Refinance Free Credit

A few media outlets are reporting this afternoon that key House representatives and officials from the Bush adminstration have hammered out a tentative $145 billion economic stimulus package; the news comes on the heels of a proposal by Senator Christopher Dodd (D-Conn.), who wants to include mortgage reform measures in any overall plan proposed by the Senate.

From the WaPo:

The deal, reached after an arduous, late-night negotiation between House Speaker Nancy Pelosi (D-Calif.), House Minority Leader John A. Boehner (R-Ohio) and Treasury Secretary Henry M. Paulson Jr., was a work of difficult compromise. Democrats acceded to Republican demands, jettisoning plans to extend unemployment benefits and food stamps for now but concluding that they could revisit the issue if the economy continues to slide.

Republicans agreed to offer rebates as large as $1,000, even to working families that earn too little to pay income tax, an idea they had roundly rejected in past stimulus plans.

“When all the numbers are tallied, this will be the most progressive economic package we have seen in years,” said a senior House Democrat.

The House deal includes FHA reform measures, although it’s unclear from early reports exactly what measures were included (i.e., did the House agree to include it’s version the the FHA Modernization bill?). The deal also includes a provision to increase the conforming limit from $417,000 to as much as $700,000 in high-cost markets.

Of course, the proposal still would need to run through the Senate — and given Dodd’s proposal, it’s likely that the Senate’s version could look very different. Senate Finance Committee chairman Max Baucus (D-Mon.) has said the Sentate will consider its own economic stimulus plan next week.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said in a letter sent to Senate Majority Leader Harry Reid (D-Nev.) that any economic stimulus plan drafted by Congress should include a host of mortgage-related reforms as part of the package.

Chief among Dodd’s proposal is the creation of a Federal Homeownership Preservation Corporation that would purchase distressed mortgages and refinance troubled borrowers into 30-year fixed FHA-insured or GSE-eligible loans. Dodd wants $10 to $20 billion to capitalize the new government agency.

While numerous media outlets are inexplicably crediting the idea to a recent paper published by the American Enterpise Institute, the idea seems to actually have its roots in the Resolution Trust Corporation from the late 1980s and early 1990s. Mortgage industry participants with any experience, particularly in servicing, know exactly what I’m talking about; RTC had responsibility for liquidating mortgages that had been assets of failed S&Ls.

Not everybody is crazy about the idea, per Bloomberg:

Instead of creating a new program, the government should offer tax breaks to buyers of distressed real estate, said David Castillo, who trades asset-backed, commercial-mortgage and collaterized debt obligation bonds at Further Lane Securities in San Francisco.

“This seems crazy to me to form another government (taxpayer) corporation to bail out Americans’ poor decision making in assuming obligations that they could never have possibly met,” Castillo wrote in an e-mail.

Dodd also wants $10 billion to scale up HUD’s Community Development Block Grant (CDBG) program, allowing it to purchase foreclosed homes, either for rehab and resale, as rentals, or for demolition. As HW has covered recently, there are plenty of cities dealing with the problem of long-vacant houses and lenders abandoning their claims to title.

Dodd also wants to include the FHA Modernization Act, as well as boosting conforming loan limits temporarily, as part of the $150 billion economic stimulus plan the Bush adminstration has asked for.

The Senate version of the FHA reform bill passed in December, while differences between it and an earlier House version of the bill have led to a delay in hammering out a final version.

Dodd’s proposal would seem to represent a departure from the more general economic measures the Bush administration had said earlier that it was looking for.

Treasury Secretary Henry Paulson had said the administration was looking to stimulate growth in other areas of the economy while the housing and mortgage crisis sorts itself out. “What we’re trying to do is to provide help to the rest of the economy … to help it better withstand and weather the effects that are coming about largely as a result of this decline in housing prices,” he said.

It’s unclear if Dodd’s proposal has bipartisan support.

If you’re in the process of refinancing your home mortgage there are a number of expensive pitfalls you’re likely to encounter along the way. Doing your homework before refinancing will not only help you avoid refinancing headaches but save you thousands of dollars in the process. Here ...

Let’s start with the real news in today’s NAR existing-home sales report: the median existing single-family home price was $206,500 in December, down 6.5 percent from a year earlier. The drop represents the first time in 40 years — going back to 1968, to be exact — that median national home prices have fallen on an annual basis.

From the press statement:

Existing-home sales slipped 2.2 percent to a seasonally-adjusted annual rate of 4.89 million units in December from a pace of 5.00 million in November, and are 22.0 percent below the 6.27 million-unit level recorded in December 2006.

Total housing inventory fell 7.4 percent at the end of December to 3.91 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.1-month supply in November.

“The fall in inventory in December is encouraging, but inventories remain elevated and buyers have a clear edge over sellers in many markets,” Yun said.

Yun’s neglecting some important points, per the Calculated Risk blog. For one thing, the reported December inventory is the highest level ever recorded for the month. For another, that months of supply number is the highest year-end reading since 1982.

The NAR joined California governator Arnold Schwarzenegger in calling for the conforming limit to be raised to $625,000. NAR president Richard Gaylord — seriously, that’s his name — said “it is grossly unfair that some Americans do not have access to low-interest rate loans.”

Let’s at least be clear that by “some Americans,” Gaylord is referring to borrowers making well over the nation’s median income. There needs to be some discussion, IMHO, as to whether providing low-interest loans to this group meets Fannie and Freddie’s stated mission of supporting affordable homeownership.

The NAR said that higher conforming loan limits, if enacted, would serve to increase annual home sales by nearly 350,000, reduce foreclosures by 140,000 to 210,000, and increase economic activity by $44 billion.

Although something tells me SocGen would rather have the focus be on bad mortgage bets than on the largest trading loss in investment banking history. The earnings statement, released this morning, begins with the following sentence:

Societe Generale Group has uncovered an exceptional fraud in a sub-section of its market activities.

Not the way you’d want to start any press statement, let alone an earnings announcement. That fraud, reports the Wall Street Journal, was due to a single futures trader — and led to a stunning $7.2 billion write-down. And it has a way of making a $3.01 billion loss due to subprime mortgage and derivative exposure seem, well, small.

The really ironic thing? SocGen was just named “Equity Derivatives House of the Year” by Risk Managment magazine, a few short weeks ago — see here for yourself. The magazine lauded SocGen for “for consistently providing liquidity during the market turmoil.”

As Felix Salmon at Portfolio.com notes, we now know where some of that liquidity might have been coming from.

Webster Financial Corp. reported a fourth quarter net loss of $8.7 million, or $.16 per share, on Thursday as the $17.2 bank holding company was sent reeling from bad loans in residential construction and home equity lending. Fourth quarter’s earnings compared to $35.0 million in profit one year earlier, the bank said.

The New England area bank took a charge of $.86 per share, which included a special provision of $40 million, to cover credit losses in both its residential construction and home equity loan portfolios. Webster has since exited broker-based originations for both loan products, it said, although it still originates home equity loans in-market via retail.

The bank, which had stepped into national lending via third-party originations, said it is not only retreating to retail, but focusing solely on its local markets. The bank will close its wholesale lending offices in Seattle; Phoenix; Cheshire, Connecticut; and Chicago, as a result.

“Webster closes 2007 having addressed head-on the challenges facing the financial services industry and taken aggressive, constructive action,” said Webster Chairman and CEO James C. Smith. “Our future is in-market and contiguous franchise growth and lending relationships that are direct to consumer and commercial customers.”

Webster has placed both its residential contruction and home equity portfolios, equalling roughly $424 million, into liquidation; the $40 million loss provision brings allowance for future loan losses in portfolio liquidation to $49 million.

Non-performing assets totaled $121.1 million, 0.97 percent of total loans and other real estate owned at the end of Q4, the bank reported; that was an increase from $104.2 million at the end of the third quarter and roughly double the level of NPAs from one year earlier.

Regional banks feeling mortgage pinch
Webster joins a growing list of regional banking outfits that have seen their mortgage banking activities take a toll on fourth quarter earnings. A number of banks have reported losses on both construction lending as well as home equity lending.

Others have seen their investments in Fannie Mae and Freddie Mac stock lead to losses, even if their mortgage portfolios remain relatively sound; the latest victim Thursday of write-downs in this area was New Jersey-based Valley National Bancorp, which wrote off $10.4 million of after-tax profit on its investments into preferred stock issued by both GSEs. National reported net income of $27.7 million for the quarter, down from $38.1 million one year earlier.

Disclosure: The author held no positions in VLY or WBS when this post was originally published.

Capital One reported fourth quarter profit of $226.6 million after market close on Wednesday, or $.60 per share, down from $390.7 million, or $1.14, in the year-ago period.

Rising losses on credit card loans were a chief culprit, although the company also took a $95 million charge associated with the shutdown of its troubled GreenPoint Mortgage unit, dragging down EPS by $.25, the company said. Capital One had warned of the earnings drag in early January.

In August of last year, Capital One shuttered GreenPoint, a wholesale mortgage originator, and laid off 1,900 employees as the business unit faced what the bank said were “significant” profitability challenges.

Calculated Risk noted yesterday that CEO Richard Fairbank was decidedly bearish on the company’s earnings call with analysts, saying “we are managing the company as if a recession was already here.”

Wow, what a day yesterday ended up being.   The Dow had over a 600 point swing and the 10 year bond had a 20 basis point swing in one day.   So what’s my take on it?

A couple of thoughts:

1. The swing is in large part a reaction to the Fed’s surprise rate cut on Tuesday.   The markets went from saying, “Wow, we must be in some deep trouble if the Fed felt they couldn’t wait until next week!”   to “Whew, the Fed is going to save us!”    That sparked the big rally.

2. See the article from www.money.cnn.com about the risks for a recession in 2008.  I think it lays out a pretty clear case that the risks for a recession are pretty large and that “things are different this time.”   What’s different?   The credit problems that are facing the financial markets are going to make it harder for us to spend our way out of this downturn.

As I’ve watched the markets for the last 20 years, I’ve seen many “sharp turns” in the markets.   Any time I have, I’ve asked the question, “Has anything fundamental changed that would cause this change?   Were there any economic reports that alter the picture substantially?  In this case, I don’t see that there is.   The only thing that has changed is that the Fed has “increased” their efforts to help by cutting rates, and a large portion of the market doesn’t believe that it will make enough of a difference.

So what does this all mean?  I take it to be the fluctuations of a volatile market and my assessment that we’re going to see gradually deteriorating conditions and gradually lower rates (with some blips) for the the near future.

It’s the fourth inning of a nine inning ballgame, in my opinion.

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Gotcha.  Actually, I don’t.

Let me explain.

One of my good friend’s wife is a Realtor.  She’s a nice lady.  I like her and I like them as people.  I was talking with her not too long ago after she had read my blog.  She said to me “Wow.  You really hate Realtors.  You must think I’m scum.” or something to that effect.  I quickly found myself stumbling over myself to explain that I don’t hate Realtors - in fact many people that I respect and am friends with are Realtors.  I also have many friends in all areas of the mortgage origination, secondary market, securitization desks, Wall Street houses, regulation - you name it.  I told her I didn’t hate those people either.

But when your friends start thinking you hate people because of what you write it’s time to set the record straight.

I Actually Like A Lot of Real Estate Agents

There are a lot of real estate agents that I like and admire.  There are a lot that I don’t like.  The ones that I do like are the ones that share values that I share - honesty, a realistic view of the world and ethics.  They don’t have to prescribe to my particular view of the market; and in fact I’ve had many spirited discussions with them on the topic that result in new understanding reached by both of us.  What they do need is to be able to look at our current situation in an objective and honest way and be able to intelligently articulate their viewpoint (whether positive or negative) about the market.  Those people, with class, intelligence and ethics are the people I aspire to know and emulate.  If they are Realtors then I respect them as the professionals that will lead us out of this mess.  (Similar to the remaining mortgage pros that are still standing after the chaff has been separated.)  Those are the real estate agents that I like.

The Ones I Don’t Like

The phonies are the ones that I don’t like.  The ones heavy on the Kool Aid.  The ones overly-optimistic to a point where it’s poisonous to the people they interact with.  The David Lereah clones.  If you are one of those Realtors then the title above applies to you.

But for the Record - I like Realtors

This blog has never been about trashing a particular occupation or belittling people for what they do for a living.  This blog has always been about exposing the trash that inhabits our industry and helping people get a balanced perspective about the mortgage and real estate industry.   I consider Blown Mortgage a counter-weight to the Rah-Rahing that goes on in the blogging world and sound bites from many Kool Aid drinking real estate agents.

Many Realtors are smart, savvy and looking out for their client’s best interest.  If you are a Realtor and this is your MO we’re probably friends.  If you’re a Realtor and the sun is always shining and you think we’re not in a down market then we won’t agree on much.

Thanks for reading whether you’re a Realtor, a consumer, a mortgage professional, an investor or someone else.  I only hate people who take advantage of others. Other than that we’re here to talk about the problems in the industry and what can be done to learn from the mistakes made and improve the quality of our industry for the people that rely on it.

Morgan

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Something tells me it’s about to get a whole lot tougher to be a mortgage broker in the Golden State.

While Federal efforts at mortgage reform have stalled, Housing Wire has learned that California Assemblyman Ted Lieu is set to introduce on Thursday sweeping reform to mortgage legislation within the Golden State.

His bill, AB1830 – the Subprime Lending Reform Act – will seek to outlaw negative amortization mortgages and stated income lending, while placing tough new restrictions on when yield spread premium would be allowed.

Via an anonymous source, Housing Wire obtained an advance copy of proposed changes to California’s Financial Code as part of AB1830, which would amend the state’s current law regulating so-called “covered loans” – conforming loans where rates are eight percentage points above the yield on US Treasuries, or loans with points and fees that exceed 6 percent.

The proposed bill seeks to extend the state’s regulatory authority to loans where the APR is as little as three percentage points above the Treasury yield, and to non-traditional mortgages as well, including interest-only and option ARM products.

In addition to outlawing option ARM mortgages altogether, the bill would essentially eliminate stated-income lending for high-cost, subprime and non-traditional mortgages (meaning that stated-income would really only be an option for prime, traditional mortgages) — the bill’s language says stated income must be “verified,” which really means it isn’t stated at all.

For high-cost mortgages in particular, the bill would outlaw balloon payments and prepayment penalties, and make broker compensation via yield spread premium illegal, as well as requiring full borrower documentation. The bill would also require certification of third-party counseling “on the advisability of the loan transaction” from a HUD-approved agency prior to origination.

For both subprime and non-traditional mortgages, including option ARMs and interest-only loans – brokers would be prohibited from receiving “incentive compensation” – i.e., yield spread premium – tied to originating any mortgage above an applicable wholesale par rate. The bill would also seek to limit the use of YSP in all mortgages by establishing a rate ceiling of 200 basis points above par, and only permitting YSP when it is the broker’s sole form of compensation.

AB1830 would also prohibit brokers, lenders and servicers from engaging in direct marketing designed to get a consumer to refinance out of an existing subprime or non-traditional loan within 12 months of closing on a purchase or prior refinance, although borrowers may still inquire regarding refinancing opportunities.