1. According to Ilian Mihov, a professor of Economics at the INSEAD business school, Italy will have to refinance what percentage of its total debt in 2012.
ANSWER: 20%
2. What major government official told a news conference on Thursday that the United Kingdom is preparing itself for a wide range of European financial crises?
ANSWER: Bank of England Governor Mervyn King
3. According to a new report, how many days delinquent is the average housing loan in foreclosure?
Answer: 631 days
Showing posts with label foreclosure. Show all posts
Showing posts with label foreclosure. Show all posts
Thursday, December 01, 2011
Tuesday, June 09, 2009
The Housing and Credit Crisis Explained
This presentation on the Housing and Credit crisis is the best I have seen. It explains everything from soup to nuts.
Each slide contains a graph that is well explained.
They say a picture is worth a thousand words.
Once you get through this, you will understanding the current credit crisis in housing, and what to expect in the years ahead.
If you take the time to view and read this you will be fully informed.
Hit the full screen button in the upper right hand corner of the panel below.
T2 Partners Presentation on the Mortgage Crisis
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Each slide contains a graph that is well explained.
They say a picture is worth a thousand words.
Once you get through this, you will understanding the current credit crisis in housing, and what to expect in the years ahead.
If you take the time to view and read this you will be fully informed.
Hit the full screen button in the upper right hand corner of the panel below.
T2 Partners Presentation on the Mortgage Crisis
Publish at Scribd or explore others: Research Business & Economics Finance Non-fiction world culture
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 Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments. |
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Monday, April 06, 2009
Shhhh-----Don't Tell Anybody
The ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac is over. The Plan which began as a high-profile effort just before the holidays to keep people in their homes as the government tried to come up with homeowner rescue plans was announced with great fanfare.
The ban ended on March 31, but I bet most of you are hearing about it for the first time right here.
There is some good news,
The ban ended on March 31, but I bet most of you are hearing about it for the first time right here.
There is some good news,
A foreclosure sale may not occur on any Fannie Mae loan until the loan servicer verifies that the borrower is ineligible for a Home Affordable Modification and all other foreclosure prevention alternatives have been exhausted.
Brad German, a spokesman for Freddie Mac, said he was “mystified” as to how anyone could be surprised by the ban’s expiration. The idea behind it was to give the government time to create homeowner rescue plans, and that’s been done, he said. Neither agency also expects a flood of homeowners out on the street because the ban is being lifted, he added.If you would like to read a very good article on this topic go here--
“For all practical purposes, people will be in their homes for a while,” despite the ban’s expiration, German said. Fannie and Freddie will need time to approach tenants and homeowners and figure out whether they are qualified for help, he said.
Fannie, Freddie Quietly Lift Moratorium on Foreclosures
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| Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments. |
Wednesday, March 18, 2009
Southern California Home Prices Stabilize
For the first time in 10 months, the median home price in Southern California in February didn’t decline from the prior month, the La Jolla, Calif., firm said. The median price for a home sold in the counties of Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange last month was $250,000. While that was down 39% from February 2008, it was unchanged from January.
Foreclosures continue to dominate the market. Sales of bank-owned properties accounted for 56% of total home resales in February, MDA DataQuick said.
Source: MDA DataQuick
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Thursday, March 12, 2009
Missouri Family avoids Foreclosure Keeps Cave--Not kidding
Curt and Deborah Sleeper had plans to auction their 15,000-square-foot home which is built inside a former limestone and sandstone cave.
Then along came John Demarest,
UPDATE: Missouri Family Will Keep Cave
Cave Dwelling Family Can’t Refinance; Selling Home on eBay
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Then along came John Demarest,the founder and owner of Logical Source, Inc., a document managing company based in Fairfield, N.J., has offered the family a private mortgage contract consisting of a 15-year loan with a low interest rate.
Subscribe to All American Investor via EmailThe news only gets better, the Sleepers are now planning to throw a cave party. Not in their cave, but in the cave of a friend.
Tom Kerr's cave has 5 million square feet and includes a 60-acre lake.Mama mia. I bet you would like to see that cave--well you can. Tickets to the party are now on sale--15 bucks in advance online--or 20 bucks at the door. They plan to donate the proceeds to other families facing foreclosure. Good news all around.
Cave Dwelling Family Can’t Refinance; Selling Home on eBay
| Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments. |
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Wednesday, March 11, 2009
Don't Get Swindled by a Foreclosure Rescue Company
You can always count on the swindlers and scam artists to come out of the woodwork when desperate consumers get in trouble and need help. In this case it is poor unsuspecting consumers that are looking for ways to keep their homes and avoid foreclosure.
The new scam is being run by so called "foreclosure rescue companies". Many of these outfits charge consumers upfront fees and then walk away with the money. In Florida, you will see ads on television all day long offering to save you from the impending disaster of losing your home. More often than not, these "scam artists" have words like "federal" or "government" in their company name. The company names are intentionally misleading and often lead consumers to believe they are somehow connected to the so called federal government "housing bailout". In other words, official government agencies.
The new scam is being run by so called "foreclosure rescue companies". Many of these outfits charge consumers upfront fees and then walk away with the money. In Florida, you will see ads on television all day long offering to save you from the impending disaster of losing your home. More often than not, these "scam artists" have words like "federal" or "government" in their company name. The company names are intentionally misleading and often lead consumers to believe they are somehow connected to the so called federal government "housing bailout". In other words, official government agencies.
At a seminar for troubled borrowers near her home, one company offered a service that promised just what Ms. Martinez needed: for $1,000, the company said it would negotiate with her mortgage company to lower her interest rate.If you are in dire straights I would suggest two paths to getting help. First, talk to the company that services your mortgage loan. Many of these companies have set up relief programs to help stressed out consumers. Second, here are two websites you can go to find local housing counselors: Guide to Avoiding Foreclosure or Housing Crisis Resource Center.
“I was desperate,” said Ms. Martinez, 57, a clerk at the San Joaquin County Jail. She made an initial payment of $500 and paid another $500 a few weeks later.
Now the house is in foreclosure, and Ms. Martinez is waiting for the sheriff to evict her. She cannot reach the man she paid to modify her loan.
Swindlers Find Growing Market in Foreclosures
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Thursday, March 05, 2009
Americans Falling Behind on Mortgage Payments
I really believe that part of this problem that has been caused by the Federal government. Many Americans were lead to believe that in order to get bailed out they needed to get into foreclosure. Much of the talk back in September and October was about saving the butts of investors that were screwed by mortgage bankers. As it turns out, the plan to save homeowners--Mortgage Modification Plan--Making Homes Affordable--is not going to help speculators, or those who bought second home for "investment purposes".
A record 5.4 million American homeowners were either behind on their payments or in foreclosure at the end of 2008.That translates to almost 12% of mortgage holders. The biggest increases in loans 90-days past due were in Louisiana, New York, Georgia, Texas and Mississippi. No California or Florida. I guess they beat everyone to the "punch" in these states.
| Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments. |
Wednesday, March 04, 2009
Beware of Foreclosure Rescue Scams - Help Is Free!
I am posted this as a public service announcement for Homeowners. I am seeing ads on television offering assistance to distressed homeowners--for a fee. I am also seeing stories on the news channels with horror stories where unsuspecting homeowners are paying fees to these scam artists and getting nothing in return.Beware of Foreclosure Rescue Scams - Help Is Free!
* There is never a fee to get assistance or information about Making Home Affordable from your lender or a HUD-approved housing counselor.
* Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!
* Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
* Never make your mortgage payments to anyone other than your mortgage company without their approval.
Source of this Informtion: FinancialStability.gov
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* There is never a fee to get assistance or information about Making Home Affordable from your lender or a HUD-approved housing counselor.
* Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!
* Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
* Never make your mortgage payments to anyone other than your mortgage company without their approval.
Source of this Informtion: FinancialStability.gov
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| Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments. |
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Thursday, February 19, 2009
CNBCs Steve Liesman versus Larry Kudlow and Rick Santelli
Steve Liesman is CNBCs Senior Economics Reporter. When it comes to the economy there is no one better than Steve on television. Steve has a way of cutting through the crap and looking beyond the obvious in his reports. Most of us can look at the headline when a new government statistic is issued and conclude what we want. Steve, on the other hand, gets into the guts of new government reports and pulls out the information that is likely to effect the markets--this information is not always easy to discover and it is not always obvious. You can make a lot of dojo listening to Steve and interpreting what he is saying. Put it this way, he is worth listening to because he might keep you out of trouble.
A few minutes ago on CNBC, Steve was arguing with Larry Kudlow and Rick Santelli about the Obama Housing plan. Larry as usual has his own preconceived explanation--this is just another attempt on the part of Democrats to transfer wealth from the rich to the poor. Larry obviously slept through most of the 90s. Rick Santelli is all bent out of shape because he thinks the good people of the country are paying off the mortgages of the bad people. He does look pretty funny screaming on the floor of the exchange--well at least his face doesn't look like it is going to explode alla Howard Dean.
Steve, on the other hand, is trying to make a simple point about the housing bailout--the current state of affairs in housing is an artificial situation caused by a mortgage system gone wild and man gone amuck. As a result, the market cannot correct itself in its normal fashion. In other words, the housing market needs some help to wash out all the excess.
I am probably not doing a good job explaining Steve Liesman's point of view. So if you are out there Steve, feel free to come in and comment; or, send us something to put up on this blog for our audience of investors.
In my opinion Steve is the guy that should have his own show on cable television. The guy is outright smart and talks in a way that can be understood. I mean Suzy Orman--give me a break. How many times can you say the same thing. Suz has no problem letting you know you are a dope. Steve gives you the dope--the real skinny.
Just so you know. I am not a friend, nor do I know Steve Liesman. I worked at Bear Stears at the same time as Larry Kudlow. And, I wouldn't mind having a drink with Rick Santelli at the Banana Boat.
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As CNBC’s Senior Economics Reporter, Steve Liesman reports on all aspects of the economy including the Federal Reserve Bank and major economic indicators. He appears on "Squawk Box" (M-F, 6-9 a.m. ET), as well as other CNBC programs throughout the Business Day.
Steve Liesman joined CNBC from The Wall Street Journal where he served as a senior economics reporter covering monetary policy, international economics, academic research and productivity. At the Journal, Liesman previously worked as an energy reporter and, from 1996-98, as the Journal’s Moscow bureau chief. He was a member of the reporting team recognized with a Pulitzer Prize for stories chronicling the crash of the Russian financial markets.
Prior to joining the Journal in 1994, Liesman was the business editor for The Moscow Times, where, as the founding business editor for the country’s first English language daily newspaper, he helped create the publication’s stock index, which was the country’s first. Liesman has also worked as a business reporter for both the St. Petersburg Times in St. Petersburg, Fl., and The Sarasota Herald-Tribune in Sarasota, Fl.
Liesman holds a Masters of Science from Columbia University Graduate School of Journalism and a B.A. in English from the State University of New York, Buffalo.
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Help for Homeowners--Are you smarter than a Fifth Grader?
I am doing my best to figure out who is in and who is out in the new mortgage plan announced by President Obama. Are you qualified if you meet any one requirement? Or, is it a more like an equation--if this, then that. For example, if your ratio of income to mortgage payment exceeds 31 percent you are in? Or is it, if your ratio exceeds 31 percent, and your house is only down a little bit, and you made a substantial down payment when you bought the house you are in?
I did figure this out---the key words throughout the announced information so far are "you may be". So you may be eligible but you might not find out until March 4.
Sooner or later I will figure this one out, "This initiative will also include borrowers who show other indications of being at risk of default."
The housing plan President Obama unveiled today could directly help up to 9 million people.
Focusing on Homeowners At Risk: Anyone with high combined mortgage debt compared to income or who is “underwater” (with a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default. Eligibility for the program will sunset at the end of three years.
Reaching Homeowners Who Have Not Missed Payments: Delinquency will not be a requirement for eligibility. Rather, because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.
Common Sense Restrictions: Only owner-occupied homes qualify; no home mortgages larger than the Freddie/Fannie conforming limits will be eligible. This initiative will go solely to supporting responsible homeowners willing to make payments to stay in their home – it will not aid speculators or house flippers.
Special Provisions for Families with High Total Debt Levels: Borrowers with high total debt qualify, but only if they agree to enter HUD-certified consumer debt counseling. Specifically, homeowners with total “back end” debt (which includes not only housing debt, but other debt including car loans and credit card debt) equal to 55% or more of their income will be required to agree to enter a counseling program as a condition for a modification.
How the Program Works
The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. This program will bring together lenders, servicers, borrowers, and the government, so that all stakeholders share in the cost of ensuring that responsible homeowners can afford their monthly mortgage payments – helping to reach up to 3 to 4 million at-risk borrowers in all segments of the mortgage market, reducing foreclosures, and helping to avoid further downward pressures on overall home prices. The program has several key components:
Shared Effort to Reduce Monthly Payments: Treasury will partner with financial institutions to reduce homeowners’ monthly mortgage payments.
“Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.
Responsible Modification Incentives: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current.
Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time under the modified loan, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance on the mortgage loan. As long as the borrower stays current on his or her payments, he or she can get up to $1,000 each year for five years.
Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be
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I did figure this out---the key words throughout the announced information so far are "you may be". So you may be eligible but you might not find out until March 4.
Sooner or later I will figure this one out, "This initiative will also include borrowers who show other indications of being at risk of default."The Obama Administration’s Homeowner Affordability and Stability Plan will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to stay current on their mortgage payments, while attempting to prevent the destructive impact of foreclosures on families and communities. It will not provide money to speculators, and it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments. Just as the American Recovery and Reinvestment Act works to save or create several million new jobs and the Financial Stability Plan works to get credit flowing, the Homeowner Affordability and Stability Plan will support a recovery in the housing market and ensure that these workers can continue paying off their mortgages.
Subscribe to All American Investor via EmailWho the Program Reaches:
The housing plan President Obama unveiled today could directly help up to 9 million people.
How the Program Works
The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. This program will bring together lenders, servicers, borrowers, and the government, so that all stakeholders share in the cost of ensuring that responsible homeowners can afford their monthly mortgage payments – helping to reach up to 3 to 4 million at-risk borrowers in all segments of the mortgage market, reducing foreclosures, and helping to avoid further downward pressures on overall home prices. The program has several key components:
- The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower’s monthly mortgage payment is no greater than 38% of his or her income). Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.
- To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.
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- Homebuyer Credit Won’t Stabilize Market, Analysts Say
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- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
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Obama Hits a Home Run in Arizona
No one seriously disputes the fact that the housing crisis is at the heart of the world wide credit crisis. Even tone deaf Republicans who turned their collective backs on the stimulus plan recognize the importance of stemming the increase in housing foreclosures which are quickly approaching the 6 million mark. Until we deal with this crisis the credit freeze will persist and the economy will get even worse. President Obama released a plan in Arizona today to do just that. Good for him.
Obama Hits a Home Run in Arizona
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Obama chose Arizona, a state which voted against him, because the state leads much of the nation in foreclosures. Obama didn’t just fly over the state on Air Force One and look down at the foreclosure signs for a photo-op. Instead he landed and exhibited the kind of leadership this country has not seen in the last 8 years. He came with a strong hand and he played it.
Much of the plan involves the quasi governmental mortgage giants Fannie Mae and Freddie Mac. These two companies hold or guarantee mortgages on millions of homes. Both showed an utter lack of judgment, if not complicity, in contributing to the sub prime mortgage debacle at the heart of this mess. Both bought and resold mortgages that represent half of the defaults behind the mortgage backed securities which are at the heart of the credit crunch.
Obama’s plan allows Fannie and Freddie to renegotiate existing mortgage rates down to affordable levels and provides both with additional federal support to lower interest rates on future mortgages. Both will go along with the Obama plan because they have no choice. With billions in bad paper Fannie and Freddie went on bended knees for federal funds to bail them out. They got the help but now the government effectively owns both and they will do what they are told.
That Fannie and Freddie were allowed to use their federally chartered clout to encourage sub-prime mortgages was a disgrace to begin with. The congressional committees with oversight responsibility over both entities turned their backs on a problem after repeatedly being warned it was coming. Why? Stupidity and greed. Stupidity because they believed the housing bubble would not burst and greed because many committee members took large amounts of campaign contributions from both Fannie and Freddie.
Both major political parties and U.S. presidents stretching all the way back to Jimmy Carter are at fault for this mess. Each one encouraged Fannie and Freddie to accept loan requests from people who were in no position to pay. Each president wanted to show that home ownership went up during his term. Presidents Reagan and Bush, both aiming to lure Hispanics away from the Democratic Party, were among the worst offenders. What they and congressional Republicans and Democrats left behind was a massive mess for Obama to fix.
Obama’s plan also calls for banks that receive federal bailout money to renegotiate terms on mortgages in default. The stimulus bill the president signed yesterday provides funds for communities to seek creative arrangements between lenders and borrowers so families can stay in their homes. Of course Republicans failed to acknowledge this provision in a bill they almost unanimously rejected. Why? Because they preferred to dwell on earmarks the GOP still cannot identify.
I once did a campaign commercial that sums up the reason Republicans lack sensitivity to those citizens at the middle or lower end of the income ladder. I was filming a conversation with farmers in North Carolina. One of them said it all: “If I were a rich man maybe I could be a Republican”. Which brings me to a question that has perplexed me my entire political career; how can any working man or woman not in management ever vote for a Republican?
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Wednesday, February 18, 2009
Obama Foreclosure Speech a Winner
President Barack Obama's foreclosure speech is sure to instill confidence across America that he has his eye on the ball and is taking control of the housing situation. This single paragraph gives me great hope.
The Obama plan calls for:
* Helping borrowers who owe more than 80% of their home's value to refinance and reduce their monthly payments.
* Creating a $75 billion homeowner stability initiative to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to bring payments to no more than 31% of a borrower's income.
* Providing multiple incentives to servicers to modify loans and to proactively help at-risk borrowers while they are still current in their payments.
* Creating a $10 billion fund to protect investors and servicers against further home price declines.
* Requiring all financial institutions receiving government funds to participate in a standardized loan modification program, while seeking to have all federal agencies that own or guarantee loans also apply the guidelines.
* Allowing judges to modify mortgages during bankruptcy, a measure the financial industry has strongly opposed.
* Providing more Treasury Department backing of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and expanding the number of mortgages the agencies back.
But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. In short, this plan will not save every home.
Read the full text of the Obama Foreclosure Speech
The Obama plan calls for:
* Helping borrowers who owe more than 80% of their home's value to refinance and reduce their monthly payments.
* Creating a $75 billion homeowner stability initiative to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to bring payments to no more than 31% of a borrower's income.
* Providing multiple incentives to servicers to modify loans and to proactively help at-risk borrowers while they are still current in their payments.
* Creating a $10 billion fund to protect investors and servicers against further home price declines.
* Requiring all financial institutions receiving government funds to participate in a standardized loan modification program, while seeking to have all federal agencies that own or guarantee loans also apply the guidelines.
* Allowing judges to modify mortgages during bankruptcy, a measure the financial industry has strongly opposed.
* Providing more Treasury Department backing of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and expanding the number of mortgages the agencies back.
Obama's Foreclosure Speech (Live)
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- Ray Dalio on the current state of affairs in the market
- Homebuyer Credit Won’t Stabilize Market, Analysts Say
- Roubini Predicts U.S. Losses May Reach $3.6 Trillion
- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
- Debt Binge--The Perfect Financial Storm
Monday, February 16, 2009
Obama May Press Banks to Cut Mortgage Payments
This is a wonderful idea that will sound good but won't help many. If you want to understand the problem you need to look beyond the obvious. The obvious--about 9 percent of all mortgages outstanding are delinqunet or in foreclosure. The number of homes going into to foreclosure is forecast at 3 million plus. But, how accurate is that number. Down here in Florida banks are dragging their feet on foreclosures. Delinquent right now, expect 1-2 years before the foreclosure happens. So, its likely that time bomb is still ticking.
Let's say they gave every eligible owner a fixed rate mortgage at 4.5 percent. How many home owners would this benefit? How many of these delinquent owners can afford that price. Next let's say they "cram" down the mortgage to near market prices? How many would benefit? Does anyone know the answer to these questions? Does anyone have a number on what it would take to bring supply and demand into balance.
Supply and demand is really the critical issue. Here is what we know. An enormous amount of buyers bought their houses with zero down. So they started with zero equity. How many buyers bought their houses with zero documents? How many NINJA loans are outstanding--no income, no job, no assets. How many Toxic Option Arms?
Wouldn't it be a good idea to first understand the size and dimensions of the problem. To define the problem and then devise the solution? I guess not.
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Let's say they gave every eligible owner a fixed rate mortgage at 4.5 percent. How many home owners would this benefit? How many of these delinquent owners can afford that price. Next let's say they "cram" down the mortgage to near market prices? How many would benefit? Does anyone know the answer to these questions? Does anyone have a number on what it would take to bring supply and demand into balance.
Supply and demand is really the critical issue. Here is what we know. An enormous amount of buyers bought their houses with zero down. So they started with zero equity. How many buyers bought their houses with zero documents? How many NINJA loans are outstanding--no income, no job, no assets. How many Toxic Option Arms?
Wouldn't it be a good idea to first understand the size and dimensions of the problem. To define the problem and then devise the solution? I guess not.
From the NY Times:
President Obama’s plan to reduce the flood of home foreclosures will include a mix of government inducements and new pressure on lenders to reduce monthly payments for borrowers at risk of losing their houses, according to people knowledgeable about the administration’s thinking.
The plan, to be announced Wednesday, is expected to include government subsidies for reducing a borrower’s interest rate, which a lender would have to match with its own money.
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More from All American Investor
- Ray Dalio on the current state of affairs in the market
- Homebuyer Credit Won’t Stabilize Market, Analysts Say
- Roubini Predicts U.S. Losses May Reach $3.6 Trillion
- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
- Debt Binge--The Perfect Financial Storm
Saturday, February 07, 2009
Wells Fargo May Cut Loans for Some Wachovia Customers
Ok. Let me get this straight.
While the terms are still a bit sketchy this is coming in response to the pressure to modify loans due to rising default levels. You have to be in default to get the 20 percent free lunch.
Speaking of free lunches. Wells Fargo bought Wachovia for a song. Wells did have to eat about $60 billion of Wachovia's impaired loans. These are the option adjusted loans that I wrote about previously--Option ARM--The Toxic Mortgage.
I'm not an accountant or a "rocket scientist" but I can make some intelligent guesses here. Wells has an immediate tax angle. They write down these mortgages and get a monster tax shelter. They can then start selling the good assets they picked up in the takeover--at cents on a dollar-- and pay not a cent in tax. At the end of the day they look like champions for saving the butt of the dumbest investors on the planet--
Wells gets bail out money. They get a forced sale of Wachovia at a rock bottom price thanks to government pressure. We the public get to finance all of this with our tax dollars.
Isn't it bad enough that we, the taxpayers, are getting screwed coming--bank bailout. Then, get screwed going--tax benefits built into the transaction.
And now the worst of all, if you have been busting your butt making your house payment for the last decade here is what you get--bumpkiss.
I don't know about you but I want a free lunch. No make that--dinner.
Wells Fargo & Co., the second-biggest U.S. home lender, offered to cut mortgage balances for some Wachovia Corp. customers by 20 percent as defaults rise and officials pressure banks to modify loans to avoid foreclosures.
Wells Fargo mailed letters to those borrowers, asking for proof of current income and a 2007 income-tax statement, bank spokeswoman Debora Blume said today in an e-mail. Customers are provided a number to call to speak with a consultant. Wells Fargo didn’t say how many customers received the letter.
“We are encouraged by the response we are getting to our outreach efforts, as it means we will be able to help more people with a solution that works,” Blume wrote.
Regulators and lawmakers are pressing the nation’s biggest lenders to pick up the pace of loan workouts after foreclosures soared 81 percent in 2008. San Francisco-based Wells Fargo inherited billions of dollars in future losses when it bought Wachovia for $12.7 billion. Wells Fargo said last week that Wachovia’s option adjustable-rate mortgage portfolio has close to $60 billion of impaired loans.
Wells Fargo rose $2.87, or 18 percent, to $19.14 at 4:05 p.m. on the New York Stock Exchange, reducing its decline for the year to 35 percent.
Citigroup Agrees
Citigroup Inc., the New York-based bank that received a $346 billion government bailout, bowed to pressure from U.S. Senators Richard Durbin and Charles Schumer and agreed to support “cram- down” legislation that allows bankruptcy judges to cut borrowers’ mortgage principal. Other banks have opposed the plan, saying foreclosures can sometimes minimize write-offs, and undeserving borrowers may seek relief.
Wells Fargo’s pilot program aimed at Wachovia borrowers is part of a plan announced on Jan. 26 to help avoid “preventable foreclosures.” As many as 478,000 Wachovia customers have access to the wider program and those who are in or at risk of foreclosure have until Feb. 28 to contact the bank. Customers may also win reduced interest rates and extensions of up to 40 years.
“It’s very positive that they are willing to look at principal reductions but they need to extend a moratorium for these borrowers” beyond the February deadline, said Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco. “Wells needs time to implement the program.”
After purchasing Wachovia, Wells Fargo controls 16 percent of the mortgage-servicing market, behind Bank of America Corp., with 19 percent, according to trade publication Inside Mortgage Finance. JPMorgan Chase and Co. accounts for 14 percent and Citigroup has 7 percent. Wachovia loans resulted in Wells Fargo’s first quarterly loss since 2001.
FDIC Chairman Sheila Bair endorsed a plan by President Barack Obama to boost spending on modifications. The agency created a “mod-in-a-box” program to help borrowers at least 60 days past due make payments by reducing interest rates, deferring principal or cutting payments.
To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net.
Wells Fargo & Co., the second-biggest U.S. home lender is offering to cut mortgage balances for some of Wachovia Corporation customers by 20 percent.So if I have a $500,000 mortgage I can get my mortgage balance reduced to $300,000. I'm in. Well, probably not.
While the terms are still a bit sketchy this is coming in response to the pressure to modify loans due to rising default levels. You have to be in default to get the 20 percent free lunch.
Wells Fargo’s pilot program aimed at Wachovia borrowers is part of a plan announced on Jan. 26 to help avoid “preventable foreclosures.” As many as 478,000 Wachovia customers have access to the wider program and those who are in or at risk of foreclosure have until Feb. 28 to contact the bank. Customers may also win reduced interest rates and extensions of up to 40 years.Well what about people that have been making their payments for say the last ten years? No free lunch?
Speaking of free lunches. Wells Fargo bought Wachovia for a song. Wells did have to eat about $60 billion of Wachovia's impaired loans. These are the option adjusted loans that I wrote about previously--Option ARM--The Toxic Mortgage.
I'm not an accountant or a "rocket scientist" but I can make some intelligent guesses here. Wells has an immediate tax angle. They write down these mortgages and get a monster tax shelter. They can then start selling the good assets they picked up in the takeover--at cents on a dollar-- and pay not a cent in tax. At the end of the day they look like champions for saving the butt of the dumbest investors on the planet--
people who took out an option arm on the advice of a so called mortgage specialist that just a few months earlier was a dishwasher.
Wells gets bail out money. They get a forced sale of Wachovia at a rock bottom price thanks to government pressure. We the public get to finance all of this with our tax dollars.
Isn't it bad enough that we, the taxpayers, are getting screwed coming--bank bailout. Then, get screwed going--tax benefits built into the transaction.
And now the worst of all, if you have been busting your butt making your house payment for the last decade here is what you get--bumpkiss.
I don't know about you but I want a free lunch. No make that--dinner.
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Wells Fargo May Cut Loans for Some Wachovia Customers
Wells Fargo & Co., the second-biggest U.S. home lender, offered to cut mortgage balances for some Wachovia Corp. customers by 20 percent as defaults rise and officials pressure banks to modify loans to avoid foreclosures.
Wells Fargo mailed letters to those borrowers, asking for proof of current income and a 2007 income-tax statement, bank spokeswoman Debora Blume said today in an e-mail. Customers are provided a number to call to speak with a consultant. Wells Fargo didn’t say how many customers received the letter.
“We are encouraged by the response we are getting to our outreach efforts, as it means we will be able to help more people with a solution that works,” Blume wrote.
Regulators and lawmakers are pressing the nation’s biggest lenders to pick up the pace of loan workouts after foreclosures soared 81 percent in 2008. San Francisco-based Wells Fargo inherited billions of dollars in future losses when it bought Wachovia for $12.7 billion. Wells Fargo said last week that Wachovia’s option adjustable-rate mortgage portfolio has close to $60 billion of impaired loans.
Wells Fargo rose $2.87, or 18 percent, to $19.14 at 4:05 p.m. on the New York Stock Exchange, reducing its decline for the year to 35 percent.
Citigroup Agrees
Citigroup Inc., the New York-based bank that received a $346 billion government bailout, bowed to pressure from U.S. Senators Richard Durbin and Charles Schumer and agreed to support “cram- down” legislation that allows bankruptcy judges to cut borrowers’ mortgage principal. Other banks have opposed the plan, saying foreclosures can sometimes minimize write-offs, and undeserving borrowers may seek relief.
Wells Fargo’s pilot program aimed at Wachovia borrowers is part of a plan announced on Jan. 26 to help avoid “preventable foreclosures.” As many as 478,000 Wachovia customers have access to the wider program and those who are in or at risk of foreclosure have until Feb. 28 to contact the bank. Customers may also win reduced interest rates and extensions of up to 40 years.
“It’s very positive that they are willing to look at principal reductions but they need to extend a moratorium for these borrowers” beyond the February deadline, said Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco. “Wells needs time to implement the program.”
After purchasing Wachovia, Wells Fargo controls 16 percent of the mortgage-servicing market, behind Bank of America Corp., with 19 percent, according to trade publication Inside Mortgage Finance. JPMorgan Chase and Co. accounts for 14 percent and Citigroup has 7 percent. Wachovia loans resulted in Wells Fargo’s first quarterly loss since 2001.
FDIC Chairman Sheila Bair endorsed a plan by President Barack Obama to boost spending on modifications. The agency created a “mod-in-a-box” program to help borrowers at least 60 days past due make payments by reducing interest rates, deferring principal or cutting payments.
To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net.
Monday, February 02, 2009
Bailing Out NINJA Homeownwers will never work
Bailing out homeowners will never work. What is the government going to do about some one that was never qualified to buy a $500,000 dollar home in the first place.
To start out, the homeowner bought something that was overvalued and is not likely to return to that price in the next decade. The value today might be $300,000. This leaves the buyer with a net worth of negative $200,000 to start. Once their NINJA loan trips from the teaser interest rate to an at market interest rate they can't afford to pay the monthly mortgage. What makes the government think they will be able to pay a $300,000 mortgage? Wouldn't they be better off renting an apartment (or for that matter a house) they can afford? I often think, where did these buyers come from in the first place? Were they a first time buyer that was enabled by the "scam" being perpetrated in the housing market? Did they sell an existing home and put the gain down on the new, bigger, inflated home (not likely)? Are they credit worthy at any price?
I finally read a good article about the so called housing bailout over on the Wall Street Journal.
*****NINJA loan--no income, no job, no assets
To start out, the homeowner bought something that was overvalued and is not likely to return to that price in the next decade. The value today might be $300,000. This leaves the buyer with a net worth of negative $200,000 to start. Once their NINJA loan trips from the teaser interest rate to an at market interest rate they can't afford to pay the monthly mortgage. What makes the government think they will be able to pay a $300,000 mortgage? Wouldn't they be better off renting an apartment (or for that matter a house) they can afford? I often think, where did these buyers come from in the first place? Were they a first time buyer that was enabled by the "scam" being perpetrated in the housing market? Did they sell an existing home and put the gain down on the new, bigger, inflated home (not likely)? Are they credit worthy at any price?I finally read a good article about the so called housing bailout over on the Wall Street Journal.
Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.
If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.
Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.
Why Be a Nation of Mortgage Slaves?
*****NINJA loan--no income, no job, no assets
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Saturday, January 31, 2009
Option ARM--The Toxic Mortgage
'Option ARM' mortgages were agressively marketed by banks because they generated huge amounts of phantom profits. Using generally accepted accounting principles, or GAAP, banks could count as revenue the highest amount of an Option ARM payment -- the so-called fully amortized amount -- even when borrowers made only the minimum payment. In other words, banks could claim "phantom income" that they never received and in the current scenario will never receive. This "phantom income" inflated reported earnings and allowed bank executives playing this game to receive enormous bonus income and enjoy dramatically inflated stock prices. Many now defunct banks, and soon to be defunct banks, reported inflated earnings that were bolstered by this phantom income. It was not unusual for "phantom income" to account for more than half of the earnings being reported.
Default rates on so called 'Option ARM' mortgages are rising fast.
An 'Option ARM' is typically a 30-year adjustable rate mortgage that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, or a 30-year fully amortizing payment. These types of loans are also called "pick-a-payment" or "pay-option" ARMs.
'Option ARMs' are particularly toxic because they allow the borrower to make a small minimum payment each month with the unpaid part of the monthly payment being added to the principle of the mortgage outstanding. In other words, these mortgages are subject to severe negative amortization. If you make the minimum payment, the principle amount you owe on the mortgage loan goes up each and every month. Current statistics indicate that 80 percent of the consumers owning these loans selected the minimum payment option.
Let's say, for example, that the fully amortized monthly payment is set at $1500. The homeowner decides to elect the minimum payment (the option) and pays $1000. The unpaid $500 is then added to the mortgage's principle balance outstanding. It only gets worse. Not only does the amount owed grow each month; this higher loan balance is immediately reflected in the next month's calculation.
The owner of an 'Option ARM' is borrowing the difference between the minimum payment and fully amoritized amount of the loan each month. In effect, the option arm mortgage holder is making a new loan each month and this amount is tacked onto the existing mortgage. Then the mortgage holder ends up paying interest not only on the increasing principle but also interest on interest. Sounds a little like loan sharking--doesn't it?
It is easy to see that the amount owed on an option ARM mortgage could grow fast. Imagine watching the amount you owe on your mortgage go up each month as you make the minimum payment. It only gets worse. This 'ticking time bomb" of a mortgage has another toxic feature built in--they reset once the principle balance owed hits 110-125% of the original loan. This fully amortized amount includes the original loan amount plus all the negative amortization. So while it appears that an 'Option ARM' works like a typical adjustable rate mortgage this in not true. A standard adjustable rate mortgages has an annual cap and the interest rate can only rise by 1-2% a year. This is true in an "option ARM" with one exception--when the 110-125% cap is hit the mortgage fully amortizes and the morgage resets to the market. This means a monster sized jump in the monthly payment. It is likely that the owner of the 'Option ARM' will see the monthly mortgage payment nearly double when the cap is hit.
Current owners of these "time bombs" are now in the unenviable postion of watching the amount they owe on the mortgage go up, the amount of their monthy payment skyrocket, and the value of the house drop like a lead stone. Talk about a double edged sword. Or is that three edges?
It appears most American's are making an easy decisions on these loans--walk away, stop paying, and go to foreclosure.
'Option ARM' mortgages were agressively marketed by banks because they generated huge amounts of phantom profits. Using generally accepted accounting principles, or GAAP, banks could count as revenue the highest amount of an Option ARM payment -- the so-called fully amortized amount -- even when borrowers made only the minimum payment. In other words, banks could claim "phantom income" that they never received and in the current scenario will never receive. This "phantom income" inflated reported earnings and allowed bank executives playing this game to receive enormous bonus income and enjoy dramatically inflated stock prices. Many now defunct banks, and soon to be defunct banks, reported inflated earnings that were bolstered by this phantom income. It was not unusual for "phantom income" to account for more than half of the earnings being reported.
Many banks moved defaulted 'Option ARMs' into "held for sale accounts". This shady accounting practice allowed banks to sequester or "hide" the loans from investors. Under normal economic conditions these loans would be sold to collection agencies or investors. However, given the enormous amounts of these loans, their uncertain futures, and the uncertainty in the market place they are now nearly impossible to sell.
When you hear proposals for the Federal government to buy "toxic assets" these are the types of loans that bankers want taxpayers to take off their hands. The bankers that issued three quarters of a billion dollars of Option Arms did so to enrich themselves.
I continue to wonder if anyone in Washington understands this scam? Or, are they going to perpetuate the scam and pass the buck to our children?
It should be mentioned that banks paid higher than usual commissions on these loans to the "hordes" of unregulated independent salespeople they used to "huckster" this product. It is already well documented that many of these so called "mortgage bankers" used pressure tactics to convince consumers that an 'Option ARM' was a good thing and that they would benefit. They might have failed to mention the onerous prepayment fees that came with these mortgages and it not likely that they explained the how negative amortization worked. I wonder if they fully disclosed that the loan became full amortized when the 110-125% cap limit was hit? Did they explain that the cap limit would be hit within five years if they made the minimum payment; and that, the monthly payment could nearly double or worse?
I believe most stock market investors think that the effects of the housing crisis has been discounted by the markets. This is not likely and the potential fallout from the coming 'Option ARMs' explosion is still to be seen.
We have not yet reached the worst part of the 'Option ARM' cycle. The news on these toxic loans is going to get worse beginning in April when thousands of Option ARM mortgage holders are going to see their monthly payments spike. This phenomena is going to continue until 2010 once it starts.
I wonder if investors understand how this will effect the banks that are still holding these loans? How the shock wave from this explosion is likely to effect banks that do business with these banks? How this might effect consumers, employment, and the psyche of investors? Uncertainty does not usually lead to sustained rallies in the markets. Of course, the market might take a tumble and discount this information at any time.
James Grant wrote that negative-amortization accounting is "frankly a fraudulent gambit. But what it lacks in morality, it compensates for in ingenuity."--Grant's Interest Rate ObserverHe wrote this back in 2006.
Default rates on so called 'Option ARM' mortgages are rising fast.
As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics, a data firm that analyzes mortgage performance.
Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs.This sobering news indicates that the bad news from the housing market is far from over and is not likely discounted in the stock markets.
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An 'Option ARM' is typically a 30-year adjustable rate mortgage that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, or a 30-year fully amortizing payment. These types of loans are also called "pick-a-payment" or "pay-option" ARMs.
'Option ARMs' are particularly toxic because they allow the borrower to make a small minimum payment each month with the unpaid part of the monthly payment being added to the principle of the mortgage outstanding. In other words, these mortgages are subject to severe negative amortization. If you make the minimum payment, the principle amount you owe on the mortgage loan goes up each and every month. Current statistics indicate that 80 percent of the consumers owning these loans selected the minimum payment option.
Let's say, for example, that the fully amortized monthly payment is set at $1500. The homeowner decides to elect the minimum payment (the option) and pays $1000. The unpaid $500 is then added to the mortgage's principle balance outstanding. It only gets worse. Not only does the amount owed grow each month; this higher loan balance is immediately reflected in the next month's calculation.
The owner of an 'Option ARM' is borrowing the difference between the minimum payment and fully amoritized amount of the loan each month. In effect, the option arm mortgage holder is making a new loan each month and this amount is tacked onto the existing mortgage. Then the mortgage holder ends up paying interest not only on the increasing principle but also interest on interest. Sounds a little like loan sharking--doesn't it?
It is easy to see that the amount owed on an option ARM mortgage could grow fast. Imagine watching the amount you owe on your mortgage go up each month as you make the minimum payment. It only gets worse. This 'ticking time bomb" of a mortgage has another toxic feature built in--they reset once the principle balance owed hits 110-125% of the original loan. This fully amortized amount includes the original loan amount plus all the negative amortization. So while it appears that an 'Option ARM' works like a typical adjustable rate mortgage this in not true. A standard adjustable rate mortgages has an annual cap and the interest rate can only rise by 1-2% a year. This is true in an "option ARM" with one exception--when the 110-125% cap is hit the mortgage fully amortizes and the morgage resets to the market. This means a monster sized jump in the monthly payment. It is likely that the owner of the 'Option ARM' will see the monthly mortgage payment nearly double when the cap is hit.
Current owners of these "time bombs" are now in the unenviable postion of watching the amount they owe on the mortgage go up, the amount of their monthy payment skyrocket, and the value of the house drop like a lead stone. Talk about a double edged sword. Or is that three edges?
It appears most American's are making an easy decisions on these loans--walk away, stop paying, and go to foreclosure.
Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance, an industry publication.
Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders.Interestingly, most 'Option ARMs' were issued to people with an above sub-prime credit rating. However, it is well known that many of these mortgage holders bought homes they intended to sell "quickly" for a profit. In effect, they were speculating in the housing market. What better way to keep the payment low than with the 'Option ARM' mortgage.
'Option ARM' mortgages were agressively marketed by banks because they generated huge amounts of phantom profits. Using generally accepted accounting principles, or GAAP, banks could count as revenue the highest amount of an Option ARM payment -- the so-called fully amortized amount -- even when borrowers made only the minimum payment. In other words, banks could claim "phantom income" that they never received and in the current scenario will never receive. This "phantom income" inflated reported earnings and allowed bank executives playing this game to receive enormous bonus income and enjoy dramatically inflated stock prices. Many now defunct banks, and soon to be defunct banks, reported inflated earnings that were bolstered by this phantom income. It was not unusual for "phantom income" to account for more than half of the earnings being reported.
James Grant of Grant's Interest Rate Observer wrote that negative-amortization accounting is "frankly a fraudulent gambit. But what it lacks in morality, it compensates for in ingenuity."He wrote this back in 2006.
Many banks moved defaulted 'Option ARMs' into "held for sale accounts". This shady accounting practice allowed banks to sequester or "hide" the loans from investors. Under normal economic conditions these loans would be sold to collection agencies or investors. However, given the enormous amounts of these loans, their uncertain futures, and the uncertainty in the market place they are now nearly impossible to sell.
When you hear proposals for the Federal government to buy "toxic assets" these are the types of loans that bankers want taxpayers to take off their hands. The bankers that issued three quarters of a billion dollars of Option Arms did so to enrich themselves.
- They have already received obscene bonuses and sold inflated stock bolstered by "phantom income".
- They now want to pass these assets to taxpayers via the bailout.
- They want us to bail them out so they can stay in their jobs.
I continue to wonder if anyone in Washington understands this scam? Or, are they going to perpetuate the scam and pass the buck to our children?
It should be mentioned that banks paid higher than usual commissions on these loans to the "hordes" of unregulated independent salespeople they used to "huckster" this product. It is already well documented that many of these so called "mortgage bankers" used pressure tactics to convince consumers that an 'Option ARM' was a good thing and that they would benefit. They might have failed to mention the onerous prepayment fees that came with these mortgages and it not likely that they explained the how negative amortization worked. I wonder if they fully disclosed that the loan became full amortized when the 110-125% cap limit was hit? Did they explain that the cap limit would be hit within five years if they made the minimum payment; and that, the monthly payment could nearly double or worse?
I believe most stock market investors think that the effects of the housing crisis has been discounted by the markets. This is not likely and the potential fallout from the coming 'Option ARMs' explosion is still to be seen.
We have not yet reached the worst part of the 'Option ARM' cycle. The news on these toxic loans is going to get worse beginning in April when thousands of Option ARM mortgage holders are going to see their monthly payments spike. This phenomena is going to continue until 2010 once it starts.
I wonder if investors understand how this will effect the banks that are still holding these loans? How the shock wave from this explosion is likely to effect banks that do business with these banks? How this might effect consumers, employment, and the psyche of investors? Uncertainty does not usually lead to sustained rallies in the markets. Of course, the market might take a tumble and discount this information at any time.
Option ARM--The Toxic Mortgage
Tuesday, January 27, 2009
Six Errors on the Path to the Financial Crisis
Alan Blinder wrote an interesting article in the New York Times last week. He spells out in easy to understand terms the six errors that led us into this financial mess. He points out that if simple choices has been made along the way the situation would not be as dire as it is today. He goes on to point out that the current situation is not the failure of capitalism but about human errors. By putting a clear, concise "frame" around the current situation he makes it easier to understand. A better basic understanding of the problem would help our politicians in Washington to make decisions about how "taxpaper" money should and could be used to exacerbate the current financial problems. The real issue right 
now is whether or not the way taxpayer money is being used is helping or just delaying the inevitable.
By ALAN S. BLINDER
WHAT’S a nice economy like ours doing in a place like this? As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn’t we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul?
The answers, I believe, are yes and no. Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable — yes, avoidable — human errors. Recognizing and understanding these errors will help us fix the system so that it doesn’t malfunction so badly again. And we can do so without ending capitalism as we know it.
My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.
WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?
SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.
A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.
Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.
The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.
FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.
Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.
LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.
People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not?
After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.
TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.
To illustrate what might have been, consider Fed programs to buy commercial paper and mortgage-backed securities. These facilities do roughly what TARP was supposed to do: buy troubled assets. And they have breathed some life into those moribund markets. The lesson for the new Treasury secretary is clear: use TARP money to buy troubled assets and to mitigate foreclosures.
Six fateful decisions — all made the wrong way. Imagine what the world would be like now if the housing bubble burst but those six things were different: if derivatives were traded on organized exchanges, if leverage were far lower, if subprime lending were smaller and done responsibly, if strong actions to limit foreclosures were taken right away, if Lehman were not allowed to fail, and if the TARP funds were used as directed.
All of this was possible. And if history had gone that way, I believe that the financial world and the economy would look far less grim than they do today.
For this litany of errors, many people in authority owe millions of Americans an apology. Richard A. Clarke, former national security adviser, set a good example when he told the commission investigating the 9/11 attacks that he wanted victims’ families “to know why we failed and what I think we need to do to ensure that nothing like that ever happens again.” I’m waiting for similar words from our financial leaders, both public and private.
Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.
My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.
Six Errors on the Path to the Financial Crisis
By ALAN S. BLINDER
WHAT’S a nice economy like ours doing in a place like this? As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn’t we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul?
The answers, I believe, are yes and no. Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable — yes, avoidable — human errors. Recognizing and understanding these errors will help us fix the system so that it doesn’t malfunction so badly again. And we can do so without ending capitalism as we know it.
My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.
WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?
SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.
A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.
Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.
The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.
FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.
Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.
LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.
People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not?
After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.
TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.
To illustrate what might have been, consider Fed programs to buy commercial paper and mortgage-backed securities. These facilities do roughly what TARP was supposed to do: buy troubled assets. And they have breathed some life into those moribund markets. The lesson for the new Treasury secretary is clear: use TARP money to buy troubled assets and to mitigate foreclosures.
Six fateful decisions — all made the wrong way. Imagine what the world would be like now if the housing bubble burst but those six things were different: if derivatives were traded on organized exchanges, if leverage were far lower, if subprime lending were smaller and done responsibly, if strong actions to limit foreclosures were taken right away, if Lehman were not allowed to fail, and if the TARP funds were used as directed.
All of this was possible. And if history had gone that way, I believe that the financial world and the economy would look far less grim than they do today.
For this litany of errors, many people in authority owe millions of Americans an apology. Richard A. Clarke, former national security adviser, set a good example when he told the commission investigating the 9/11 attacks that he wanted victims’ families “to know why we failed and what I think we need to do to ensure that nothing like that ever happens again.” I’m waiting for similar words from our financial leaders, both public and private.
Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.
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