In other newsworthy happenings, here’s a link to a U.S. map…
Maybe the folks that went to the effort of creating this map and story have had a few too many Starbucks this week.
Online, several "Save Our Starbucks" petitions have popped up for stores across the country, including locations in San Diego, Dallas and New York City.
from The Porch…
Where does the money come from?
Fannie Mae takes mortgage loans from banks, in order to repackage them in the form of mortgage-backed securities.
Those mortgage-backed securities are sold to investors, and Fannie Mae guarantees that the loans will be repaid. Fannie Mae also borrows money from the debt markets usually at a rate much lower than other banks, and uses it to buy mortgages it holds as its own investments.
By buying these loans, Fannie Mae injects new money into the housing economy.
Current Problems
Guaranteed Mortgages
Fannie Mae's exposure to the housing market has soared. Its outstanding guaranteed mortgages tripled from 1998 to 2007.
Delinquency Rates
The delinquency rate on Fannie Mae mortgages is rising. This increases the chance that the company will have to make good on its guarantees.
Borrowing Costs
Borrowing costs are volatile and rising, reflecting investor concerns about Fannie Mae's health.
What Is the Reach of the Problems?
Fannie Mae and Freddie Mac (a competing mortgage lender) own or guarantee about half of the nation's $12 trillion mortgage market.
Housing Markets
They provide the capital that banks use to write new loans. If Fannie Mae and Freddie Mac stop buying loans, banks may stop making new loans, freezing the United States housing market.
These mortgage operations provide stability and liquidity to the mortgage market. If it is harder for them to borrow money, mortgage interest rates will rise.
Financial Markets
Virtually every Wall Street bank and many overseas financial institutions, central banks and investors do business with Fannie Mae and Freddie Mac.
What Are the Consequences of a Government Bailout?
A bailout would potentially put taxpayers on the hook for billions to offset Fannie's and Freddie's losses.
National Debt
It would most likely make it more expensive for the United States government to borrow money in the future, since the government's potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion.
Investors Suffer
Shares of Fannie and Freddie would probably be worth little or nothing.
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Sources: New York Times, Fannie Mae; Office of Federal Housing Enterprise Oversight; Bloomberg
from The Porch…
Mike B. Class Star®
From a week ago (July 15, 2008) Wall Street Journal’s Meena Thiruvengadam and Maya Jackson-Randall report:
The Federal Reserve Board unanimously approved a rule aimed at better protecting consumers from deceptive mortgage-lending practices.
Here are the highlights:
Board of Governors of the Federal Reserve System
Highlights of Final Rule Amending Home Mortgage Provisions of Regulation Z (Truth in Lending)
The rule establishes a new category of "higher-priced mortgages" that includes virtually all closed-end subprime loans secured by a consumer's principal dwelling. Which loans qualify as "higher-priced" will be determined by a new index that will be published by the Federal Reserve Board.1
The rule, for these higher-priced loans:
· Prohibits a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
· Prohibits a lender from relying on income or assets that it does not verify to determine repayment ability.
· Bans any prepayment penalty if the payment can change during the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years.
· Requires that the lender establish an escrow account for the payment of property taxes and homeowners' insurance for first-lien loans. The lender may offer the borrower the opportunity to cancel the escrow account after one year.
The rule, for all closed-end mortgages secured by a consumer's principal dwelling:
· Prohibits certain servicing practices: failing to credit a payment to a consumer’s account as of the date the payment is received, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.
· Prohibits a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.
· Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.
The rule, for all mortgages:
· Requires advertising to contain additional information about rates, monthly payments, and other loan features. The rule also bans seven deceptive or misleading advertising practices, including representing that a rate or payment is "fixed" when it can change.
Based on compelling evidence from consumer testing, the Board is withdrawing the proposed rule regarding yield-spread premiums. The Board, however, intends to analyze alternative approaches to this issue as part of its ongoing review of the rules for closed-end loan rules under Regulation Z.
Compliance with the new rules, other than the escrow requirement, is mandatory for all applications received on or after October 1, 2009. The escrow requirement has an effective date of April 1, 2010 for site-built homes, and October 1, 2010 for manufactured homes.
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1. The rule's definition of "higher-priced mortgage loans" will capture virtually all loans in the subprime market, but generally exclude loans in the prime market. To provide an index, the Federal Reserve Board will publish the "average prime offer rate," based on a survey currently published by Freddie Mac.
…not to mention that a lender ought to determine that the loan being made has a very good probability of repayment…BEFORE packaging it and selling it on the secondary holders.
from The Porch…
from The Porch…
Mike B. Class Star®
I am amused by the “new” requirements by mortgage lenders to document income and verify assets. It’s hard to say…but maybe these “non-conforming”,” no-doc” “sub-prime” boys and girls shot themselves in the foot?
My friend Rick Klein, the top mortgage lender at Wells Fargo in Park City sent a note to me last Tuesday saying:
“Yesterday I was closing loans and taking applications. The markets are working; interest rates did not increase. “Savings,” “down payment” and “ability to re-pay” are not dirty words…”
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From today’s (July 21) Wall Street Journal; Mark Maremont writes:
Federal officials heap much of the blame for the subprime mortgage mess on lenders, claiming they recklessly made too many high-cost home loans to borrowers who couldn't afford them.
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.
The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.
The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according toa written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.
From a week ago (July 15, 2008) Wall Street Journal’s Meena Thiruvengadam and Maya Jackson-Randall report:
The Federal Reserve Board unanimously approved a rule* aimed at better protecting consumers from deceptive mortgage-lending practices.
The rule is similar to a proposal issued in December but adds protections for people with higher-priced mortgages. Those loans include those in the subprime market but typically exclude prme loans…
The new measures require creditors to verify borrowers' income and assets and to establish escrow accounts for all first-lien mortgages. Lenders will be prohibited from relying solely on a home's value to assess a borrowers' ability to repay loans.
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* In my next blog…I’ll post the highlights of the Final Rule Amending Home Mortgage Provisions of Regulation Z, Board of Governors of the Federal Reserve System, July 14, 2008.
Good lending practices revisited? Mercy.
from The Porch...
Mike B.
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MIKE BALLIF
