May 29, 2022

Americans Stubbornly Deny All Time High In Personal Income

American workers should be celebrating the latest numbers from the U.S. Department of Commerce that show personal income at all time highs.  Since taking a rather sharp dip during the recession of 2008-2009, personal income has soared to almost $13 trillion, up from $12 trillion in early 2009.

Getting Americans to believe that their incomes have actually increased is another story.  While the Department of Commerce is reporting all time highs in income,  another survey released by Fannie Mae shows the opposite.

Fannie Mae (FNMA.OB) conducts a National Housing Survey every quarter that polls homeowners and renters in depth about their confidence in homeownership, overall confidence in the economy and the current state of their household finances.

The latest National Housing Survey for the fourth quarter of 2010 polled 3,407 Americans and the results do not reflect the rosy income numbers reported by the Department of Commerce.

The survey revealed that 62% of all respondents believe the U.S. economy is on the wrong track, 60% reported that monthly household income was the same as a year ago and 34% said that their monthly expenses were “significantly higher” than a year ago.  Only 19% of those polled said their incomes were significantly higher.

Keep in mind that Americans do not normally “inflation adjust” their perception of personal income – when respondents say that their income has not changed, it means they are receiving the same absolute amount of dollars, unadjusted for inflation.

Total personal income may have increased but income gains seem to have been limited to a small minority of Americans.

In any event, if most Americans have not seen an increase in their monthly incomes, there is little reason for comfort going forward.  As higher oil and commodity prices work their way through the system, the basic cost of living will increase for everyone.  If that’s not enough, once Fed Chairman Bernanke’s obsession with creating higher inflation succeeds, we are all apt to feel poorer.

Fannie and Freddie – The New Subprime Lenders

Fannie and Freddie Impose Huge Fees On Borrowers

Freddie Mac last week announced additional fees for condo owners who refinance, effective April 1, 2009.  The fee mirrors a similar charge imposed by Fannie Mae last year.  Both Fannie and Freddie now assess a wide variety of fees to borrowers based on loan to value, credit and type of loan.  The fees are euphemistically referred to as “Postsettlement Delivery Fees for Mortgages with Special Attributes”. Translation – we need the money and are now charging huge fees to reflect lending risks that we never recognized prior to the housing crash.

Many borrowers are finding out that the Fannie and Freddie fees are resulting in mortgage rates far higher than the rates they see advertised.  See All Time Low Rates For A++ Borrowers Only.   The fees imposed are too large to be absorbed by the lending institutions that sell their loans to Fannie and Freddie.  Therefore the fees must be passed on to the customer in the form of closing costs and/or a much higher interest rate. The total fees imposed by the agency lenders are cumulative for each special attribute. The end result is that the fees and rates are so high that most borrowers are unable to refinance.

Here is an example of the fees that Fannie and Freddie would charge on a routine mortgage refinance with the following “special attributes”.   The borrower is attempting to refinance at 80% loan to value, has a 675 FICO score and needs to take cash out.    This is a routine type of refinance and the credit score of 675 is considered good.  The borrower is applying for the prevailing rate of 5.5%. Three years ago, this borrower would easily have qualified under a conforming Fannie or Freddie loan with a minimum of agency fees.  The same borrower today, if approved, would be facing very steep fees as follows in a $250,000 loan example.

Delivery Fees Effective April 1, 2009 Based on 80% Loan to Value

1. 675 FICO score fee 2.50%
2. Cash out fee 1.50%
3. If the property is a  Condo add additional fee .75%

The total fees imposed by Fannie or Freddie on this example loan would total 4.75% of the $250,000 loan or $11,875. In addition, there are various lender and legal fees involved in a refinance that could easily total another $2,000.   These Fannie and Freddie fees make the defunct sub prime lenders look like good guys.

Rates Are Low – Don’t Bother Applying

In real life, here’s what would happen. The borrower refuses to pay $11,875 in fees to get 5.5%.  The lender could not provide that rate in any event since the total of fees involved are so high that they would violate predatory lending rules. The rate cannot be raised enough to absorb all of these fees based on current pricing structures.  The best this customer could get would be a rate of around 7.25 and agency fees of $7,000, plus regular closing costs.  Several years ago, this customer could have gotten a lower fixed rate with much lower fees from a sub prime lender.

For a borrower to get the “low rates available” today, you usually need to show up with a credit score of 740 and a loan to value of 70% or less. Most borrowers who need to refinance today do not possess this loan profile.  While the Fed strives to lower mortgage rates, Fannie and Freddie are effectively telling all but the highest quality borrower to get lost by pricing them out of the market.  Compounding this ridiculous situation is that the Federal Housing Administration (FHA)  does not charge many of these fees, even at higher loan to values and lower credit scores.

By the way, did I mention that the Government has effectively nationalized the mortgage industry?

Items Of Interest

Life Insurers Seek TARP Funds But Pay Little In Tax

Several of the biggest U.S. life-insurance companies are seeking a piece of the taxpayer-funded $700 billion federal bailout program, but pay little in income taxes themselves, securities filings show.

Consider Prudential Financial Inc., which last week announced that it is seeking an unspecified amount of aid through the federal Troubled Asset Relief Program, or TARP.

Despite reporting pretax profits to shareholders of nearly $25 billion over the past decade, Prudential has paid just $1.3 billion in taxes to federal, state and foreign governments in that period, filings show, for an effective tax rate of 5.1%. That compares with a statutory combined federal and state corporate income-tax rate of about 39.5%.

When you can pay good lobbyists, good things happen.  If they paid higher taxes, our life and car insurance premiums would cost more; can’t really get upset about this.  You can be certain that with the recent large losses the insurance companies have taken (plus probably more to come) that they won’t be paying taxes for some time due to tax loss carry forward credits.

Executive Accused in Mortgage Scheme

A financial executive used little more than a pen to alter credit scores and reclassify mobile homes as single-family houses, inflating the value of thousands of mortgages that were repackaged and sold to investors, prosecutors allege.

Mr. Gordon, a former director of residential acquisitions at Bayview, made more than $2.8 million in additional commissions by altering the value of 2,800 loans from 2001 to 2006, according to documents filed by prosecutors in U.S. District Court in Miami.

The worst part of this mortgage fraud was the ease with which it was carried out.  This is just the tip of the iceberg.  At the peak frenzy of the mortgage bubble, there were few controls or oversight, underwriting standards were a joke and everyone was too busy cashing their paychecks to notice anything.

Madoff Charged in $50 Billion Fraud at Advisory Firm

Bernard Madoff, founder and president of a New York firm that invested funds for wealthy individuals, hedge funds and other institutions, was charged with operating what he told employees was a long-running $50 billion Ponzi scheme in what may be one of the largest frauds in history.

This is truly off the scale.  Would this fraud have continued if not for the huge drop in stocks and other asset values?  Look for continued financial horror stories as the economy weakens.  Wall Street brokers are going to have a very tough time soliciting new customers.

Household Net Worth in U.S. Declines Most on Record

U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled, highlighting the tattered state of consumer finances even before the most recent slump in lending.

Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, according to the Federal Reserve’s Flow of Funds report issued today in Washington. Real-estate-related assets declined by $646.9 billion, three times the prior quarter’s drop.

All of the wealth accumulated since the third quarter of 2006 has been vaporized and this does not include the horrific market sell offs that occurred in October and November which probably wiped out another $4 trillion in wealth.  Not surprising that investors are putting what is left into “risk less” treasury paper paying zero per cent.

Is America On A Downward Slope?

America has given indications that it has reached its peak and is on a downward slope. The U.S. government has taken measures in the last 11 months that appear to be a desperate attempt to keep our dysfunctional corrupt financial system propped up.

Exceptionally well written and thought provoking masterpiece, well worth the read.  You may not feel very bullish after reading this.

Fannie & Freddie May Waive Appraisals On Refinance

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.

This action, if taken, is equivalent to lending at a loan to value of over 100%.  Looks like another desperate attempt to prop up the property markets which won’t succeed.  If the government could have controlled housing prices, they never would have declined in the first place.  What investor in his right mind will buy mortgage paper going forward?  Without government guarantees, mortgage rates would be somewhere between the yield on high grade corporates and junk bonds.