MBA (9/22/2008 ) Murray, Michael
The Natural Catastrophe Policyholders Coalition —which includes the Mortgage Bankers Association—sent a letter to Senate Banking Committee Chairman Christopher Dodd, D-Conn., detailing the importance of the Non-Admitted Lines and Reinsurance Act of 2007, under S. 929 and H.R. 1065.
“Ensuring adequate catastrophic insurance capacity for commercial and multifamily property owners remains a top priority for the NCPC. The passage of [the Act] by the Senate represents an important step for increasing catastrophic insurance capacity,” the letter said.
In November 2007, the Government Accounting Office’s report to the House Committee on Financial Services estimated that the federal government provided nearly $26 billion to homeowners who lacked adequate insurance in response to the 2005 Hurricanes Katrina, Rita and Wilma .
“Large losses associated with natural catastrophes are some of the biggest exposures that insurers face. Particularly in catastrophe-prone locations, government insurance programs have tended not to charge premiums that reflect the actual risks that homeowners face, resulting in financial deficits,” the GAO report said.
The NCPC's letter pointed out that finding natural catastrophe insurance has become more difficult and expensive for commercial property owners because “admitted” insurance companies would reduce their exposure in states and/or regions impacted by a major natural catastrophe and no longer write policies for the impacted states or regions or significantly reduce the number of policies they write in these areas.
"In these instances, non-admitted insurance carriers serve a vital role by filling the insurance capacity gap caused by the reduced admitted carrier insurance," the letter said.
Commercial and multifamily property loan documents require owners to have insurance coverage in place for the duration of the loan, including natural catastrophe insurance coverage.
The GAO report said federal reinsurance for state programs could lead to broader coverage but could also displace private reinsurance. The agency identified several policy options for tax-based incentives for insurance companies, homeowners, investors and state governments.
“But these options, which could help recipients better address catastrophe risk, could also result in ongoing costs to taxpayers,” the GAO report said. “While some options would address the public policy goals of charging risk-based rates, encourage broad participation, or promote greater private sector participation, these policy goals need to be balanced with the desire to make rates affordable.”
The National Association of Insurance Commissioners “generally agreed with GAO’s report findings,” the agency said.
This year was the heaviest hurricane season since Katrina hit the Gulf coast more than three years ago. Hurricane Gustav hit the Louisiana area without the intensity of Katrina, but Hurricane Ike caused severe damage to Galveston, Texas and many Houston residents had property damage from falling trees with power yet to be restored in a number of homes and businesses. The hurricane was blamed for more than 60 deaths.
The Washington Post reported last week that the American Red Cross was falling into debt from its aid in Hurricanes Gustav and Ike, based on a recent GAO report. The report said the Red Cross and other disaster relief charities still face shortages in trained volunteers and have not dedicated enough resources for disaster preparedness, based on the inability to raise funds through private donations in a weakened economy.
Passage of S. 929 or H.R. 1065, however, would provide the means to reduce uncertainty regarding availability of natural catastrophe insurance in the wake of a major hurricane or other natural disaster, NCPC's letter noted.
“Given the fragile state of the commercial and multifamily lending and capital markets, this consideration assumes heightened importance,” the letter said.
The Natural Catastrophe Policyholders Coalition includes MBA; the American Resort Development Association; Building Owners and Managers Association; Chamber Southwest Louisiana; Commercial Mortgage Securities Association; Greater New Orleans Inc.; International Council of Shopping Centers; National Apartment Association; National Association of Industrial and Office Properties; National Association of Real Estate Investment Trusts; National Association of Realtors and the National Multi Housing Council.
Tuesday, September 30, 2008
HELOCs Gain Borrower Interest Despite Fewer Originations
MBA (9/22/2008 ) Palaparty, Vijay
Home equity line of credit product applications and originations decreased 33.8 percent and 26.4 percent, respectively, among small/medium-sized lenders, bewteen the first and second quarters, according to a study from BenchMark Consulting International, Atlanta.
However, the study revealed that from a book-to-look perspective, borrowers' interest found renewal in the second quarter, with the rate rising by 5 percent to 49 percent from 44 percent in the first quarter,
“From the second quarter of 2007 through this year's first quarter, originations were fairly constant, increasing 6.25 percent; applications increased 32.75 percent over the same period,” said Brian King, senior vice president at BenchMark Consulting. “However in the second quarter, applications and originations dropped significantly. Overall, the ability to book new originations for HELOC products for the small/medium group, however, has been fairly consistent over the past five years.”
Furthermore, the study revealed that among large lenders, HELOC applications dropped 55 percent between the second quarter of 2007 to the second quarter this year. “With tightening of credit standards, tougher underwriting guidelines and less direct marketing focus, it is understandable why applications are down so significantly,” King said.
The book-to-look rate also degraded among large lenders, decreasing from 43 percent in the second quarter of 2007 to 37 percent a year later. “Typically large lenders will receive more applications with lower credit scores and that increases the number of applications, but the approval rates are lower so there is a lower book-to-look rate,” King said. “It is interesting that the large group’s book-to-look rate is lower than that of the small/medium group, which impacts efficiency in the loan originations areas.”
In terms of distribution by channel, the branch was most popular among borrowers. Seventy-six percent of borrowers applied for a loan and 74 percent of loans were originated among the small/medium group. Among originations, the internet accounted for only 1 percent of transactions and the phone accounted for 14 percent. The broker channel disappeared by the second quarter in both small/medium and large lender groups.
Among the large group, the internet channel was more popular. “However, for the internet channel, we also see the impact of pull-through rate with 13 percent of all applications but only 6 percent of all originations,” King said. “So while this channel has potential, the pull-through rate continues to be a challenge, possibly due to the proliferation of aggregators in this space.”
In terms of defining prime borrowers, small/medium respondents were more conservative. Sixty-seven percent of the small/medium group established cutoff points of FICO scores greater than 700 or greater than 720, while those responses were not provided in the large group.
“This may explain in part why the credit cycle appears to have a more severe impact on the large lenders,” King said. “However, what is interesting is that this is recent information—second data as of the end of June. To see such a drastic different in the definition of “prime” is interesting.”
Analysis of credit score distribution among both small/medium and large lenders yielded similar results. "Lenders typically have a higher pull-through percentage for higher credit scores versus lower credit scores,” King said.
The study revealed that 56 percent of the applications had FICO scores of 720 or higher, while 79 percent of originations had FICO scores of 720. Comparatively, 12 percent of applications had less than a 600 FICO score, while only 1 percent of originations were in the same band. “The higher the credit score, the more likely the borrower is to make it from application to origination, which increases the book-to-look rate and profitability,” King said.
“Underwriting restrictions have tightened and they will remain that way,” King said. “It will make it difficult for some borrowers to get HELOCs, but there is still plenty of business out there. With the reduction in the brokerage space, especially, banks have more business opportunity now.”
Home equity line of credit product applications and originations decreased 33.8 percent and 26.4 percent, respectively, among small/medium-sized lenders, bewteen the first and second quarters, according to a study from BenchMark Consulting International, Atlanta.
However, the study revealed that from a book-to-look perspective, borrowers' interest found renewal in the second quarter, with the rate rising by 5 percent to 49 percent from 44 percent in the first quarter,
“From the second quarter of 2007 through this year's first quarter, originations were fairly constant, increasing 6.25 percent; applications increased 32.75 percent over the same period,” said Brian King, senior vice president at BenchMark Consulting. “However in the second quarter, applications and originations dropped significantly. Overall, the ability to book new originations for HELOC products for the small/medium group, however, has been fairly consistent over the past five years.”
Furthermore, the study revealed that among large lenders, HELOC applications dropped 55 percent between the second quarter of 2007 to the second quarter this year. “With tightening of credit standards, tougher underwriting guidelines and less direct marketing focus, it is understandable why applications are down so significantly,” King said.
The book-to-look rate also degraded among large lenders, decreasing from 43 percent in the second quarter of 2007 to 37 percent a year later. “Typically large lenders will receive more applications with lower credit scores and that increases the number of applications, but the approval rates are lower so there is a lower book-to-look rate,” King said. “It is interesting that the large group’s book-to-look rate is lower than that of the small/medium group, which impacts efficiency in the loan originations areas.”
In terms of distribution by channel, the branch was most popular among borrowers. Seventy-six percent of borrowers applied for a loan and 74 percent of loans were originated among the small/medium group. Among originations, the internet accounted for only 1 percent of transactions and the phone accounted for 14 percent. The broker channel disappeared by the second quarter in both small/medium and large lender groups.
Among the large group, the internet channel was more popular. “However, for the internet channel, we also see the impact of pull-through rate with 13 percent of all applications but only 6 percent of all originations,” King said. “So while this channel has potential, the pull-through rate continues to be a challenge, possibly due to the proliferation of aggregators in this space.”
In terms of defining prime borrowers, small/medium respondents were more conservative. Sixty-seven percent of the small/medium group established cutoff points of FICO scores greater than 700 or greater than 720, while those responses were not provided in the large group.
“This may explain in part why the credit cycle appears to have a more severe impact on the large lenders,” King said. “However, what is interesting is that this is recent information—second data as of the end of June. To see such a drastic different in the definition of “prime” is interesting.”
Analysis of credit score distribution among both small/medium and large lenders yielded similar results. "Lenders typically have a higher pull-through percentage for higher credit scores versus lower credit scores,” King said.
The study revealed that 56 percent of the applications had FICO scores of 720 or higher, while 79 percent of originations had FICO scores of 720. Comparatively, 12 percent of applications had less than a 600 FICO score, while only 1 percent of originations were in the same band. “The higher the credit score, the more likely the borrower is to make it from application to origination, which increases the book-to-look rate and profitability,” King said.
“Underwriting restrictions have tightened and they will remain that way,” King said. “It will make it difficult for some borrowers to get HELOCs, but there is still plenty of business out there. With the reduction in the brokerage space, especially, banks have more business opportunity now.”
Policymakers Attempt to Stabilize Markets
MBA (9/22/2008 ) Velz, Orawin
Financial turmoil dominated financial markets last week. The week began with several dramatic events, including Lehman Brother's bankruptcy, the sale of Merrill Lynch and the threat that AIG could go bankrupt.
Once again, investors re-priced their risk and moved their funds, including those from money-market mutual funds, to safe-haven U.S Treasuries, bringing down the yields across the curve, with the yield on three-month Treasury bills dipping below a tenth of a percent.
The extent of risk aversion and the resulting liquidity crisis was reflected in the explosion in the TED spread—the difference between the three-month Libor and three-month Treasury bill rate. (Libor is the dollar-denominated overnight London interbank offered rate or the rate at which banks lend to one another). The significantly wider TED spread reflected market jitters and extreme levels of counterparty risks as it indicated that banks were unwilling to lend each other money and would do so only by charging a considerable risk premium.
Amid the crisis, the Federal Reserve held the federal funds rate steady on Tuesday but took extraordinary measures to inject liquidity into the global financial markets. On Wednesday, to relieve the pressure on the Libor market, the Fed boosted its U.S. dollar swap line with foreign central banks so that they could provide their respective financial institutions with short-term dollar funding.
These efforts did little to relieve liquidity pressure, however. The TED spread continued to rise to more than 300 basis points by mid-day Thursday. This was considerably higher than the spread seen in mid-August, 2007 of about 240 basis points and more than 200 basis points above its recent lows on September 5. The spread narrowed modestly on Thursday afternoon, as the stock markets rebounded in response to reports that policymakers were considering to create a new entity to absorb distressed and illiquid assets from the balance sheets of troubled banks.
The details of how such an entity will operate are being worked out as this is written. Congressional action will also be required. There will be many questions to be answered and a great deal of uncertainty involved. More immediately, as part of its broad plan to stabilize markets, the Treasury will double its planned purchases of mortgage-backed securities to $10 billion this month and may make more MBS purchases in coming months. Fannie Mae and Freddie Mac will also increase their purchases of MBS.
Economic reports, which took a backseat to the financial crisis, generally pointed to deteriorating activity. Industrial production fell sharply in August. The Conference Board's Index of Leading Indicators dropped in August for the second consecutive month, indicating a slowing economy ahead. Total housing starts dropped sharply in August, driven by declines in multifamily starts. Single-family starts fell modestly, but sharp back-to-back drops in single-family permits suggested further cutbacks in coming months. Continued pullbacks are necessary, however, to reduce the excess supply in the market given the huge overhang of unsold inventory in many parts of the country and soft housing demand.
While continued decreases in home sales are likely, near-term leading indicators suggested that the declines should be moderate in the coming months. Home builders reported that current market conditions and outlook for new home sales modestly improved in September, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The index was up slightly from a record low, the first increase in seven months. Rising consumer confidence, declining mortgage rates and the first-time homebuyer tax credit helped lift builders' confidence.
The Mortgage Bankers Association Weekly Application Survey also showed that the purchase application index has steadily increased since mid-August as mortgage rates trended down. The increases in the purchase index paled in comparison, however, to the surge in the refinance index of 88 percent in the latest week following a 15-percent rise in the prior week.
Treasury yields dropped sharply across the curve through mid-Thursday, benefitting from a flight to quality. Stocks surged on Thursday afternoon and continued through Friday. Treasuries declined and yields rose as investors' risk appetite increased. The yield on the 10-year Treasury note stayed around 3.82 percent by mid-Friday afternoon, about five basis points higher than the rate on the previous Friday but 35 basis points higher than the rate at the start of the week.
With the turmoil in financial markets, the spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages widened to about 230 basis points, still about 40 basis points narrower than the gap seen before the announcement on Fannie Mae and Freddie Mac.
Housing and Mortgage Indicators:
The National Association of Home Builders/Wells Fargo Housing Market Index rose two points to 18 in September from 16 in August. The August reading matched the record low reached in July. (Readings below 50 indicates that more respondents view market conditions as poor.)
The survey asks builders for their sentiments on current sales, traffic of potential buyers, and projected sales over the next six months. All the three components improved over the month. The index gauging current sales conditions increased to 17 from 16 in August, while the index gauging traffic of prospective buyers edged up to 14 from 13. The index gauging sales expectations for the next six months jumped to 30 from 24—the largest one-month gain since April 2003 and the highest reading since April.
All four regions posted increases in September. The Northeast led the gain with a six-point increase, while the Midwest, South and West each posted a two-point increase.
Rising consumer confidence, declining mortgage rates and the first-time home buyer tax credit have combined to improve builders' confidence, according to NAHB. Nearly half of the builders in the survey expected to see a positive impact from the tax credit in their markets, while 20 percent already saw some of the impact.
Total housing starts fell 6.2 percent in August to a seasonally adjusted annualized rate of 895,000. Single-family starts dropped a modest 1.9 percent, reaching the lowest level since January 1991, while multifamily starts were down 15.1 percent, following a 26.8 percent plunge in July. Multifamily starts surged about 230 percent in June in the Northeast, reflecting a rush to start building activity before local building code changes took effect at the beginning of July. A huge decline in multifamily starts in the Northeast in July partially reversed that surge. In August, every region but the West showed sizable drops in multifamily starts.
Through the first eight months of this year, single-family starts were 39.7 percent lower than those in the first eight months of 2007. By contrast, year-to-date multifamily starts with five units and over were 11.2 percent higher than those last year. Year-to-date construction of structures with 2-4 units declined 45.6 percent.
Total permits fell 8.9 percent in August. Single-family permits—a leading indicator for single-family housing starts—dropped 5.1 percent following a similar drop in July. This marked the 16th decline over the past 17 months. The report also showed that the share of single-family starts intended for sale was about one third in the second quarter of 2008 (the rest were owner- or contractor-built units). This suggested that seasonally adjusted single-family starts intended for sale in August were around 420,000 units, well below the sales pace in recent months. Unless new home sales slip considerably going forward, the months' supply (inventory-sales ratio) should decline slowly from the current level of about 10 months.
Economic Indicators:
Industrial production—the nation's output from factories, mines and utilities—fell by 1.1 percent in August after edging up 0.1 percent increase in July. Manufacturing output dropped 1.0 percent in August, led by a plunge in motor vehicle and parts output. Business equipment production fell 0.6 percent—the biggest decline since April—driven by a large drop in transportation equipment production.
Utility output declined 3.2 percent, while mining output fell 0.4 percent. Capacity utilization fell a full percentage point to 78.7 percent, the lowest reading in four years.
The Consumer Price Index fell 0.1 percent in August after a 0.8 percent increase in July and 1.1 percent gain in June. From a year ago, the CPI was up 5.4 percent, edging down from 5.5 percent, which was the biggest year-over-year increase since January 1991. During the three months ended in August, the CPI has risen at an annual rate of 7.2 percent, compared with a 10.6 percent increase during the three months ended in July.
Excluding the volatile food and energy items, the core CPI rose 0.2 percent following a 0.3 percent gain in July. Over the past year, the core CPI was up 2.5 percent for the second consecutive month.
The Conference Board index of leading indicators—a gauge of future business activity three to six months ahead—fell 0.5 percent in August after dropping 0.7 percent in July. The index was at its lowest level since October 2004.
The Conference Board's index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on 10 economic components. A decline in building permits led the decline.
The biggest positive contributors included positive Treasury yield spreads and an increase in consumer expectations. The six-month annualized growth rate slipped to negative 2.1 percent from negative 1.6 percent.
The index is down 3.7 percent from its recent peak in January 2006. During the 2001 recession, the index posted a 3.6 percent peak-to-trough decline. Over the past three months, the index fell 4.2 percent (annualized rate) suggesting that the economy has decelerated quickly.
Financial turmoil dominated financial markets last week. The week began with several dramatic events, including Lehman Brother's bankruptcy, the sale of Merrill Lynch and the threat that AIG could go bankrupt.
Once again, investors re-priced their risk and moved their funds, including those from money-market mutual funds, to safe-haven U.S Treasuries, bringing down the yields across the curve, with the yield on three-month Treasury bills dipping below a tenth of a percent.
The extent of risk aversion and the resulting liquidity crisis was reflected in the explosion in the TED spread—the difference between the three-month Libor and three-month Treasury bill rate. (Libor is the dollar-denominated overnight London interbank offered rate or the rate at which banks lend to one another). The significantly wider TED spread reflected market jitters and extreme levels of counterparty risks as it indicated that banks were unwilling to lend each other money and would do so only by charging a considerable risk premium.
Amid the crisis, the Federal Reserve held the federal funds rate steady on Tuesday but took extraordinary measures to inject liquidity into the global financial markets. On Wednesday, to relieve the pressure on the Libor market, the Fed boosted its U.S. dollar swap line with foreign central banks so that they could provide their respective financial institutions with short-term dollar funding.
These efforts did little to relieve liquidity pressure, however. The TED spread continued to rise to more than 300 basis points by mid-day Thursday. This was considerably higher than the spread seen in mid-August, 2007 of about 240 basis points and more than 200 basis points above its recent lows on September 5. The spread narrowed modestly on Thursday afternoon, as the stock markets rebounded in response to reports that policymakers were considering to create a new entity to absorb distressed and illiquid assets from the balance sheets of troubled banks.
The details of how such an entity will operate are being worked out as this is written. Congressional action will also be required. There will be many questions to be answered and a great deal of uncertainty involved. More immediately, as part of its broad plan to stabilize markets, the Treasury will double its planned purchases of mortgage-backed securities to $10 billion this month and may make more MBS purchases in coming months. Fannie Mae and Freddie Mac will also increase their purchases of MBS.
Economic reports, which took a backseat to the financial crisis, generally pointed to deteriorating activity. Industrial production fell sharply in August. The Conference Board's Index of Leading Indicators dropped in August for the second consecutive month, indicating a slowing economy ahead. Total housing starts dropped sharply in August, driven by declines in multifamily starts. Single-family starts fell modestly, but sharp back-to-back drops in single-family permits suggested further cutbacks in coming months. Continued pullbacks are necessary, however, to reduce the excess supply in the market given the huge overhang of unsold inventory in many parts of the country and soft housing demand.
While continued decreases in home sales are likely, near-term leading indicators suggested that the declines should be moderate in the coming months. Home builders reported that current market conditions and outlook for new home sales modestly improved in September, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The index was up slightly from a record low, the first increase in seven months. Rising consumer confidence, declining mortgage rates and the first-time homebuyer tax credit helped lift builders' confidence.
The Mortgage Bankers Association Weekly Application Survey also showed that the purchase application index has steadily increased since mid-August as mortgage rates trended down. The increases in the purchase index paled in comparison, however, to the surge in the refinance index of 88 percent in the latest week following a 15-percent rise in the prior week.
Treasury yields dropped sharply across the curve through mid-Thursday, benefitting from a flight to quality. Stocks surged on Thursday afternoon and continued through Friday. Treasuries declined and yields rose as investors' risk appetite increased. The yield on the 10-year Treasury note stayed around 3.82 percent by mid-Friday afternoon, about five basis points higher than the rate on the previous Friday but 35 basis points higher than the rate at the start of the week.
With the turmoil in financial markets, the spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages widened to about 230 basis points, still about 40 basis points narrower than the gap seen before the announcement on Fannie Mae and Freddie Mac.
Housing and Mortgage Indicators:
The National Association of Home Builders/Wells Fargo Housing Market Index rose two points to 18 in September from 16 in August. The August reading matched the record low reached in July. (Readings below 50 indicates that more respondents view market conditions as poor.)
The survey asks builders for their sentiments on current sales, traffic of potential buyers, and projected sales over the next six months. All the three components improved over the month. The index gauging current sales conditions increased to 17 from 16 in August, while the index gauging traffic of prospective buyers edged up to 14 from 13. The index gauging sales expectations for the next six months jumped to 30 from 24—the largest one-month gain since April 2003 and the highest reading since April.
All four regions posted increases in September. The Northeast led the gain with a six-point increase, while the Midwest, South and West each posted a two-point increase.
Rising consumer confidence, declining mortgage rates and the first-time home buyer tax credit have combined to improve builders' confidence, according to NAHB. Nearly half of the builders in the survey expected to see a positive impact from the tax credit in their markets, while 20 percent already saw some of the impact.
Total housing starts fell 6.2 percent in August to a seasonally adjusted annualized rate of 895,000. Single-family starts dropped a modest 1.9 percent, reaching the lowest level since January 1991, while multifamily starts were down 15.1 percent, following a 26.8 percent plunge in July. Multifamily starts surged about 230 percent in June in the Northeast, reflecting a rush to start building activity before local building code changes took effect at the beginning of July. A huge decline in multifamily starts in the Northeast in July partially reversed that surge. In August, every region but the West showed sizable drops in multifamily starts.
Through the first eight months of this year, single-family starts were 39.7 percent lower than those in the first eight months of 2007. By contrast, year-to-date multifamily starts with five units and over were 11.2 percent higher than those last year. Year-to-date construction of structures with 2-4 units declined 45.6 percent.
Total permits fell 8.9 percent in August. Single-family permits—a leading indicator for single-family housing starts—dropped 5.1 percent following a similar drop in July. This marked the 16th decline over the past 17 months. The report also showed that the share of single-family starts intended for sale was about one third in the second quarter of 2008 (the rest were owner- or contractor-built units). This suggested that seasonally adjusted single-family starts intended for sale in August were around 420,000 units, well below the sales pace in recent months. Unless new home sales slip considerably going forward, the months' supply (inventory-sales ratio) should decline slowly from the current level of about 10 months.
Economic Indicators:
Industrial production—the nation's output from factories, mines and utilities—fell by 1.1 percent in August after edging up 0.1 percent increase in July. Manufacturing output dropped 1.0 percent in August, led by a plunge in motor vehicle and parts output. Business equipment production fell 0.6 percent—the biggest decline since April—driven by a large drop in transportation equipment production.
Utility output declined 3.2 percent, while mining output fell 0.4 percent. Capacity utilization fell a full percentage point to 78.7 percent, the lowest reading in four years.
The Consumer Price Index fell 0.1 percent in August after a 0.8 percent increase in July and 1.1 percent gain in June. From a year ago, the CPI was up 5.4 percent, edging down from 5.5 percent, which was the biggest year-over-year increase since January 1991. During the three months ended in August, the CPI has risen at an annual rate of 7.2 percent, compared with a 10.6 percent increase during the three months ended in July.
Excluding the volatile food and energy items, the core CPI rose 0.2 percent following a 0.3 percent gain in July. Over the past year, the core CPI was up 2.5 percent for the second consecutive month.
The Conference Board index of leading indicators—a gauge of future business activity three to six months ahead—fell 0.5 percent in August after dropping 0.7 percent in July. The index was at its lowest level since October 2004.
The Conference Board's index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on 10 economic components. A decline in building permits led the decline.
The biggest positive contributors included positive Treasury yield spreads and an increase in consumer expectations. The six-month annualized growth rate slipped to negative 2.1 percent from negative 1.6 percent.
The index is down 3.7 percent from its recent peak in January 2006. During the 2001 recession, the index posted a 3.6 percent peak-to-trough decline. Over the past three months, the index fell 4.2 percent (annualized rate) suggesting that the economy has decelerated quickly.
Weekend Developments
MBA (9/22/2008 ) Sorohan, Mike
The Mortgage Bankers Association said it welcomed efforts by the Treasury Department on steps taken in the past week to support liquidity in the financial markets and will work with leaders in the House and Senate in moving forward this week with legislation.
Treasury Secretary Henry Paulson Jr. this weekend announced a number of “powerful tactical steps” to increase confidence in the nation’s financial systems, including establishment of a temporary guaranty program for the U.S. money market mutual fund industry.
“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” Paulson said. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”
Treasury said it would authorize Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities; and expand the MBS purchase program announced earlier this month to increase the availability of capital for new home loans;
“Right now, our focus is restoring the strength of our financial system so it can again finance economic growth,” Paulson said. “The financial security of all Americans—their retirement savings, their home values, their ability to borrow for college and the opportunities for more and higher-paying jobs—depends on our ability to restore our financial institutions to a sound footing.”
MBA Chief Operating Officer John Courson issued the following statement in response:
"The moves Secretary Paulson announced [Friday] to increase GSE and Treasury purchases of mortgage-backed securities should provide support for mortgage rates. The fear was that the illiquidity in the financial markets we have seen this week would have reversed the recent drops in mortgage rates.
"The broader steps outlined by Treasury are aimed at ending the further meltdown in the financial markets and are designed to minimize the resulting impact of the market turmoil on the broader economy. It is another step in the long-term process of restoring a balance between the supply and demand for housing in a number of markets and thus addressing the continuing problem of mortgage delinquencies and foreclosures.
"The mortgage finance industry looks forward to continuing to work with Congress and the Administration on this historic proposal."
In other developments:
Fed Approves Switch of Goldman Sachs, Morgan Stanley to Holding Companies. The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.
In a statement, the Fed said the quick approval is designed to "provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure." The Fed authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility; the Fed has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.
In addition, the Fedalso authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF. The Fed statement can be viewed at http://www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm.
Treasury Clarifies Details of Guaranty Program. Treasury continued to clarify details involving the temporary guaranty program for money market funds that was announced on September 19:
1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program.
2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.
3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19.
The Treasury statement can be found at http://www.treas.gov/press/releases/hp1151.htm.
Congress to Take Up Administration Plan
The House and Senate are expected to consider the Administration's proposal to shore up the U.S. financial system with a series of hearings and possibly votes. Paulson has been working with House and Senate leaders over the weekend to reach an agreement on a bill; both the House Financial Services Committee and Senate Banking Committee, which hold jurisdiction over such legislation, will hold hearings this week; for more details, see the "Week Ahead" section of today's MBA NewsLink.
The Mortgage Bankers Association said it welcomed efforts by the Treasury Department on steps taken in the past week to support liquidity in the financial markets and will work with leaders in the House and Senate in moving forward this week with legislation.
Treasury Secretary Henry Paulson Jr. this weekend announced a number of “powerful tactical steps” to increase confidence in the nation’s financial systems, including establishment of a temporary guaranty program for the U.S. money market mutual fund industry.
“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” Paulson said. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”
Treasury said it would authorize Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities; and expand the MBS purchase program announced earlier this month to increase the availability of capital for new home loans;
“Right now, our focus is restoring the strength of our financial system so it can again finance economic growth,” Paulson said. “The financial security of all Americans—their retirement savings, their home values, their ability to borrow for college and the opportunities for more and higher-paying jobs—depends on our ability to restore our financial institutions to a sound footing.”
MBA Chief Operating Officer John Courson issued the following statement in response:
"The moves Secretary Paulson announced [Friday] to increase GSE and Treasury purchases of mortgage-backed securities should provide support for mortgage rates. The fear was that the illiquidity in the financial markets we have seen this week would have reversed the recent drops in mortgage rates.
"The broader steps outlined by Treasury are aimed at ending the further meltdown in the financial markets and are designed to minimize the resulting impact of the market turmoil on the broader economy. It is another step in the long-term process of restoring a balance between the supply and demand for housing in a number of markets and thus addressing the continuing problem of mortgage delinquencies and foreclosures.
"The mortgage finance industry looks forward to continuing to work with Congress and the Administration on this historic proposal."
In other developments:
Fed Approves Switch of Goldman Sachs, Morgan Stanley to Holding Companies. The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.
In a statement, the Fed said the quick approval is designed to "provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure." The Fed authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility; the Fed has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.
In addition, the Fedalso authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF. The Fed statement can be viewed at http://www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm.
Treasury Clarifies Details of Guaranty Program. Treasury continued to clarify details involving the temporary guaranty program for money market funds that was announced on September 19:
1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program.
2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.
3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19.
The Treasury statement can be found at http://www.treas.gov/press/releases/hp1151.htm.
Congress to Take Up Administration Plan
The House and Senate are expected to consider the Administration's proposal to shore up the U.S. financial system with a series of hearings and possibly votes. Paulson has been working with House and Senate leaders over the weekend to reach an agreement on a bill; both the House Financial Services Committee and Senate Banking Committee, which hold jurisdiction over such legislation, will hold hearings this week; for more details, see the "Week Ahead" section of today's MBA NewsLink.
GE the Lender Tries to Dodge Bank Wrecks Piling on Shore
Seattle Times (09/22/08); Lohr, Steve
The finance arm of General Electric--which includes property lending, home mortgages and credit cards and accounts for half of its profits--is putting pressure on the industrial giant. GE Capital entered the subprime mortgage lending market by acquiring WMC Mortgage in 2004 but, reacting to red flags, sold the business in 2007 and took a loss of about $1 billion. Robert Spremulli, an analyst at the investment company TIAA-CREF, says "that was a big mistake... but it wasn't a disaster for GE." The finance unit is still exposed, however, to residential mortgages and commercial real estate loans--although most are outside of the United States.
The finance arm of General Electric--which includes property lending, home mortgages and credit cards and accounts for half of its profits--is putting pressure on the industrial giant. GE Capital entered the subprime mortgage lending market by acquiring WMC Mortgage in 2004 but, reacting to red flags, sold the business in 2007 and took a loss of about $1 billion. Robert Spremulli, an analyst at the investment company TIAA-CREF, says "that was a big mistake... but it wasn't a disaster for GE." The finance unit is still exposed, however, to residential mortgages and commercial real estate loans--although most are outside of the United States.
WaMu, Under U.S. Pressure, Scrambles for Deal or Capital
Wall Street Journal (09/22/08) P. C1; Fitzpatrick, Dan; Sidel, Robin; Enrich, David
Washington Mutual Inc.--which is considering a sale to Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co. or Spain's Banco Santander SA--projected mortgage losses of $19 billion over the next couple of years. The estimate has the prospective buyers backing a government-assisted takeover. This could involve a seizure of the Seattle-based thrift's assets by the Federal Deposit Insurance Corp., which would allow buyers to choose which branches and assets to buy and leave the government holding the higher-risk assets. However, experts point out that WaMu likely will have problems raising capital, as outside investors are concerned about the worsening credit crisis and home-price declines.
Washington Mutual Inc.--which is considering a sale to Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co. or Spain's Banco Santander SA--projected mortgage losses of $19 billion over the next couple of years. The estimate has the prospective buyers backing a government-assisted takeover. This could involve a seizure of the Seattle-based thrift's assets by the Federal Deposit Insurance Corp., which would allow buyers to choose which branches and assets to buy and leave the government holding the higher-risk assets. However, experts point out that WaMu likely will have problems raising capital, as outside investors are concerned about the worsening credit crisis and home-price declines.
Tithing Adds to Woes of U.S. Homeowners
Canada.com (09/22/08); Carey, Nick
Housing counselors say they often have to bring up the issue of tithing to borrowers who are struggling to keep up the payments on their homes. They say tithing is a sensitive topic, considered to be a mandatory item by many homeowners; but many of those who faithfully give 10 percent of their income to their church are in the lower income brackets. Some borrowers have been willing to give up their homes rather than stop tithing. "For those people, a contract with God is worth more than their home," says Roger Oldham, a member of the executive committee of the Southern Baptist Convention.
Housing counselors say they often have to bring up the issue of tithing to borrowers who are struggling to keep up the payments on their homes. They say tithing is a sensitive topic, considered to be a mandatory item by many homeowners; but many of those who faithfully give 10 percent of their income to their church are in the lower income brackets. Some borrowers have been willing to give up their homes rather than stop tithing. "For those people, a contract with God is worth more than their home," says Roger Oldham, a member of the executive committee of the Southern Baptist Convention.
Fannie Shuts Door to More Small Lenders
American Banker (09/22/08) P. 1; Berry, Kate
New eligibility rules issued by Fannie Mae could make it difficult for small lenders to remain in business, though the Mortgage Bankers Association is uncertain how many would be impacted. Under the rules, lenders cannot experience material adverse changes or four straight quarters of net losses coupled with a 30-percent decline in net worth. Lenders also will be in breach of contract if their net worth falls more than 25 percent during three months or more than 40 percent over six months, if the lender defaults on its warehouse line or if an affiliate defaults on its obligations to Fannie Mae.
New eligibility rules issued by Fannie Mae could make it difficult for small lenders to remain in business, though the Mortgage Bankers Association is uncertain how many would be impacted. Under the rules, lenders cannot experience material adverse changes or four straight quarters of net losses coupled with a 30-percent decline in net worth. Lenders also will be in breach of contract if their net worth falls more than 25 percent during three months or more than 40 percent over six months, if the lender defaults on its warehouse line or if an affiliate defaults on its obligations to Fannie Mae.
Bailout May Give Housing Market Some Breathing Room
Los Angeles Times (09/22/08); Hiltzik, Michael A.
The real value of the federal government's $700 billion plan to bail out the banking system may be in buying time for the housing market to recover after months of plunging home values, even though the rescue plan does nothing in itself to shore up the nation's residential property sector. It essentially casts the government in the role of investment bank, buying up debt from troubled financial institutions stuck with securities tied to distressed mortgage loans. However, bringing the money funds under the umbrella of the government could create its own problems if proper regulation is not in place and exercised. Analysts and economists generally agree that a housing rebound is essential to an overall financial recovery, but they also say this cannot be achieved without government assistance to battered banks.
The real value of the federal government's $700 billion plan to bail out the banking system may be in buying time for the housing market to recover after months of plunging home values, even though the rescue plan does nothing in itself to shore up the nation's residential property sector. It essentially casts the government in the role of investment bank, buying up debt from troubled financial institutions stuck with securities tied to distressed mortgage loans. However, bringing the money funds under the umbrella of the government could create its own problems if proper regulation is not in place and exercised. Analysts and economists generally agree that a housing rebound is essential to an overall financial recovery, but they also say this cannot be achieved without government assistance to battered banks.
Banks Rush to Shape Rescue Plan
Wall Street Journal (09/22/08) P. A3; Williamson, Elizabeth
Financial industry lobbyists want a say in legislation that could provide $700 billion for the federal government to purchase distressed assets and sell them when the market improves, and their efforts could delay the bill's passage. The industry fought to help foreign institutions with significant mortgage exposure in the United States, and the Treasury responded by pushing for a provision to include banks with "significant" U.S. operations. However, the industry is rallying against proposed language to assist homeowners in bankruptcy because it likely would inflate mortgage rates.
Financial industry lobbyists want a say in legislation that could provide $700 billion for the federal government to purchase distressed assets and sell them when the market improves, and their efforts could delay the bill's passage. The industry fought to help foreign institutions with significant mortgage exposure in the United States, and the Treasury responded by pushing for a provision to include banks with "significant" U.S. operations. However, the industry is rallying against proposed language to assist homeowners in bankruptcy because it likely would inflate mortgage rates.
Paulson Seeks Quick Action on Rescues
Boston Globe (09/22/08); Crutsinger, Martin; Babington, Charles
The Bush administration is pressing Capitol Hill lawmakers to move quickly in approving a $700 billion proposal to buy up the troubled mortgage debt that has a stranglehold on the country's credit markets. Although congressional leaders have endorsed the strategy's main thrust, they believe the plan must be expanded to include such elements as greater protections for homeowners, limits on excessive executive compensation and independent oversight. Treasury Secretary Henry Paulson Jr. insists the proposal must be passed soon, adding that changes to the White House's measure could delay that approval and further roil global financial markets. Administration officials said over the weekend that the White House was modifying a program announced just a couple of days earlier to try and bolster the $3 trillion money-market mutual fund industry after the banking industry complained that new guarantees ran the risk of sparking withdrawals by their savings depositors.
The Bush administration is pressing Capitol Hill lawmakers to move quickly in approving a $700 billion proposal to buy up the troubled mortgage debt that has a stranglehold on the country's credit markets. Although congressional leaders have endorsed the strategy's main thrust, they believe the plan must be expanded to include such elements as greater protections for homeowners, limits on excessive executive compensation and independent oversight. Treasury Secretary Henry Paulson Jr. insists the proposal must be passed soon, adding that changes to the White House's measure could delay that approval and further roil global financial markets. Administration officials said over the weekend that the White House was modifying a program announced just a couple of days earlier to try and bolster the $3 trillion money-market mutual fund industry after the banking industry complained that new guarantees ran the risk of sparking withdrawals by their savings depositors.
Why Libraries Are Back in Style
It's Not Because of Books; They're “Memory Rooms” Or TV-Free Private Spaces
by June Fletcher
In the library of her 5,800-square-foot house in Glen Cove, N.Y., Linda Teitelbaum keeps trophies from dog shows, needlepoint pillows of bulldogs and gold-framed photos of family. Though the plaid-papered room has a scattering of books, she often retreats to it not just to read but to remember the dogs she used to breed, to nap, or to get away from the TV. “It's my veg-out room,” Ms. Teitelbaum says.
Reading rates are down and Americans say they love casual living. And yet, one of the most popular rooms in big new houses is a library. Rather than being about books, their appeal is often about creating a certain ambiance. “Libraries connote elegance and quality,” says New York architect and interior designer Campion Platt, adding that most of his wealthy clients want one, even if they do most of their reading online.
Click Here for the full article
by June Fletcher
In the library of her 5,800-square-foot house in Glen Cove, N.Y., Linda Teitelbaum keeps trophies from dog shows, needlepoint pillows of bulldogs and gold-framed photos of family. Though the plaid-papered room has a scattering of books, she often retreats to it not just to read but to remember the dogs she used to breed, to nap, or to get away from the TV. “It's my veg-out room,” Ms. Teitelbaum says.
Reading rates are down and Americans say they love casual living. And yet, one of the most popular rooms in big new houses is a library. Rather than being about books, their appeal is often about creating a certain ambiance. “Libraries connote elegance and quality,” says New York architect and interior designer Campion Platt, adding that most of his wealthy clients want one, even if they do most of their reading online.
Click Here
A Quest for an Energy-Efficient House
We Undertake Four Home 'Audits'; The Pros vs. DIY
by Jane Hodges
Preventing energy waste has become a household preoccupation in the era of nearly $4-a-gallon gas and rising prices for everything from airline tickets to milk. Whether motivated by environmental impulses or a desire to reduce utility bills, many Americans are researching ways to create a more energy-efficient home.
Statistics from a range of sources provide plenty of motivation. The U.S. Department of Energy's office of Energy Efficiency and Renewable Energy (EERE) estimates that draft reduction within a home can lower energy costs anywhere from 5% to 30% annually. Meanwhile, according to Department of Energy data provided by the U.S. Green Building Council, homes account for 21% of U.S. carbon dioxide emissions. And claiming a green home remodel makes for great neighborhood bragging rights.
Click Here for the full article
by Jane Hodges
Preventing energy waste has become a household preoccupation in the era of nearly $4-a-gallon gas and rising prices for everything from airline tickets to milk. Whether motivated by environmental impulses or a desire to reduce utility bills, many Americans are researching ways to create a more energy-efficient home.
Statistics from a range of sources provide plenty of motivation. The U.S. Department of Energy's office of Energy Efficiency and Renewable Energy (EERE) estimates that draft reduction within a home can lower energy costs anywhere from 5% to 30% annually. Meanwhile, according to Department of Energy data provided by the U.S. Green Building Council, homes account for 21% of U.S. carbon dioxide emissions. And claiming a green home remodel makes for great neighborhood bragging rights.
Click Here
25 best places for affordable homes
CNNMoney.com
Want to retire near the water, but without paying premium prices for a home? Residents who buy real estate in these towns see their incomes go the furthest.
Click Here for the full article
Want to retire near the water, but without paying premium prices for a home? Residents who buy real estate in these towns see their incomes go the furthest.
Click Here
Get ducks in a row before putting home up for sale
by Alan J. Heavens
A colleague has decided to downsize to a condo and has added her house to the substantial existing-home inventory in Philadelphia.
She and her late husband were part of the urban-pioneering movement in their neighborhood in the early 1970s. For their efforts, and as a result of the housing boom in the early part of this decade, they accumulated a substantial amount of equity that even this bump in the real estate road cannot reduce.
But she faces a buyer's market, with all that implies, made more difficult by tighter credit in the aftermath of the subprime debacle of August 2007.
The price she is asking is within the financial means of a young professional single or couple - I've seen newly minted lawyers buy Rittenhouse Square condos for about the same amount.
She also is willing to negotiate, and that puts her ahead of the pack. Agents tell me that there are plenty of sellers who remain unwilling to budge from the wrongheaded “but my neighbor sold his house in 2006 for a zillion dollars” view of proper pricing.
Click Here for the full article
A colleague has decided to downsize to a condo and has added her house to the substantial existing-home inventory in Philadelphia.
She and her late husband were part of the urban-pioneering movement in their neighborhood in the early 1970s. For their efforts, and as a result of the housing boom in the early part of this decade, they accumulated a substantial amount of equity that even this bump in the real estate road cannot reduce.
But she faces a buyer's market, with all that implies, made more difficult by tighter credit in the aftermath of the subprime debacle of August 2007.
The price she is asking is within the financial means of a young professional single or couple - I've seen newly minted lawyers buy Rittenhouse Square condos for about the same amount.
She also is willing to negotiate, and that puts her ahead of the pack. Agents tell me that there are plenty of sellers who remain unwilling to budge from the wrongheaded “but my neighbor sold his house in 2006 for a zillion dollars” view of proper pricing.
Click Here
Mortgage rates fall to seven-month low
Bailout of Fannie, Freddie helps rates plunge to 5.78 percent
The Associated Press
Rates on 30-year mortgages dropped sharply again this week, falling to the lowest level in seven months, as rates continue to decline following the government's dramatic takeover of mortgage giants Fannie Mae and Freddie Mac.
Freddie Mac reported Thursday that its nationwide survey found 30-year, fixed-rate mortgages declined to 5.78 percent this week, down from 5.93 percent last week.
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The Associated Press
Rates on 30-year mortgages dropped sharply again this week, falling to the lowest level in seven months, as rates continue to decline following the government's dramatic takeover of mortgage giants Fannie Mae and Freddie Mac.
Freddie Mac reported Thursday that its nationwide survey found 30-year, fixed-rate mortgages declined to 5.78 percent this week, down from 5.93 percent last week.
Click Here
FHFA Issues Statement of Support for GSE Multifamily Activity
MBA (9/15/2008 ) MBA Staff
The Federal Housing Finance Agency, the successor to the Office of Federal Housing Enterprise Oversight, issued the following statement Friday in support of continued multifamily business involving Fannie Mae and Freddie Mac:
"FHFA has stated that business will continue as usual at the Enterprises during the conservatorship—this applies to both their single-family and multifamily businesses.
FHFA recognizes the importance of all aspects of the Enterprises’ multifamily businesses—including the LIHTC (low-income housing tax credit) area and liquidity facilities for remarketed mortgage revenue bonds – for a healthy secondary market and housing affordability. In particular, support for multifamily housing finance is central to the Enterprises’ public purpose.
FHFA’s September 7, 2008 Statement Regarding Contracts of Enterprises in Conservatorship (posted on www.ofheo.gov) applies equally to the single-family and multifamily businesses. It states that the conservatorship does not affect existing contracts, nor the authority of the Enterprises to enter into new contracts, nor their enforceability.
As conservator, FHFA expects each Enterprise to continue underwriting and financing sound multifamily business. We also do not expect either company to liquidate its portfolio of LIHTC or mortgage-revenue bonds.
FHFA will only intervene when there is a question of unsafe and unsound business practice that would have a negative impact on an Enterprise's financial position and is outside of the normal course of business. Under these unusual circumstances, both Enterprises would first seek advice and guidance from FHFA before proceeding further as they deem appropriate."
The Federal Housing Finance Agency, the successor to the Office of Federal Housing Enterprise Oversight, issued the following statement Friday in support of continued multifamily business involving Fannie Mae and Freddie Mac:
"FHFA has stated that business will continue as usual at the Enterprises during the conservatorship—this applies to both their single-family and multifamily businesses.
FHFA recognizes the importance of all aspects of the Enterprises’ multifamily businesses—including the LIHTC (low-income housing tax credit) area and liquidity facilities for remarketed mortgage revenue bonds – for a healthy secondary market and housing affordability. In particular, support for multifamily housing finance is central to the Enterprises’ public purpose.
FHFA’s September 7, 2008 Statement Regarding Contracts of Enterprises in Conservatorship (posted on www.ofheo.gov) applies equally to the single-family and multifamily businesses. It states that the conservatorship does not affect existing contracts, nor the authority of the Enterprises to enter into new contracts, nor their enforceability.
As conservator, FHFA expects each Enterprise to continue underwriting and financing sound multifamily business. We also do not expect either company to liquidate its portfolio of LIHTC or mortgage-revenue bonds.
FHFA will only intervene when there is a question of unsafe and unsound business practice that would have a negative impact on an Enterprise's financial position and is outside of the normal course of business. Under these unusual circumstances, both Enterprises would first seek advice and guidance from FHFA before proceeding further as they deem appropriate."
Despite Opportunities, CRE to 'Suffer' Next Year
MBA (9/15/2008 ) Murray, Michael
Ron Insana, former senior analyst at CNBC now working within the investor community, said commercial real estate will suffer next year, but will also present "attractive opportunities" for investors.
“There will be different points along the way where commercial real estate, which will suffer next year, is going to become attractive—just not yet,” Insana said in a Mortgage Bankers Association Executive Podcast.
Insana said contractual obligations slow tenant turnover, and anecdotal evidence shows overbuilt construction is leading to more difficulty in finding tenants and meeting price expectations.
“Next year, that is going to be a real big problem for financial intermediaries that are going to face both souring construction loans and probably bad commercial real estate investments or loans as well,” Insana said.
Financial markets continue to evolve as “one of the most random environments” with respect to market behavior and present one of the most difficult periods Insana said he has seen in his 24-year career as a business journalist.
“I think this will, in history, compare in some ways to both the 1930s and the 1970s, although maybe not to either extreme,” Insana said. “There is a combination of both eras taking place right now where you have radical deflation in financial assets, particularly real estate right now. We have huge dislocations in the financial system—banks contracting their balance sheets, lenders pulling in their horns—and we have some commodity shocks going on that are somewhat analogous to the '70s, although I don’t think it is the same kind of inflation problem we had then.”
The failure of Continental Illinois Bank in 1984 was the first serious news item for Insana, followed by the stock market crash in 1987 and the savings and loan crisis in 1990 and 1991. The bankruptcy in Orange County, Calif., and the Mexican peso crisis in 1994-1995 preceded the Russian ruble crisis with the commercial mortgage-backed securities meltdown. The Long Term Capital Management hedge fund collapsed in the late 1990s, and by the turn of the century, the dot-com bubble burst. Insana also reported on the recession at the time of the September 11 terrorist attacks.
Insana noted, however, that this current workout has taken much longer than financial crises in the past.
“Each one of those [crises] were solved relatively easy, shockingly enough, with some pretty enlightened policy that allowed both the markets and the economy to stage—pretty much—something of a bottom,” Insana said. “This is something different. This is a much longer workout cycle, given how pervasive the credit crisis is, the use of derivative instruments and the use of leverage—and it’s a global phenomenon. As a consequence, I don’t think it goes away easily and I don’t think it goes away anytime soon.”
Insana said he expects the financial market situation worsened since May, and it will get worse in 2009 and be harder on individuals than this year.
“It’s confusing and complex for most regular people who don’t have to deal in this on a day-to-day basis," Insana said. "They just get affected by it.”
However, while lenders return to basics, Insana said well-capitalized investors could have the “opportunity of a generation” in purchasing distressed assets. “There are entire housing developments that have been put up by builders that are substantially empty, and they are able to come in and put money to work just buying communities,” he said. “It’s going to take quite some time for this inventory of unsold homes to work off.”
Condominiums, vacation condominiums and second homes in Miami, San Diego and Las Vegas are strong investments, Insana noted, and some sovereign wealth funds have purchased vacant housing developments in the United States. “Buying certain mortgage securities makes a lot of sense in the distressed arena,” he said.
Ron Insana, former senior analyst at CNBC now working within the investor community, said commercial real estate will suffer next year, but will also present "attractive opportunities" for investors.
“There will be different points along the way where commercial real estate, which will suffer next year, is going to become attractive—just not yet,” Insana said in a Mortgage Bankers Association Executive Podcast.
Insana said contractual obligations slow tenant turnover, and anecdotal evidence shows overbuilt construction is leading to more difficulty in finding tenants and meeting price expectations.
“Next year, that is going to be a real big problem for financial intermediaries that are going to face both souring construction loans and probably bad commercial real estate investments or loans as well,” Insana said.
Financial markets continue to evolve as “one of the most random environments” with respect to market behavior and present one of the most difficult periods Insana said he has seen in his 24-year career as a business journalist.
“I think this will, in history, compare in some ways to both the 1930s and the 1970s, although maybe not to either extreme,” Insana said. “There is a combination of both eras taking place right now where you have radical deflation in financial assets, particularly real estate right now. We have huge dislocations in the financial system—banks contracting their balance sheets, lenders pulling in their horns—and we have some commodity shocks going on that are somewhat analogous to the '70s, although I don’t think it is the same kind of inflation problem we had then.”
The failure of Continental Illinois Bank in 1984 was the first serious news item for Insana, followed by the stock market crash in 1987 and the savings and loan crisis in 1990 and 1991. The bankruptcy in Orange County, Calif., and the Mexican peso crisis in 1994-1995 preceded the Russian ruble crisis with the commercial mortgage-backed securities meltdown. The Long Term Capital Management hedge fund collapsed in the late 1990s, and by the turn of the century, the dot-com bubble burst. Insana also reported on the recession at the time of the September 11 terrorist attacks.
Insana noted, however, that this current workout has taken much longer than financial crises in the past.
“Each one of those [crises] were solved relatively easy, shockingly enough, with some pretty enlightened policy that allowed both the markets and the economy to stage—pretty much—something of a bottom,” Insana said. “This is something different. This is a much longer workout cycle, given how pervasive the credit crisis is, the use of derivative instruments and the use of leverage—and it’s a global phenomenon. As a consequence, I don’t think it goes away easily and I don’t think it goes away anytime soon.”
Insana said he expects the financial market situation worsened since May, and it will get worse in 2009 and be harder on individuals than this year.
“It’s confusing and complex for most regular people who don’t have to deal in this on a day-to-day basis," Insana said. "They just get affected by it.”
However, while lenders return to basics, Insana said well-capitalized investors could have the “opportunity of a generation” in purchasing distressed assets. “There are entire housing developments that have been put up by builders that are substantially empty, and they are able to come in and put money to work just buying communities,” he said. “It’s going to take quite some time for this inventory of unsold homes to work off.”
Condominiums, vacation condominiums and second homes in Miami, San Diego and Las Vegas are strong investments, Insana noted, and some sovereign wealth funds have purchased vacant housing developments in the United States. “Buying certain mortgage securities makes a lot of sense in the distressed arena,” he said.
Home Values in Further Decline, Zillow Says
MBA (9/15/2008 ) Murray, Michael
More than 60 percent of homeowners in the United States believe their home’s value increased or stayed the same during the past year, when in reality, 77 percent of U.S. homes lost value, said Zillow.com.
A second quarter market report from Zillow that assesses housing trends for 165 different markets, reported that home values declined 10 percent year-over-year nationwide, marking the sixth consecutive quarter of national declines.
The Office of Federal Housing Enterprise Oversight (now the Federal Housing Finance Agency) House Price Index fell 1.7 percent in the second quarter from a year ago. The HPI is based on data from both purchase and refinance transactions from Fannie Mae and Freddie Mac.
“These continued declines have pushed home values back to levels from the fourth quarter of 2004, with some markets falling back to 2000 levels or in the case of Detroit , 1999,” the report said.
Zillow reported 29.1 percent of homeowners who bought since 2003 are now "underwater" on their mortgage. When most markets peaked, 45 percent of people who bought in 2006 were underwater, and the number surpasses 90 percent of 2006 buyers in many areas of California.
In the second quarter, 32.7 percent of every home sold did so at a loss, Zillow said. By comparison, this figure was 12 percent in the second quarter 2007, the report said.
More than 60 percent of homeowners in the United States believe their home’s value increased or stayed the same during the past year, when in reality, 77 percent of U.S. homes lost value, said Zillow.com.
A second quarter market report from Zillow that assesses housing trends for 165 different markets, reported that home values declined 10 percent year-over-year nationwide, marking the sixth consecutive quarter of national declines.
The Office of Federal Housing Enterprise Oversight (now the Federal Housing Finance Agency) House Price Index fell 1.7 percent in the second quarter from a year ago. The HPI is based on data from both purchase and refinance transactions from Fannie Mae and Freddie Mac.
“These continued declines have pushed home values back to levels from the fourth quarter of 2004, with some markets falling back to 2000 levels or in the case of Detroit , 1999,” the report said.
Zillow reported 29.1 percent of homeowners who bought since 2003 are now "underwater" on their mortgage. When most markets peaked, 45 percent of people who bought in 2006 were underwater, and the number surpasses 90 percent of 2006 buyers in many areas of California.
In the second quarter, 32.7 percent of every home sold did so at a loss, Zillow said. By comparison, this figure was 12 percent in the second quarter 2007, the report said.
Lift from Tax Rebates Fades in Third Quarter
MBA (9/15/2008 ) Velz, Orawin
The latest data confirmed that the economic growth seen in the second quarter is unlikely to be repeated in the third quarter. Retail sales decreased 0.3 percent in August, and July’s figure was revised downward to a drop of 0.5 percent from a previously reported 0.1 percent decrease.
This marked the first back-to-back declines in retail sales in more than two years While falling energy prices played a large role in the decrease in retail sales as they led to a huge drop in sales of gasoline, sales also fell in other major categories including building supply, electronics and department stores.
Retail sales account for about 40 percent of personal consumption expenditures with spending on services accounting for the rest. In July, Inflation-adjusted PCE fell for the second consecutive month. Declining August retail sales and a downward revision in July’s figure strongly suggested that real consumption expenditures could decline in the third quarter for the first time since the 1990-1991 recession.
While PCE accounts for roughly 70 percent of gross domestic product, the economy is likely to continue to grow slightly in the current quarter even with a decline in real consumer spending. Trade is expected to remain a support to the economy, but a weaker one given faltering overseas economies and the stabilization of the dollar, which should slow export growth. The July trade deficit in goods and services was the biggest in 16 months, largely reflecting a jump in oil import bills. Declining energy prices should slow import growth in the near term, offsetting the slower export growth and allowing trade to continue to boost economic growth.
The impact of falling energy prices, partly induced by concerns of slowing global demand, was also evident in August wholesale prices and import prices. The Producer Price Index fell for the first time this year and import prices posted the largest drop since the inception of the series in 1982.
Housing activity remained subdued. The drop in July pending home sales suggested that existing home sales should fall in the near term. One bright spot for the housing and mortgage markets was the sizable decline in mortgage rates, triggered by the Treasury’s announcement that Fannie Mae and Freddie Mac were placed into conservatorship under the control of the Federal Housing Finance Agency.
If mortgage rates remain low or drop further, they should spur housing demand and refinance activity. The impact will depend on the extent of the drop in mortgage rates, which is uncertain for several reasons. First, under the announcement, the Treasury will periodically purchase agency mortgage-backed securities but did not specify the magnitude of its purchases following the $5 billion initial purchase later this month.
Second, mortgage holdings of the two companies will be steadily reduced beginning in 2010. Third, the Treasury’s actions will raise the size of the federal debt, which could potentially cause on long-term Treasury yields to move up. Finally, it’s not clear if there will be changes to previous and future fee increases the two companies charge lenders to buy or guarantee mortgages. These fees are passed through to consumers. In any case, the Treasury’s plans have reduced the odds of a severe financial crisis associated with the possible failure of Fannie Mae and Freddie Mac that could have sent the overall economy into a protracted downturn.
Long-term Treasury yields were little changed. The yield on the 10-year Treasury note stayed around 3.73 percent by mid-Friday afternoon, seven basis points higher than the rate on the previous Friday. Despite little movement in the benchmark 10-year yield, mortgage rates dropped sharply. The spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages narrowed by about 40 basis points last week from nearly 270 basis points in the prior week. Thirty-year conforming mortgage yields averaged 5.93 percent for the week ending September 11, according to the Freddie Mac Primary Mortgage Market Survey, the lowest reading since mid-May.
Housing and Mortgage Indicators:
The National Association of Realtors Pending Home Sales Index was down 3.2 percent to 86.5 in July, reversing about half of the jump in June. The index was down 6.8 percent from last July, the smallest year-over-year decline since December 2006.
Responsible for the decline in the overall index were large drops in pending home sales in two regions of the country: 10.6 percent in the West and 7.5 percent in Northeast. Pending sales increased 2.8 percent in the Midwest and were flat in the South. Compared with a year ago, every region but the West posted declines. The West, which has experienced the largest home price drop over the past year, saw a robust 11.3 percent increase from last July.
The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closings, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Following the 6.8 percent pickup in the pending home sales index in June, total existing home sales were up 3.1 percent in July to a seasonally-adjusted annualized rate of 5.0 million. Since November 2007, total existing home sales have been in a narrow range of 4.8 million units to 5.1 million units. NAR will release the existing home sales figure for August on September 24.
Economic Indicators:
The trade deficit in goods and services widened to $62.2 billion in July from $58.8 billion in June. Both exports and imports of goods and services increased to record highs.
Imports rose 3.9 percent, reflecting purchases of crude oil, which averaged a record $124.66 a barrel for foreign crude oil. Exports increased 3.3 percent, led by a $1.4 billion jump in shipments of autos and parts, aircraft and machinery.
Adjusted for inflation, the trade deficit rose to $41.2 billion from $40.1 billion in June. June real trade deficit was revised higher and thus the contribution from trade to economic growth in the second quarter would be downwardly revised.
Import prices declined 3.7 percent in August. Declines in petroleum and industrial metals led the drop. Prices for petroleum dropped 13.0 percent in August, the largest month-to-month decline since 2003. Imported natural gas prices fell 16.4 percent after rising 4.9 percent in July.
Over the past year, import prices were up 16.0 percent, slowing from a 20.1 percent year-over-year gain in July. Import prices excluding fuels rose a tame 0.2 percent, following back-to-back gains of 0.6 percent.
The Producer Price Index fell 0.9 percent, following a 1.2 percent increase in July. Large declines in food and energy prices led the drop in the overall index. Over the past year, the PPI rose 9.7 percent, edging down from a 9.8 percent gain in July, which was the largest year-over-year gain since June 1981.
Excluding food and energy items, the core PPI was up a modest 0.2 percent, decelerating from a 0.7 percent gain in July. From a year ago, the core PPI rose 3.7 percent, the largest gain since May 1991.
Retail sales decreased 0.3 percent in August following a 0.5 percent drop in July. An increase in sales at auto dealers was offset by declines in sales at gasoline stations and building supply stores, non-store retailers, electronics stores and department stores. Sales excluding autos fell 0.7 percent, the first decline since February. Sales increased at grocery stores and sporting goods and hobby stores.
From a year ago, retail sales were up 1.6 percent, the weakest gain since 2002. Despite the expect drop in August, sales at gasoline stations were up more than 20 percent from last year. On the other hand, sales at auto dealers were down nearly 15 percent from last year.
Retail sales excluding autos, gasoline and building materials—the portions used to calculate the consumer spending component of gross domestic product (GDP)—dropped 0.2 percent after a 0.3 percent increase in July.
The preliminary estimate of the University of Michigan’s Consumer Sentiment Index jumped 10.1 points in early September, reaching its highest reading since January. This was the biggest monthly increase since January 2004. A 13-point surge in expectations, the biggest increase since March 1991, led the increase. Assessments of current conditions rose a more modest 5.5 points. Confidence has been improving since July.
Inflationary expectations dropped sharply in September because of declining energy prices. One-year expectations dropped to 3.6 percent from 4.8 percent in July and a peak of 5.2 percent in May. Five-year expectations dropped to 2.9 percent from 3.2 percent in July after peaking in May and June at 3.4 percent.
The latest data confirmed that the economic growth seen in the second quarter is unlikely to be repeated in the third quarter. Retail sales decreased 0.3 percent in August, and July’s figure was revised downward to a drop of 0.5 percent from a previously reported 0.1 percent decrease.
This marked the first back-to-back declines in retail sales in more than two years While falling energy prices played a large role in the decrease in retail sales as they led to a huge drop in sales of gasoline, sales also fell in other major categories including building supply, electronics and department stores.
Retail sales account for about 40 percent of personal consumption expenditures with spending on services accounting for the rest. In July, Inflation-adjusted PCE fell for the second consecutive month. Declining August retail sales and a downward revision in July’s figure strongly suggested that real consumption expenditures could decline in the third quarter for the first time since the 1990-1991 recession.
While PCE accounts for roughly 70 percent of gross domestic product, the economy is likely to continue to grow slightly in the current quarter even with a decline in real consumer spending. Trade is expected to remain a support to the economy, but a weaker one given faltering overseas economies and the stabilization of the dollar, which should slow export growth. The July trade deficit in goods and services was the biggest in 16 months, largely reflecting a jump in oil import bills. Declining energy prices should slow import growth in the near term, offsetting the slower export growth and allowing trade to continue to boost economic growth.
The impact of falling energy prices, partly induced by concerns of slowing global demand, was also evident in August wholesale prices and import prices. The Producer Price Index fell for the first time this year and import prices posted the largest drop since the inception of the series in 1982.
Housing activity remained subdued. The drop in July pending home sales suggested that existing home sales should fall in the near term. One bright spot for the housing and mortgage markets was the sizable decline in mortgage rates, triggered by the Treasury’s announcement that Fannie Mae and Freddie Mac were placed into conservatorship under the control of the Federal Housing Finance Agency.
If mortgage rates remain low or drop further, they should spur housing demand and refinance activity. The impact will depend on the extent of the drop in mortgage rates, which is uncertain for several reasons. First, under the announcement, the Treasury will periodically purchase agency mortgage-backed securities but did not specify the magnitude of its purchases following the $5 billion initial purchase later this month.
Second, mortgage holdings of the two companies will be steadily reduced beginning in 2010. Third, the Treasury’s actions will raise the size of the federal debt, which could potentially cause on long-term Treasury yields to move up. Finally, it’s not clear if there will be changes to previous and future fee increases the two companies charge lenders to buy or guarantee mortgages. These fees are passed through to consumers. In any case, the Treasury’s plans have reduced the odds of a severe financial crisis associated with the possible failure of Fannie Mae and Freddie Mac that could have sent the overall economy into a protracted downturn.
Long-term Treasury yields were little changed. The yield on the 10-year Treasury note stayed around 3.73 percent by mid-Friday afternoon, seven basis points higher than the rate on the previous Friday. Despite little movement in the benchmark 10-year yield, mortgage rates dropped sharply. The spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages narrowed by about 40 basis points last week from nearly 270 basis points in the prior week. Thirty-year conforming mortgage yields averaged 5.93 percent for the week ending September 11, according to the Freddie Mac Primary Mortgage Market Survey, the lowest reading since mid-May.
Housing and Mortgage Indicators:
The National Association of Realtors Pending Home Sales Index was down 3.2 percent to 86.5 in July, reversing about half of the jump in June. The index was down 6.8 percent from last July, the smallest year-over-year decline since December 2006.
Responsible for the decline in the overall index were large drops in pending home sales in two regions of the country: 10.6 percent in the West and 7.5 percent in Northeast. Pending sales increased 2.8 percent in the Midwest and were flat in the South. Compared with a year ago, every region but the West posted declines. The West, which has experienced the largest home price drop over the past year, saw a robust 11.3 percent increase from last July.
The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closings, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Following the 6.8 percent pickup in the pending home sales index in June, total existing home sales were up 3.1 percent in July to a seasonally-adjusted annualized rate of 5.0 million. Since November 2007, total existing home sales have been in a narrow range of 4.8 million units to 5.1 million units. NAR will release the existing home sales figure for August on September 24.
Economic Indicators:
The trade deficit in goods and services widened to $62.2 billion in July from $58.8 billion in June. Both exports and imports of goods and services increased to record highs.
Imports rose 3.9 percent, reflecting purchases of crude oil, which averaged a record $124.66 a barrel for foreign crude oil. Exports increased 3.3 percent, led by a $1.4 billion jump in shipments of autos and parts, aircraft and machinery.
Adjusted for inflation, the trade deficit rose to $41.2 billion from $40.1 billion in June. June real trade deficit was revised higher and thus the contribution from trade to economic growth in the second quarter would be downwardly revised.
Import prices declined 3.7 percent in August. Declines in petroleum and industrial metals led the drop. Prices for petroleum dropped 13.0 percent in August, the largest month-to-month decline since 2003. Imported natural gas prices fell 16.4 percent after rising 4.9 percent in July.
Over the past year, import prices were up 16.0 percent, slowing from a 20.1 percent year-over-year gain in July. Import prices excluding fuels rose a tame 0.2 percent, following back-to-back gains of 0.6 percent.
The Producer Price Index fell 0.9 percent, following a 1.2 percent increase in July. Large declines in food and energy prices led the drop in the overall index. Over the past year, the PPI rose 9.7 percent, edging down from a 9.8 percent gain in July, which was the largest year-over-year gain since June 1981.
Excluding food and energy items, the core PPI was up a modest 0.2 percent, decelerating from a 0.7 percent gain in July. From a year ago, the core PPI rose 3.7 percent, the largest gain since May 1991.
Retail sales decreased 0.3 percent in August following a 0.5 percent drop in July. An increase in sales at auto dealers was offset by declines in sales at gasoline stations and building supply stores, non-store retailers, electronics stores and department stores. Sales excluding autos fell 0.7 percent, the first decline since February. Sales increased at grocery stores and sporting goods and hobby stores.
From a year ago, retail sales were up 1.6 percent, the weakest gain since 2002. Despite the expect drop in August, sales at gasoline stations were up more than 20 percent from last year. On the other hand, sales at auto dealers were down nearly 15 percent from last year.
Retail sales excluding autos, gasoline and building materials—the portions used to calculate the consumer spending component of gross domestic product (GDP)—dropped 0.2 percent after a 0.3 percent increase in July.
The preliminary estimate of the University of Michigan’s Consumer Sentiment Index jumped 10.1 points in early September, reaching its highest reading since January. This was the biggest monthly increase since January 2004. A 13-point surge in expectations, the biggest increase since March 1991, led the increase. Assessments of current conditions rose a more modest 5.5 points. Confidence has been improving since July.
Inflationary expectations dropped sharply in September because of declining energy prices. One-year expectations dropped to 3.6 percent from 4.8 percent in July and a peak of 5.2 percent in May. Five-year expectations dropped to 2.9 percent from 3.2 percent in July after peaking in May and June at 3.4 percent.
Fed Widens Collateral, Banks Set Up $70 Billion Fund
Bloomberg (09/15/08); Torres, Craig; McCormick, Liz Capo
In an effort to help Wall Street weather Lehman Brothers Holdings Inc.'s Chapter 11 bankruptcy filing, the Federal Reserve has widened the collateral it accepts for loans to securities firms to include stocks. In addition, the Fed has boosted its program for lending Treasuries to bond dealers by $25 billion, while a group of 10 banks has formed a $70 billion fund to ensure market liquidity. Saumil Parikh, who helps oversee $688 billion at Pacific Investment Management Co., notes that policymakers are aiming to prevent a "broad run on the U.S. financial system." Fed Chairman Ben Bernanke adds that the Fed remains in contact with other central banks "to monitor and share conditions in financial markets and firms around the world."
In an effort to help Wall Street weather Lehman Brothers Holdings Inc.'s Chapter 11 bankruptcy filing, the Federal Reserve has widened the collateral it accepts for loans to securities firms to include stocks. In addition, the Fed has boosted its program for lending Treasuries to bond dealers by $25 billion, while a group of 10 banks has formed a $70 billion fund to ensure market liquidity. Saumil Parikh, who helps oversee $688 billion at Pacific Investment Management Co., notes that policymakers are aiming to prevent a "broad run on the U.S. financial system." Fed Chairman Ben Bernanke adds that the Fed remains in contact with other central banks "to monitor and share conditions in financial markets and firms around the world."
Bank of America Buying Merrill Lynch
Miami Herald (09/15/08); Sorkin, Andrew Ross; White, Ben; Anderson, Jenny
Bank of America has agreed to acquire Merrill Lynch for $50 billion in stock. However, another Wall Street giant--Lehman Brothers--was unable to complete a deal to spin off its troubled assets into a "bad bank," and the investment bank now is likely to file for bankruptcy protection. Meanwhile, the large insurer AIG, already reeling from losses on mortgage securities and collateralized debt obligations, is facing further write-down and is seeking a capital infusion of more than $40 billion. Also, the shares of Washington Mutual plummeted last week, and there are concerns that firm could falter as well.
Bank of America has agreed to acquire Merrill Lynch for $50 billion in stock. However, another Wall Street giant--Lehman Brothers--was unable to complete a deal to spin off its troubled assets into a "bad bank," and the investment bank now is likely to file for bankruptcy protection. Meanwhile, the large insurer AIG, already reeling from losses on mortgage securities and collateralized debt obligations, is facing further write-down and is seeking a capital infusion of more than $40 billion. Also, the shares of Washington Mutual plummeted last week, and there are concerns that firm could falter as well.
Regulator Plans to Bar Big Severance
Wall Street Journal (09/15/08) P. A18; Hagerty, James R.
Despite contract provisions allowing "golden parachute" severance payments to ousted Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, the Federal Housing Finance Agency issued a statement indicating that it would block such compensation. If the agency does not step in, James F. Reda & Associates LLC senior consultant David Schmidt says exit packages could reach $8 million for Mudd and $15 million for Syron. The regulator attributes its decision to "applicable statute and regulation." After the government takeover, Herb Allison was named as Mudd's successor and David Moffett assumed Syron's position.
Despite contract provisions allowing "golden parachute" severance payments to ousted Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, the Federal Housing Finance Agency issued a statement indicating that it would block such compensation. If the agency does not step in, James F. Reda & Associates LLC senior consultant David Schmidt says exit packages could reach $8 million for Mudd and $15 million for Syron. The regulator attributes its decision to "applicable statute and regulation." After the government takeover, Herb Allison was named as Mudd's successor and David Moffett assumed Syron's position.
Web Snares More Real Estate Buyers
Inman News (09/15/08)
The California Association of Realtors' annual Survey of California Home Buyers study revealed that 78 percent of those polled used the Internet "as an important part of [their] home buying and selection process," up from 72 percent in 2007. Furthermore, buyers who cited the Web as an important part of the buying process spent an average 8.3 weeks searching for a property with their agent, an increase from 5.2 weeks in 2007 and 2.2 weeks a year earlier. At the same time, "traditional" buyers who said the Internet was not an important part of their personal buying and selection process took 10.3 weeks searching for a residence with their realtor versus eight weeks in 2007. The report also determined that traditional buyers saw nearly double the number of homes with their agent (23.3 properties) as Internet buyers (12.7 homes).
The California Association of Realtors' annual Survey of California Home Buyers study revealed that 78 percent of those polled used the Internet "as an important part of [their] home buying and selection process," up from 72 percent in 2007. Furthermore, buyers who cited the Web as an important part of the buying process spent an average 8.3 weeks searching for a property with their agent, an increase from 5.2 weeks in 2007 and 2.2 weeks a year earlier. At the same time, "traditional" buyers who said the Internet was not an important part of their personal buying and selection process took 10.3 weeks searching for a residence with their realtor versus eight weeks in 2007. The report also determined that traditional buyers saw nearly double the number of homes with their agent (23.3 properties) as Internet buyers (12.7 homes).
OTS, OCC Say Loss Mitigation on Rise
American Banker (09/15/08) P. 16; Flitter, Emily
The Mortgage Metrics Report from the Office of Thrift Supervision and the Office of the Comptroller of the Currency indicates a jump in loss mitigation by the nation's biggest mortgage servicers during the second quarter. Some 87 percent of borrowers were in loss mitigation during the period, up from 76 percent during the first three months of 2008. The report also shows a more than 80-percent surge in modifications during the first six months of the year but only an 8-percent jump in payment plans. According to OTS director John Reich, "The trend definitely is moving in the right direction to minimize the number of avoidable foreclosures and keep more Americans in their homes."
The Mortgage Metrics Report from the Office of Thrift Supervision and the Office of the Comptroller of the Currency indicates a jump in loss mitigation by the nation's biggest mortgage servicers during the second quarter. Some 87 percent of borrowers were in loss mitigation during the period, up from 76 percent during the first three months of 2008. The report also shows a more than 80-percent surge in modifications during the first six months of the year but only an 8-percent jump in payment plans. According to OTS director John Reich, "The trend definitely is moving in the right direction to minimize the number of avoidable foreclosures and keep more Americans in their homes."
More Home Deals Closing With Cash
Sarasota Herald-Tribune (FL) (09/15/08); Kessler, Aaron
Real estate companies in Florida say they are seeing more buyers use cash to obtain a home, rather than rely on mortgages. For example, NRT says cash transactions have risen from 25 percent of home sales in August 2007 to nearly 40 percent last month; and Michael Saunders & Co. says cash transactions have risen from 38.5 percent between January 2007 and August 2007 to 54.5 percent during the same period of this year. Mortgage bankers have tightened their lending standards during the credit crisis, making it more difficult for consumers to borrow money. "To get a loan these days you have to have really excellent credit, a minimum 700 FICO score; some even want 720 or 740," says Jack McCabe, a real estate analyst in Deerfield Beach, who adds that these players "are able to command the best prices, as when you have a cash buyer sitting across from you saying you don't have to worry about anything, this deal will close right away."
Real estate companies in Florida say they are seeing more buyers use cash to obtain a home, rather than rely on mortgages. For example, NRT says cash transactions have risen from 25 percent of home sales in August 2007 to nearly 40 percent last month; and Michael Saunders & Co. says cash transactions have risen from 38.5 percent between January 2007 and August 2007 to 54.5 percent during the same period of this year. Mortgage bankers have tightened their lending standards during the credit crisis, making it more difficult for consumers to borrow money. "To get a loan these days you have to have really excellent credit, a minimum 700 FICO score; some even want 720 or 740," says Jack McCabe, a real estate analyst in Deerfield Beach, who adds that these players "are able to command the best prices, as when you have a cash buyer sitting across from you saying you don't have to worry about anything, this deal will close right away."
Fed to Meet on Rates, Look Down the Road
Wall Street Journal (09/15/08) P. A2; Reddy, Sudeep
Experts originally expected the Federal Reserve to hold the federal-funds rate steady at 2 percent when it meets on Sept. 16, but Lehman Brothers' financial troubles and the belief that economic growth will brake by year's end has led some to anticipate calls for a rate cut. However, observers point out that the central bank must contend with improvements in inflation at a time when the labor, housing and financial markets remain weak. They predict the Fed will hold off on raising rates until the housing market shows signs of recovery and officials are confident that the credit sector will not be negatively impacted by tightening policy.
Experts originally expected the Federal Reserve to hold the federal-funds rate steady at 2 percent when it meets on Sept. 16, but Lehman Brothers' financial troubles and the belief that economic growth will brake by year's end has led some to anticipate calls for a rate cut. However, observers point out that the central bank must contend with improvements in inflation at a time when the labor, housing and financial markets remain weak. They predict the Fed will hold off on raising rates until the housing market shows signs of recovery and officials are confident that the credit sector will not be negatively impacted by tightening policy.
Bailout: Little help for homeowners
If it does pass, the plan calls for the Treasury to work with loan servicers to stem the tide of foreclosures. But just how that will happen remains unclear.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 29, 2008: 3:28 PM ET
NEW YORK (CNNMoney.com) -- The $700 billion bailout legislation now under consideration by Congress calls for the Treasury Secretary to implement a plan to stem foreclosures by working with servicers to modify loans.
But many housing experts question whether the bill will help struggling homeowners refinance into more affordable mortgages. They stress that the economy won't recover until the tide of foreclosures stops, and the million-plus foreclosed homes on the market find buyers.
"It's impossible to know whether it will help anybody but the banks stay open another week," said Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University. "Until we see a plan to get people to buy those empty homes, we're just going to go from one band-aid to the next."
The legislation was unveiled Sunday, but voted down by the House on Monday. It's now up to lawmakers to revise the bill so it can garner approval from enough members to pass. The main objections were levied by House Republicans and are centered around the potential risk to taxpayers.
Since the credit crisis began a year ago, Democratic lawmakers and the Bush administration have tussled over how much to help borrowers who have fallen behind in their mortgage payments. Until now, efforts have focused on prodding lenders to work with distressed borrowers.
In Sunday's version of the bill, federal agencies holding mortgages and mortgage securities would be required to identify loans that could be modified without causing big losses for taxpayers. It calls for encouraging servicers to refinance loans through the Hope for Homeownership program, which begins Oct. 1 and allows borrowers who can't meet their current mortgage terms to refinance into more affordable, fixed-rate loans backed by the Federal Housing Administration.
However, exactly how the modifications would be done isn't totally clear.
Generally, when considering whether to modify a loan, servicers determine whether the borrower has the means to make payments on their loan, if the loan terms were changed slightly. At the same time, the servicer considers whether it would cost less for it to modify the loan instead of foreclose.
Often when a borrower is up-to-date on payments, but faces a big spike in rates, the modification may call for freezing interest rates at the introductory level. The workout could also reduce principal balance or stretch out the term of the loan, from 30 years to 40 years, for example.
In addition to the Treasury Department, agencies that would promote the modifications would include the Federal Reserve, Federal Deposit Insurance Corp., and the Federal Housing Finance Agency, which controls mortgage insurers Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).
The bill also allows the Secretary to use loan guarantees and credit enhancements to avoid foreclosures, though on a press call Treasury officials declined to elaborate on these provisions. Loan guarantees generally refer to mortgages backed by a federal agency, such as the Federal Housing Administration, or by mortgage insurers Fannie Mae and Freddie Mac. Credit enhancements usually reduce the risk of mortgage securities or loans in case borrowers default.
Avoiding 'preventable foreclosures'
Servicers have been under pressure to modify loans since the mortgage meltdown began a year ago. However, they say the biggest roadblock to changing loan terms are the investors who hold the securities created from those mortgages.
"It's really not the servicers' decision," said John Harding, real estate finance professor at the University of Connecticut School of Business.
But, as the owner of a large number of mortgage securities, the federal government would have the power to modify more troubled loans, said Treasury officials. The government may also buy the mortgage loans themselves from banks, which it can then adjust more easily.
The government would try to avoid "preventable foreclosures" in a way that "makes sense for taxpayers," the officials said on a press call.
"We will have a lot of influence," they added.
But just how far the government will go to help homeowners remains in doubt. Treasury Secretary Henry Paulson said last week that the "vast majority" of foreclosures in this country are happening to people who took out loans they couldn't afford or who don't want to stay in their homes.
Will it help?
Some housing counselors said the legislation falls far short of helping troubled homeowners. One of the best ways to stop foreclosures would be to allow bankruptcy judges to change the terms of some mortgages to make them more affordable, a measure the banking industry strenuously opposed.
"There is nothing in the bailout that will mitigate widespread damage caused by foreclosures," said Michael Calhoun, president of the Center for Responsible Lending.
"The bill includes a vague provision that calls for the government to buy mortgages and securities and then try to modify them, but this will have very limited impact," he continued. "It doesn't stop the [foreclosure] epidemic that will continue to drag down property values for everyone."
The bill's failure in Congress pleased some community activists, who saw it as an opportunity to renegotiate the housing provisions in the bill. In addition to including the bankruptcy provision, housing groups would like to see stronger language in the legislation to help homeowners, said Bill Austin, director of Acorn Financial Justice Center. For instance, the Treasury Department could put a higher priority on buying securities that have underlying mortgages that need to be modified.
Still, even if some homeowners are helped, it's not going to quickly put the American economy back on its feet, said Shaun Bond, associate professor of real estate at University of Cincinnati's business school.
"The adjustment in the housing market will still be a long, drawn-out process," Bond said. "It will be several years before we see a return to normal conditions."
By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 29, 2008: 3:28 PM ET
NEW YORK (CNNMoney.com) -- The $700 billion bailout legislation now under consideration by Congress calls for the Treasury Secretary to implement a plan to stem foreclosures by working with servicers to modify loans.
But many housing experts question whether the bill will help struggling homeowners refinance into more affordable mortgages. They stress that the economy won't recover until the tide of foreclosures stops, and the million-plus foreclosed homes on the market find buyers.
"It's impossible to know whether it will help anybody but the banks stay open another week," said Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University. "Until we see a plan to get people to buy those empty homes, we're just going to go from one band-aid to the next."
The legislation was unveiled Sunday, but voted down by the House on Monday. It's now up to lawmakers to revise the bill so it can garner approval from enough members to pass. The main objections were levied by House Republicans and are centered around the potential risk to taxpayers.
Since the credit crisis began a year ago, Democratic lawmakers and the Bush administration have tussled over how much to help borrowers who have fallen behind in their mortgage payments. Until now, efforts have focused on prodding lenders to work with distressed borrowers.
In Sunday's version of the bill, federal agencies holding mortgages and mortgage securities would be required to identify loans that could be modified without causing big losses for taxpayers. It calls for encouraging servicers to refinance loans through the Hope for Homeownership program, which begins Oct. 1 and allows borrowers who can't meet their current mortgage terms to refinance into more affordable, fixed-rate loans backed by the Federal Housing Administration.
However, exactly how the modifications would be done isn't totally clear.
Generally, when considering whether to modify a loan, servicers determine whether the borrower has the means to make payments on their loan, if the loan terms were changed slightly. At the same time, the servicer considers whether it would cost less for it to modify the loan instead of foreclose.
Often when a borrower is up-to-date on payments, but faces a big spike in rates, the modification may call for freezing interest rates at the introductory level. The workout could also reduce principal balance or stretch out the term of the loan, from 30 years to 40 years, for example.
In addition to the Treasury Department, agencies that would promote the modifications would include the Federal Reserve, Federal Deposit Insurance Corp., and the Federal Housing Finance Agency, which controls mortgage insurers Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).
The bill also allows the Secretary to use loan guarantees and credit enhancements to avoid foreclosures, though on a press call Treasury officials declined to elaborate on these provisions. Loan guarantees generally refer to mortgages backed by a federal agency, such as the Federal Housing Administration, or by mortgage insurers Fannie Mae and Freddie Mac. Credit enhancements usually reduce the risk of mortgage securities or loans in case borrowers default.
Avoiding 'preventable foreclosures'
Servicers have been under pressure to modify loans since the mortgage meltdown began a year ago. However, they say the biggest roadblock to changing loan terms are the investors who hold the securities created from those mortgages.
"It's really not the servicers' decision," said John Harding, real estate finance professor at the University of Connecticut School of Business.
But, as the owner of a large number of mortgage securities, the federal government would have the power to modify more troubled loans, said Treasury officials. The government may also buy the mortgage loans themselves from banks, which it can then adjust more easily.
The government would try to avoid "preventable foreclosures" in a way that "makes sense for taxpayers," the officials said on a press call.
"We will have a lot of influence," they added.
But just how far the government will go to help homeowners remains in doubt. Treasury Secretary Henry Paulson said last week that the "vast majority" of foreclosures in this country are happening to people who took out loans they couldn't afford or who don't want to stay in their homes.
Will it help?
Some housing counselors said the legislation falls far short of helping troubled homeowners. One of the best ways to stop foreclosures would be to allow bankruptcy judges to change the terms of some mortgages to make them more affordable, a measure the banking industry strenuously opposed.
"There is nothing in the bailout that will mitigate widespread damage caused by foreclosures," said Michael Calhoun, president of the Center for Responsible Lending.
"The bill includes a vague provision that calls for the government to buy mortgages and securities and then try to modify them, but this will have very limited impact," he continued. "It doesn't stop the [foreclosure] epidemic that will continue to drag down property values for everyone."
The bill's failure in Congress pleased some community activists, who saw it as an opportunity to renegotiate the housing provisions in the bill. In addition to including the bankruptcy provision, housing groups would like to see stronger language in the legislation to help homeowners, said Bill Austin, director of Acorn Financial Justice Center. For instance, the Treasury Department could put a higher priority on buying securities that have underlying mortgages that need to be modified.
Still, even if some homeowners are helped, it's not going to quickly put the American economy back on its feet, said Shaun Bond, associate professor of real estate at University of Cincinnati's business school.
"The adjustment in the housing market will still be a long, drawn-out process," Bond said. "It will be several years before we see a return to normal conditions."
Crisis puts home loans out of reach
The meltdown on Wall Street is making it even harder for home buyers to land a mortgage loan.
By Les Christie, CNNMoney.com staff writer
September 26, 2008: 6:24 AM ET
NEW YORK (CNNMoney.com) -- Wall Street's meltdown has put the squeeze on all sorts of lending, and home loans are no exception. Now, even some very well-qualified home buyers are getting turned down for mortgages.
"A lot of good, well-qualified people are being turned away for no good reason," said Mark Savitt, president of the National Association of Mortgage Brokers and a mortgage broker in West Virginia. "The wheels are coming to a grinding halt."
Sometimes the rejections seem completely inexplicable. Long Island, N.Y.-based mortgage broker Bob Moulton had one client with substantial income and assets who planned to put down $1.2 million on a house selling for $2.2 million. For this borrower, a mortgage should have been a snap. But it wasn't.
The hitch: The buyer was a few days late with a single mortgage payment last year when he was away on vacation. That lowered his credit score to 679, which is the reason the lender cited when it denied his loan.
"Just a little ding on his credit report, one late payment a year-and-a-half ago," said Moulton. "Everything else was fine."
Higher rates
Another example comes from Savitt. One of his clients was buying a home for $205,000, putting down 20%. The buyer had an excellent credit score in the mid-700s, and the house was appraised at a little higher than the sale price.
The problem here: The borrower's debt to income ratio would be at about 45 - slightly higher than what most banks like to see, but by no means excessive. And his other risk factors were great.
"The bank turned it down over excessive debt ratio," said Savitt. "That's crazy."
And higher interest rates are making it even harder for borrowers to get a loan. The 30-year fixed rate has shot up in the wake of the financial crisis - to 6.09%, compared with 5.78% last week - making monthly mortgage payments higher as well. That's raising the debt to income ratio for most borrowers, which means more will have their loan applications rejected.
"
It used to be that if most of a borrower's qualifications were quite strong - income, assets, credit score and the value of the home itself - lenders would use their judgment to make exceptions if one factor was a bit weak.
A lender might accept a less than stellar credit score, for example, if the borrower was making a big down payment, or forgive a modest income if the borrower's bank account was fat enough.
Not any more, says Alan Rosenbaum, president of New York City mortgage broker GuardHill Finance.
"There are no exceptions today," said Rosenbaum. "If an application does not meet each of the guidelines - and those guidelines themselves have gotten more strict - it's denied."
That means many more people simply no longer qualify for a mortgage.
A numbers game
"I get as many phone calls as I got two years ago," said broker George Hanzimanolis, of Bankers First Mortgage in Pennsylvania, "but I bet you 40% of the people calling in, we can't do anything for, versus 5% a year ago."
And Hanzimanolis say it's gotten worse in the last few weeks. One recent client who had excellent assets and income wanted to refinance his first and second mortgages. The house was valued at $1.6 million, and he was looking for a $1.2 million loan. That's an excellent loan-to-value ratio of 75%; the banks like it to be no more than 80%.
But these days many lenders are anticipating that home prices will continue to fall, so they're automatically discounting every home's appraised value by 10%.
That dropped the value of the borrower's home to $1.44 million, which put him over the 80% loan-to-value ratio. So the loan was turned down.
Things like that make brokering mortgage loans today a struggle, according to Moulton.
"Nothing is making sense. Everything is torture right now," he said. "We're getting things done but it takes enormous effort. You think a deal is vanilla and it turns out to be rocky road."
By Les Christie, CNNMoney.com staff writer
September 26, 2008: 6:24 AM ET
NEW YORK (CNNMoney.com) -- Wall Street's meltdown has put the squeeze on all sorts of lending, and home loans are no exception. Now, even some very well-qualified home buyers are getting turned down for mortgages.
"A lot of good, well-qualified people are being turned away for no good reason," said Mark Savitt, president of the National Association of Mortgage Brokers and a mortgage broker in West Virginia. "The wheels are coming to a grinding halt."
Sometimes the rejections seem completely inexplicable. Long Island, N.Y.-based mortgage broker Bob Moulton had one client with substantial income and assets who planned to put down $1.2 million on a house selling for $2.2 million. For this borrower, a mortgage should have been a snap. But it wasn't.
The hitch: The buyer was a few days late with a single mortgage payment last year when he was away on vacation. That lowered his credit score to 679, which is the reason the lender cited when it denied his loan.
"Just a little ding on his credit report, one late payment a year-and-a-half ago," said Moulton. "Everything else was fine."
Higher rates
Another example comes from Savitt. One of his clients was buying a home for $205,000, putting down 20%. The buyer had an excellent credit score in the mid-700s, and the house was appraised at a little higher than the sale price.
The problem here: The borrower's debt to income ratio would be at about 45 - slightly higher than what most banks like to see, but by no means excessive. And his other risk factors were great.
"The bank turned it down over excessive debt ratio," said Savitt. "That's crazy."
And higher interest rates are making it even harder for borrowers to get a loan. The 30-year fixed rate has shot up in the wake of the financial crisis - to 6.09%, compared with 5.78% last week - making monthly mortgage payments higher as well. That's raising the debt to income ratio for most borrowers, which means more will have their loan applications rejected.
"
It used to be that if most of a borrower's qualifications were quite strong - income, assets, credit score and the value of the home itself - lenders would use their judgment to make exceptions if one factor was a bit weak.
A lender might accept a less than stellar credit score, for example, if the borrower was making a big down payment, or forgive a modest income if the borrower's bank account was fat enough.
Not any more, says Alan Rosenbaum, president of New York City mortgage broker GuardHill Finance.
"There are no exceptions today," said Rosenbaum. "If an application does not meet each of the guidelines - and those guidelines themselves have gotten more strict - it's denied."
That means many more people simply no longer qualify for a mortgage.
A numbers game
"I get as many phone calls as I got two years ago," said broker George Hanzimanolis, of Bankers First Mortgage in Pennsylvania, "but I bet you 40% of the people calling in, we can't do anything for, versus 5% a year ago."
And Hanzimanolis say it's gotten worse in the last few weeks. One recent client who had excellent assets and income wanted to refinance his first and second mortgages. The house was valued at $1.6 million, and he was looking for a $1.2 million loan. That's an excellent loan-to-value ratio of 75%; the banks like it to be no more than 80%.
But these days many lenders are anticipating that home prices will continue to fall, so they're automatically discounting every home's appraised value by 10%.
That dropped the value of the borrower's home to $1.44 million, which put him over the 80% loan-to-value ratio. So the loan was turned down.
Things like that make brokering mortgage loans today a struggle, according to Moulton.
"Nothing is making sense. Everything is torture right now," he said. "We're getting things done but it takes enormous effort. You think a deal is vanilla and it turns out to be rocky road."
Monday, September 29, 2008
Home buyers get cold feet
The shocking events over the last two weeks are hurting the already moribund real estate market.
By Les Christie, CNNMoney.com staff writer
Last Updated: September 23, 2008: 5:11 PM ET
NEW YORK (CNNMoney.com) -- Housing markets finally looked like they might be stabilizing when the crisis on Wall Street hit last week, shattering many home buyers' resolve.
Glenn Kelman, founder of the online brokerage house Redfin, reports that business at his company had been humming, thanks to a steep, six-week drop in interest rates as well as the government takeover of mortgage giants Fannie Mae (FME) and Freddie Mac (FRE, Fortune 500).
But now, Kelman says that some people are pulling out of deals. "Clients have expressed their reservations about continuing the process," in the wake of recent events, according to Redfin broker Febe Cude
For instance, Cory Claassen, a 32-year-old attorney, and his wife, an engineer in her mid-20s, have been in the process of buying a house in the Seattle area. They made an offer on a house with an asking price of $795,000 and are waiting for a counter-offer. But now they're getting cold feet, and may not accept it.
"My concern, even before last week, was that the market could go down," said Claassen. "[Last week's events] made me fear a more precipitous fall. I'm also worried about jobs and the economy. We have no debt, good assets and if something happened now, we could always move to a smaller apartment. We wouldn't be able to do that if we bought a house."
Claassen hasn't decided whether to blow off the deal or not, since the market chaos has the upside of motivating sellers to slash prices.
Kelman says his buyers are seeing an average discount of 10.7% from a home's listing price. "That's enormous," he said.
Rates turn again
Further complicating matters, interest rates started to creep back up late last week.
By Tuesday, the 30-year fixed had nudged up from 5.78% to 6.26%, according to Keith Gumbinger of HSH Associate, a publisher of financial information.
"It's a very perilous time in the financial markets right now," Gumbinger said. "That makes for a very uncertain rate environment."
The nearly half-point interest rate jump turned off buyers like a switch, according to Steve Habetz, a mortgage broker with Threshold Mortgage in Connecticut. "Things quieted down almost immediately," he said.
Nicole Harkin, who is a financial analyst with the General Accounting Office, and her husband, Brent Lattin, who works for the Federal Reserve, were particularly concerned about interest rates as they house-hunted in the District of Columbia.
They were encouraged immediately after rates fell following the Fannie-Freddie takeover. But in the end, last week's turmoil convinced them to postpone their purchase indefinitely.
"We didn't want to waste a half million dollars," said Nicole. "I think home prices have to correct some more." Their plan now is to wait out that correction and buy later at what they hope will be a lower price.
"Nobody wants to catch a falling knife," said Dean Baker, co-director of the Center for Economic and Policy Research.
Home buyers are also facing a slowing overall economy that's shedding 100,000 jobs a month. Layoffs are of course especially high in the financial sector.
"I wouldn't be buying a condo in Manhattan if I were an investment banker," said Baker. "And if I owned one, I might be thinking about selling it."
It's going to take a while for consumers to process everything that's happened lately, according to Jim Gillespie, CEO of Coldwell Banker, one of the nation's largest real estate brokers.
"Consumers have been subjected to a barrage of information," he said, "Once they grasp what has happened, they'll understand that mortgage interest rates are still near historic lows, that they have a lot of homes to choose from, and that price corrections have improved affordability."
Whether that will be enough to overcome people's reluctance to buy in declining markets as their jobs and their nest eggs grow more threatened is very much in doubt.
By Les Christie, CNNMoney.com staff writer
Last Updated: September 23, 2008: 5:11 PM ET
NEW YORK (CNNMoney.com) -- Housing markets finally looked like they might be stabilizing when the crisis on Wall Street hit last week, shattering many home buyers' resolve.
Glenn Kelman, founder of the online brokerage house Redfin, reports that business at his company had been humming, thanks to a steep, six-week drop in interest rates as well as the government takeover of mortgage giants Fannie Mae (FME) and Freddie Mac (FRE, Fortune 500).
But now, Kelman says that some people are pulling out of deals. "Clients have expressed their reservations about continuing the process," in the wake of recent events, according to Redfin broker Febe Cude
For instance, Cory Claassen, a 32-year-old attorney, and his wife, an engineer in her mid-20s, have been in the process of buying a house in the Seattle area. They made an offer on a house with an asking price of $795,000 and are waiting for a counter-offer. But now they're getting cold feet, and may not accept it.
"My concern, even before last week, was that the market could go down," said Claassen. "[Last week's events] made me fear a more precipitous fall. I'm also worried about jobs and the economy. We have no debt, good assets and if something happened now, we could always move to a smaller apartment. We wouldn't be able to do that if we bought a house."
Claassen hasn't decided whether to blow off the deal or not, since the market chaos has the upside of motivating sellers to slash prices.
Kelman says his buyers are seeing an average discount of 10.7% from a home's listing price. "That's enormous," he said.
Rates turn again
Further complicating matters, interest rates started to creep back up late last week.
By Tuesday, the 30-year fixed had nudged up from 5.78% to 6.26%, according to Keith Gumbinger of HSH Associate, a publisher of financial information.
"It's a very perilous time in the financial markets right now," Gumbinger said. "That makes for a very uncertain rate environment."
The nearly half-point interest rate jump turned off buyers like a switch, according to Steve Habetz, a mortgage broker with Threshold Mortgage in Connecticut. "Things quieted down almost immediately," he said.
Nicole Harkin, who is a financial analyst with the General Accounting Office, and her husband, Brent Lattin, who works for the Federal Reserve, were particularly concerned about interest rates as they house-hunted in the District of Columbia.
They were encouraged immediately after rates fell following the Fannie-Freddie takeover. But in the end, last week's turmoil convinced them to postpone their purchase indefinitely.
"We didn't want to waste a half million dollars," said Nicole. "I think home prices have to correct some more." Their plan now is to wait out that correction and buy later at what they hope will be a lower price.
"Nobody wants to catch a falling knife," said Dean Baker, co-director of the Center for Economic and Policy Research.
Home buyers are also facing a slowing overall economy that's shedding 100,000 jobs a month. Layoffs are of course especially high in the financial sector.
"I wouldn't be buying a condo in Manhattan if I were an investment banker," said Baker. "And if I owned one, I might be thinking about selling it."
It's going to take a while for consumers to process everything that's happened lately, according to Jim Gillespie, CEO of Coldwell Banker, one of the nation's largest real estate brokers.
"Consumers have been subjected to a barrage of information," he said, "Once they grasp what has happened, they'll understand that mortgage interest rates are still near historic lows, that they have a lot of homes to choose from, and that price corrections have improved affordability."
Whether that will be enough to overcome people's reluctance to buy in declining markets as their jobs and their nest eggs grow more threatened is very much in doubt.
Can't anyone afford my home?
Prices have dropped. A lot. But it's still surprisingly hard to find buyers.
By Money Magazine's Stephen Gandel and Amanda Gengler
Last Updated: September 24, 2008: 10:18 AM ET
(Money Magazine) -- Maybe you've started thinking that now you can finally find a buyer for your house. After all, this summer the National Association of Homebuilders asserted that houses were more affordable than at any time during the previous four years. Prices have slid so far that many homes are now within the reach of people who couldn't buy during the bubble.
Other faintly cheery facts have emerged too. Sales of existing homes were 3% brisker in July than June, and in several metropolitan areas - among them Boston and Denver - the market seems to be turning around.
When examined closely, however, those glimmers of better times ahead seem to fade. Sure, lower prices can help you sell, but you also have to know whether there are enough people who can afford to pay the price you want.
That, in turn, depends on a mix of factors including the financing that buyers can get, whether there are enough of them who want to live where you do, their other housing options and how they feel about investing so much in an asset whose future appreciation is iffy.
"Price is just one of many variables that go into a decision to buy a house," says real estate analyst Michael Larson of Weiss Research, a Jupiter, Fla. investment newsletter publisher. "Many other factors are overriding price right now. That's why the market remains challenged."
The long fall
Price, though, is still the primary measure of affordability for any buyer. And while the median price for an existing house has tumbled 8% from $230,100 to $212,400 since its peak in 2006, according to the National Association of Realtors, many potential buyers still see asking prices as expensive.
And they're not wrong. That $212,400 house, after all, costs 39% more than it did back in pre-boom 2001 when it sold for about $153,100. Prices in red-hot markets such as Miami became even more inflated during the boom and are still up about twice as high as they were in 2001.
So while homes are selling at a discount, they're not on clearance - not yet anyway. Peak to trough, the median-priced home nationwide is projected to fall as much as 20%, bottoming out around $185,000 by late 2009, according to a July report from Wachovia.
"Houses may be more affordable, but they will probably be even more affordable next year," says Nigel Gault, chief U.S. economist at Global Insight, an economic forecasting firm. "So why buy now?"
Crunched credit
The price may be right, but if buyers can't borrow enough, the house isn't affordable. Difficulty borrowing is keeping many Americans from buying. "The industry went from little or no credit standards to credit standards on steroids," says Marc Savitt, president of the National Association of Mortgage Brokers.
According to the Federal Reserve Board, about 85% of lenders, worried about falling prices and rising foreclosures, have stiffened requirements for borrowers in the past three months. Those with a credit score of 600 or lower cannot get loans at all, says Keith Gumbinger of HSH Associates, a mortgage information publisher.
The upshot: 21 million, or 13% of those who have credit records, many of whom would have qualified for mortgages during the bubble, can no longer do so.
Those whose credit scores are high enough to qualify for a mortgage will likely pay more. Fannie Mae and Freddie Mac, which set the lending criteria for most loans, in November will require a 740 score, up from 680 for buyers to escape a surcharge that ultimately increases their interest rate.
As a result, the 33 million Americans whose scores fall between 680 and 740 (roughly 20% of adults with credit histories) may have to pay half a percentage point more to borrow. On a $300,000, 30-year loan, that would add about $100 to a buyer's monthly payment.
Adios, easy money
Back in the go-go years, lenders fell all over themselves to make no-down-payment loans. Those are gone, and lenders want some skin in the game, at least 5%. But to avoid paying extra, most buyers need the full 20% demanded in days of yore. To buy a $400,000 house, a family would now have to amass $80,000 in cash, up from $20,000 or less a few years ago.
Buyers also face higher interest rates, which allow them to borrow less. In mid-2004 a borrower with good credit could have qualified for a rate of 5.87% on a 30-year fixed $300,000 loan. That translates to a monthly payment of $1,774. Now, with the rate for the same loan at 6.57%, the same monthly payment could support a loan of just $278,500.
Back in the day, option ARMs and other exotic mortgages with low teaser rates helped struggling purchasers stretch to buy houses that they could not otherwise afford. Those deals have largely disappeared.
And while banks once allowed a homeowner's monthly principal, interest, taxes and insurance (PITI) to make up as much as 45% of a family's before-tax income, now buyers are restricted to using only 32% for a house payment. If PITI rises beyond that limit, banks consider the loan unaffordable and the family cannot receive a mortgage.
That limit boosts the amount of income a homeowner needs to purchase. Say your house has dropped from $425,000 to about $395,000. A couple of years ago a family needed an income of only $80,000 to buy. Now, even though the house costs less, a prospective buyer must have an income of $92,000.
Less expensive options
Rental prices are looking good in many areas. Christopher Mayer, a Columbia University real estate professor, recently found that in 11 of 16 top cities, renting is a better deal compared to buying than it has been historically.
The extra expense of owning was offset by rising house values - at least a few years ago. Now that new buyers can no longer count on steep appreciation, they have less incentive to buy.
And it's not as if rents are standing still while your house's price falls. "Competition from vacant houses or condos that people can't sell is driving down rental rates," says Hessam Nadji, managing director of research at Marcus & Millichap Real Estate Investment Services in Encino, Calif.
The big pinch
A house is only affordable if a homeowner can meet its monthly payment and have enough left over to live on. Incomes rose by about 5% in the first half of the year, but few people feel as though they're better off.
Americans spent an extra $165 billion, or 26% more, on gasoline and oil in the first six months than over the same period last year, and food bills rose by 7%. Without a doubt, most Americans feel pinched.
If you live in an area dominated by financial companies or car makers, two sectors shedding jobs in the current downturn, you may encounter even less appetite to buy.
If the economic turmoil continues, vacation destinations like Las Vegas or Orlando could suffer a drop-off in business that would leave prospective buyers with less in their pockets.
"Not only is the amount of money people have to spend on housing in decline but because a house is a risky asset, the amount they want to spend on it is falling too," says Michael Englund, chief economist at Action Economics, a forecasting firm.
Buyers being wary
That fear may be the biggest obstacle keeping buyers from knocking on your door. During the boom, people were willing to spend as much as they did on housing because they thought that they were putting away money for retirement or college. And they could draw on their equity for renovations or other goodies.
If homes rose in value faster than stocks, as they did for a few years, homeowners could console themselves that forgoing 401(k) contributions for high mortgage payments was a sensible strategy.
Few these days think of real estate as a safe place to invest, however. According to Gallup, only 27% of the population believe a home is their best long-term investment, down from 50% in 2002.
"Nearly a quarter of potential buyers are on the sidelines waiting for some form of encouragement," says Walter Molony, spokesman for the National Association of Realtors. Maybe they're looking for some sign that houses have truly become more affordable. The price declines haven't done that yet.
How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com.
By Money Magazine's Stephen Gandel and Amanda Gengler
Last Updated: September 24, 2008: 10:18 AM ET
(Money Magazine) -- Maybe you've started thinking that now you can finally find a buyer for your house. After all, this summer the National Association of Homebuilders asserted that houses were more affordable than at any time during the previous four years. Prices have slid so far that many homes are now within the reach of people who couldn't buy during the bubble.
Other faintly cheery facts have emerged too. Sales of existing homes were 3% brisker in July than June, and in several metropolitan areas - among them Boston and Denver - the market seems to be turning around.
When examined closely, however, those glimmers of better times ahead seem to fade. Sure, lower prices can help you sell, but you also have to know whether there are enough people who can afford to pay the price you want.
That, in turn, depends on a mix of factors including the financing that buyers can get, whether there are enough of them who want to live where you do, their other housing options and how they feel about investing so much in an asset whose future appreciation is iffy.
"Price is just one of many variables that go into a decision to buy a house," says real estate analyst Michael Larson of Weiss Research, a Jupiter, Fla. investment newsletter publisher. "Many other factors are overriding price right now. That's why the market remains challenged."
The long fall
Price, though, is still the primary measure of affordability for any buyer. And while the median price for an existing house has tumbled 8% from $230,100 to $212,400 since its peak in 2006, according to the National Association of Realtors, many potential buyers still see asking prices as expensive.
And they're not wrong. That $212,400 house, after all, costs 39% more than it did back in pre-boom 2001 when it sold for about $153,100. Prices in red-hot markets such as Miami became even more inflated during the boom and are still up about twice as high as they were in 2001.
So while homes are selling at a discount, they're not on clearance - not yet anyway. Peak to trough, the median-priced home nationwide is projected to fall as much as 20%, bottoming out around $185,000 by late 2009, according to a July report from Wachovia.
"Houses may be more affordable, but they will probably be even more affordable next year," says Nigel Gault, chief U.S. economist at Global Insight, an economic forecasting firm. "So why buy now?"
Crunched credit
The price may be right, but if buyers can't borrow enough, the house isn't affordable. Difficulty borrowing is keeping many Americans from buying. "The industry went from little or no credit standards to credit standards on steroids," says Marc Savitt, president of the National Association of Mortgage Brokers.
According to the Federal Reserve Board, about 85% of lenders, worried about falling prices and rising foreclosures, have stiffened requirements for borrowers in the past three months. Those with a credit score of 600 or lower cannot get loans at all, says Keith Gumbinger of HSH Associates, a mortgage information publisher.
The upshot: 21 million, or 13% of those who have credit records, many of whom would have qualified for mortgages during the bubble, can no longer do so.
Those whose credit scores are high enough to qualify for a mortgage will likely pay more. Fannie Mae and Freddie Mac, which set the lending criteria for most loans, in November will require a 740 score, up from 680 for buyers to escape a surcharge that ultimately increases their interest rate.
As a result, the 33 million Americans whose scores fall between 680 and 740 (roughly 20% of adults with credit histories) may have to pay half a percentage point more to borrow. On a $300,000, 30-year loan, that would add about $100 to a buyer's monthly payment.
Adios, easy money
Back in the go-go years, lenders fell all over themselves to make no-down-payment loans. Those are gone, and lenders want some skin in the game, at least 5%. But to avoid paying extra, most buyers need the full 20% demanded in days of yore. To buy a $400,000 house, a family would now have to amass $80,000 in cash, up from $20,000 or less a few years ago.
Buyers also face higher interest rates, which allow them to borrow less. In mid-2004 a borrower with good credit could have qualified for a rate of 5.87% on a 30-year fixed $300,000 loan. That translates to a monthly payment of $1,774. Now, with the rate for the same loan at 6.57%, the same monthly payment could support a loan of just $278,500.
Back in the day, option ARMs and other exotic mortgages with low teaser rates helped struggling purchasers stretch to buy houses that they could not otherwise afford. Those deals have largely disappeared.
And while banks once allowed a homeowner's monthly principal, interest, taxes and insurance (PITI) to make up as much as 45% of a family's before-tax income, now buyers are restricted to using only 32% for a house payment. If PITI rises beyond that limit, banks consider the loan unaffordable and the family cannot receive a mortgage.
That limit boosts the amount of income a homeowner needs to purchase. Say your house has dropped from $425,000 to about $395,000. A couple of years ago a family needed an income of only $80,000 to buy. Now, even though the house costs less, a prospective buyer must have an income of $92,000.
Less expensive options
Rental prices are looking good in many areas. Christopher Mayer, a Columbia University real estate professor, recently found that in 11 of 16 top cities, renting is a better deal compared to buying than it has been historically.
The extra expense of owning was offset by rising house values - at least a few years ago. Now that new buyers can no longer count on steep appreciation, they have less incentive to buy.
And it's not as if rents are standing still while your house's price falls. "Competition from vacant houses or condos that people can't sell is driving down rental rates," says Hessam Nadji, managing director of research at Marcus & Millichap Real Estate Investment Services in Encino, Calif.
The big pinch
A house is only affordable if a homeowner can meet its monthly payment and have enough left over to live on. Incomes rose by about 5% in the first half of the year, but few people feel as though they're better off.
Americans spent an extra $165 billion, or 26% more, on gasoline and oil in the first six months than over the same period last year, and food bills rose by 7%. Without a doubt, most Americans feel pinched.
If you live in an area dominated by financial companies or car makers, two sectors shedding jobs in the current downturn, you may encounter even less appetite to buy.
If the economic turmoil continues, vacation destinations like Las Vegas or Orlando could suffer a drop-off in business that would leave prospective buyers with less in their pockets.
"Not only is the amount of money people have to spend on housing in decline but because a house is a risky asset, the amount they want to spend on it is falling too," says Michael Englund, chief economist at Action Economics, a forecasting firm.
Buyers being wary
That fear may be the biggest obstacle keeping buyers from knocking on your door. During the boom, people were willing to spend as much as they did on housing because they thought that they were putting away money for retirement or college. And they could draw on their equity for renovations or other goodies.
If homes rose in value faster than stocks, as they did for a few years, homeowners could console themselves that forgoing 401(k) contributions for high mortgage payments was a sensible strategy.
Few these days think of real estate as a safe place to invest, however. According to Gallup, only 27% of the population believe a home is their best long-term investment, down from 50% in 2002.
"Nearly a quarter of potential buyers are on the sidelines waiting for some form of encouragement," says Walter Molony, spokesman for the National Association of Realtors. Maybe they're looking for some sign that houses have truly become more affordable. The price declines haven't done that yet.
How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com.
Freddie Mac shakes up management
Troubled mortgage finance company says goodbye to three top executives.
September 26, 2008: 2:06 PM ET
WASHINGTON (AP) -- Three top executives are departing mortgage finance company Freddie Mac, which was seized by the government nearly three weeks ago.
The McLean, Va.-based company said its chief financial officer, Anthony Piszel; chief business officer, Patricia Cook and Timothy McBride, senior vice president for government and industry relations are leaving the company, effective immediately.
McBride's departure comes after the government banned all lobbying activities at Freddie Mac and its sibling company, Fannie Mae, as part of the Sept. 7 government takeover.
Freddie Mac named David Kellermann, previously the company's senior vice president and corporate controller, as acting chief financial officer, reporting directly to new CEO David Moffett.
The company said it would undertake an external search to fill the CFO position permanently.
The company said its business divisions will now report directly to Moffett, rather than the chief business officer, whose position is being eliminated. Freddie Mac is also establishing a new position of chief credit officer and named Raymond Romano to that role on an acting basis.
"I am excited about the changes we're making today, and believe they position us to best achieve the mission and goals of the company over the long term," Moffett said in a statement.
Earlier this month, the government seized control of Fannie (FNM, Fortune 500) and Freddie and agreed to pump as much as $200 billion into the firms to help keep them afloat.
Shares of Freddie Mac (FRE, Fortune 500) rose 2 cents to $1.88 in afternoon trading.
September 26, 2008: 2:06 PM ET
WASHINGTON (AP) -- Three top executives are departing mortgage finance company Freddie Mac, which was seized by the government nearly three weeks ago.
The McLean, Va.-based company said its chief financial officer, Anthony Piszel; chief business officer, Patricia Cook and Timothy McBride, senior vice president for government and industry relations are leaving the company, effective immediately.
McBride's departure comes after the government banned all lobbying activities at Freddie Mac and its sibling company, Fannie Mae, as part of the Sept. 7 government takeover.
Freddie Mac named David Kellermann, previously the company's senior vice president and corporate controller, as acting chief financial officer, reporting directly to new CEO David Moffett.
The company said it would undertake an external search to fill the CFO position permanently.
The company said its business divisions will now report directly to Moffett, rather than the chief business officer, whose position is being eliminated. Freddie Mac is also establishing a new position of chief credit officer and named Raymond Romano to that role on an acting basis.
"I am excited about the changes we're making today, and believe they position us to best achieve the mission and goals of the company over the long term," Moffett said in a statement.
Earlier this month, the government seized control of Fannie (FNM, Fortune 500) and Freddie and agreed to pump as much as $200 billion into the firms to help keep them afloat.
Shares of Freddie Mac (FRE, Fortune 500) rose 2 cents to $1.88 in afternoon trading.
Home prices slide 5.3% in July
James Lockhart, head of government housing agency, sees looser lending standards as way to recharge ailing housing market.
September 23, 2008: 11:19 AM EDT
WASHINGTON (AP) -- Home prices in July fell 5.3% compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.
The home price index was down 0.6% from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency.
The nationwide decline in home values coupled with reckless lending standards are the driving forces behind rising mortgage defaults and foreclosures, and the credit crisis that has shaken Wall Street to its core.
Lending standards
James Lockhart, the head of that agency, suggested Tuesday that mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) could loosen lending standards to help more homebuyers qualify for a loan and stabilize the market. The government took control of Fannie and Freddie earlier this month.
"I expect any changes to reflect both safe and sound business strategy and attentiveness to the [companies'] mission," Lockhart said Tuesday in prepared testimony before a Senate Banking Committee hearing. He also said that modifying loans for troubled borrowers should be a "high priority."
Lockhart also said he has directed the companies' new chief executives "to examine the underwriting standards and pricing" of Fannie Mae and Freddie Mac-backed loans.
Over the past year, the companies have tightened requirements and raised fees substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.
Government intervention
Lockhart explained the government had little option but to seize control of Fannie and Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.
Without new money, the only other option was to do stop doing new business and shed assets in a weak market. "That would have been disastrous for the mortgage markets and mortgage rates would have continued to move higher," Lockhart said.
But rates are creeping back up.
The national average rate on a 30-year, fixed rate mortgage rose to 6.26% on Monday up from 6.11% on Friday as details of the government's rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87% last Tuesday.
September 23, 2008: 11:19 AM EDT
WASHINGTON (AP) -- Home prices in July fell 5.3% compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.
The home price index was down 0.6% from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency.
The nationwide decline in home values coupled with reckless lending standards are the driving forces behind rising mortgage defaults and foreclosures, and the credit crisis that has shaken Wall Street to its core.
Lending standards
James Lockhart, the head of that agency, suggested Tuesday that mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) could loosen lending standards to help more homebuyers qualify for a loan and stabilize the market. The government took control of Fannie and Freddie earlier this month.
"I expect any changes to reflect both safe and sound business strategy and attentiveness to the [companies'] mission," Lockhart said Tuesday in prepared testimony before a Senate Banking Committee hearing. He also said that modifying loans for troubled borrowers should be a "high priority."
Lockhart also said he has directed the companies' new chief executives "to examine the underwriting standards and pricing" of Fannie Mae and Freddie Mac-backed loans.
Over the past year, the companies have tightened requirements and raised fees substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.
Government intervention
Lockhart explained the government had little option but to seize control of Fannie and Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.
Without new money, the only other option was to do stop doing new business and shed assets in a weak market. "That would have been disastrous for the mortgage markets and mortgage rates would have continued to move higher," Lockhart said.
But rates are creeping back up.
The national average rate on a 30-year, fixed rate mortgage rose to 6.26% on Monday up from 6.11% on Friday as details of the government's rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87% last Tuesday.
FDIC chief : Hopes of home loan bailout
Government could acquire troubled mortgage assets or provide guaranty for delinquent loans.
Last Updated: September 23, 2008: 12:56 PM ET
WASHINGTON (AP) -- As Congress moves on the financial bailout plan, restructuring of troubled mortgages should be part of the final package, the head of the Federal Deposit Insurance Corp. said Tuesday.
FDIC Chairman Sheila Bair said she hoped that changes on home loans "will be a feature of that."
Under the $700 billion proposed bailout plan, the government could acquire troubled mortgage assets or provide a guaranty for delinquent loans, buying them and removing them from the overall pool of mortgages, Bair suggested.
Mortgage finance giants Fannie Mae and Freddie Mac, taken over earlier this month by the government which is operating them under a conservatorship, bought mortgages from banks and other lenders and guaranteed them in exchange for fees.
"We're highly supportive of Treasury's initiative," Bair said, stressing the need for a restructuring of distressed home loans in a comprehensive, streamlined manner.
Bair was speaking at a Brookings Institution conference on housing. She also reaffirmed that she believes it unlikely that the FDIC would have to use its "wide flexibility" to borrow from the Treasury if needed.
IndyMac failure sets back fund
The failure in July of Pasadena, Calif.-based IndyMac Bank tipped the federal deposit insurance fund - now at around $45.2 billion - below the target minimum level set by Congress, but Bair has said the agency's plan to raise the premiums charged U.S. banks and thrifts to replenish the fund likely will be sufficient.
"I think actually the banking sector is holding up pretty well," Bair said. The recent collapse of major investment banks and the cataclysm on Wall Street has shown that "there is some virtue to regulation. There is some virtue to leverage constraints," she said.
Investment banks have had more lenient guidelines in how highly leveraged they could become, with a much higher ratio of debt to their capital than commercial banks regulated by the FDIC that have access to the deposit safety net.
Referring to Treasury Secretary Henry Paulson and the current tumultuous events, Bair said, "Hank's got a whole lot of other people knocking on his door. I don't want to add to people knocking on his door."
Last Updated: September 23, 2008: 12:56 PM ET
WASHINGTON (AP) -- As Congress moves on the financial bailout plan, restructuring of troubled mortgages should be part of the final package, the head of the Federal Deposit Insurance Corp. said Tuesday.
FDIC Chairman Sheila Bair said she hoped that changes on home loans "will be a feature of that."
Under the $700 billion proposed bailout plan, the government could acquire troubled mortgage assets or provide a guaranty for delinquent loans, buying them and removing them from the overall pool of mortgages, Bair suggested.
Mortgage finance giants Fannie Mae and Freddie Mac, taken over earlier this month by the government which is operating them under a conservatorship, bought mortgages from banks and other lenders and guaranteed them in exchange for fees.
"We're highly supportive of Treasury's initiative," Bair said, stressing the need for a restructuring of distressed home loans in a comprehensive, streamlined manner.
Bair was speaking at a Brookings Institution conference on housing. She also reaffirmed that she believes it unlikely that the FDIC would have to use its "wide flexibility" to borrow from the Treasury if needed.
IndyMac failure sets back fund
The failure in July of Pasadena, Calif.-based IndyMac Bank tipped the federal deposit insurance fund - now at around $45.2 billion - below the target minimum level set by Congress, but Bair has said the agency's plan to raise the premiums charged U.S. banks and thrifts to replenish the fund likely will be sufficient.
"I think actually the banking sector is holding up pretty well," Bair said. The recent collapse of major investment banks and the cataclysm on Wall Street has shown that "there is some virtue to regulation. There is some virtue to leverage constraints," she said.
Investment banks have had more lenient guidelines in how highly leveraged they could become, with a much higher ratio of debt to their capital than commercial banks regulated by the FDIC that have access to the deposit safety net.
Referring to Treasury Secretary Henry Paulson and the current tumultuous events, Bair said, "Hank's got a whole lot of other people knocking on his door. I don't want to add to people knocking on his door."
Sunday, September 28, 2008
Lenders to FHA: Thanks but no thanks for your help
Testifying before Congress, lenders praised the FHA's foreclosure prevention program but indicated that they'd prefer to handle their own mortgage workouts.
By Les Christie, CNNMoney.com staff writer
Last Updated: September 17, 2008: 4:01 PM EDT
NEW YORK (CNNMoney.com) -- As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.
But at a congressional hearing today in Washington, lenders didn't seem terribly enthusiastic about the program, dubbed Hope for Homeowners.
The program calls for lenders to voluntarily refinance delinquent mortgages by reducing loan balances to 90% of a home's current market value. The new loans will be backed by the FHA, which will be receive 5% of the new loan balance as a payment from the lender.
"I think lenders will be enthusiastic about the program but they have other things they'd like to do before they do a principal write down," said Brian Montgomery, Assistant Secretary for Housing at the Department of Housing and Urban Development.
One lender's representative, Marguerite Sheehan, Senior Vice President for JPMorganChase (JPM, Fortune 500) Home Lending, testified about the drawbacks of Hope for Homeowners.
"Under the Program, [investors in the loans] will take a loss when the principal balance is written down," she testified, adding that they won't have a chance to make up that loss if home prices recover. Sheehan added that Chase can make borrowers' monthly payments affordable simply by reducing their interest rates, rather than loan principle.
She added that JPMorganChase will use the program when it is deemed to be the best option for investors and borrowers, but that investors would prefer to use alternative loan workouts that give banks and investors the chance to share in any future home price appreciation. That's similar to the program recently announced by the FDIC for IndyMac Bank.
Banks stress their own efforts
Bank of America (BAC, Fortune 500) managing director Michael Gross said that the new FHA program was just one of many loan workout options that the bank is employing.
And he stressed that the bank's own efforts to save troubled loans, especially those B of A inherited when it bought Countrywide, have been successful. He said that the bank increased its loan modifications by 450% this past August compared with August of 2007.
When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.
And Mary Coffin, speaking for Wells Fargo (WFC, Fortune 500), testified that relatively few of her bank's borrowers owe more on their mortgages than their homes are worth, meaning they would be unlikely to benefit from the FHA's refinancing and write down program.
"We estimate as many as 30,000 to 40,000 customers who ... may qualify for Hope for Homeowners," she said, and committed to using the program in those cases.
Even Sheila Bair, who heads the Federal Deposit Insurance Corporation, praised the FHA program but said that few borrowers with IndyMac, the bank that the FDIC took over in July, would use it.
She said that her responsibility to maximize profits for the investors would probably limit the number of IndyMac borrowers who would take advantage of Hope for Homeowners
On its own, her agency has been very aggressive in heading off foreclosures at the troubled bank. About 60,000 of IndyMac's more than 740,000 mortgages are more than 60 days past due, according to Bair. The FDIC has already offered 7,400 of them workouts. Some 1,200 workouts have been completed, giving borrowers an average monthly savings of $430.
Bair also said that she thinks the FDIC's programs could be used as a model for other lenders to use in their workout efforts.
By Les Christie, CNNMoney.com staff writer
Last Updated: September 17, 2008: 4:01 PM EDT
NEW YORK (CNNMoney.com) -- As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.
But at a congressional hearing today in Washington, lenders didn't seem terribly enthusiastic about the program, dubbed Hope for Homeowners.
The program calls for lenders to voluntarily refinance delinquent mortgages by reducing loan balances to 90% of a home's current market value. The new loans will be backed by the FHA, which will be receive 5% of the new loan balance as a payment from the lender.
"I think lenders will be enthusiastic about the program but they have other things they'd like to do before they do a principal write down," said Brian Montgomery, Assistant Secretary for Housing at the Department of Housing and Urban Development.
One lender's representative, Marguerite Sheehan, Senior Vice President for JPMorganChase (JPM, Fortune 500) Home Lending, testified about the drawbacks of Hope for Homeowners.
"Under the Program, [investors in the loans] will take a loss when the principal balance is written down," she testified, adding that they won't have a chance to make up that loss if home prices recover. Sheehan added that Chase can make borrowers' monthly payments affordable simply by reducing their interest rates, rather than loan principle.
She added that JPMorganChase will use the program when it is deemed to be the best option for investors and borrowers, but that investors would prefer to use alternative loan workouts that give banks and investors the chance to share in any future home price appreciation. That's similar to the program recently announced by the FDIC for IndyMac Bank.
Banks stress their own efforts
Bank of America (BAC, Fortune 500) managing director Michael Gross said that the new FHA program was just one of many loan workout options that the bank is employing.
And he stressed that the bank's own efforts to save troubled loans, especially those B of A inherited when it bought Countrywide, have been successful. He said that the bank increased its loan modifications by 450% this past August compared with August of 2007.
When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.
And Mary Coffin, speaking for Wells Fargo (WFC, Fortune 500), testified that relatively few of her bank's borrowers owe more on their mortgages than their homes are worth, meaning they would be unlikely to benefit from the FHA's refinancing and write down program.
"We estimate as many as 30,000 to 40,000 customers who ... may qualify for Hope for Homeowners," she said, and committed to using the program in those cases.
Even Sheila Bair, who heads the Federal Deposit Insurance Corporation, praised the FHA program but said that few borrowers with IndyMac, the bank that the FDIC took over in July, would use it.
She said that her responsibility to maximize profits for the investors would probably limit the number of IndyMac borrowers who would take advantage of Hope for Homeowners
On its own, her agency has been very aggressive in heading off foreclosures at the troubled bank. About 60,000 of IndyMac's more than 740,000 mortgages are more than 60 days past due, according to Bair. The FDIC has already offered 7,400 of them workouts. Some 1,200 workouts have been completed, giving borrowers an average monthly savings of $430.
Bair also said that she thinks the FDIC's programs could be used as a model for other lenders to use in their workout efforts.
August foreclosures hit another high
There were 304,000 homes in some stage of default last month, and 91,000 families lost their homes.
By Les Christie, CNNMoney.com staff writer
Last Updated: September 18, 2008: 3:22 PM EDT
NEW YORK (CNNMoney.com) -- Foreclosures hit another record high in August: 304,000 homes were in default and 91,000 families lost their houses.
More than 770,000 homes have been repossessed by lenders since August 2007, when the credit crunch took hold.
The report from RealtyTrac, an online marketer of foreclosures properties, is the latest in string of bad news for housing.
Foreclosure filings of all kinds, including notices of defaults, notices of auctions and bank repossessions, grew 12% in August over July, and 27% compared with August 2007.
The 27% jump over last August represents a more modest year-over-year increase than in previous months, but that's only because the housing crisis was already underway in August 2007, which saw a big spike in foreclosures.
"In August 2008 the total number of U.S. properties that received foreclosure filings, as well as the national foreclosure rate, were both the highest we've seen in any month since we began issuing our report in January 2005," RealtyTrac CEO James Saccacio said in a statement.
Fannie Mae (FNM, Fortune 500) chief economist Doug Duncan isn't surprised by the swelling numbers. "It's been my view for a long time that foreclosures won't peak until the last three months of 2008," he said.
And now that the nation in a recessionary economy, with job losses exceeding 400,000 a month, Duncan speculates that the foreclosure crisis may be drawn out even longer.
"We've been saying that the foreclosure trend has not yet peaked," said Doug Robinson, a spokesman for the foreclosure prevention organization NeighborWorks America. "Before it was a subprime problem," he said. "Now, it's everybody's problem."
Putting filings on hold
The August figures would have been worse, had it not been for new legislation passed in several states, including Maryland and Massachusetts, designed to make lenders wait before filing notices of default.
In Massachusetts, for example, a 90-day waiting period went into effect on May 1. Every Massachusetts homeowner now has to be notified of their lenders's intention to file a notice of default against them, and they get a 90 day window during which they can attempt to bring their payments up to date. Lenders are prohibited from filing a first notice of default until after that period.
The impact has been immediate. RealtyTrac recorded no new notices of initial default for the state during August. That helped drive down total foreclosure filings in the state by more than 46% compared with last year.
Other states didn't fare as well. Nevada once again had the highest rate of filings in the nation. One of every 91 households, or 11,706 families, received a foreclosure notice of some kind during the month, and more than 4,000 others lost their homes.
More than 101,000 Californians received foreclosure notices, which comes to about one in every 130 households, while more than 33,000 people there lost their homes. Arizona had the third-highest rate with one out of every 182 households in default.
All of these states saw tremendous home price run-ups during the boom, which meant that many buyers had to use exotic, risky loans in order to be able to afford a home. These mortgages include subprime, hybrid adjustable rate mortgages (ARMs) that feature two or three years of low introductory rates before the loans reset to higher, often unaffordable levels and cause borrowers to default.
In some of the other hard hit states, such as Michigan (which had one filing for every 332 households) and Ohio (one filing per 444 households), which never saw a housing boom, delinquencies are being driven by fundamental economic woes like unemployment, rather than pricey real estate.
Eight of the top 10 worst performing metro areas were in California. Stockton, in the Central Valley, had the highest rate in the nation with one in every 50 households receiving a foreclosure filing during the month.
"You go up and down the central part of [California] and that's where you're seeing the carnage," said Rick Sharga, RealtyTrac's director of marketing. Home sales are actually up in many of these cities, the prices have dropped, often precipitously. "What's selling is the bank owned properties," he said.
By Les Christie, CNNMoney.com staff writer
Last Updated: September 18, 2008: 3:22 PM EDT
NEW YORK (CNNMoney.com) -- Foreclosures hit another record high in August: 304,000 homes were in default and 91,000 families lost their houses.
More than 770,000 homes have been repossessed by lenders since August 2007, when the credit crunch took hold.
The report from RealtyTrac, an online marketer of foreclosures properties, is the latest in string of bad news for housing.
Foreclosure filings of all kinds, including notices of defaults, notices of auctions and bank repossessions, grew 12% in August over July, and 27% compared with August 2007.
The 27% jump over last August represents a more modest year-over-year increase than in previous months, but that's only because the housing crisis was already underway in August 2007, which saw a big spike in foreclosures.
"In August 2008 the total number of U.S. properties that received foreclosure filings, as well as the national foreclosure rate, were both the highest we've seen in any month since we began issuing our report in January 2005," RealtyTrac CEO James Saccacio said in a statement.
Fannie Mae (FNM, Fortune 500) chief economist Doug Duncan isn't surprised by the swelling numbers. "It's been my view for a long time that foreclosures won't peak until the last three months of 2008," he said.
And now that the nation in a recessionary economy, with job losses exceeding 400,000 a month, Duncan speculates that the foreclosure crisis may be drawn out even longer.
"We've been saying that the foreclosure trend has not yet peaked," said Doug Robinson, a spokesman for the foreclosure prevention organization NeighborWorks America. "Before it was a subprime problem," he said. "Now, it's everybody's problem."
Putting filings on hold
The August figures would have been worse, had it not been for new legislation passed in several states, including Maryland and Massachusetts, designed to make lenders wait before filing notices of default.
In Massachusetts, for example, a 90-day waiting period went into effect on May 1. Every Massachusetts homeowner now has to be notified of their lenders's intention to file a notice of default against them, and they get a 90 day window during which they can attempt to bring their payments up to date. Lenders are prohibited from filing a first notice of default until after that period.
The impact has been immediate. RealtyTrac recorded no new notices of initial default for the state during August. That helped drive down total foreclosure filings in the state by more than 46% compared with last year.
Other states didn't fare as well. Nevada once again had the highest rate of filings in the nation. One of every 91 households, or 11,706 families, received a foreclosure notice of some kind during the month, and more than 4,000 others lost their homes.
More than 101,000 Californians received foreclosure notices, which comes to about one in every 130 households, while more than 33,000 people there lost their homes. Arizona had the third-highest rate with one out of every 182 households in default.
All of these states saw tremendous home price run-ups during the boom, which meant that many buyers had to use exotic, risky loans in order to be able to afford a home. These mortgages include subprime, hybrid adjustable rate mortgages (ARMs) that feature two or three years of low introductory rates before the loans reset to higher, often unaffordable levels and cause borrowers to default.
In some of the other hard hit states, such as Michigan (which had one filing for every 332 households) and Ohio (one filing per 444 households), which never saw a housing boom, delinquencies are being driven by fundamental economic woes like unemployment, rather than pricey real estate.
Eight of the top 10 worst performing metro areas were in California. Stockton, in the Central Valley, had the highest rate in the nation with one in every 50 households receiving a foreclosure filing during the month.
"You go up and down the central part of [California] and that's where you're seeing the carnage," said Rick Sharga, RealtyTrac's director of marketing. Home sales are actually up in many of these cities, the prices have dropped, often precipitously. "What's selling is the bank owned properties," he said.
New home construction at 17-year low
The building rate falls more than expected - to 6.2% - in August, while building permits fall nearly 9%.
Last Updated: September 18, 2008: 3:26 PM EDT
WASHINGTON (AP) -- Construction of new homes and apartments fell to its lowest level in 17 years last month, showing the country is still gripped by a severe housing downturn that has triggered billions of dollars of losses and is reshaping the structure of U.S. finance.
The Commerce Department reported Wednesday that housing construction dropped a surprise 6.2% last month to a seasonally adjusted annual rate of 895,000 units. That's the slowest building pace since January 1991, another period when housing was going through a painful correction.
The decline is larger than the 1.6% drop analysts expected and showed weakness in all the country except the West.
The data was bound to shake Wall Street, already rattled by a crisis in the financial system. Stock futures pointed to a lower opening.
The housing downturn has depressed overall economic activity and pushed the country close to a recession. Thousands of construction jobs have been lost, contributing to an economic slowdown that has pushed the overall unemployment rate to a five-year high of 6.1% in August.
Housing woes reshape Wall Street
There have been steep declines in home prices in much of the country. This has helped trigger record levels of mortgage defaults, dumping more homes on an already glutted market and further depressing prices. The billions of dollars of losses on mortgage investments have sent shockwaves through the country's financial sector, triggering the biggest restructuring on Wall Street since the Great Depression.
In the past 10 days, the government has seized control of the country's two biggest mortgage finance companies, Fannie Mae and Freddie Mac, and late Tuesday announced it was providing an $85 billion emergency loan to the country's largest insurance company, American International Group Inc. All three titans were brought low by soaring losses on mortgage investments.
For August, the 6.2% drop in housing construction reflected a 1.9% decline in single-family construction, which fell to an annual rate of 630,000 units. Construction of multifamily units fell by 15.1% to an annual rate of 265,000 units.
Northeast building activity falls the most
Building activity was down in all parts of the country outside of the West. Construction fell by 14.5% in the Northeast and was down 13.6% in the Midwest and 7.4% in the South.
All the declines left construction activity 33.1% below the level of a year ago. Analysts believe that construction will continue falling for many more months as builders struggle to reduce the backlog of unsold new homes in a market that continues to slump.
Building permits, considered a good indicator of future activity, dropped 8.9% in August to an annual rate of 854,000 units.
Last Updated: September 18, 2008: 3:26 PM EDT
WASHINGTON (AP) -- Construction of new homes and apartments fell to its lowest level in 17 years last month, showing the country is still gripped by a severe housing downturn that has triggered billions of dollars of losses and is reshaping the structure of U.S. finance.
The Commerce Department reported Wednesday that housing construction dropped a surprise 6.2% last month to a seasonally adjusted annual rate of 895,000 units. That's the slowest building pace since January 1991, another period when housing was going through a painful correction.
The decline is larger than the 1.6% drop analysts expected and showed weakness in all the country except the West.
The data was bound to shake Wall Street, already rattled by a crisis in the financial system. Stock futures pointed to a lower opening.
The housing downturn has depressed overall economic activity and pushed the country close to a recession. Thousands of construction jobs have been lost, contributing to an economic slowdown that has pushed the overall unemployment rate to a five-year high of 6.1% in August.
Housing woes reshape Wall Street
There have been steep declines in home prices in much of the country. This has helped trigger record levels of mortgage defaults, dumping more homes on an already glutted market and further depressing prices. The billions of dollars of losses on mortgage investments have sent shockwaves through the country's financial sector, triggering the biggest restructuring on Wall Street since the Great Depression.
In the past 10 days, the government has seized control of the country's two biggest mortgage finance companies, Fannie Mae and Freddie Mac, and late Tuesday announced it was providing an $85 billion emergency loan to the country's largest insurance company, American International Group Inc. All three titans were brought low by soaring losses on mortgage investments.
For August, the 6.2% drop in housing construction reflected a 1.9% decline in single-family construction, which fell to an annual rate of 630,000 units. Construction of multifamily units fell by 15.1% to an annual rate of 265,000 units.
Northeast building activity falls the most
Building activity was down in all parts of the country outside of the West. Construction fell by 14.5% in the Northeast and was down 13.6% in the Midwest and 7.4% in the South.
All the declines left construction activity 33.1% below the level of a year ago. Analysts believe that construction will continue falling for many more months as builders struggle to reduce the backlog of unsold new homes in a market that continues to slump.
Building permits, considered a good indicator of future activity, dropped 8.9% in August to an annual rate of 854,000 units.
Builder sentiment rises from record low
Survey of home developers doesn't reflect fall in mortgage rates from bailout of mortgage-finance giants or turmoil on Wall Street.
Last Updated: September 18, 2008: 3:29 PM EDT
WASHINGTON (AP) -- Battered housing developers are getting a bit more optimistic about their prospects for the next six months, an index of the sector's confidence showed Tuesday.
The National Association of Home Builders/Wells Fargo housing market index rose two points to 18 this month from an all-time low of 16 in July and August.
The survey was taken in the first 10 days of September, and for the most part doesn't reflect the fall in mortgage rates since the government's takeover of mortgage finance companies Fannie Mae and Freddie Mac. It also doesn't take into account this week's Wall Street turmoil, which may push rates downward as nervous investors move into government bonds.
Immediately after the Fannie and Freddie seizure, "the positive impact on mortgage rates was probably not apparent to many builders," the trade group's chief economist, David Seiders, said in an interview.
Average rates on 30-year fixed-rate mortgages dipped to 5.93% last week, down from 6.35% on the Thursday before the takeover, according to Freddie Mac's weekly survey. Rates had been bouncing between 6% and 6.5% since late May.
Weak housing market offers discounts
Builders have been slammed by a combination of falling home prices, soaring foreclosures and an oversupply of unsold homes languishing on the market. But the industry is growing hopeful that consumers will finally take advantage of deeply discounted prices.
Another key reason for the improving outlook: a temporary $7,500 tax credit for first-time homebuyers passed by Congress this summer. The credit essentially works out to a 15-year, interest-free loan.
Many in the industry "are sensing that home sales are nearing a turning point," Sandy Dunn, a homebuilder from Point Pleasant, W.Va. and the trade group's president, said in a statement. New home sales likely will stabilize by year-end, Seiders predicts.
All three components of the index improved, with the largest gain in the index of builders' sales expectations over the next six months. That gauge rose by six points to 30.
Gains in builder confidence were seen across the United States, with the largest gain in the Northeast, where confidence rose by six points.
Homebuyers take another hit
Still, many in the industry are worried about the cancellation of popular programs that let sellers channel down payment money to cash-strapped homebuyers via charities. Those seller-financed down payment assistance programs were eliminated in the housing bill passed over the summer because homebuyers who used them had high default rates.
The latest housing market index reflects a survey of 461 residential developers nationwide, tracking builders' perceptions of current market conditions and expectations for home sales over the next six months.
Index readings higher than 50 indicate positive sentiment about the market. The seasonally adjusted index has been below 50 since May 2006 and has been below 20 since April.
Last Updated: September 18, 2008: 3:29 PM EDT
WASHINGTON (AP) -- Battered housing developers are getting a bit more optimistic about their prospects for the next six months, an index of the sector's confidence showed Tuesday.
The National Association of Home Builders/Wells Fargo housing market index rose two points to 18 this month from an all-time low of 16 in July and August.
The survey was taken in the first 10 days of September, and for the most part doesn't reflect the fall in mortgage rates since the government's takeover of mortgage finance companies Fannie Mae and Freddie Mac. It also doesn't take into account this week's Wall Street turmoil, which may push rates downward as nervous investors move into government bonds.
Immediately after the Fannie and Freddie seizure, "the positive impact on mortgage rates was probably not apparent to many builders," the trade group's chief economist, David Seiders, said in an interview.
Average rates on 30-year fixed-rate mortgages dipped to 5.93% last week, down from 6.35% on the Thursday before the takeover, according to Freddie Mac's weekly survey. Rates had been bouncing between 6% and 6.5% since late May.
Weak housing market offers discounts
Builders have been slammed by a combination of falling home prices, soaring foreclosures and an oversupply of unsold homes languishing on the market. But the industry is growing hopeful that consumers will finally take advantage of deeply discounted prices.
Another key reason for the improving outlook: a temporary $7,500 tax credit for first-time homebuyers passed by Congress this summer. The credit essentially works out to a 15-year, interest-free loan.
Many in the industry "are sensing that home sales are nearing a turning point," Sandy Dunn, a homebuilder from Point Pleasant, W.Va. and the trade group's president, said in a statement. New home sales likely will stabilize by year-end, Seiders predicts.
All three components of the index improved, with the largest gain in the index of builders' sales expectations over the next six months. That gauge rose by six points to 30.
Gains in builder confidence were seen across the United States, with the largest gain in the Northeast, where confidence rose by six points.
Homebuyers take another hit
Still, many in the industry are worried about the cancellation of popular programs that let sellers channel down payment money to cash-strapped homebuyers via charities. Those seller-financed down payment assistance programs were eliminated in the housing bill passed over the summer because homebuyers who used them had high default rates.
The latest housing market index reflects a survey of 461 residential developers nationwide, tracking builders' perceptions of current market conditions and expectations for home sales over the next six months.
Index readings higher than 50 indicate positive sentiment about the market. The seasonally adjusted index has been below 50 since May 2006 and has been below 20 since April.
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