailout plan. This whole idea of freezing mortgage rates and foreclosure bailouts is bad medicine with unbelievable side effects. The equivalent to taking a drug to treat your fever but it gives you cancer a year later. We need to let free markets work. Flush out the people who can't afford their homes and took out loans that they could never pay. Otherwise, the housing crisis that is now a credit meltdown will last much longer.

Who would want to lend money to homeowners or other borrowers for that matter knowing that the government stepped in and altered the terms of millions of mortgages during the meltdown? Borrowers with less than perfect credit were given rates and terms much better than they otherwise would have received because the investors/banks were counting on the reset to make up for a teaser rate that didn't compensate for the credit risk of a non-prime borrower or high loan to value mortgage. Without the teaser rates borrowers would likely have had rates of 8-11%. That is what we see now at the remaining lenders that work in the non-prime market. If the bailout proponents win, we will see credit costs increase and credit availability dramatically decline. Someone pays, it will be the tax payer and anyone who borrowers will see increased requirements and higher rates. This has already happened with subprime rates, stated loans, and down payment requirements. I agree things were way out of hand but a bailout will only make the patient much worse off in the long run. Let the fever run its course. Terrible ideas found below:

December 3, 2007
The Honorable Henry M. Paulson, Jr.

Secretary

United States Department of the Treasury

1500 Pennsylvania Avenue,

N.W.Washington, D.C. 20220

Dear Mr. Secretary:
I am encouraged by news accounts that Treasury officials are negotiating an agreement with the mortgage industry to curb the foreclosure crisis. Reports of this agreement indicate that it will allow homeowners to apply to quickly refinance their mortgages or temporarily stop their adjustable rate mortgages from resetting at higher levels.
An effort to end the foreclosure crisis is long overdue. 1.8 million foreclosure notices have been sent out this year, an increase of 74% from last year. And with the monthly payments set to rise on more than 1 million subprime loans next year, the situation is likely to worsen. Experts now say that the foreclosure crisis is weakening the economic outlook, hurting industries from construction to autos, and making banks reluctant to lend companies the capital they need to expand and create jobs. Cities face the prospect of vacant properties marring neighborhoods, cutting tax receipts, and dragging down property values.
It is critical that we address this crisis. The Administration and the mortgage industry must reach an agreement that matches the scale of the problem. If you produce an inadequate agreement, or fail outright, the cost to our economy will be incalculable. A satisfactory agreement must do at least the following: impose a moratorium on foreclosures, freeze mortgage rates before they escalate, and require that the mortgage industry report its progress on loan modifications:
Impose a foreclosure moratorium of at least 90 days on subprime, owner-occupied homes. The moratorium will stop foreclosures until lenders and servicers have an opportunity to implement the freeze in mortgage rates. Servicers have complained that they do not have the systems in place to quickly contact the large numbers of at-risk borrowers. Servicers can certainly expect that during the moratorium at-risk borrowers will contact them. The moratorium will also give state and city organizations as well as community groups the necessary time to provide financial counseling to at-risk homeowners. The moratorium only applies to owner-occupied houses, and therefore excludes real estate speculators.
Freeze the monthly rate on subprime adjustable rate mortgages, with the freeze lasting at least 5 years or until the mortgages have been converted into affordable, fixed-rate loans. After the moratorium, there should be a long freeze in rates on adjustable rate mortgages. The overwhelming majority of subprime mortgages have adjustable rates. The long rate-freeze will give the housing market time to stabilize. It will give families an opportunity to rebuild equity in their homes. It also gives the mortgage industry time, and incentive, to convert mortgages that were designed to fail into loans that are actually affordable. The rate freeze and loan modification must be extended not only to borrowers who are current but to some who have fallen behind. After all, it is indisputable that brokers and mortgage companies lured families into mortgages which were designed to end in foreclosure. This was only possible because regulators were asleep at the switch. A rate freeze is critical. An average of $30 billion in loans will reset monthly next year. One study indicates that the average reset increases monthly payments by 40%. It is no surprise that rate resets are the major driver of the foreclosure crisis. The rate freeze and loan modification would only apply to owner-occupied houses.
Require the mortgage industry to provide status reports on the number of mortgages it has modified. Resolution of the foreclosure crisis will require that large numbers of unworkable mortgages be converted to more stable loans. To date, however, despite pressure from Congress and the press, lenders and servicers have modified only about 1% of subprime mortgages. This obviously has to change. We cannot take the industry at its words that it will follow through on an agreement to convert loans expeditiously. Accordingly, the agreement must impose on lenders and servicers an obligation to regularly report their modifications.
Mr. Secretary, if you produce an agreement that lacks these provisions, I will pursue another course to end the crisis:
I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy.
I also propose to provide financial assistance to communities on the frontlines of the crisis:
A fund of up to $5 billion to help hard-hit communities and distressed homeowners weather the foreclosure crisis. The fund will support initiatives by states, cities, and community groups to reduce foreclosures, and to help cities cope with the financial and social costs associated with an increase in vacant properties. The fund will provide a much-needed boost to communities already feeling the effects of the economic downturn. States are already piloting programs to stem foreclosures. Many of the programs provide financial counseling to at-risk homeowners, help borrowers work out solutions with lenders and educate homeowners about predatory lending. Studies demonstrate that the overwhelming majority of families that receive financial counseling ultimately avoid foreclosures. Financial counseling can cost as little as $3,000 per household, while each foreclosure costs a local community $227,000 when the harm to surrounding property values is included. Foreclosure prevention is more critical than ever. The concentration of foreclosures in particular neighborhoods has a negative ripple effect on communities. It leads to higher rates of crime, lower tax revenues, and lower property values. Low-income communities are especially at risk. Risky subprime loans are three times more likely in low-income neighborhoods than in high-income ones. Minority communities are also disproportionately at risk because subprime loans are five times more likely in predominantly black neighborhoods than in predominantly white neighborhoods. The Center for Responsible Lending estimates that 55% of African-Americans and 46% of Latinos who purchased homes in 2005 received subprime mortgages. Those loans were mostly adjustable rate mortgages, and most of them will experience escalations in the monthly payments either this year or next. The foreclosure crisis threatens to undo the gains in minority homeownership rates. Lawsuits have been filed against mortgage lenders alleging discriminatory practices. Regulators should be especially attentive to these concerns.
In March I called on the mortgage industry to observe a “foreclosure timeout” so that lenders and borrowers could work out solutions. I also wrote to Federal Reserve Chairman Ben Bernanke urging him to act swiftly to curb abusive and irresponsible lending practices. Just two weeks later, however, you told Congress that the subprime problem was “contained.” Unfortunately it was not. While you and others in the Administration misdiagnosed the problem, over 1 million additional foreclosure notices were sent out. Later, I called on the Administration to convene a “crisis conference” that gathered the housing stakeholders–lenders, investors, mortgage servicers, regulators, representatives of homeowners, and others–to devise a way of modifying the large number of unworkable mortgages. I am glad that the Administration has at least heeded this call.
Now that you have gathered the housing stakeholders, it is imperative that you negotiate an agreement appropriate to the scale of the problem. The proposals I have outlined provide the framework for a comprehensive workout, not a bailout. This is a moment of shared responsibility. Investors, lenders, and homeowners all have a part to play and sacrifices to make. While we work to solve the immediate problem, I call on the Administration, the regulators, and the mortgage industry to ensure that the abuses of recent years never recur. There must be a commitment to tightening underwriting standards and disclosure obligations. Federal prohibitions against abusive lending must be vigorously enforced. Prepayment penalties must be eliminated. Brokers must be subject to federal registration. Mortgage servicing fraud and foreclosure rescue fraud must be prosecuted. Homeowners and homebuyers must have greater access to financial counseling. I have already announced proposals to accomplish many of these things. It is unfortunate that the Administration has been so slow to act. But now that you and others are engaged, I urge you to make the bold decisions that the situation warrants. Thank you for your attention to this critical issue.
Sincerely,

Hillary Rodham Clinton

Home Prices Show Record Decline

In Sept S&P/Case-Shiller Home Price Index fell 4.9% y/o/y, the biggest drop since the data began in 1988 -- but in-line with expectations. It's the 9th straight month of declines. Lower house prices will help to clear out excess inventories (a lot much more than rate cuts).
Here's the money quote from Shiller:
"The declines in the national figure are notable for two reasons. First, the 3rd quarter decline, at 1.7%, was the largest quarterly decline in the index’s 21-year history. And, second, the year-over-year decline posted its second consecutive record low at -4.5%. Consistent with prior 2007 reports, there is no real positive news in today’s data. Most of the metro areas continue to show declining or decelerating returns returns on both an annual and monthly basis.
All 20 metro areas were in decline in September over August. Even the five metro areas that still have positive annual growth rates -- Atlanta, Charlotte, Dallas, Portland and Seattle -- show continued deceleration in returns."
Here's the metro overview:
S&P/Case-Shiller Index Release - September 2007 Index

A FED rate cut won't help this slow process of adjusting prices to economic reality. Banks continue to tighten guidelines and the major mortgage insurance companies AIG, GE are pulling out of providing lenders protection from default on anyone with less than a 620 FICO. Mortgage rates and especially jumbo mortgage rates for prime borrowers are at the best levels in years. These items and the belief by the public at large that prices were irrational will pressure the real estate market for severals years. As an example of the moves that have occured so far. This is from our friends at Sacramento Area Flippers in Trouble

8112 Sacramento StFair Oaks, CA 95628
Total Loss: $390,000
Percent Loss: 33.1%
Asking Price: $789,000Bedrooms:4 Baths: 3 Sq. feet:3501
Listing History:Down 36.9% from $1,250,000 On 2006-04-09Down 34.2% from $1,199,000 On 2006-06-16Down 33.1% from $1,179,000 On 2006-07-15Down 28.2% from $1,099,000 On 2006-09-16Down 33.1% from $1,179,000 On 2006-09-30Down 49.1% from $1,549,000 On 2007-07-14Down 34.2% from $1,200,000 On 2007-08-18Down 1.3% from $799,000 On 2007-10-20Days on market: 594# of Times Listed: 6

11836 Delavan CirRancho Cordova, CA 95742
Total Loss: $323,500
Percent Loss: 32.3%
Asking Price: $679,000Bedrooms:6 Baths: 4 Sq. feet:5600
Listing History:Down 38.3% from $1,100,000 On 2006-09-16Days on market: 434# of Times Listed: 3

6030 Eagles Nest RdSacramento, CA 95830
Total Loss: $300,000
Percent Loss: 33.3%
Asking Price: $600,000Bedrooms:3 Baths: 3 Sq. feet:3039
Listing History:Down 33.3% from $899,000 On 2006-05-25Days on market: 569# of Times Listed: 3

6415 Valenda CtElk Grove, CA 95757
Total Loss: $294,500
Percent Loss: 42.5%
Asking Price: $399,000Bedrooms:5 Baths: 3 Sq. feet:2954
Listing History:Down 27.5% from $550,000 On 2007-06-16Days on market: 161# of Times Listed: 2

11999 Mandolin WayRancho Cordova, CA 95742
Total Loss: $288,000
Percent Loss: 43.2%
Asking Price: $379,000Bedrooms:3 Baths: 3 Sq. feet:2885
Listing History:Down 20.2% from $475,000 On 2007-08-04Down 17.4% from $459,000 On 2007-09-08Down 11.7% from $429,000 On 2007-09-29Days on market: 112# of Times Listed: 3

If a peak at Sacramento, CA wasn't enough look over at Phoenix Flippers in Trouble. When will the bleeding stop? 08, 2011? Make a comment while it's still FREE of charge.

Countrywide:Sorry you can't afford it.

Obviously, you are well aware of the credit crunch and the impact it has had thus far on the once roaring real estate markets. I say it's just the tip of the iceberg. Over half the loans in CA in 2006 were NEGAM or interest only. That is a small window into the loans that pushed the bubble further and will lead to a larger, more protracted collapse than anyone anticipates. Those days seem like ancient times in the mortgage world. Countrywide announced this today:

As you may be aware, federal regulatory agencies have issued joint guidance which impacts the qualifying methodology for non-traditional mortgage products. This guidance was designed to better address risks associated with non-traditional mortgage products that offer interest-only and/or negative amortization payment features and to better support the needs of those borrowers who might not understand these types of risks. In an effort to further align our lending strategy with this guidance, effective Monday, November 19, 2007 Countrywide®, America's Wholesale Lender® began calculating borrower repayment capacity for non-traditional mortgage products using the following three criteria:

The greater of the Note Rate or the Fully Indexed Rate
A full amortizing payment
A loan amount which includes the total potential negative amortization
The resulting qualifying payment amount will be used to calculate both the Housing and the Debt-to-Income (DTI) Ratios for the loan transaction. The qualifying loan amount including the total potential negative amortization is determined as follows:
New York - 110% of the original loan amount
All other states - 115% of the original loan amount Please note, for ARM loans with MTA or COFI indices, the qualifying interest rate will be calculated using the fully indexed rate (index + margin) plus an "adjuster." The adjuster is a variable which will be used to annualize the MTA or COFI indices due to the "lagging" nature of these two indices.

The bottom line is that a borrower has to qualify at the highest possible payment the loan could have in the future. During the boom everyone underwrote to the minimum payment, either the interest only or the lower NEGAM payment. Otherwise very few of these loans would have been approved. That's how you had someone making $100k buying a 800k house. The normal historic lending ratio is to have a loan balance that doesn't exceed 4x your gross annual income.

The exotic loans that were everywhere and are now like neutron bombs, destroying the borrower but leaving the home standing are no longer available. Countrywide's action is not the first major lender to dramatically tighten lending guidelines. But, I highlight their action because they originated about 20% of all mortgage loans year to date. The removal of leverage has been very rapid. The decline of real estate in the hot markets has just begun. I am an optimist by nature but I believe we are in a recession now and we likely will be in a deep recession until 2010. The FED can't cut rates to bail anybody out because the dollar will collapse even further. Creating a whole series of global problems. It's time for belt tightening for the American consumer. Don't let this spoil your Thanksgiving. Be thankful for what matters most in life. Pray that we buckle down and fight our way back to becoming the shinning beacon of hope on the hill that world expects and we deserve to be.

Recession and possible depression. Can I get some prozac with that?

Finally the "recession" talk is making headlines. The only thing right now that drives me wild is that there is still a discussion that the US will face a recession.... If the US would use a more "realistic" formula I assume that the recession is already here.... The clearest sign might be that Starbucks reported the first decline ever in customer visits. Hmm, five dollar coffee is a necessity right? Watch for 7-11 to pick up all the old Starbucks customers who downgrade. The good old substitution effect. Take a look at the warnings we have seen from Coach, Kohl's, JC Penny, etc. They are all reporting sharp drop offs in traffic YOY. Walmart is reporting various signs of consumer downgrading as well. But Ferrari is sold out for the year. So at least the rich are still doing well. I know you were worried for a minute that we were in serious trouble.


IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort Recession in America / America's vulnerable economy

Also in case you think BusinessWeek and The Economist forgot to take their anti-depressants I would encourage you to think about what the CEO of the one largest banks in the US said today:

Wells Fargo CEO John Stumpf dropped the "D" word today: "We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a banking conference in New York. Stumpf said the second-largest U.S. mortgage lender and fifth-largest U.S. bank was "not immune" from the storm, but was well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008. Are we in a recession? Post your thoughts or anecdotal evidence. Free speech still works here.

Fired: Heads roll as Mortgage Bets Collapse.

This has been a dramatic week on Wall St. We have seen multi-billion dollar losses disclosed from almost all global banks. CEO's at Citigroup and Merrill Lynch have been sacked because of mortgage losses and unacceptable risk management. The shoe dropped when the $100 billion dollar M-LEC super conduit that CITI and other banks were working to setup with the US Treasury dept stalled. I wonder why. Heard in the back alley of Wall St,"Psss, hey I have a box here of mortgage paper that we modeled to be worth $20 billion. Would you loan us money against it? We are a little low on liquid cash because we are investing so much in these great mortgages. Oh no, you can't look inside, but trust us we have more PhDs calculating the value of these holdings than any other bank. We are CITI after all." The idea was to package all the junk mortgage paper in a massive pool and have other banks buy the paper. The problem continues to be that everyone is valuing the paper according to some rocket science model not what the market price is. Granted their isn't a real market for subprime or ALT-A, aka scratch and dent mortgage paper. To get an idea how bad it is inside the belly of mortage lending, here is a chart of 2007 Prime HELOC loans. These are perfect credit borrowers. Known as the ABX-HE-AAA. What this means is that the average current value of these loans is .70 on the dollar. This is largely because of an illiquid market, foreclosures, defaults and the great unknown of how these loans will perform in years to come. In the foreclosure wave sweeping the nation HELOCs are completely wiped out. Total loss. So the market believes right now that a third of the money lent will never be paid back or recovered in foreclosure. Gee, no wonder it is very difficult to find a HELOC to turn on the household ATM above 80% loan to value.
Credit will continue to get tighter until the losses stop. It could be years of bank confessions as the unwind occurs and the bubble deflates. I would expect to see residential real estate to fall in the bubble markets through 2011 because of all the resetting paper. The foreclosures that are on the market now are people who stopped paying in Feb/Mar, well before the credit freeze, high gas prices, and the fall of real estate price declines really gathered momentum. It's called creative destruction. The weak hands give up assets to the strong buyers. Houses in bubble areas continue to get more affordable for people running the make sense economic calculations. The buyers that are circulating now at open houses are putting 15-20% down payments, getting fixed rates and fully documenting income. Sure prices might drop but they are in it for the long haul and they can easily make the payment on their $500k home that some fool bought for $700k in 2005. This decade won't soon be forgotten for it's massive excess and dramatic belt tightening following the bubble.