Refinance Free Credit

Bloomberg reports that consumer confidence is sinking with home values, reaching lows not seen since 1992.  From the article on the lack of consumer confidence:

Confidence among American consumers fell in May to the lowest level since 1992 as the two-year housing slump showed no sign of bottoming.

The Conference Board’s confidence index declined more than forecast to 57.2, the New York-based research group said today. The S&P/Case-Shiller home-price index dropped 14.4 percent in March from a year earlier, the most since the figures were first published in 2001. Separate figures from the Commerce Department showed sales of new homes were the second-lowest since 1991 in April.

The slide in home values, along with gasoline near $4 a gallon and rising unemployment, threatens to hobble the consumer spending that accounts for more than two-thirds of the economy.

“When confidence is as bad as it is on the consumer side, it’s hard to believe we’re going to be buying a lot of homes in the near term,” said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis, Minnesota. “The drag from home-price declines, the credit crunch and oil prices will probably be more severe than some had forecast earlier in the year.”

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I'm very grateful.  I have been nosing around financial guru Dave Ramsey's forums and ran across a post that probably saved me a bunch of money.

Let me backtrack for a moment.  Dave Ramsey isn't a get rich quick guy, or a multi-level martketing guy or anything like that.  His philosophy is that debt is bad and encourages families to do everything in their ability to get rid of debt.   Once out of debt, Ramsey advises those same families to save up 2 to 3 months salary in a savings account.  Ramsey basically preaches financial responsibility.

I'm like most people, in way too much debt.  I'm stressed about it and am looking for any way to get out of it.  I thought about refinancing the house and absorbing our credit card debt.  The I ran across the following sage advice:

There's a good reason lenders encourage folks to get cash out. They make a lot more money. But for the borrower, a cash out refi is a terribly expensive way to borrow money. In addition to putting up your home at risk as collateral to secure the debt, you're paying interest for the entire life of the mortgage for the use of the cash. It's actually a lot cheaper to borrow the money for a short term on a credit card. Because a loan is compound interest in reverse, Time is a more important factor than Rate in determining the total Interest. If you stretch out a loan for a long time to have a lower payment, it will still cost more, even if the rate is substantially lower.

To give you an example, let's suppose you were getting $30K cash out to pay off a bad car loan:

If you were paying $608 per month on a debt of $30,000 at 8.% it would be paid off in 60 months. The total interest would be $6,498.

If you refinanced it in a cash-out mortgage for 30 years at 5.5% with 2.0% closing costs rolled in, the payment on $30,600 would only be $173.74 per month. But over the 30 years, the total interest would be $31,948. That's 4.9 times more interest for the same amount of initial debt.

At the end of 60 months when the original debt would have been paid off, you'll still have 300 payments (25. years) of that extra $173.74 to go on the mortgage. Instead of having it paid off at that 60 month point, you will have already paid $8,118 in interest, and will still owe $28,293 of the original $30,000 debt.

If you were to sell the home in 5 years, carrying that extra $28,293 with 1.5% closing costs into a new 30 year mortgage at 6% would give you an extra $172.17 per month on the payment for the next mortgage, and would cost you $33,266 more interest over the life of the loan. So you'd be paying a total of $41,383 interest on a debt that you could have paid off in 60 months at a cost of $6,498 in interest if you hadn't taken any cash out in the first place.

It's even worse if you refi a mortgage that has less time remaining than you refinance.

If you owed $200,000 on your mortgage at 6.0% for 25. more years the payment for P&I would be $1289 and the total cost would be $386,581 with $186,581 in interest.

If you rolled in 2% closing costs plus the old debt into a new mortgage at 6.0% for 30. more years the payment for P&I on the total debt of $234,600 would be $1407 and the total cost would be $506,356 with $271,756 in interest. You've added $66,046 to the cost of the mortgage alone.

At 60 months when the original consumer debt would have been paid off, you will still owe $218,306 on the new mortgage. At that time you would only have owed $179,864 on the old mortgage. So instead of having the original debt paid off, you owe $38,441. That's $8,441 more than the original deb was to start with.

I'm very grateful to see the numbers in a real world situation.  Rolling your debt into a mortage is a horrible idea!

Troubled lender Residential Capital, LLC is taking key steps to enable easier loan modifications on mortgages involved in certain RMBS transactions it backs, according to a statement released over the past weekend by Moody’s Investors Service. The rating agency said that Residential Funding Company, LLC — a ResCap subsidiary that was at one time among that largest underwriters/issuers of subprime RMBS — had increased the limits on the number of loans in certain residential mortgage pools that were permitted to be modified, although further details weren’t made available.

ResCap officials did not immediately respond to a request for further information; a Moody’s representative said that further details on the changes made weren’t immediately available.

The move by RFC suggests that investors and issuers are looking to amend terms of respective Pooling & Servicing Agreements that underlie key subprime and Alt-A transactions; PSA clauses can vary signficantly from deal to deal, but HW’s sources suggest that many private-party deals had a so-called “five percent clause” that permits servicers to modify loans equal to 5 percent of the pool’s balance without investor approval. Modification activity reaching above that cap would require the consent of investors, we were told.

“RFC and the respective issuers of the affected transactions requested that Moody’s provide its opinion to them as to whether its ratings on the Moody’s-rated securities issued by the affected transactions would be downgraded or withdrawn as a result of the increases in loan modification limits,” the rating agency said in a statement.

Seven different deals saw their modification limits increased, Moody’s said; all are subprime mortgage deals from 2005 to 2007; sources told HW that all of the involved deals are seeing significant borrower delinquencies and default activity.

ResCap, tied to former General Motors division GMAC Financial Services, has been hit hard by woes in the U.S. mortgage markets, posting an $859 million loss in the first quarter. GMAC has since been providing liquidity to the ailing lender, most recently lending $468 million to the ailing lender.

On Tuesday, RFC also agreed to transfer an unspecified number of mortgages to Lehman Brothers (LEH: 36.569, +1.27%) unit Aurora Loan Services, LLC, in a separate statement provided by Moody’s; it’s unclear why RFC agreed to transfer the loans. Loan servicing rights are commonly resold, but rarely transferred (without sale) unless investors or a master servicer require the transfer of loans. All deals involved in the transfer involve Wells Fargo & Co. (WFC: 27.24, -1.59%) as master servicer; calls to the company for comment were not immediately returned.

Disclosure: The author held no positions in publicly-traded firms mentioned in this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

In the clearest challenge yet to a proposed appraisal management agreement reached in March by New York attorney general Andrew Cuomo and home finance giants Fannie Mae (FNM: 26.65, -3.41%) and Freddie Mac (FRE: 25.01, -2.80%), Comptroller of the Currency John Dugan has sent a letter calling on Office of Federal Housing Enterprise Oversight director James Lockhart withdraw the appraisal pact.

The letter, dated May 27, characterized the so-called Home Valuation Code of Conduct (or HVCC) as having “adverse consequences … for the safe, sound, and efficient operation of national banks’ residential mortgage lending activities, as well as for the cost of mortgage credit to consumers.”

Republicans in the Senate have been mulling a Congressional challenge to the appraisal pact as well, on the grounds that the proposal violates or attempts to supsercede federal law. Dugan and other federal regulators have expressed their displeasure at what they see as a “power grab” by Cuomo’s office, after the state AG didn’t involve federal entities in crafting the original appraisal pact.

“The OCC endorses the principle that real estate appraisals must be conducted free from influence or coercion by any party,” Dugan writes in the letter. “But this objective should be achieved directly … not by dictating the corporate and internal organizational structures of lenders.”

Dugan argued that the HVCC “directly conflicts with ongoing federal efforts,” as well as complex legal issues that have yet to be addressed.

Cuomo’s office has been steadfast in its insistence to hold to the terms of the agreement, despite growing pressure from numerous industry groups and federal regulators. It’s unclear if Tuesday’s letter from Dugan will soften the stance of the AG’s office.

Calls to the New York attorney general’s office seeking comment were not immediately returned by the time this story was published. OFHEO did not have an immediate comment available to the press.

New-home sales unexpectedly rose in April, thanks to a significant downward revision of March sales numbers, according to statistics released Tuesday by the Commerce Department. Sales of new single-family houses last month were at a seasonally-adjusted annual rate of 526,000, up 3.3 percent from one month ago — but still the second-worst sales pace since October 1991. See the report.

March’s numbers were revised downward significantly from an originally-reported 526,000 to 509,000, underscoring the volatility of new-home sales estimates, especially in a turbulent housing market. The revision made March the worse new-home sales total since April of 1991.

Bloomberg News reported that most economists had expected the April sales rate to come at 520,000, making the April numbers better than originally expected. The question, of course, is whether this month’s numbers are also likely to be revised downward in subsequent months.

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The seasonally-adjusted inventory estimate for April was 456,000, representing a supply of 10.6
months at the current sales rate, the Commerce Dept. said. The graph (right), provided courtesy of the Calculated Risk blog and used with permission, show that months of supply is now scratching against an all-time high, set in 1980 at 11.6 months.

Yet, it’s well worth noting that new home inventories did actually decrease, as did months of supply, which had been at 11.1 months in March. Inventory had been at 467,000 in March — and the number of homes completed and waiting to be sold decreased to 181,000, the fewest since July of last year.

“This is sort of a good news, bad news report,” said one source, an MBS analyst who asked not to be named. “The good news is that sales posted a gain, and inventories appear to be falling.”

“The bad news is that it’s sort of an artificial gain that we can’t have much confidence in. Without the revision, the gain in sales goes away, and cancellation rates don’t show much in the way of decreases, either.”

As JPMorgan & Chase Co. (JPM: 42.76, +1.04%) looks to digest its bail-out of Bear Stearns, once the biggest player in the private-party mortgage-backed securities space, questions appear to be bubbling to the surface regarding the value of Bear’s own mortgage book.

Let’s just say that the questions aren’t around a possible undervaluation of mortgage- related assets.

HW’s sources have suggested for at least a month that JPMorgan executives would need to reconcile the values assigned in Bear Stearns’ mortgage book with valuation methods already in place at JPMorgan. While none of our sources have explicitly said that Bear’s mortgage book is misvalued, news from the Financial Times over the weekend suggests that some problems may yet be in the offing:

Two senior Bear Stearns executives who moved to senior positions at JPMorgan Chase just weeks ago are leaving the bank.

The departure of Jeff Mayer and Craig Overlander comes amid questions about the value of the Bear Stearns mortgage book …

But they are leaving, partly because of problems with Bear’s mortgage portfolio. Their departure “is not exclusively because of marks on the mortgage book,” according to a person familiar with the matter, who added “there were plenty of other people involved with that”.

The FT report didn’t specify what “problems” were at issue, and JPMorgan press reps certainly haven’t commented on the issue publicly.

Mayer and Overlander ran the fixed income department at Bear Stearns, but weren’t responsible for the original marks on Bear’s mortgage book.

Disclosure: The author held no positions in JPM when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

The pace of dropping U.S. property values quickened during March, reaching a record 14.1 percent decline during the first quarter of 2008, according to data released by Standard & Poor’s on Tuesday morning. The record drop was recorded by the S&P/Case-Shiller U.S. National Home Price Index, which covers sales spanning all nine census divisions for the past 20 years.

The widely-watched S&P/Case-Shiller indices also all posted significant drops, with a 20-City composite index dropping 14.4 percent annually; a 10-City composite index fell 15.3 percent versus year-ago home prices, underscoring just how painful the drop has been for many local housing markets. All declines represent records, S&P said.

“The steep downturn in residential real estate continues,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. “There are very few silver linings that one can see in the data.”

No kidding. Nineteen of 20 metro areas tracked by the monthly Case-Shiller index are now reporting annual declines — and six even posted negative annual pricing rates in excess of 20 percent. The hardest hit areas likely won’t surprise: Las Vegas, Miami, Phoenix, Los Angeles, San Diego and San Francisco all posted annual housing price declines greater than 20 percent.

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“Looking closely at these returns, you can see that 15 of the metro areas are also reporting record lows, and eleven are in double digit decline, with Chicago being the latest metro area to join these ranks,” Blitzer said. “The monthly data paints a similar picture, with 18 of the metro areas reporting at least seven consecutive months of negative returns.”

The Case-Shiller data contrasts sharply with the results of a separate housing price index maintained by the Office of Housing Enterprise Oversight; the most recent OFHEO HPI data found that home prices fell a comparatively more muted 1.7 percent between Q4 2007 and the first quarter of this year — still a record by that measure’s own yardstick. The OFHEO data, while more geographically diverse, only considers properties mortgage with a conforming mortgage owned by either of the GSEs.

Despite the gloom and doom of the S&P report, two local housing markets managed to show at least some strength during the month of March: Charlotte eked out a 0.2 percentage gain in prices, while prices in Dallas rebounded 1.1 percent in March compared to February. Numerous markets in Texas are regularly cited by housing experts as among the nation’s best during the ongoing slump, as many were bypassed during the recent housing boom and labor markets in Texas have remained strong amid the latest energy boom.

Nonetheless, in March, half of the MSAs and both composites fell by more than 2 percent relative to February. Miami was the worst performer, returning -4.5 percent.

For more information, visit http://www.standardandpoors.com.

It’s become a somewhat predictable pattern as the mortgage crisis has rolled onward: company takes huge losses, investors hope for the best, company executives mask the same hope as fact, only to post more losses in the next earnings period, leading investors to (again) hope for the best. And thus the cycle has tended to repeat for the past three quarters or so.

Nowhere has this trend been more true than at European banking giant UBS AG (UBS: 25.35, -5.94%), which has been battered by its exposure to U.S. mortgages in recent months. The company absorbed $19.5 billion in write-downs during the most recent first quarter — enough to put lesser financial institutions out of business — and sold off a chunk of its subprime mortgage book to BlackRock Inc. (BLK: 212.25, +1.79%) in an effort to limit its future exposure to bad mortgages.

Problem is, troubled mortgages keep appearing elsewhere.

The latest example lies within the company’s 925-page investor prospectus for an upcoming 16-billion euro rights offer, which warned that losses on mortgages outside the U.S. might be the next chip to fall. Via Bloomberg News, which combed the prospectus:

UBS, in the prospectus for its 16 billion-franc rights offer, said the bank’s losses on non-U.S. residential and commercial real-estate securities “could increase in the future.” UBS is also evaluating whether to limit or discontinue one or more U.S. reference-linked note programs, which “could result in a charge to income,” the bank said in the document, released after markets closed on May 23.

“UBS will have to fight against negative news flow for at least several more quarters,” said Rolf Biland, who helps manage about $3.1 billion, including UBS shares, as chief investment officer at VZ Vermoegenszentrum in Zurich. “The U.K. housing market is almost as overheated as in the U.S., and could lead to losses for banks.”

We don’t focus heavily (yet) on the international mortgage market here at HW, but what we have seen in the press thus far rings a familar tone to what we’ve seen transpire within the United States. And that certainly bears some watching going forward; UBS, however, hasn’t disclosed how much it holds in RMBS and related securities outside of the U.S. market — certainly curious to HW’s reporters, given that the rights issue is limited to investors outside of the United States.

Not that UBS’ exposure to mortgages state-side is nil: in its prospectus, the financial giant pegged its net exposure to U.S. subprime mortgages at $27.6 billion, net of hedges. Alt-A mortgage exposure stood at a similar $26.6 billion, as well.

And with hedges proving less effective at a somewhat alarming rate for more than a few financial institutions, HW’s sources have suggested that UBS’ exposure could quickly increase beyond what has been disclosed thus far.

Disclosure: The author held no positions in UBS or BLK when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Home Owners Associations are feeling the effects of the housing bust as foreclosures and delinquent association payments put the squeeze on budgets.  Homeowners feeling the squeeze of increased mortgage payments have stopped paying their association dues.  In addition banks that are holding REO property in neighborhoods with association dues are notorious for lack of payment, causing the associations charged with keeping up public areas of housing developments to cut back on services.

HOA’s are a familiar sight in newer developments and are responsible for everything from maintaining the common area lawns, to the pools, parks and other amenities of master-planned living.  Now, with revenues dwindling the HOA’s are faced with the unpleasant reality of having to raise the dues of the paying homeowners while cutting back services just to stay solvent.

The USA today covers the plight of a typical HOA in Arizona:

AVONDALE, Ariz. — A modest housing tract, set amid pecan trees here in suburban Phoenix, faces big problems: About 40% of its homeowners aren’t paying their association fees, leaving neighbors with higher assessments and reduced services.

“We’re looking at a very deep hole,” says Kent Miller, president of the Los Arbolitos Homeowners Association in Avondale. “I don’t know how we’re going to get out of it. We’ve put liens on all the (delinquent) properties, but it doesn’t do any good.”

It’s a scenario being repeated across the country. Delinquent fees at condo and homeowner associations have become an outgrowth of the mortgage crisis. Housing cooperatives, in a squeeze because of unpaid fees from struggling homeowners, are scraping to pay for landscaping, maintenance, pools, recreation centers and other amenities.

“It’s happening all over,” says Frank Rathbun, a spokesman for the Virginia-based Community Associations Institute. “It’s a national problem.”

The institute estimates there are 300,000 homeowner and condominium cooperatives nationwide, representing one in every five Americans. Assessments, which resemble self-imposed community taxes, total about $40 billion a year.

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The credit crunch isn’t just taking a bite out of the housing and boating industries.  The automobile industry is starting to feel the effects of limited credit and reduced consumer spending.  Automobile sales for 2008 are on pace to be the worst in more than a decade.  During the housing boom more than 1 in 9 auto purchases was financed in part by a home equity line of credit.  Now that HELOC’s are being frozen and property values are declining consumers have run out of available cash to purchase new cars.

As mortgage payments have ballooned and credit has become more expensive late payments on cars has started to tick up drastically as well.  This combination of tightened lending guidelines, reduced profits and a deteriorating economy paint a bleak picture for the near-term future of the automobile industry.

From the New York Times on the spreading ills of the credit crunch to the auto industry:

“It is a bleak picture, and it all hinges on the availability of financing,” said William Ryan, a financial analyst at Portales Partners who has followed the auto business for years. “The whole universe related to the auto industry is touched in some way — parts suppliers, manufacturers, salespeople, trucking people, the paint and metals industries. Even semiconductors.”

As the pool of money available to auto lenders has dried up, they have cut back on making new loans. Since late last year, nearly every auto finance company has tightened its lending standards. They are forcing borrowers to put more money down. They are also demanding higher monthly payments and requiring stronger credit records and more stringent documentation.

Subprime auto lenders have been forced to pull back the most. AmeriCredit, a big subprime finance company, said it would issue about $3 billion in new auto loans this year, compared with $9.2 billion in 2007. That translates into around 340,000 fewer vehicles being financed this year. But lenders catering to less risky borrowers are also retrenching.

“Capital One is pulling back, Citi is pulling back, HSBC and Wells Fargo are pulling back,” said Mr. Ryan, the analyst. So are the finance arms of the major automakers, like GMAC, Chrysler Financial and Ford Motor Credit. “What you are seeing at AmeriCredit is probably happening everywhere else, but probably to a lesser degree.”

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