Marc's Mortgage Matter's

The historical cure for most recessions is a reduction in interest rates (standard monetary policy) and fiscal expansion. The problem with the current recession is that its primary cause is the credit crunch. Whoever was in the working world in the 1980’s remembers the S&L crisis, the resolution of which cost us $40 billion, which was only about 2% of GDP at the time. This time around, the impact is being felt in every aspect of the economy, from state budgets like California’s, the shuttering of investment banks like Lehman Brothers, the consumer who needs a new car but can’t get credit to buy one. The only good thing is that I am receiving fewer offers of credit cards in the mail!

The other day we were playing Monopoly. Of course someone inevitably landed on Park Place, which happened to have three houses on it, and he promptly declared bankruptcy, but then wanted to keep playing. It reminded me that "declaring bankruptcy" doesn't seem to have quite the finality that it once did. This year many well-known companies have done it, but still seem to be around. Individuals were sent (in the US until the 1830's; England until 1869) to debtor's prison, or at least threatened with being sent to a damp, dark, place with rats in it. In the United States, laws have always favored debtors versus creditors. But in 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act made it harder to declare bankruptcy, and prior to it taking affect there was a spike in filings that hit over 2 million! In 2008 there were about 1 million filings, which mean that in the US one in three hundred people declared bankruptcy.

But a bankruptcy is still, for the most part, considered a last-ditch option for dealing with overwhelming debt. Most of your assets go away, and your credit rating takes a fall (a bankruptcy for ten years, whereas a foreclosure remains on it for seven). Most homeowners will avoid a Chapter 7 bankruptcy and instead file for Chapter 13 if they want to avoid a foreclosure. A Chapter 7 filing can wipe out unsecured debts, but secured debts are tied to a specific asset, such as a mortgage secured by a home and which reverts to the creditor. A Chapter 13 bankruptcy doesn't actually wipe out the debt but can shield debtors from their creditors for several months during the forbearance period until a court-ordered repayment schedule can be worked out. During this time most homeowners try to work out a loan modification program. If you do need to go down these roads, do speak to a trusted attorney or financial advisor first.

With economic news sporting a warmer glow for the past couple of months, Federal Reserve Chairman Ben Bernanke boldly claimed that the "recession is very likely over." It's not unreasonable to assume that many people would respond with the query "So when does the recovery start?"

There is little doubt that the numbers, facts, and figures which define and describe the nation's output have taken a decidedly firmer tone as Summer progressed and that the Gross Domestic Product readings will likely turn positive before long. However, there is plenty of doubt that this new firmness will grow into a full-fledged growth pattern soon -- or without significant ongoing government support.

A store that sells new husbands called The Husband Store has opened in New York City, where a woman may go to choose a husband. Among the instructions at the entrance is a description of how the store operates: "You may visit this store ONLY ONCE! There are six floors and the value of the products increase as the shopper ascends the flights. The shopper may choose any item from a particular floor, or may choose to go up to the next floor, but you cannot go back down except to exit the building!"
So, a woman goes to the Husband Store to find a husband. On the first floor the sign on the door reads: “Floor 1 - These men Have Jobs”.
She is intrigued, but continues to the second floor, where the sign reads: “Floor 2 - These men Have Jobs and Love Kids”.
“That's nice,” she thinks, “but I want more.” So she continues upward. The third floor sign reads: “Floor 3 - These men Have Jobs, Love Kids, and are Extremely Good Looking”.
“Wow,” she thinks, but feels compelled to keep going. She goes to the fourth floor and the sign reads: “Floor 4 - These men Have Jobs, Love Kids, are Drop-dead Good Looking and Help With Housework”.
“Oh, mercy me!” she exclaims, “I can hardly stand it!”
Still, she goes to the fifth floor and the sign reads: “Floor 5 - These men Have Jobs, Love Kids, are Drop-dead Gorgeous, Help with Housework, and Have a Strong Romantic Streak.”
She is so tempted to stay, but she goes to the sixth floor, where the sign reads: “Floor 6 - You are visitor 31,456,012 to this floor. There are no men on this floor. This floor exists solely as proof that women are impossible to please. Thank you for shopping at the Husband Store.”

In the 1990’s it was hard to lose money in the stock market. “Don’t confuse brains with a bull market” was a popular slogan, and in fact was printed on a shirt that we wore on the trading desk at Tuttle & Co. Late in the decade, however, stocks did not look so great. When stocks were running out of steam, and in 2000 when the equity market really fell, people looked around and said, “Hey, how about we invest in real estate? Accounting scandals, like Enron, couldn’t happen in real estate, right?” Suddenly, instead of homes, more and more people began viewing real estate as a way to make a quick buck: “flipping”, “no money down”, etc. gained in popularity. The US government cut taxes, and the Fed cut the discount rate from 6% to less than 1% by late 2002. And although this was not the only cause of some of the mess that we’re find ourselves in, it is a contributing factor.

States have taken the lead in adopting laws to protect consumers from some of the problem loans that helped trigger the home foreclosure crisis, but the federal government is now stepping up its efforts.

On Oct. 1, new rules adopted by the Federal Reserve will go into effect, requiring greater diligence on the part of mortgage lenders and brokers who make so-called high cost loans for borrowers with weak credit. The interest rates on these loans are at least 1.5 percentage points higher than the average prime mortgage rate.

Some consumer advocates applaud the new rules but say they come too late to help many borrowers. Mortgage executives, meanwhile, have expressed concern that the changes could further dry up the mortgage market.

The regulations — finalized in July 2008 but only now being put into effect — bar lenders from making a high-cost mortgage without verifying that a borrower could repay the loan in the conventional way, and not simply through a foreclosure sale.

During the home lending boom from 2003 to 2006, subprime lenders would often offer loans without requiring borrowers to prove that they could make the monthly payments. With stated-income loans — or as some called them, “liar loans” — borrowers could easily fabricate annual income figures and even buy a home without a down payment.

Those lies represented mortgage fraud, but brokers and lenders often overlooked them — and in some cases even encouraged lying — in the interest of generating loan fees.

The new regulations represent one of the most substantial efforts on the part of the federal government to combat such lending practices, at least in the realm of subprime loans.

In recent years, states like New York and Connecticut have enacted legislation that requires greater underwriting diligence from lenders who make subprime loans.

But those laws applied only to state-chartered institutions, like community savings banks, and not the federally chartered banking institutions, like JPMorgan Chase and Wells Fargo, that dominate the mortgage industry.

According to Uriah King, a senior policy associate for the Center for Responsible Lending, a consumer advocacy group based in Durham, N.C., the new federal rules are “important, and they are good.”

But Mr. King says the new regulations are “five years too late.” Had they been in place earlier in the decade, he said, they would have prevented some of the damage done in the foreclosure crisis.

Lenders continued to make stated-income loans into 2007, but by that time, the volume of these loans had tailed off sharply.

Since then, borrowers who cannot fully document their income — like restaurant waiters or others who take cash payments — have largely been turned away by lenders.

Mr. King said another shortcoming in the new regulations is that they do not cover option ARMs, adjustable-rate mortgages on which borrowers can choose from several monthly payments options during the loan’s early years. (Borrowers often chose the minimum-payment option, which usually didn’t even cover the loan’s monthly interest charge.)

JIM PAIR, the president of the National Association of Mortgage Brokers, which is based in McLean, Va., says he is pleased that the new rules do not enact a “suitability standard,” whereby loan officers are legally responsible for offering loans that best suit the borrower’s circumstances.

But Mr. Pair said he was concerned that the rules would greatly curtail loan alternatives, especially for those who might qualify only for subprime mortgages.

“We’re going to have some consumers who are not able to purchase a home because of this, since most lenders don’t want to do high-cost loans,” he said. “There’s too much potential liability for them.”

If your stock portfolio is going up in value, do you save less? Probably. People generally feel wealthier when their stocks are rising, or their house is appreciating: they will spend more and save less. When the reverse happens, they spend less and save more, which is exactly what is happening now, or at least has been until recently. And it happens to companies: when the stock market drops in value, companies decrease their spending on plants and equipment. When the value of homes declines, builders slow down or stop building new homes. In general, people become less confident, and the economy slows. We’re all so…predictable.

Why do people constantly return to the refrigerator with hopes that something new to eat will have materialized? Is that like economists and analysts continuing to go back to the news about the economy hoping something is better? Yesterday’s Beige Book, which summaries the economic activity in the 12 Fed regions here in the US, indicates that economic activity is either stabilizing or improving in most regions. Of course, consumers have to have confidence and start spending money to help push it along – most folks that I know seem more inclined to save their money than to go out and buy a car or a new TV. All but one region (St. Louis) indicated economic activity either was "stable," showed "signs of stabilization" or had "firmed," according to the Fed's survey.

Mortgage rates barely moved in this past holiday-shortened week. The quiet end of the Summer of 2009 contrasts sharply this time a year ago when Lehman Bros, Fannie Mae, and Freddie Mac all succumbed to the financial market maelstrom in quick succession. Thankfully, we're winding our way out of that mess, rather than still pressing deeper into the murk. The slog to fully extricate the economy will persist for some time yet, but prospects for recovery are gradually improving as we go.

Relative to last year, mortgage rates are considerably more favorable, at least for conforming 30-year fixed. This week a year ago we stood at a national average 6.25%, almost a full percentage point above today's levels.
The overall average rate for 30-year fixed-rate mortgages tracked by HSH's Fixed-Rate Mortgage Indicator (FRMI) was at 5.54%.

We'd also like to take a moment to remember the thousands of innocent souls who lost their lives in terrorist attacks on Sept. 11, eight years ago. Much has changed in the world since they've gone, but too few of the battles and struggles which were sparked on that day have reached resolution. We pledge to remember and persevere.

Maybe the world will be a happier place if we all share the same currency. We have the UN calling for a global currency to replace the dollar, which is obviously easier said than done. But watch for more news on that as time passes. One person wrote to me saying, “Have you lost your mind? I could talk for days on the cons associated with a unified currency. And the UN? The UN couldn't break up a food fight at a Cub Scout jamboree, and we're supposed to base our international policy on their whims?” How true!

You know you're trailer trash if…
You consider your license plate personalized because your father made it.
You wonder how service stations keep their rest-rooms so clean.
You come back from the dump with more than you took.
You keep a can of Raid on the kitchen table.
Your wife can climb a tree faster than your cat.
You've been involved in a custody fight over a hunting dog.
You know how many bales of hay your car will hold.
Your house doesn't have curtains, but your truck does.
You can spit without opening your mouth.
Your lifetime goal is to own a fireworks stand.
A tornado hits your neighborhood and does $100,000 worth of improvements.

If you’re an honest, law-biding citizen, should you care if the IRS starts comparing mortgage payments and income? What about if you’re a roofer who makes half his income in cash? If Jane Doe claims she makes $2,000 per month on her taxes, yet her mortgage payment is $3,500, should that be a reason for Ms. Doe to be investigated?

In yet another story yesterday, it appears that the IRS “will study whether it should make greater use of data on mortgage-interest payments provided to it by banks.” The IRS currently uses such data to send notices to non-filers who it believes should have filed a return. The data could also be used to target for audits individuals who don't file tax returns, or who report less income than they paid in mortgage interest. Of course, if you’re a struggling borrower that is using money out of your savings account, or from Mom & Dad, to make the mortgage payment, you don’t need two guys with badges showing up at your office….

HOME buyers are often advised to come up with at least a 20 percent down payment, or face the likely additional expense of private mortgage insurance (PMI). But this year, at least, that counsel would not have saved them as much money as in the past. 

Rules put in place in late 2008 by Fannie Mae and similar rules adopted by Freddie Mac are less favorable to borrowers who put down 20 percent to 25 percent, considered to be the industry minimum. (Fannie and Freddie are the government-controlled companies that establish the underwriting standards for most of the nation’s loans.)

For most people, it turns out, smaller down payments result in lower interest rates. Whether that benefits borrowers in the long term, though, is open to debate.

Take, for instance, borrowers who want to buy a $400,000 home, and who have a credit score of 720, which is considered very good.

In late August, such borrowers who had $80,000 saved for a 20 percent down payment would have qualified for a 4.875 percent rate on a 30-year fixed-rate loan. But that was also the rate offered to borrowers putting down only 5 percent, and therefore required to have private mortgage insurance.

Oddly, those who put down 25 percent, or $100,000, were saddled with a higher interest rate, 5.375 percent. The underwriting rules from Fannie Mae and Freddie Mac consider borrowers in the 20 to 25 percent down payment category to be the riskiest, in part because they are not required to carry private mortgage insurance. At higher down payments, however, rates begin to fall.

Amy Bonitatibus, a spokeswoman for Fannie Mae, said that the policy wasn’t meant to encourage lower down payments, which some have seen as the main culprit in the home foreclosure crisis. “It’s just a less risky loan from our point of view,” Ms. Bonitatibus said, because the lender’s exposure to foreclosure losses is largely eliminated by mortgage insurance.

She said the policy didn’t benefit only Fannie Mae and lenders that sell loans to the company. Borrowers benefit too, she said, especially those who would otherwise have had to stretch for a bigger down payment and leave themselves with no financial cushion. These borrowers can instead save the extra cash they might have put toward a bigger down payment, keeping it handy for emergencies.

Besides, Ms. Bonitatibus noted, as soon as borrowers pay off enough of their loan principal to establish a 20 percent equity position in the home mortgage, insurance is no longer required. While borrowers who take out mortgage insurance can indeed enjoy lower interest rates, their monthly payments will be larger than those who made the larger down payments, because the loan itself is bigger.

A borrower who put down 25 percent for a $400,000 home would make a monthly mortgage payment of $1,680, while the borrower who put 15 percent down would pay $1,906 — or $1,799 in principal and interest, plus another $107 monthly in mortgage insurance. (The mortgage insurance is tax deductible, however, so depending on a borrower’s financial circumstances, the net mortgage liability would probably be less.)

Most experts still advise borrowers to make a down payment as large as they can, because the increased equity will help them in the long term. Typically, borrowers maintain savings equivalent to at least nine months of mortgage payments.

Those who choose to make a lower down payment in the expectation of terminating their private mortgage insurance after a few years may encounter a harsh surprise. With property values declining, some lenders have balked at releasing borrowers from mortgage insurance. However, once values begin to back up, as most believe, that issue will be moot.

The following was actually developed as a mental age assessment by the School of Psychiatry at Harvard University. Take your time and see if you can read each line aloud without a mistake. The average person over 40 years of age cannot do it!

1. This is this cat.
2. This is is cat.
3. This is how cat.
4. This is to cat.
5. This is keep cat.
6. This is an cat.
7. This is old cat.
8. This is geezer cat.
9. This is busy cat.
10. This is for cat.
11. This is forty cat.
12. This is seconds cat.

Now, go back and read the third word in each line from the top down.

A US Congressman was seated next to a little girl on the airplane when the Congressman turned to her and said, “Let's talk. I've heard that flights go quicker if you strike up a conversation with your fellow passenger.”
The little girl, who had just opened her book, closed it slowly and said to the stranger, “What would you like to talk about?”
“Oh, I don't know,” said the Representative. “How about the banking crisis?” And he smiles.
“OK,”' she said. “That could be an interesting and timely topic. But let me ask you a question first: A horse, a cow, and a deer all eat the same stuff - grass. Yet a deer excretes little pellets, while a cow turns out a flat patty, and a horse produces clumps of dried grass. Why do you suppose that is?”
The Congressman, visibly surprised by the little girl's intelligence, thinks about it and says, “Hmmm, I have no idea.”
To which the little girl replies, “Do you really feel qualified to discuss banking when you don't know sh-t?”

The other day Existing Home Sales were up over 7%. That is great news. But as I mentioned earlier in the week, the “recovery” is not impacting every segment in the same way, and in fact most of the housing price boom has been in the lower-priced home market. For example, sales of houses priced at less than $100,000 were up almost 39%. But sales of homes with a price tag of over $250,000 were actually down, and in fact for anything more than $1 million sales were down 25-30%.

First American CoreLogic reports that there are about 600,000 option ARMs scheduled to reset in the next four years. Normally this would be ok, but this year default and foreclosure rates on option ARMs have passed those of subprime mortgages. Option ARMs, which helped so many originators increase their fundings and profits, accounted for $750 billion in mortgages made from 2004 to 2007. Roughly a third are already in default, according to analysts. Of course borrowers enjoyed the option of paying less than the interest, which increases the balance every month; just the interest; the equivalent of a 30-year fixed-rate mortgage; and the equivalent of a 15-year fixed, and apparently 75% of borrowers take the minimum option, which usually expires after five years or when the balance reaches a cap, generally 110 percent to 125 percent of the original loan.

Is your sentiment as a consumer improving? The sentiment of those consumers polled by the University of Michigan’s is, improving in late August but still below July’s level. And what else happened Friday? The FDIC said it had 416 banks on its "problem list" at the end of June, equivalent to about 5% of the nation's banks. And these banks had/have a combined $300 billion of assets, compared with only $78 billion a year ago. So should the government send the FDIC more money now or wait a month or two? On Friday the FDIC “only” closed down three banks: Affinity Bank (CA), Bradford Bank (MD), and Mainstreet Bank (MN).


Reverend Boudreaux was the part-time pastor of the local Cajun Baptist Church and Pastor Thibodaux was the minister of the Covenant Church across the road. They were both standing by the road, pounding a sign into the ground that read:

"Da End is Near. Turn Yo Sef 'Roun Now fore It Be Too Late!"

As a car sped past them, the driver leaned out his window and yelled, “You religious nuts!”

From the curve they heard screeching tires, a big splash and then silence....
Boudreaux turn to Thibodaux and axk,

“Do ya tink maybe da sign should jussay.....'Bridge Out?'”