From the WSJ this morning “FDIC Faces Mortgage Mess After Running Failed Bank“:

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

Reminds me of Lisa Simpson’s line in “Homer the Vigilante“, when Homer sets up a group to track down a cat burglar.  Lisa’s line goes along the lines of (paraphrase): “but if you’re the police, who’s going to police the police?” To which Homer replies “I don’t know, the Coast Guard?”

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Categories: Congress and Government, Subprime Mortgages
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From Bloomberg this morning as stocks tumble:

“This is a systemic financial crisis, there is no end to it,” Nouriel Roubini, professor of economics and international business at New York University, told Bloomberg Television. “It’s a vicious circle between a contracting economy and greater credit and financial losses feeding on the economy.”

President Bush reminds us that the system is “basically sound”:

WASHINGTON (AP) - President Bush urged lawmakers on Tuesday to move quickly in putting into force legislation designed to help prop up mortgage giants Fannie Mae and Freddie Mac while declaring the nation’s financial system to be “basically sound.”

My thoughts?

Well - I don’t think the government should move too quickly on the Fannie and Freddie bailouts. I don’t trust them to get it right this quickly. Too many variables, too many unknowns. Take a deep breath, try to really understand what the best solution is to this problem. The last thing you want to do is panic. At the end of the day it’s investors who are losing money right now - and that’s the game they play, and the government can come in at anytime in the future with a more sensible plan and rescue the market. I just want to caution against hastily put together plans.

Late afternoon update (4:12PM):

Fed Chairman testifies on the Hill (Marketwatch):

Fed uneasy about inflation, growth, Bernanke says

But he also spoke candidly about the weak economy and fragile financial markets. “The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth,” Bernanke said.

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Tags: crisis, fannie, freddie, market, stocks
Categories: Congress and Government, Debt, Economics
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I came across an interesting post at The Liscio Report called “Presidential economics: Do parties matter?” And as I read through it I came across some interesting analysis and I realized there may be come misconceptions about which party really does what. Democrats are believed to be fiscally irresponsible, spenders and Republicans are supposed to be fiscally responsible and small government. Which should technically result in bloated budgets with lots of deficits for Democrats and trimmed outlays with balanced budgets for Republicans. I know in recent years fiscal responsibilty has been thrown out the window, but that seems to fit the pattern and does not appear to be an anaomoly.

Take a look at this chart:

This is not what I would have expected. Democrats lowering the budget deficits and Republicans increasing it for the most part? Are we being misled here then? Do the parties have a branding issue? This is how the authors explain it:

Though the picture so far is of the Republicans as the party of austerity and the Democrats as the party of stimulus, there’s a surprise when it comes to changes in the federal deficit: Republicans are more liberal with the red ink than Dems. On average, a Republican in the White House has meant a shift of –1.9% of GDP in the government’s budget balance (i.e., towards smaller surpluses or bigger deficits), while a Dem has meant a 1.5% improvement in the budget position (or 1.8%, if you start in 1949, thereby omitting the huge World War II deficit). And in this case, the average is a faithful representation of the distribution, with only one Democrat in the minus column and only one Republican in the plus.

Some of this reflects different tax policies, with Reagan and Bush 43 cutting, and Clinton raising income taxes. But it also reflects the partisan difference in GDP growth.

Read the whole thing. Certainly makes you think, doesn’t it?

Hat tip: The Big Picture

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Categories: Congress and Government, Debt, Economics
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Negative amortization was always controversial. Option ARMS (Pick-a-pay) always have had a negative amortization feature. In fact this loan has always been World Savings bread and butter. For the financially savvy person this loan makes complete sense. It has features which allows you to lower your taxable income, decrease your cost of funds over the long term and if used with a carefully calibrated investment strategy allows you to maximize returns to the max. Within this context negative amortization is a well accounted for risk and balanced by high returns. Even if on a short term basis you ended up with some negative amortization, over the long term, you would come out ahead.

The problem is the average consumer is not tremendously financially savvy. And therein lies the problem. When option arms were marketed to the average Joe as a financial vehicle, loan originators who themselves are not tremendously financially savvy saw an opportunity to sell more house for lower monthly payment. I’m not trying to put the onus solely on the originator here either. I am of the opinion that the head of every bank in the United States fully knew what they were selling to the average borrower.

I remember a borrower a few years ago who insisted beyond any reasonable persuasion that he wanted to be in such a loan. He said that the payment on the 5/1 ARM I was proposing was to high and he wouldn’t’ be able to afford the house after a few years. However, with the option ARM a different lender had proposed he would be “comfortable”, so if I didn’t give him a similar option he was going to go with the other lender.

This borrower had no business being in an option ARM. Not only was he relatively financially unstable, he was trying to live way beyond his means, counting on future income and future equity to compensate for the short term loss. This was never the market for the option ARM and these types of borrower had no business being in this type of loan. In fact I wrote a post back in 2005 warning borrowers about the dangers of the option ARM. I wanted to remind folks that despite how things were being advertised as a borrower you are still obligated to pay back the full loan amount with any accumulated interest.

And it is because of stories of such borrowers over the past few years that today we sit where we are. Today, Wachovia, one of the largest underwriters of option ARM’s pulled the plug on these negative amortization loans. Here is the news clip from Fortune magazine:

Wachovia (nyse: WB - news - people ) announced Monday that it is pulling the plug on it’s Pick-a-Pay program. The pay-what-you-will exotic loan offerings weren’t exactly subprime –the borrowers were a bit better-heeled Alt-A types– but the default rates on the loans have been much higher than expected and have been driving the lender’s losses.

The loans gave borrowers the option of paying several amounts each month, including low payments that led to an increase in the principal amount of the loans.

Not only did they stop the program they also have said they’ll waive the prepayment penalties on these loans as well. Most option ARM included three year hard pre-payment penalties. So whether you sold or refinanced the loan within the first three years you had to pay a prepayment penalty. With the fall in home prices adding to negative amortization more than they had figured things are not looking good that the banks can make money on these. So, Wachovoia took a long hard look and decided to cut their losses. According to Housing Wire:

Wachovia also said it will waive all prepayment fees for borrowers looking to refinance out of an option ARM, a clear indication of the stress borrowers in such loans are now facing; the bank recently hired Goldman Sachs Group Inc. (GS: 174.90, +0.19%) in an effort to help it figure out what it should do with the Option ARM loans on its books.

As you can tell it’s not just the consumer who is in pain here, Wachovia is hurting too.

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Categories: Arizona, Congress and Government, Humor and Fun, Interest Rate, Mortgage Roundup, Mortgages, Real Estate
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Okay most everyone knows what I think about this massive bailout package Congress is about to pass. In case you missed it, I think it’s a sham. Seriously. A big sham. How else do you explain this to the 30% of tax payers who are not homeowners. How about the 80%+ homeowners who pay their bills on time, buy what they can afford and read before they sign? Yeah. How about these tax payers.  Mr. and Mrs. Renter who lives within your means how about you pony up some dough so that we can clean up the mess our Wall Street pals and a few over excited folks made over there.

Okay.

Take a deep breath.

Aaaaaaaaahhhhhhhhhhh!

Now. Here are some of the details of the $300,000,000,000.00 mortgage rescue plan currently being “debated” in the Senate. From the Dallas Morning News:

They would receive a refundable tax credit of up to $8,000, or 10 percent of the home value, on purchases of unoccupied housing.

As part of a regulatory overhaul of Fannie Mae and Freddie Mac, the mortgage finance giants, the bill would permanently increase to $625,000, from $417,000, the limit on loans they can purchase from lenders in expensive housing markets. That would make it easier for borrowers in those areas to obtain mortgages at discounted rates.

Later on in the same peice it says:

The Senate bill would provide $150 million to expand counseling for borrowers to prevent foreclosure and establish stricter lender disclosure rules to make plain the maximum monthly payment for an adjustable rate loan.

The bill also establishes an Affordable Housing Trust Fund, to be financed by $500 million to $900 million in fees from Fannie Mae and Freddie Mac. Initially, the trust fund would cover any expenses related to the foreclosure rescue plan, meeting a demand by Senate Republicans that taxpayers not pay for the program.

Under the refinancing plan, only borrowers seeking to remain in their primary home would be eligible, shutting out real estate speculators and owners of vacation homes. And lenders would first have to agree to cut the principal balance of loans to roughly 85 percent of each property’s current value, a substantial loss in many housing markets.

Arizona Mortgage Team has a great post with all the details too.

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Tags: bill, Congress, housing rescue, Mortgages
Categories: Congress and Government, Debt, Economics, FHA
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Early in my mortgage career a sales veteran once told me that the best way to solve a customer problem was to throw money at it. I guess this is an even better solution when you’re the ones printing money.

Full story “Housing rescue plan passes key Senate test“.

My opinion:

Just to put things in perspective, I thought I’d put the faces of the folks who’ll be stuck with the bill:

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Tags: FHA, foreclosure rescue, spending
Categories: Congress and Government, Debt, Personal Finance
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The good news is most US Senators have disclosed the circumstances of how they obtained their home mortgage. The bad news is 23 have not. Should we be suspicious? I think we should. The story this morning:

Amid a brewing scandal over special mortgage deals given to two U.S. senators, Politico last week asked the offices of all 100 senators to describe the circumstances under which they obtained their own home loans. Seventy-seven senators have complied so far. Twenty-three have not.

Senators are not required to report in their disclosure forms any financial information about their homes unless they draw rental income from the home. But in the wake of questions regarding mortgages obtained by Sens. Chris Dodd (D-Conn.) and Kent Conrad (D-N.D.) — loans they received through a VIP program run by Countrywide Financial Corp. — Senate Majority Leader Harry Reid (D-Nev.) has said that the disclosure rules should be changed so that senators’ mortgage details are made public.

Full story (Senators’ mortgages under microscope).

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Tags: Mortgages, scandal, senators
Categories: Congress and Government, Mortgages, Real Estate
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There is a scandal brewing in Washington involving members of the Senate Banking Committee and Countrywide. Apparently these guys were getting “special deals” from Countrywide and are now pleading ignorance. I guess the trick is when you’re getting special treatment the best thing to do is not ask questions. I’ll have to keep that in mind if I should ever become a politician.

Denial. Ignorance. Incompetence. Fill your word here __________ after you watch the Chairman of the Senate Banking Committee revealing to reporters that  he doesn’t know the interest rates these days. Geez. Why are you then spearheading one of the most important mortgage banking reforms of the modern era? Twitter me Senator, I’d be happy to send you hourly updates on mortgage rates:

More on the brewing scandal.

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Tags: interest rates, Mortgages, senate, senators
Categories: Congress and Government, Interest Rate, Mortgages
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Senator Kent Conrad admits he wasn’t aware that Countrywide gave him preferential treatment on his mortgage and donated the equivalent fee to a charity. Senator Christopher Dodd on the other hand also got a loan from Countrywide but denies he was treated any differently. I don’t know if I buy that necessarily. Shame on Countrywide for treating these powerful senators differently than the regular borrower. It only hurts the industry when big companies try to pull this kind of shenanigan.

Now why is this significatn you ask? Well because these two Senators sit on the Senate Banking Committe, and Dodd is in fact the chairman. This committee has been actively seeking ways to regulate the mortgage industry since early last year.

Now, if I were a Senator on this committee, I’d highly recommend not doing any Real Estate transaction until the credit crunch is fully behind us and any legislation has been dealt with. Or, just doing a cash purchase if you must delve into the market.

Here is the story from Bloomberg:

June 14 (Bloomberg) — Senator Kent Conrad said he was given preferential treatment on a mortgage from Countrywide Financial Corp. and will write a $10,500 check to charity.

“It appears Countrywide waived one point on my mortgage,” Conrad, a North Dakota Democrat, said in a statement today in Washington. “Although I did not ask for or know that I was receiving a discount, and even though I was offered a competitive loan from another lender, I do not want to have received preferential treatment.”

Conrad said he also received a loan from Countrywide on an eight-unit apartment building in Bismarck, North Dakota, even though the lender typically serves properties that have four units or less. He said he had decided to refinance that loan with another institution.

Conrad and Senator Christopher Dodd, who oversees the U.S. mortgage industry as chairman of the Senate Banking Committee, were among those who received loans through Countrywide’s “V.I.P.” program, which waived points, fees and borrowing rules for prominent people, Portfolio magazine reported June 12. Dodd has denied receiving preferential treatment.

Full story here.

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Tags: countrywide, senate banking committee, senators
Categories: Congress and Government, Mortgages, Uncategorized
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David Brooks wrote a thought provoking column today on money and debt. I think he makes a great point about “The Great Seduction” of debt and the impact on todays society. He makes some interesting observations on how powerful a role financial discipline played as the United States became the wealthiest nation on earth:

The United States has been an affluent nation since its founding. But the country was, by an large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

I think the bubble economy we’ve seen the past few years bears this point out beautifully. To consider that the US economy has been through two huge bubbles since I graduated from college in 1997 is quite staggering. The first being the dot com bubble and the second is of course the housing (mortgage) one.

The explosion in personal consumer debt and the growing economic disparity cannot be good things for the long term health of the economy. I also think that the borrow and spend mentality that has overtaken the entire country starting from the President all the way down to teenagers applying for credit cards must be rectified at some point if this country to continue to be a wealthy nation. Otherwise it will go the way of Argentina in the late 1990s.

I found Brooks column very thoughtful and

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Tags: debt, economy, financial prudence
Categories: Congress and Government, Debt, Economics
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