Mortgage Financing Blog

On Tuesday, the United States goverment and the nation’s fourth largest lender, Citigroup, announced help for homeowners who are struggling in the nation’s mortgage crisis.  The Federal Housing Finance Agency, which controls Fannie Mae and Freddie Mac, is reaching out with a plan to keep people from losing their primary homes.  The plan, which goes into effect on Dec. 15, aims to help homeowners who are already in the foreclosure process, get fixed rates they can afford. The program offers either a reduction in principal or interest rates, or a loan extension to lower monthly payments.  Federal Housing Administration Commissioner Brian Montgomery said it’s still up to homeowners to pay what they owe.  “This is not loan forgiveness. These are terms that are affordable to borrowers,” Montgomery said.  Citigroup is also taking steps to help the half million of their clients who are current on their mortgage payments, but may face a future financial crisis.  The company is halting foreclosures and urging borrowers to call if they face job cuts or any other loss of income.  “We are reaching out to those homeowners before they run into trouble, before they become delinquent,” Citigroup’s Eric Eve told Local 10.

Miami mortgage broker Grant Stern said it’s a great move. Due to the housing market’s downturn, many of his clients, like homeowners throughout Florida, owe more on their homes than what they are worth.  “When I tell homeowners it’s not their fault, I can hear the relief in their voice. They realize they’re not in it by themselves,” Stern said.  Financial experts believe these plans will offer relief to some, but they won’t bail out everyone facing foreclosure.

It’s always nice to know that someone is interested in your opinions, and in my humble one, the direct aid to homeowners is long overdue.  However, there are some important measures that need to be introduced to prevent future bubbles like . . . Read the rest of this entry »

Yes, I think it may be.  For those who are casual traders, this type of market timing opportunity is worth taking a look at.  Why, even Warren Buffet recently bought back into the market!  He knows that you can never time the market outright, but certainly there are better times to buy than others.  Right now, there are 2 items of interest that are In My Humble Opinion about to take the market higher and move the pricing floor higher shortly.  The technical events are related to the movement of the VIX index and the fundamental event is the settlement of Washington Mutual’s Credit Default Swaps both of which interconnected events should move the markets 10% higher and probably keep them above that benchmark for some time to come (or at least a few months until early next year).

For those who don’t know what the VIX is, it is an index that the Chicago Board of Exchange (CBOE) publishes which tracks the options market’s Implied Volatility of the market’s option contracts on the price of the S&P 500 Stocks.  This is an indicator that explains the implied risks of holding a market index fund with the 500 largest stocks, which is a simple and managed way for individual investors to gain exposure to stock market returns, while limiting exposure to losses that indivudual stockholders may suffer in tough times (ie. a Bear Stearns stockholder got essentially wiped out, but a SPY investor only has lost 40% of value this year).  When the VIX goes up, it indicates that the stock market is a riskier investment, when it is low, it indicates that equities are a strong investment.  If you have ever read about Warren Buffet, one of his most well known aphorisms is “When the market is greedy, be fearful; when the market is fearful, be greedy”.

The VIX is Wall Street’s Fear Factor and at its current levels, it is still in the danger zone, higher than 9/11 or the Long Term Capital panic in 1998.  As I write this, it is over 60%, which to put into perspective, it’s previous historical high was 9/17/2001.  Typically anything over 30% is a major drop in the markets, and anything over 40% is an absolute panic, yet, it has been trading over 50% for weeks now!  The leading indicator in the bond market of the risks of doing business is called the TED Spread and a reading above 200 is also panic territory, and right now, it is flirting with dips under that level.  What does that all mean?  It means that the markets are actually very close to regaining a semi normal amount of confidence.

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Some intrepid InTrade.com predictions market user added a predictions category for the next Secretary of Treasury of the USA.  It’s a great way to see what the market thinks of who the most powerful member of the Cabinet.  A must check out for serious traders! 

In the article Volatile Mortgage Rates to Persist Until Year-End, Analyst Says, Alexis Leondis discusses some of the effects of a rough month for mortgage interest rates, which has had up to 5% daily and 10% weekly changes in the cost of mortgage financing.  What does that really mean?  When the average mortgage interest rate rises from 5.875% to 6.625% the cost of borrowing increases by 10% in the monthly payments alone.  Generally, a 5% move usually happens in 7-14 days, not just from one day to the next, but lately, there have been enormous swings daily, and even intraday.        

As quoted, I noted several strategies to beat the volatility, foremost of which is contractual caps to the amount of your obligation.  The second is “having the loan originator not lock in a rate until the loan is nearer to closing, because borrowers may receive a better rate if rates decline.”   and needs some clarification.  A “Rate Lock-In” determines the loan price over a specified time to close.  There are different lock periods by lender, and the status of the loan.  When I take a loan application, I typically work with the borrower to select the rate and terms that fit their needs the best.  Unless specified by the client, or myself while settling the terms, the rate floats to market.  This means that while we talk, the rate can change, and from one day to the next, you are exposed to the movements of rate that are tied to the bond markets.  Once a rate is settled, there are multiple pricing systems of different lenders, each unique.  When it is specified between myself and the borrower, or if the offered rate is at “PAR” (0% pricing from bank to broker, 0% pricing from borrower to lender) and priced to lock in by date (30-45-50 days, are typical time periods), it is house policy for most mortgage brokerage businesses to request an immediate “Rate Lock” from the investor on that loan.    The 30 day rate lock is what lenders use in determining the current pricing because a typical loan process runs 28-30 days.  This is where the loan status comes into play, because only approved loans can take 15 day locks with better pricing!

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Think this is Countrywide’s first finest effort to stem the tide of foreclosures, and only about a year too late.

Still for a major piece of legislation to spur actual action 5 months later by the largest player in the market is fairly impressive. Only took an act of Congress and a giant new tax cut. Still, this is surely a good sign that the right bells are close to being rung in the financial system to move bank assets from broken institutions to the functioning and strong ones.

Take a peek at the July 28th entry in this blog, this is the end result. Finally . ..

Fragile Hank is my new website. It’s got Fragile Hank t-shirts, buttons, posters and dart board covers. Ok, I’m frustrated and wondering when the government is going to come along and bail out every private business in the country. Is capitalism now the new communism?? Anyhow, please check out Fragile Hank and give me your feedback.

Updated 11/10/2008

For all those financial company bears in the market place, there’s an old regulator’s tool, born in the wild west during the 80’s which might shed some light on the health of banks large and small:

The Texas Ratio

definition: Non performing Loans / ( Tangible net capital +Loan Loss Reserves)

Values: 0%-100% = Insolvent with 0% being better

Check out this marketwatch story on the Texas Ratio and this blogpost on the texas ratio by seeking alpha.

For the would be investors who are bargain hunting financial stocks, this is a great tool for evaluating the solvency on a current and historical basis of the institutions that you are targeting. It also explains how lenders that indulged in too many option arms are suffering.

To recap, book a loan whose payments are 65% of the total income, report the 35% that you don’t get paid in monthly interested, but add to the balance as PROFITS. Use these loans to expand your balance sheet continuously, and keep adding more income by writing paper, but not actually collecting all of your profits, per se. Close new loan and repeat.

If you read this blog back in 2006 and noticed that Option ARMs tend to have problems with payment shock, one might imagine that these loans would certainly be candidates for default considering they were given with 3 year prepayment penalties and to borrowers who didn’t document income . . . When home prices are eternally rising I guess there’s always someone else to re-option the property, but these call options are coming due and the buyers (current homeowners) are probably not going to be able to make due with a 255% monthly payment increase, especially, if the option loan blew their property value out of proportion.

The primary lenders for thse products such as IndyMac Bank IMB, Wachovia WB, Washington Mutual Bank IMB and BankUnited BKUNA are now being punished by the market is that their option arm portfolios growth makes them highly susceptible to requiring excess amounts of new capital as swollen Option ARM loans move in the the non-performing asset categories and requiring larger loan loss reserves which are eating current profits as well as threatening shareholders’ equity. Countrywide Financial now owned wholly by Bank of America also has many of these loans, but mostly held off balance sheet through reps and warranties to the investors who bought the loans.

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Updated 11/10/2008

Let the unintended consequences begin! This type of action caused major investor lawsuits in the 1980s in the wake of the S&L scandals,and will surely cause more headaches in the next few years, than it solved from the last 2 years’ foreclosure headaches.  Below, text of the passage of the FHA bailout bill related to Safe Harbor for Mortgage Servicers of Securitized mortgage loan pools.

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For all of you avid blog readers out there, this topic was covered about Hyman Minsky, and the developing push towards a “Minsky Moment” last year, but oddly, I am going to say that last year’s events did not constitute a real “Moment” but this weeks’s events are in fact the long awaited Minsky Moment!

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It’s not often that a pundit columnist, who is most known for his comedic game show on cable, and random cameo roles in movies commands so much respect in the realm of economics, but that just means that there’s only one Ben Stein . . . This opinion piece in the New York Times calls into question why Goldman Sachs came out of the most recent quarter so squeaky clean, especially by short selling the very structured products that it was underwriting and selling to investors. . . . . .

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