April 25, 2024

Archives for December 2008

Few May Benefit From Lower Mortgage Rates

Rates Increase

Mortgage rates increased today on a sell off in the Treasury market. The benchmark 10 year treasury note increased in yield by 16 basis points (bps) to 2.244%. The 2008 low on the 10 year treasury yield was 2.038%.

Courtesy Yahoo Finance

The increased yield on the treasury bond has resulted in a mortgage rate increase of 3/8% over the past few weeks.   A 30 year fixed rate mortgage at par today is 4.875%, historically a super low rate.  So what if rates moved up a little bit – 4.875% still sounds almost too good to believe.

Low Rate Does Not Apply To All Borrowers

Before rushing out to refinance, be aware that the advertised low rate of 4.875% is available only to the most perfect borrowers and the 4.875% rate will cost around 1 point (1% of the loan amount) plus other closing costs.

Unless a borrower has perfect credit (at least a 720 FICO score), adequate income (debt ratio of 32% or less) and substantial equity in the home (loan to value of 75% or less), the rate will be higher due to adders.  Adders are fees imposed by Fannie and Freddie if the applicant does not fit into the little box of a perfect borrower.  Adders are imposed for higher loan to value, lower credit scores and cash out refinances.  The adders can easily amount to 2% of the loan amount, or $2,000 on a $100,000 loan.   If a borrower is applying for cash out with a FICO score below 680 many lenders will turn the loan down.

Here’s an example of what used to be considered a prime borrower in the recent past.  Borrower has a 680 FICO score, adequate income and wants $20,000 cash out with an 80% loan to value and a loan amount of $160,000.   The chart below shows the cost of not being a perfect borrower as defined today.

Interest Rate


Price Adjustments

-1 FICO 680-699, LTV 75.01-80

-0.8750 C/O Refi. LTV 75.01-80, FICO 680-699

The best rate this borrower would get quoted today would be 6.75% and the mortgage company would need to charge an additional 1 to 2 points on the loan (up to $3200 based on a $160,000 loan amount).

This is the reality of the mortgage market today.  Many borrowers applying for a refinance with visions of a 4.875% rate and a payment reduction are finding out that they do not qualify.   There is much in the news about the “mortgage refinance boom”.   Expect to see stories in a month or two about how few borrowers actually benefited from the lower rates.

FHA Takes A Closer Look At Home Values On Refinances

HUD announced in Mortgagee Letter 2008-40 that effective January 1, 2009 that FHA will require a second appraisal for all cash-out refinances where the loan to value, exclusive of UFMIP,  exceeds 85% of the appraised value.  The new rule applies regardless of the loan amount or the location of the property.

The actual letter ruling reads as follows:

· Second Appraisal Requirements/Loan-to-Value Limits for Cash-Out Refinances: The instructions in ML 2008-09 regarding when a second appraisal is needed, and the requirements for that second appraisal, as well as the 85 percent limitation on cash-out refinances when the loan balance will exceed $417,000, remain in effect.

In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value. This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not. This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09. Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.

Additional underwriting and eligibility criteria

· The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.

· If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.

· The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.

· Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.

· Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.

The FHA has been gradually tightening various underwriting guidelines for some time now, probably due to a default rate of over 12%.

The  new regulation requiring 2 appraisals on cash out refinances will probably reduce the number of refinances done on higher LTV properties.  The customer typically pays for the appraisal when doing a refinance and the FHA appraisal usually costs $350.  A potential borrower will now have to come up with $700 just to find out if they have enough equity in the property.

Actually the rules could have been constructed to further restrict cash out lending.  Many lenders who have doubts about the value of an appraised property routinely require a second appraisal to be conducted by an appraiser of their choice.  Often times, the second appraisal will come in lower under this method.

The FHA has seen a large increase in loan applications in 2008 due to underwriting restrictions imposed by other lenders.  It will be interesting to see if these new guidelines reduce the number of FHA refinances in 2009.

Is A Loan Modification Worth The Cost?

With the large number of people in arrears on their mortgages, various governmental agencies have been attempting to provide solutions.   Loan modifications have been proposed as the answer for over a year now.  The FDIC has recently been pushing this as the solution to keeping people in their homes and  spearheaded the effort to formalize and streamline the mortgage modification procedure.

From a practical standpoint of the person who is behind on their mortgage, the most important questions to ask, assuming that you want to remain a homeowners, are as follows:

  1. Do I qualify to have my mortgage modified?
  2. Will a loan modification help me in the long run?
  3. Should I pay someone to get a loan modification?

1.  As far as qualification goes,  a good place to start is by reviewing the new SMP guidelines – see Streamlined Modification Program – Who is Eligible? If a review of the guidelines leads you to believe that you qualify for a loan modification, a good way to start is by calling your loan servicer directly, whose phone number is on your monthly statement.

Be advised, however, that nothing is simple when it comes to a loan modification.  The process is controlled by different parties with different interests.   If your mortgage is not owned by Fannie Mae or Freddie Mac, the SMP guidelines that they issued may not apply to you.  A large percentage of mortgages originated over the last five years were sold on a worldwide basis to many different investors.  Generally speaking, the loan servicer that you are dealing with is operating under the guidelines of the investors who own your mortgage.  Some of these investors are willing to do a loan mod and some are not.  The terms of a loan mod that each investor allows will differ depending on their guidelines.

2. Whether or not a loan modification will help in the long run is a complex topic and will be the subject of another post.  Each loan situation is unique but if we examine the data from the Comptroller of the Currency, Office of Thrift Supervision, the results of a loan mod after 6 months showed re-default rates of 50 to 60%.

Three Months After Modification (30+ Days Delinquent)

Six Months After Modification (30+ Days Delinquent)

On-book portfolio (loans held by servicers)



FHLMC (Freddie Mac)



FNMA (Fannie Mae)



Private Investors



3.  Assuming that questions number 1. and 2. were answered with a “yes”,  a potential loan mod applicant should assess whether or not it makes sense to pay someone to do the loan modification for him.  The loan mod business seems to growing larger every day with a large number of companies offering to provide  loan mod services.   Some factors to consider when deciding whether or not to engage a loan mod company to help you include the following.

-How difficult will it be to get my mortgage modified?  The best way to get a preliminary assessment of this is to call your loan servicer, whose number is on your mortgage statement.  Depending on your situation and who owns your loan, it may be relatively simple to provide the servicer with the documents that they are requesting.  Many servicers and investors consider getting your loan current again to be in their best interests so they should be willing to help you out.

-If for whatever reason you do not want to deal with the loan servicer directly a call to a non profit organization such as Hope Now cannot hurt.  I have heard some people say that they have helped, some say that they are a waste of time; either way, a free phone call is an easy way to find out.

-Keep in mind that if you do engage the services of a loan mod company, they do not have any special powers of persuasion over the the investor owning your mortgage.   The loan servicer is going to make the same modified payment offer regardless of who they deal with.

-The price of a loan mod varies depending on what company you engage to help you.  I have seen prices ranging from $700 to $3500.  The amount of fees charged upfront also varies as do the service guarantees.  Some companies want the entire fee upfront and sometimes the entire fee is nonrefundable.

-If a loan mod company has expertise in the mortgage modification business they should be able to give you an accurate idea of what they can accomplish for you.  For example, there are some servicers (due to restrictions by the investor) who essentially refuse to modify a mortgage.  Regardless of who owns your mortgage, the loan mod company should be able to tell you give you a good idea of how your mortgage will be modified and what your new monthly payment will be.

-A principal reduction is done by very few servicers so if the company you are speaking to guarantees that they can do this for you,  be very skeptical.

-Do not work with any loan mod company without first checking their references.  There are few state or federal licensing requirements or proof of expertise required to enter this business so it is “buyer beware”.     Do not pay more than a modest nonrefundable application fee ($300 to $400 is common).  I would also not recommend engaging a loan mod company whose fee is nonrefundable.   You are paying for their expertise and they should know if they can help you before they take your money

-If your mortgage is delinquent by 90 days, which is usually required before a loan can be modified, do you really have up to $3,500 to spend getting your loan modified, when the odds of re-defaulting are up to 60%?


There are reputable loan mod companies willing and able to get your loan modified for you and save you the time and hassle of paperwork and phone calls.   Considering the cost that most loan mod companies charge, your best bet is to directly contact your loan servicer or a nonprofit help agency first.

Consumer Confidence Crushed As Upward Mobility Dies

No-Lay Off Policies Crumble, as reported by WSJ

Until recently, Enterprise Rent-A-Car Co. prided itself on a 51-year history of never laying off a U.S. employee. When competitors slashed fleets and shuttered branches after the Sept. 11 attacks, Enterprise kept hiring.

This fall, though, the nation’s largest car-rental agency said it would dismiss 1,000 of its 75,000 employees, as Americans curtailed driving and flying. “These types of declines are unprecedented,” says Patrick Farrell, Enterprise’s vice president of corporate responsibility.

The deepening recession is prompting layoffs at long-established employers that avoided job cuts in previous downturns. These layoffs demonstrate both the severity of the current recession and the continued erosion of workplace norms that once shielded many U.S. workers from permanent job loss.

Several of these employers are in hard-hit industries. Employment in the car rental and leasing sector, for example, fell 3.3% in October from a year earlier, according to the U.S. Bureau of Labor Statistics. Gentex Corp., a Zeeland, Mich., automotive supplier, conducted its first layoffs in 34 years this month amid plunging car sales. Declining gambling revenue prompted the Little River Casino in Manistee, Mich., to dismiss 100 of its 950 employees in November, the first layoffs in the resort’s nine-year history.

Waning Stigma

Some workplace experts say such layoffs show that the stigma associated with permanent job cuts — unthinkable to many employers three decades ago — continues to decline. They say companies find it easier to let go of workers when rivals and other employers also are eliminating jobs.

Kevin Hallock, a professor at Cornell University’s School of Industrial and Labor Relations, says as layoffs become more common, managers may find it easier to discount the human and business costs.

“It was a really difficult thing for them the first time,” he says. But “they got over that hump.”

Many of the employers conducting their first layoffs say they first tried other ways to cut costs, such as freezing salaries or drumming up work for idle employees.

This is not the type of post World War II recession the world has been accustomed to.  This recession, caused by a financial crisis, is distinctly unique in its global reach and appears to have no precedence.   To compare what is happening today to the Great Depression of the ’30’s is simplistic at best given today’s infinitely more complex global financial system.  The 30’s depression, as is the case today, was preceded by a booming highly leveraged economy  Beyond that similarity, there is little from the past which can guide us today.

Bernanke, a “student” of the Great Depression is finding out that his textbook solutions do not seem to be working.    The only certainty is that no one can say how long and how crippling the current economic downturn will become.  The speed of the collapse and the destruction of our conventional view of how things should work are causing the greatest harm of all –  the destruction of confidence caused by asset and job losses.


Loss of confidence works in many ways to confound whatever amount of fiscal stimulus the government undertakes.   Future financial action is predominantly rear view mirror based.   If stocks or housing have been great investments in the past, that view is extrapolated to infinity by most investors.   A rising market has many cheerleaders which reinforces the trend.

Confidence, once shattered by plummeting prices, needs many years to draw investors back into a broken asset class.   Having a job or a stimulus check is not enough to create the confidence to invest if you believe that you may not have a job tomorrow.


Even more destructive to confidence is the abrogation of labor agreements once viewed as sacrosanct.

The greatest assault on our economic foundation is not the collapse of the banking system or investment banks on wall street.  The harshest economic reality of today is the realization that our long held belief in upward mobility has come to an end.   No longer can we assume that our children are entitled to earn more than us.   The American dream is becoming a nightmare as highlighted by pay and benefit reductions and job losses.  Job losses become the ultimate negative feedback loop.   Unemployed people do not spend.  Those with jobs are not confident that they will keep their jobs and spend frugally.

The number of companies announcing job cuts has so far been on a par with our last recession.  The number of companies announcing salary and benefits reductions is unprecedented.   Corporate America’s actions foretell a bleak economic assessment going forward.

It will take many years of economic improvement until the shattered confidence of both employees and employers is restored.   The upside of this downturn is that the urge by consumers to take ridiculous leveraged risks with borrowed funds will be curtailed.   Going forward, banks will price risk properly and the financial system will become sound again.   The hard part will be getting there.

Madoff’s $50 Billion Only Exists On Customer Account Statements

Based on Bernard Madoff’s own estimation, he lost approximately $50 billion of investor funds.  Every since this disclosure, the biggest questions are where did the money go and how much of the $50 billion remains.

Bloomberg is reporting that Madoff To Reveal Assets by year end.

Investors looking to recoup some of the $50 billion they lost in Bernard Madoff’s alleged Ponzi scheme may get a better idea what the New York financial adviser has left when he is forced to reveal his assets to regulators.

Madoff, 70, must provide a detailed list of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings to the Securities and Exchange Commission by New Year’s Eve, a federal judge ruled. Madoff’s foreign business units were given until Jan. 26 to provide a similar accounting.

A catalog of Madoff’s assets may reveal targets for angry investors including hedge funds and charities seeking the return of their funds.

This is a curious report.  Why would a federal judge ask Madoff to provide an accounting?  The SEC states that his records are in disarray and in any event, totally unreliable.   Is it to be expected that a man who lived by deception and lies for two decades is going to present an accurate report?  Where is the SEC, are they still not interested in this man’s operations?    It would obviously make more sense for an outside regulatory agency to produce a report on Madoff’s assets.

Nonetheless, regardless of who produces the report, I would not expect the Madoff funds to show very much in the way of assets due to the magic of compounded interest.   Consider the following scenario.   If Madoff had $2 billion in assets under management assets 20 years ago, the amount of this initial investment, compounded at 12% for 20 years would now be approximately $9.6 billion.   If Madoff took in another half billion per year over the next 20 years, to date that amount compounded at 12% would now be worth around $40.4 billion.   With other factors disregarded and a total principal investment of $11 billion, the investors’ account statements would now show $50 billion of assets.

We know that Madoff was not generating magical returns of 12% per year over 20 years, so the phantom gains of $39 billion in this example probably never existed.   In addition, withdrawals, huge fee payments to feeder hedge funds and losses on investments probably consumed much of the original principal invested.    A classic Ponzi scheme collapses when the amounts needed to be paid out cannot be covered by new investment monies, which seems to be the case here.

Madoff probably did not start his fund with the objective of becoming a Ponzi scheme.  He was probably drawn into it slowly as his warped ego would not let him admit to the world that he was not an investment genius.   Failure to cover previous losses or outperform the market going forward never allowed him to stop the deception once it started.  Indifference by regulators allowed the deception to continue.

Madoff’s $50 billion never really existed except on customer account statements.   Defrauded investors will now find this out come December 31st.

The Collapse Of The American Consumer

Retail Sales Plummet

2008 is winding up as one of the worst holiday sales seasons on record.   Overall sales for December declined by 4% and selected sales categories showed huge declines.

Luxury goods, once considered immune from economic turmoil, were hardest hit, with sales falling 21.2%, Including jewelry sales, the luxury sector plunged by a whopping 34.5%.

A final burst of spending retailers hoped for last weekend never came. Shopper traffic fell 27% compared with the same time last year,

No retail sector was spared. Among the biggest losers were electronics and appliances, which fell a combined 26.7% versus a 2.7% gain last year. Women’s apparel slid 22.7% compared with a 2.4% drop a year ago.

The season’s dismal results have left stores with mountains of inventory to clear

Luxury retailer Neiman Marcus Group  offered 40% off already reduced merchandise. Two weeks ago, Neiman’s reported its net profit dropped 84% for its fiscal first quarter as affluent shoppers cut way back on discretionary purchases.

Circuit City holiday sales were down 50%, nearly twice what the chain had expected.

The great American spending binge is over, a victim of its own excess.  A plunge in spending on luxury goods reflects the economic reality that no income class is exempt from a collapsing economy.  Electronics, jewelry and apparel are the ultimate discretionary purchase and easily postponed.

The government can encourage us to spend money we don’t have but consumers have to deal with economic reality.   When confronted with job losses and pay cuts, most consumers are wise enough to cut spending and increase savings.

One possible positive spin to what looks like dismal holiday sales is that the discounts offered this year were huge.  If a retailer is offering goods at 50% off compared to last year and retail dollar sales are down 4%, that implies unit volume was roughly the same as last year.  At the right price, the consumer will buy but is being very frugal, and big savings for consumers will mean big losses for retailers.

State Lotteries Show Big Declines

The sour economy is striking the one source of government financing that had been widely regarded as recession-proof: lotteries

Across the U.S., many state lotteries are reporting hefty declines, with ticket sales down nearly 10% in California

The decline in lottery sales “is an unusual phenomenon,” said John W. Kindt, a gambling critic and business professor at the University of Illinois. A big proportion of lottery tickets are bought by people with gambling problems who are likely to play more in bad economic times

In past recessions, players continued to buy tickets, but not this time, said Jack Boehm, director of the Colorado Lottery. “Now they are thinking, ‘My retirement is gone, I might lose my job, I’d better start putting money away’ — that means fewer dollars for lottery tickets.”

But Jose Torres, a disabled forklift driver who lives nearby, said that if anything, the recession has prompted him to spend a little more, maybe $2 a day instead of $1. “We need the money — we’re broke,” he said.

The ridiculous number of state sponsored gambling games reflects the states’ insatiably lust for revenue.   Most studies show that a large proportion of gambling tickets are bought by those with gambling problems and lower income groups looking for that one in a billion chance to get rich.   The lotteries are a tax on those least able to afford it and least able to properly budget their incomes.   My advice to Mr Torres is to stop wasting $730 per year.

How To Inspire Panic In An Economic Crisis

In an extraordinarily candid and chilling economic assessment, the Governor of the Bank of Spain, Miguel Ordonez, warned that the global economy is on the brink of a “total” financial meltdown.  Governor Ordonez, in an interview with the Spanish newspaper El Pais is quoted as follows:

“This is the worst financial crisis since the Great Depression”

“There is an almost total paralysis from which no-one is escaping.”

“The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.”

“If, among other variables, we observe that inflation expectations go much below two percent, it’s logical that we will lower rates.”

“The lack of confidence is total”

One thing for certain is that the Governor’s remarks will do nothing to restore confidence in the financial system.  Typically, central banker statements are reserved and constructed to restore confidence in the financial system rather than to incite panic.

As the head of Spain’s Central Bank, one of the Governor’s primary functions is the promotion of the sound working and stability of the financial system.  One may wonder exactly how seriously the Central Bank adhered to their duties when they allowed the Spanish property markets to soar to ridiculous markets values, fueled by easy Central Bank lending policies and lax oversight.  Perhaps they were following Alan Greenspan’s advice that bubbles cannot be recognized and are best dealt with after the fact.   It is statements such as this that prove the basic incompetency of Greenspan,  the man most responsible for destroying the integrity of the world’s financial system.

The central banks responsible for the insane easy money and lending policies that brought us to the brink of ruin are now in charge of restoring confidence. Their prescription for recovery is more easy credit. ( See $700 Billion Debated – $5 Trillion Ignored)    I think it is indeed time to panic.

$700 Billion Debated – $5 Trillion Ignored

When the original $700 billion TARP bailout program was proposed by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke, the American public was shocked.  The size of the bailout request was colossal, representing almost 10% of the country’s entire yearly economic output.  The country’s financial meltdown hit the front pages and caused public outrage.  Realization set in that the Government had been blindsided by the crisis and that interest rate cuts alone would not solve this problem.

Opposition to the bill’s passage was intense and the initial bill was defeated.   The Treasury and Federal Reserve insisted that the money was needed to prevent a collapse of the banking system.  Scare tactics were employed to sway voters minds.   President Bush informed us that the bill was necessary to protect America’s retirement plans and financial future.

TARP was passed and $350 billion quickly dissipated with little to show for it.  Secretary Paulson is now requesting the remaining $350 which will quickly disappear as well, with little assurance of ending the financial crisis.

Meanwhile, with virtually no public debate, the Federal Reserve has put the US taxpayers at risk for over $5 trillion dollars and counting.   This $5 trillion includes direct loans (such as to AIG),  debt guarantees and asset purchases from troubled institutions.

Bernanke, the non elected head of a central bank gone wild is committing vast sums of taxpayer money with no assurance of a positive outcome.  Are we to put our trust in a man who did not see this crisis coming, predicted that it would be contained and is now in charge of solving the problem?    Is Bernanke the savior or the guide on the road to financial Armageddon?

Mr. Bernanke’s predecessor at the Federal Reserve allowed the explosive credit growth and easy lending that fueled financial bubbles.  These bubbles are now bursting and collapsing the world economy.  We now have the lunacy of the Federal Reserve trying to convince us that easy money, which caused the problem, is now also the solution.  Easy money and low interest rates are the only answer the Fed has and so far all it has caused is financial insolvency on a worldwide scale..

The fact of the matter is, the Federal Reserve is not bigger than the US economy.   The power of the Fed is derived from the US free enterprise system.   The Fed cannot change the primary trend of market forces nor can it bailout an entire nation.  All they can do is slow it down and drag it out, as happened in Japan.  The end result of the Fed’s “rescue” is likely  to be an impoverished future caused by unmanageable debt burdens.

Streamlined Modification Program – Who Is Eligible?

On December 18, 2008 the Federal Housing Finance Agency, Fannie Mae, Freddie Mac and Hope announced their Streamline Modification Program (SMP) to assist troubled homeowners.  By implementing common standards and procedures for loan servicers to follow it is expected that the process will expedite the process of modifying a mortgage loan for a troubled homeowner.

Am I eligible for assistance under the new Streamlined Modification Program (SMP)?

If the answer to all of the following questions are YES, you may qualify for assistance under the new Streamlined Modification Program (SMP).

  1. Is your mortgage principal equal to or greater than 90% of your home’s market value?
  2. Is your home a single family residence or condo?
  3. Is the single family residence or condo your primary residence?
  4. Is your mortgage past due by 3 months or more?
  5. Is there a financial hardship that caused you to become late with your mortgage?
  6. Did you take out your mortgage before January 1, 2008?
  7. Can you verify your income?
  8. Is your current monthly mortgage payment (including taxes and insurance) greater than 38% of your gross monthly income?

If you answered yes to all of the above questions you probably qualify for assistance.  Even if you think you may not be qualified, you should still call your loan service provider, who will try to arrange an affordable monthly mortgage payment.  The Federal Housing Finance Agency states that “The key to success is the borrower’s ongoing cooperation and communication with the (loan) servicer”.

Other Considerations

The loan servicer’s phone number is usually listed on your mortgage statement.   In addition, the participating loan servicers in the SMP will attempt to contact delinquent borrowers by phone and mail.

A homeowner’s mortgage may be in foreclosure but the borrower may not be in an active bankruptcy.  A mortgage that was modified previously is eligible.   The new SMP covers mortgages owned by Fannie Mae and Freddie Mac.  Mortgages with the FHA, VA and RHS are not eligible under this program.

The loan service provider is authorized to lower your interest rate to as low as 3%.   A struggling homeowner has nothing to lose by directly contacting their service provider to determine eligibility.