In a previous post I discussed the steps the Fed is taking to stop shoddy and unethical mortgage practices. I saw it as a good thing. I am troubled by the fact that the Fed isn’t rolling it out until October 2009, and, because it was of interest, decided to dig further into the concept. Some feel that the Fed isn’t taking this far enough in its stance, and others, such as the banking industry, feel it is sticking its nose in where it should have no right to go. This is all well and good – everyone is entitled, you know.

Some of what I gathered shocked me out of my complacency a bit, and some things only made me nod my head. As in all things governmental, I find that the Fed stopped short of making these new regulations effective. I applaud their effort to go after the unethical advertising and the “liar loans” but think that overlooking the role mortgage brokers play in the mortgage market is just short of criminal. According to the Fed, 60% of loans were originated through mortgage brokers in the last several years. One has to acknowledge that at least he Fed is being honest – they say that consumers “often are unaware that a broker’s interests may diverge from, and conflict with, their own interests.”

The big picture here is that mortgage brokers have their interest in mind, not the borrower. Brokers get higher compensation for placing a consumer in a higher-interest, riskier loan. A major problem has been the abuse of yield spread premiums, and instead of the Fed dealing with this issue, the Fed withdrew its proposal for even a modest rule requiring brokers to disclose whether they were getting a premium.

Studies have shown that a lot of people – 55 to 61% to be exact -have qualified for a standard fixed rate 30 year loan. But these people were steered into a higher risk subprime loan because the mortgage broker got the luxury of a higher commission. No truth in lending, no customer service, just “what’s in it for me?” And now, with the Fed turning a blind eye to these practices, they will continue their practice of ripping off the consumer.

I have said it before, and say it again – without proper and honest regulation, the troubles of the present will continue. Not only does housing and the economy suffer, but banks and brokers, if left unchecked, will still drive people to places they shouldn’t have to go. And with nothing being done to address this, it makes all the other efforts fruitless.

If you take a really good look at the way things are right now concerning banks, mortgages and bailouts, you see a whole lot of trouble on the horizon.  Freddie and Fannie are in the soup, and it would be no surprise to me that the government will step in to pull their collective butts out of the fire.   I spent time this AM working on research for tonight’s post, looking at the banks that are in trouble and posting loss after loss.  It is not a pretty picture.

Besides the troubles at Fannie and Freddie, we see Citigroup Inc, the largest U.S. bank, posting a smaller-than-expected quarterly loss on Friday.  Claims are due to $11.7 billion of write-downs and credit losses.  Good news, indeed, if you consider smaller-than-expected good.  It is the $11.7 billion in loss that worries me.  No matter where you stand, that is a lot of cash. 

Merrill Lynch & Co. are also posting poor results, with heavy losses of $4.89 billion for the quarter, tied to write-downs from exposure to CDOs, residential mortgages, bond insurers and other investments.  ML is dumping its stake in Bloomberg to try to stop the bleeding.

Istar Financial, Inc., which lends primarily to real estate-related businesses, said it expects to post a second-quarter operating loss. 

These stats are just a few of things going on.  Last week, we saw that 90 banks were headed for financial difficulties, and this appeared before the trouble at IndyMac. 

I think it is inevitable that the government will have to step in and take a hand in Freddie and Fannie.  Although we hear how liquid they are, I find it hard to believe that the government would be taking such a great interest in them at his time if there were nothing to it. 

Who will inevitably pay for all this?  Unless you’ve been living in an ice cage in the Antarctic for the past 20 years, you can bet your booties that it will trickle down to the American taxpayer.  We do, after all, finance the government.  I feel we have not seen anywhere near the bottom of this worst case scenario yet.  People will continue to lose homes, foreclosures will rise, and, more banks will see difficulties.  And no matter what you may think, I feel that it is all a matter of poor regulation by the government.  Advocates of big business are totally against regulation, as is understandable.  But when the burden finally falls to ground zero, and the American taxpayers try to pick up the pieces, then regulation will look awfully good to a lot of people.  Without tighter regulation, it will be business as usual, and the kids in the candy shop will have a field day.  And to me, that is just plain criminal and wrong.  It is up to the American taxpayers to see that this doesn’t happen in the future.  Maybe our vote will mean a little bit of something once again.  It is obvious that those minding the store are not doing so well right now…

It is no secret that the Fed is working to curb shady housing practices.  It has been talked about for a long time, yet we have seen nothing substantial materialize yet.  Now that the housing market is deeply depressed, it seems Washington is finally willing to lend an ear.

From The Associated Press, here are the guidelines they expect to put in place:

* restrict lenders from penalizing risky borrowers who         pay loans off early.
* require lenders to ensure those borrowers set aside           money to pay for taxes  and insurance.
* bar lenders from making loans without proof of a                borrower’s income.
* prohibit lenders from engaging in a pattern or practice       of  lending without considering a borrower’s ability to           repay a home loan from sources other than the homes         value.
* curtail misleading ads for many types of mortgages.
* bolster financial disclosures to borrowers.

I guess I see the world through rose colored glasses - I would like to be able to think that these would be standard practices regardless of how things are right now in the economy.

Of course, advocacy groups think it isn’t enough, and lenders feel these guidelines too tough.  The plan is expected to gel in the light of the troubles with Freddie and Fannie.

Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School of Business, echoed my sentiments exactly.  She said that “Clearly this is closing the barn door after the fact. This is a very important move. It absolutely will make a difference going forward.”

Guidelines for moving forward might be a bit difficult to gauge.  With credit tightened up and people hunkering down and riding out this mess, there will be no benchmarks in place to see if it is working. The Mortgage Bankers Association wants the Fed to tread lightly.  From Greenspan to Bernanke, the Chiefs have taken heat for being lax in seeing that proper practice was not in place.  If it had, I think we would not see this situation we are in now.  Rep. Maxine Waters hit the nail on the head when she told Congress “How disappointed I am with all of us members of Congress, for what appears to have been weak oversight of our regulatory agencies, and our regulatory agencies for what appears to have been weak oversight of our financial institutions.”

With the evening news telling us that around 90 banks are doomed to fail, and that not including IndyMac, then it appears the ill will and misdeeds have come home to roost.  I am reminded of what my Granny once said to me - “Greed and avarice leads to the downfall of any man.”

The NBC Nightly News tonight was all atwitter with the latest news about Fannie Mae and Freddie Mac, the lending giants that handle $5.1 trillion in loans and mortgages.  Backed by the Fed, the two giants are in free fall with over $11 billion in loss this year.  Senior Bush officials are looking to place the two in conservatorship if the bleeding continues.  There is no hope in sight that it won’t.

Current worries are that these two giants will default on payment.  If that were to happen, the economy of this country goes in the crapper.  Bush officials are fearful, but not as fearful as the boys on Wall Street, who are watching shares plummet in price.  Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing.  In default, this would effectively put the loss on the backs of American taxpayers - something we can little afford right now.  Government officials said that the administration has also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned. Doing so would effectively double the size of the public debt.  Although government officials say not to worry, they are holding conferences and setting contingency plans.  The last time we saw something like this situation, folks on Wall Street went to work on Friday, and Bear Stearns went belly up on Monday.  Will the same happen with Fannie and Freddie?

One of the thing s most people fail to understand it that these two are public owned, and are not a government entity.  The government has its hand in, with guarantees on loans, but they do not fully subsidize them.

The down side of this whole situation is this - if Freddie and Fannie can’t borrow money from the Fed, then they will not be able to buy mortgages from commercial lenders. If this happens, anyone attempting to get a loan or mortgage will be effectively out of luck.  If banks know that Fannie or Freddie can’t pick up the paper, then they hold on to their money.  It’s as simple as that.

It will be interesting indeed to see how this plays out.  With the pair holding $1.5 trillion in securities, things could get a bit desperate if there is no intervention.  From my point of view, conservatorship appears to be a good thing now, instead of when the other shoe falls.  Let’s keep a close eye on this one!

Let’s face it - whoever wins the White House in November is gaining a legacy that will be hard for the toughest individual to face.  Although a President has many powers and authorities, he cannot change the fact that the foreclosure crisis and values of homes in the country of ours is going to magically change over night.  We know that any President does not have the direct ability to change mortgage rates by the stroke of a pen.   It simply cannot be turned around, until the market is ready to correct itself.

Both presumptive candidates promise relief.  Both Obama and McCain are looking to the FHA to be a big player in the new presidency. The plan is simple - provide new mortgages to distressed homeowners who are losing to foreclosure.  The banks might have to bite the bullet, but a home saved from foreclosure is one less empty house on an already glutted market.  It can be seen as a win-win situation because it is cheaper for a bank to do this than it is to foreclose and then have to handle the sale of a house in a market that just isn’t ready for it.

Both presumptives seem to be focusing on the magic number of 400,000 homeowners to be aided.  Obama feels that it should aid homeowners who may not have exactly stellar credit, but can make payment.  McCain seems to lean towards those that had good credit when first applying for the original loan.

Obama, who supports legislation by Sen. Chris Dodd, D-Conn., would pony up $1 billion from the FHA side of things.  McCain, on the other hand, is looking to spend $3 billion to $10 billion, depending on cuts from other programs to pay for it, and have the government borrow more to go with it.  The McCain camp is looking to cut spending.  How they do that by borrowing from the sources available and by cutting other services hasn’t quite hit me yet.

Regardless of the plan, neither candidate has a real fix for the situation.  The reality is this - experts predict foreclosures will continue to climb well into 2009. Others feel it will carry over to 2010.  No matter who takes office, there is no good fix, and it will affect the economy in ways we cannot even predict yet.  Once again, we must stare into our crystal balls and then just sit back and wait and see what happens.

I read with interest today about a woman living in Altoona, Pa. This woman, Vicki Miller, had bought her childhood home from her mother’s estate for $32K.  No matter how you look at it, $32K isn’t a whole lot of money these days.  Ms. Miller now is looking at her debt doubled; her once-significant equity has shrunk to zero. And she is now behind on payment.  She is being threatened by her lender for foreclosure as this is written.

You have to wonder why a woman with a modest income could not manage the payments on a $32K loan.  Although there are determining factors, such as needed repairs because her mother couldn’t keep up the house, the reality is that Ms. Miller was persuaded to refinance her mortgage twice into sub-prime loans she didn’t really understand.  To top it all off, she took out a second mortgage on the home to fix the roof.

Pundits will say Ms. Miller only got what she deserved, and that it is her responsibility to insure that her finances are in order.  Although I agree to a certain extent, I find that if one digs deeper they find that people such as Ms. Miller are taken advantage of by unethical lenders.  What she now faces reflects what experts say is the true face of the sub-prime mortgage debacle.

We always hear that it has been greed or over extension of finances that have put people in these positions of subprime foolery, yet experts agree - 90% of people who took out sub-prime loans from 1998 to 2006 were already homeowners.  People with good, solid conventional loans got themselves in deep when they refinanced and were taken advantage of by unscrupulous lenders that did not fully disclose to borrowers what they were really getting into.

Legislators are concerned about giving aid to greedy or careless home mortgage borrowers, yet the truth of the matter is this - lawyers for many of these people say few of them were trying to finance outrageous lifestyles.  And that makes the whole thing so troublesome.  After a loan provider hooks a person into a non-transparent loan that will put the borrower under when reset comes around, the loan is bundled and sold and investors take control.  You cannot sort out the good apples from the bad in a situation like that, so it makes the whole case scenario a difficult - almost impossible - situation to sort out.

There were two great culprits in Miller’s troubles - Ameriquest and Countrywide.  Miller believed that her new mortgage would be a fixed-rate mortgage at 7.5% interest. Records show it was an adjustable-rate mortgage with an 8.9% interest rate.
Whenever she received an invoice from Countrywide, who now held her loan, she was urged to refinance.  It was made so easy for her that she did so, with the results she faces today. Her monthly payments reached $700 - about half of her monthly income.  When heating bills reached levels of $3,000 last winter, she then fell behind on her mortgage payments.  Countrywide’s advice to Miller?  Refinance.  Raise the payment to $1,165. Call it a “loan modification.”

Miller, now in dire straits, is facing foreclosure.  When she receives an invoice she is told that refinancing is an option.  Yet calls to Countrywide go unanswered.  Another one bites the dust…

Thirty year fixed rate mortgages see a drop this week after rising for five straight weeks. The national average for 30-year fixed-rate mortgages fell to 6.35% from 6.45% a week ago. The 30-year loan averaged 6.63% last year at this time. 15-year fixed-rate mortgages dropped to 5.92 percent from 6.04 percent.

This of course does not take into account points, which are running around 0.6 points this week.

I found interesting comments on this news, and see everything from jubilation to skepticism.  A gentleman commented that “A tenth of a percent is hardly a drop, I would be more impressed with a half to three-quarters drop.”  Another: “That’s it. The bottom’s in!”

Hardly.  Hate to spoil the good news, boys and girls, but we haven’t seen anything yet.  It will take a lot more than a tenth of a percent to turn things around.  Right now, people are hunkered down, waiting for the other shoe to drop.  Drop it  will.  Whether it lands right side up or belly down remains to be seen.  There are too many other factors right now that need to be taken into account before it is all fair skies and good weather again.   Take into account, for example, the horrendous flooding in Iowa, with thousands of acres of corn and soybeans under water, and no way for farmers to get them replanted this season.  Take into account the rising price of food, and the pain at the pump.  Consider that this is an election year, and who knows what way the wind will blow on THAT.  Heard the percentages on consumer confidence lately?

Also to be considered is the fear in the banking system of credit ratings.  Although I find that practice a bit unfair to many people, it is an indicator of how the sentiment is in the banking industry.  Not many average people today have a 720 credit score, and that only points to the fact that there will be houses left unsold, people living in homes they cannot afford, and builders going belly up.  It is a mix of everything that needs to be looked at, not a simple tenth of a percent decrease.  And we all know that this can change overnight.  Once again, we wait and see.

Today is the Fourth of July.  I am vacationing sans wife in Anderson, Indiana, and enjoying the company of son and daughter in law.  No fireworks for this tired old vet, but a wish to the readership of a well celebrated Fourth.

A report by Bloomberg states that 3 million homes now face foreclosure in the U.S.  U.S. lawmakers aren’t expected to complete work on a bill until after the July 4 recess.  This leaves a lot of people in a lurch, but we all know how slowly the wheels of Washington turn.  President Bush has said he will not veto what lawmakers come up with, with a few provisions. The legislation would help some borrowers refinance into more stable 30-year fixed-rate loans backed by the government.  The new legislation would help about 400,000 borrowers if they can hold on until after the recess, that is.

It is evident that the new President will be faced with dealing with the foreclosure issue.  Both have a plan that would be beneficial to homeowners in default.  Obama has a plan to put up $10 billion to help people refinance their mortgages or sell their homes under court protection. I believe his statement earlier this month that “The principle is simple — if the government can bail out investment banks on Wall Street, we can extend a hand to folks who are struggling on Main Street” echoes the feelings of many Americans.  It certainly does mine.  McCain, on the other hand, said in March that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”   McCain has since backpedaled a bit on that position.  And I have to agree with that, also, but take into account the bailout, pure and simple, of Bear Stearns.  It should be tit for tat, and all that, in my humble opinion.  If the government can bail out a company who had questionable loan practices and subsequently failed, then it is no different to me than Mr. Average Joe down there on Main Street.  With, of course, the exception that Joe probably did not do a thing to defraud or deceive, as happened with Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin.  I have to think Joe just wants to keep a roof over his head, not be the next great white hope.  But that is another thing…

No matter what the newly elected President does, he will have a very hard time sorting this out, and I doubt that he will have bipartisan support.  It will be interesting to see what happens during the first 100 days in office of the new President.  I can hardly wait.

The general consensus amongst mortgage market insiders it that the whole mortgage mess begin in the 1980’s when the industry was deregulated.  Anyone that could throw up a store front and put together a few thousand were suddenly in the mortgage business.  Being a creative sort, and nowhere near as conservative as most bankers, they begin to put together what at the time sounded like fantastic deals.  It was - for them.  I believe it lead to what is going on today, or is at least a giant share of it.

Now, of course, the Fed is working hard to backtrack on this whole scenario, and try to sort out what is one of the worst mortgage markets since the 30’s.  While researching this article, I see that KB Homes, the large LA based builder, is in a world of hurt, and its earnings dropped $3.30 since the first of the year.  Although KB sees hope in the market, it has a long, tough row to hoe to get there.

California has always been a forward thinking state, with regulations and laws that far surpassed the rest of the country, and I have always admired their stance on such things as strict pollution laws.  Now it appears that California is falling down when it comes to the Fed Reserve action of guidance to federally regulated lenders to tighten lending practices, to assure that borrowers have the ability to repay over the life of a loan.  Even though the Fed realizes that guidance is not enough, and it wishes the states to be proactive in helping to clear the field, California is now leading with its own response to the crisis of foreclosures and delinquencies by waiting for the Fed to do their thing, and then making the minimum effort to follow through.  Senate Bill 385, signed into law last September, gives empowerment to state-regulated entities engaged in mortgage lending and brokering.  It basically extends the little-good power to the companies that the Fed has put in place referencing guidance, which is in all truth no help at all.  California should be more proactive with this, I think, because a great deal of the mess lies there, with over priced properties and a plethora of foreclosures.  Yet the Senate and Assembly play politics, and do little to more than follow like good little sheep.  California, it is time to get off your butts and go for it.  We all look to you for guidance, not playing follow the leader.  Take note of New York, and the strides they have made there.  Give this country a break.

Current legislation in Michigan at his time could make it very hard for both consumers and lending institutions if they pass the legislature.  Michigan has been hard hit by the mortgage market fiasco, and the state of the economy is such that even graduating college kids run for the border as soon as they have diploma in hand.

New legislation is tough on everyone involved because it wishes to do away with subprime lending altogether, leaving a lot of struggling families out of luck.  Consumer advocates are unwilling to make any compromise on what they wish done - do away with sub prime or else.

With The Big Three in a lot of trouble due to the high cost of gasoline, and jobs being lost and plants closing on a regular basis, doing away with subprime altogether makes little sense.  Michigan has been on a downslide for years, and its future looks rather dim, indeed.

Better, I think, for Michigan to do away with the ARM components, crack down on unethical lenders, and clean up some of the already huge damage created by the fallout.  Doing away with subprime shuts out a lot of people that ordinarily would be able to make payment on a lesser mortgage, thus increasing the state of the economy and putting money into the community where they live.

One of the caveats of this new legislation is that certain banks and credit unions would be exempt from current legislation.  That shuts out a lot of mortgage companies that would otherwise be able to help Mr. Average Joe in his search for the American Dream. It wouldn’t be surprising to see a lot of lending companies make a run for the border if this legislation is passed.

If you wonder why I might think I know anything about Michigan, it is because I have lived here most of my life outside of time spent in military service.  Being in business, I see what happens in the community.  And as a writer, I see   what happens through a lot of research.  Let’s hope Michigan makes the right moves.

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