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HUD Imposes Dramatic Restrictions On FHA Cash Out Refinances

March 16, 2009 by Leave a Comment

FHA Tightens Rules Again

First there was an increase in the required credit scores to be eligible for FHA financing.  (See FHA Increases Minimum Credit Score Requirement).  Now comes a major tightening of the rules on FHA cash out refinances.    HUD Mortgagee Letter 2009-08 announced that the maximum loan to value for any cash out FHA loan has been reduced from 95% to 85%, effective April 1, 2009.

HUD is taking this step due to the continued deterioration in the housing market and to limit their exposure to “undue risk”.

HUD Mortgagee Letter 2009-08

Effective for case number assignments on or after April 1, 2009, the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser’s estimate of value.

Given the continued deterioration in the housing market, and FHA’s need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.

Considering that the default rate on FHA loans exceeds 12%, this announcement is not surprising and  long overdue.   It is interesting, however,  to examine the conflicting signals from the government in regards to mortgage lending, as follows:

1. There is constant talk about the need  to increase the flow of credit and politicians from both sides of the aisle are encouraging the banks to lend money.  At the same time the “we need more lending talk” is going on, the government controlled agency lenders have dramatically increased restrictions on lending – see Few May Benefit From Lower Mortgage Rates and Banks Restrict Mortgage Lending To A+ Customers Only.

2.  Fannie Mae and Freddie Mac have imposed huge “delivery fees” on their mortgages, which has greatly increased the cost and reduced the benefits for many borrowers –  see Fannie and Freddie – The New Subprime Lenders.

3.  The Federal Reserve has already purchased mortgage backed securities.  Chairman Bernanke has stated his intention to dramatically increase such purchases in the future in an attempt to lower mortgage rates.  Since so few people are eligible for mortgages, he might as well save himself the trouble of printing the money that would be necessary to purchase mortgage backed securities.

Sound Mortgage Underwriting Essential

The banking system should have strict underwriting guidelines for approving a mortgage loan.  If proper underwriting guidelines had been adhered to in the past, we would not now have a major banking and housing crisis.  The question is, has the pendulum swung too far in the other direction?

Filed Under: Banking Industry, FHA, Interest Rates, refinance Tagged With: , ,

Are Geithner’s Days Numbered? Banks And Investors Have Zero Confidence

March 16, 2009 by Leave a Comment

First Impressions Hard To Reverse

The old saying in the recruiting business is that one is judged in the first 15 seconds of a job interview.  Irregardless of what happens for the rest of the interview, that first impression cannot be changed.  No doubt, Treasury Chief Geithner wishes that he could take back that first big interview on February 10 when he announced his Financial Stability Plan.  The plan was so lacking in details that one could only wonder why Mr Geithner did not postpone his grand announcement.   Investors on Wall Street rendered prompt judgment on Mr Geithner with the Dow plunging almost 400 points.

Forget The Learning Curve

A month later, Mr Geithner has still not come up with anything of substance to deal with a broken banking system, which by some estimates could cost upwards of $4 trillion dollars.  In fairness to Mr Geithner, he is tasked with solving a problem that only time and the free markets may ultimately cure.   There are no quick and easy answers to the banking and housing crisis, but we cannot afford the luxury of allowing Mr Geithner a multi month learning curve period.    Mr Geithner’s delay in coming up with a detailed plan after his disastrous first attempt may have destroyed his credibility to the point where it doesn’t really matter what he does for an encore.

Banks Burning Mad As Geithner Fiddles

“As Americans recover from the shock and disgust of this latest [AIG] revelation, they will justifiably ask who got us into this mess,” writes Henry Blodget. “The answer, in part, is the same man who has yet to come up with a coherent plan to get us out of it: Tim Geithner.”

Geithner told Bloomberg TV this weekend he will “move quickly to lay out a new financing program” to help banks deal with their toxic assets.

In other words, Geithner still hasn’t put the finishing touches on the “Financial Stability Plan” he announced in mid-February to rousing condemnation because it lacked detail. More to the point, Geithner still doesn’t have a coherent plan he’s willing to share a year after the Bear Stearns-JPMorgan shotgun wedding.

Similarly, Geithner & Co. have yet to unveil their new blueprint for regulating banks. But, again, it’s coming soon

Recipients Of Bailout Cash Stage Revolt

The original TARP bailout plan which was supposed to save the banking industry from collapse has turned into a disaster.  Many banks are saying that they were forced to take expensive TARP money that they did not need or want and now want to return the money – see Banks Push Back On Bailout Plan – Wells Fargo Calls Stress Test Asinine.   The Chairman of Wells Fargo voiced some remarkably blunt criticism of the TARP plan yesterday when he called the governments plan to “stress test” banks asinine.  Relations between the banks and Geithner’s Treasury seem frayed beyond repair at this point.

Effective Leadership Needed

Mr Geithner seems to command zero confidence or respect at this point – he should be replaced by someone who can get the job done.

Filed Under: Bailout, Banking Industry, Confidence, Geithner, Housing Tagged With: , , ,

Banks Push Back On Bailout – Wells Fargo Calls Stress Test “Asinine”

March 16, 2009 by Leave a Comment

Wells Fargo Discovers High Cost Of Government Help

Wells Fargo Chief Calls Stress Test Asinine

March 16 (Bloomberg) — Wells Fargo & Co. Chairman Richard Kovacevich criticized the U.S. for retroactively adding curbs to the Troubled Asset Relief Program, which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks “asinine.”

When the U.S. Treasury persuaded the nation’s nine biggest banks to accept capital investments in October, it signaled the whole industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it must comply with the same rules that the government placed on banks that did need it, he said.

Kovacevich joins a growing list of bankers who are chafing at restrictions imposed by the TARP program, which affect lending, foreclosures, pay and perks. Lenders including Bank of America Corp., U.S. Bancorp and Goldman

Kovacevich said the government is still making mistakes as it tries to save the industry.

“We do stress tests all the time on all of our portfolios,” Kovacevich said. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

Regulate Yes – Operate No

Wells Fargo Chief Kovacevich is discovering the truth of Ronald Regan’s quip when he said the nine most terrifying words in the English language are “I’m from the government and I’m here to help”.  I applaud the head of Wells Fargo for pushing back and rejecting the heavy hand of the government in the banking industry.   Those banks that have run their operations properly should reject or return bailout funds and run their operations free of the strangulating hand of government control.  The government should regulate banks – not operate them. The government failed at regulating banks in the past – what are the odds that the government could run a bank properly?

Many other banks are also pushing back and returning TARP money that they say was forced upon them.  Ironically, the TARP money that certain banks were required to accept wound up causing more harm than good.   The banks that accepted TARP funds were viewed as tainted by the public.  The interest rate that the government was charging the banks was so high (up to 9%) that the money could not be profitably lent out without taking undue risk.

TARP was passed by Congress last year after the Fed, the Treasury and the President employed scare tactics, predicting financial Armageddon unless the $700 billion bailout was approved.  Now we learn that much of the TARP money was forced upon banks that did not need the money and now wish to return it.  This entire episode leads us to wonder exactly how poor the government’s comprehension of the banking problem was to begin with.  Any future scare tactics employed by the government to borrow more trillions to “save us” should be viewed with great skepticism.

Banks Scramble to Return Bailout Funds

A growing number of healthy bank chains across the country are bailing out of the $700-billion federal banking bailout program, saying it has tarnished the reputation of banks that took the money and tangled them in unwieldy regulations.

“The TARP money is tainted and we don’t want it,” said Jason Korstange, a spokesman for Minnesota-based TCF Financial Corp., which received $361 million and announced this month that it wanted to pay it back. “The perception is that any bank that took this money is weak. Well, that isn’t our case. We were asked to take this money.”

The bank issued a toughly worded statement earlier this year, saying that the money had put the financially strong banking chain at a “competitive disadvantage” and that the bank now believed it was “in the best interest of shareholders” to return it.

For Rothenberg, the banker in Century City, the prospect of unlimited government intervention was too much.

Only a few banks formally have told the department they would return the money early, although others have signaled they intend to follow suit, a Treasury spokesman said.

So far, the banks are waiting to hear how they are supposed to return the money.

Government Cure Was Worse Than The Disease

The banks have learned that any free enterprise operation that gets entangled with the suffocating idiocy of government bureaucracy will neither live long nor prosper.  The government cure turned out to be worse than the disease.  Now let’s see how long it takes the government to figure out the rules that must be followed before the banks can return the taxpayer money that they don’t need or want.

Filed Under: Bailout, Banking Industry, Wells Fargo Tagged With: , ,

Banks Tighten Lending By Restricting FHA Cashout Refi

February 26, 2009 by Leave a Comment

FHA Loans Become Tougher To Qualify For

Effective January 1, 2009 HUD announced that any FHA cash out refinance would require two appraisals when the loan to value exceeds 85% – see FHA Takes A Closer Look At Home Values. Since the customer usually has to pay for the appraisal, this adds around $350 to the cost of refinancing with the FHA.  In addition, many underwriters are taking a very close look at appraised values, due to the continuing drop in home prices.   In turn, the close scrutiny of appraised values by the underwriters are making many appraisers more conservative in the values that they assign to a home.  The FHA also raised the down payment requirement on purchases to 3.5% and increased mortgage insurance premiums.

The net result is that an FHA loan not only has higher costs but also a higher probability of being turned down due to insufficient equity and more stringent underwriting guidelines.

Some Banks Reduce Cash Out Limits On FHA Loans

Two smaller banks today have reduced the cash out limits on FHA loans to 85% loan to value, despite the FHA guideline allowing 95% cash out.  Rumor has it that larger banks will also follow through on lowering the loan to value limits on FHA cash out refinances.   Tougher guidelines quickly spread industry wide, so expect many more lenders to make it more difficult to cash out on an FHA refinance.

Since FHA loans have a very high default rate (roughly 12%), it is only logical that banks are imposing tougher guidelines for borrowers.   The banks simply cannot afford to take on additional default risk given their weak financial position.

Many potential borrowers will continue to find it difficult to obtain mortgage approval until the economy recovers and the housing markets stabilize.  Based on the way things are going, it could be a long wait.

Filed Under: Banking Industry, FHA, Housing, Mortgages Tagged With: ,

Jumbo Mortgage Rates Reflect Default Risk

February 24, 2009 by 4 Comments

Economic Crisis Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels.  Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off.

Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners.  Due to the higher level of defaults, banks are becoming very reluctant to make jumbo mortgages for either purchases or refinances.  Since Fannie Mae and Freddie Mac  will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses.  All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 20 basis points “for several decades,” according to BanxQuote CEO Norbert Mehl.

The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg data.

“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.”

Conforming Loans At 7%?

An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate.  Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee.  This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates.  In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

Jumbo Mortgage, Jumbo Headache – Wall Street Journal

Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.

President Barack Obama’s housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country

Anything bigger is called a “jumbo” loan — and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.

“Every single day I’m talking to people who have a jumbo loan, and I can’t do anything for them,” says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.

ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.

“If you have been able to … save for a down payment, that to us speaks volumes about your character,” says Bill Higgins, ING’s chief lending officer.

Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Mr. Lazerson says.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”.  Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums.   Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors.  This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing.  The banks are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.

Filed Under: Banking Industry, Economy, Interest Rates, Jumbo mortgages, Mortgages Tagged With: , ,

Defaults Everywhere – More Lending Is Not The Solution

February 24, 2009 by 2 Comments

Mortgage Defaults Only Part Of The Problem

Mention loan defaults and most people probably think of mortgages.  Home foreclosures due to mortgage defaults are getting the bulk of press coverage and the most attention in Washington.  The credit crisis, however, is not confined to home mortgages.  Lack of consumer demand, reduced incomes, lack of credit and an economy that seems to be getting weaker by the hour, is causing growing defaults in almost every category of lending.  Commercial real estate, credit cards, car loans, student loans, second mortgage loans, business loans and personal loans are all defaulting at shockingly high rates that the banking industry never expected.  The losses from these loan defaults are depleting bank capital, making banks less eager to lend to anyone.

The Wall Street Journal reports today that loan Defaults by Franchisees Soar As The Recession Deepens.

From ice-cream parlors to tanning salons, franchisees’ defaults on loans guaranteed by the U.S. Small Business Administration are piling up in amounts unseen in years. A list of loans at 500 franchises shows the number of defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007. Loan losses totaled $93.3 million, a 167% jump from $35 million just 12 months earlier.

The figures, a stark barometer of the downturn’s severity and scope, could give pause to banks that have loan money about where to lend next. Banks that make SBA-guaranteed loans say they use the annual list as guidance in assessing future commitments.

SBA-guaranteed loans are aimed at providing capital to small businesses that often can’t qualify for conventional credit. Those loans, made through commercial banks and other lenders, can total as much as $2 million for as long as 10 years. The SBA essentially insures a significant portion of the loan to encourage lending and small-business entrepreneurship. The recently passed stimulus package raises that guarantee amount to 90% from 75%.

The franchise brands where at least 11 franchisees defaulted on loans during the 2008 fiscal year were: Aamco Transmissions, Carvel Ice Cream, CiCi’s Pizza, Cold Stone Creamery, Curves for Women, Domino’s Pizza, Dream Dinners, Planet Beach tanning salons, Quiznos, Subway and Taco Del Mar.

Over time, some businesses have significantly better loan-performance rates than others. Among the worst-performing franchise brands, as measured by the percentage of SBA-guaranteed loans issued to franchisees over the past eight fiscal years that defaulted: Mr. Goodcents Subs & Pastas, 55%; Philly Connection sandwiches, 51%; Cottman Transmission, 49%; All Tune & Lube auto centers, 47%; Cornwell Quality Tools, 42%; and Carvel and Blimpie, both with 41% failure rates. Each had obtained at least 50 SBA-guaranteed loans during that period.

An interesting aspect of the default ratio is that certain franchise operations have a huge number of defaults.  With more than enough bad debts on the banking industry’s books, one would hope that lending would be severely curtailed or eliminated to franchise operators that are showing over a 40% default rate.  A default ratio of almost half of all borrowers  would seem to indicate a basic flaw in the franchise system’s business model.

The bottom line for franchise operations and probably every other business right now is that more loans may keep the doors open, but at the cost of burying the business owners in debt and making future profitability all that much more difficult.   What businesses really needs right now to survive and prosper is increased sales, something that seems very difficult to achieve under current economic conditions.

Filed Under: Banking Industry, Economy, Franchise operators, Interest Rates Tagged With: ,

Notable Links

February 19, 2009 by 1 Comment

Straight Talking Common Sense

Obama Must Destroy Detroit, So America Can Live – Evan Newmark

Dear President Obama,

Who said life was fair?

You’re in office less than a month and the markets already hate your presidency, your Treasury secretary and your economic stimulus plan.

It’s time for you to destroy Detroit, so that the rest of America can live.

Mr. President, it’s time for the bankruptcy of GM and Chrysler.

Now that may seem harsh. But you really have no choice. Look around you. Everybody in America has his hand out — California and the movie industry, New York and Wall Street, homebuilders and the millions of mortgage deadbeats.

You need to send a message to all America — and fast. No more Mr. Nice Guy and no more money. Reinventing America doesn’t mean bailing everyone out. It means stopping those things that just don’t work anymore.

But such a bold gamble could mark a turning point early in your term.

It would get Republicans behind you. It would get Wall Street and America’s trading partners behind you. And it would get even more Americans behind you. Americans know when something makes sense.

Remember Ronald Reagan and the air traffic controllers’ strike of 1981?

That’s how he reinvented America. Now, it’s your turn.

Some good thoughts – worth a full reading.  Only problem is it won’t happen because there is no common sense in Washington and Mr. Obama is not Ronald Reagan.

The Burning Platform

The $787 billion 1,074 page stimulus bill has been passed. President Obama has signed it. The market immediately dropped 500 points. It will have no impact on the economy in 2009. The bill will stimulate nothing but the National Debt. Within months, plans for another stimulus plan will be demanded by the Democratic led Congress because speed and the appearance of action are how politicians get reelected. When I see Senator Charles Schumer of New York make a speech on the floor of the Senate saying, “And let me say this to all of the chattering class that so much focuses on those little, tiny, yes, porky amendments, the American people really don’t care”, I want to throttle him.Only a U.S. Senator would consider $100 billion a little tiny pork. His words prove that our leaders are so corrupted and disconnected from real Americans that they are running this country for their own self interest and the interests of their corporate money backers. Abraham Lincoln, an honest and wise man by most accounts, knew that calling pork spending stimulus doesn’t make it stimulus.

The definition of unsustainable is, not able to be maintained or supported in the future. To me, a picture is worth a thousand words.

3
Source: Robert Shiller

As Congressional moron after Congressional moron goes on the usual Sunday talk show circuit and says we must stop home prices from falling, I wonder whether these people took basic math in high school. Are they capable of looking at a chart and understanding a long-term average? The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.

Instead of allowing the housing market to correct to its fair value, President Obama and Barney Frank will attempt to “mitigate” foreclosures. Mr. Frank has big plans for your tax dollars, “We may need more than $50 billion for foreclosure [mitigation]”. What this means is that you will be making your monthly mortgage payment and in addition you will be making a $100 payment per month for a deadbeat who bought more house than they could afford, is still watching a 52 inch HDTV, still eating in their perfect kitchens with granite countertops and stainless steel appliances. Barney thinks he can reverse the law of supply and demand by throwing your money at the problem. He will succeed in wasting billions of tax dollars and home prices will still fall 20% to 30%. Unsustainably high home prices can not be sustained. I would normally say that even a 3rd grader could understand this concept. But, instead I’ll say that even a U.S. Congressman should understand this.

Another common sense analysis by James Quinn well worth the entire read.  Markets are larger than any government and ultimately cannot be manipulated by government over the long term.  The United States Congress will waste trillions trying to support a housing market that will ultimately stabilize based on free market factors – not government manipulation and price supports.  If the government had the power to control the housing market, they would not have let it crash in the first place.

Greenspan Backs Bank Nationalization

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

The one man who is probably the most responsible for creating the debt bomb explosion and global collapse has more advice for us.  Mr Greenspan, enjoy life with your $150,000 per speech fees along with your fine government pension.   But PLEASE stop giving us your damn advice.

The mad attempts to avoid any and all foreclosures is counter-productive. The foreclosure process is how an over-priced market returns back to normalcy.

Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.

Before getting to those specifics, let’s revisit and recognize several truths:

• Home prices remain elevated;

• Artificially propping up prices is counter-productive;

• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;

• Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;

• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.

What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;

More sound, common sense advice from Barry Ritholtz.  The government’s constant stream of ridiculous “new plans” for solving the housing crisis with their Rube Goldberg mechanisms is sure to postpone any recovery or bottom in housing for decades.

Sovereign Default –  Which Domino Falls First?

It’s no longer a question of if, but where.  Will the first sovereign default occur in Eastern Europe or Asia?  The debt levels of many countries are no longer sustainable due to collapsing economies, destruction of asset/collateral values and the inability to obtain more credit.  Of the $5 trillion in loans made to emerging market countries, almost 75% of the lending was done by Western European banks.

Many countries no longer have the economic ability to service their debts.  Debts that cannot be paid, by definition, will be defaulted on.  The larger question is will the first sovereign default trigger a domino of defaults, resulting in a catastrophic series of defaults worldwide?

Courtesy Wall Street Journal

Filed Under: Bailout, Banking Industry, Deleveraging, Government spending, Sovereign Default Tagged With: , ,

Jet Age “Run On The Bank” In Antigua

February 17, 2009 by Leave a Comment

Stanford Depositors Head To Antigua

Depositors from as far away as Colombia have begun arriving in the island nation of Antigua, seeking to withdraw their money from an offshore bank under investigation by U.S. state and federal authorities.

Reached by telephone on Monday afternoon, the chief financial officer at Stanford International Bank, James M. Davis, declined to comment when asked if investors are having difficulty obtaining redemptions. “I don’t have any comment, but I appreciate your call,” said Mr. Davis, the longtime top aide to Mr. Stanford.

A Stanford spokesman said because of the holiday he was unable to comment on the mutual-fund product.

Mr. Stanford said in a conference call to employees Tuesday there would be a temporary moratorium of two months on early redemptions for CDs, according to one Stanford financial adviser who has worked at the firm for about five years. Several depositors say they have been told the same thing.

In Antigua, anxious depositors have flown in from overseas to seek their money from Stanford International Bank, housed in an imposing neo-Georgian building beside Antigua’s international airport.

Just over three months ago, Mr. Stanford paid out $20 million in prize money to the winners of a single cricket match in Antigua. Mr. Stanford announced his inaugural tournament by descending on Lord’s Cricket Ground in London in what was described as a gold-plated helicopter. According to the Times of London, Mr. Stanford now plans to continue the tournament but in reduced form.

My take here is that many innocent people will sustain losses on their investments – See Stanford Financial Investigated. The SEC has been investigating Stanford since at least 2007.  After seeing the SEC in action with Bernard Madoff, investors should have zero confidence in the SEC’s ability to protect investors.

Filed Under: Auditors, Banking Industry, Confidence Tagged With: ,

Banks Restrict Mortgage Lending To A+ Customers Only

February 10, 2009 by 1 Comment

Latest Changes Eliminate More Borrowers From Mortgage Market

As written previously, for those without impeccable credit, adequate income and loan to value below 70%, the low advertised rates are not available.  See All Time Low Rates For A++ Borrowers Only and Few May Benefit From Lower Mortgage Rates.

Much more stringent underwritten guidelines for mortgage approvals were issued today by a major bank as follows:

Important Update Regarding Revised Minimum Credit Score for All Loan Products, Effective Immediately

Effective for locks on or after Tuesday, February 10, 2009, the minimum credit score requirement for ALL loan products is 640. This includes the following loan programs:

· Agency Loan Program

· Agency Affordable Lending Program

· Portfolio Affordable Housing Program

· Texas Cash Out Refinance

· FHA 203b (FHA),

· Veterans Administration (VA), and

· Rural Development (RD) Guaranteed Rural Housing (GRH) Program

Additionally, the following applies:

· a minimum credit score of 640 will be required for ALL scoreable borrowers regardless of the LTV/TLTV.

· A minimum credit score of 640 will be required for all traditionally underwritten and AUS (DU/DO and LP) processed loan transactions, regardless of the AUS approval or recommendation.

These new guidelines are far more restrictive than Fannie Mae, Freddie Mac and FHA guidelines.   The bank and mortgage company guidelines are the ones that really matter because a consumer cannot directly apply to the agencies for a mortgage.

Pricing on mortgages can be described as chaotic.  Guideline changes such as the ones instituted today are basically a message from the banks that the mortgage business is unprofitable to them.   Every customer is seen as a future default.  Simply put, the banks do not want new mortgage business, which is why virtually every major bank has eliminated their wholesale lending operations.   The mortgage bankers who sell their loans to the agencies or larger banks are restricted in lending activities by the lack of warehouse lines of credit.  All of the above factors combined have severely restricted mortgage lending and disrupted the established channels for mortgage lending.  A perfect borrower with a loan to value under 70% can still reap the full benefit of lower rates; all other borrowers will find it very difficult to qualify.

The Fed can buy mortgage backed securities and treasury bonds by the trillions to lower mortgage rates, but with the lending intermediaries either unwilling or unable to make new mortgage loans, the benefit of any rate reductions will be severely limited to  A++ customers.   The borrowers who need the benefit of lower rates the most will see the least benefit since many do not qualify under current guidelines.

Filed Under: Banking Industry, Interest Rates, Mortgages, refinance Tagged With: ,