Express Mortgage Mortgage Rants and Raves

Time to start buying real estate...

Dow down about 1700 points, plus or minus since the bailout bill... real estate sales up 86% in August.

Time to give me a call..   916-677-4725

The Fed made two significant moves in the last 24 hours.   Yesterday the Federal Reserve announced the unprecedented move of offering major companies access to their discount window, to borrow directly from the Federal Reserve (truly making them a lender of last resort), and bypass the major banks.

The major banks continue to hoard cash and will not put it back into circulation, no doubt frustrating the Federal Reserve.   It may be time to call for aggregious penalties for member banks that borrow from the Fed (whose motivation is to stimulate the economy), but only put those proceeds into their own coffers.

Today the Federal Reserve Board of Governors voted to reduce the Fed Funds target rate from 2.00% to 1.50%.   So far, this has only moved mortgage rates a net 25 bps in price for the day, or a rate adjustment of about 0.065% to the end customer.

Mortgage Backed Securities – these would be basically Fannie Mae’s, Ginnie Mae’s and Freddie Mac bonds, mostly sold to mutual funds. The loans are plugged into large pools of say 1000 prime or insured mortgages (Ginnie Mae perhaps), and then the pool is carved up into shares and sold on the bond market. One share is usually about $10 to $40, so it is significantly sliced & diced. These usually have a true default rate of about 2%, and probably shouldn’t change much. The danger over the last year has been the people just walking away from their houses due to loss of value – not a failure of underwriting standards. There isn’t really a way this could have been foreseen. Ginnie Mae’s continue to perform very well, incidentally, as any default is insured by the government, and the borrowers are disclosed initially that if they default, the shortfall can be garnished from their wages and withheld from income tax returns until paid in full back to the government or they may actually break your legs...

Mortgage Backed Securities are what provide the money for the mortgage industry to write loans in the United States.. by about 4 to 1 from all other sources.

If you are interested in a well-performing MBS fund, check out the Vanguard Ginnie Mae fund.

The Subprime Meltdown has been going on for well over a year... and Congress basically had done nothing. 

What happened on September 19, 2008, scared the daylights out of the government.

In a single day, on September 19, 2008, a record $140 Billion was withdrawn from US Money Market accounts... long considered the safest of safe investments.

Investors were moving money from Money Markets to US Treasuries so rapidly, that it rolled the Treasury yield down to 0... they didn't care if they got any return at all, they just didn't want to lose principal and had lost faith in the dollar.

Money Markets provide cash for short term loans between banks, top credit institutions, and the like.  The rapid withdrawals evaporated liquid capital available to major banks and triggered essentially a run on the US financial system.   It threatened to collapse the economy.

Banks have been hoarding cash.. too scared to lend to each other, or their customers.. they normally have around $2 Billion in cash on hand, and currently have an unprecedented $200 Billion, which should be circulating in the economy (and now is not).

The government wasn't afraid of a run on the banks by depositors, but by corporate institutions, and threatened to collapse the banking system.

The media has done a fine job of distorting what the Economic Stabilization Act is intended to do, and how it will accomplish the mission.

The following is the purpose of the program, and the authority empowered into those to operate it:

"Purpose" - Provide authority to the Treasury Secretary to restore liquidity and stability to the US financial system and to ensure the economic well-being of Americans.

Title I. Troubled Assets Relief Program (TARP)

- Authorizes the Secretary to establish a "TARP" to purchase troubled assets from the financial institutions. Establishes an Office of Financial Stability within the Treasury Dept. to implement the TARP in consultation with the Board of Governors of the Federal Reserve. Includes provisions to prevent unjust enrichment by participants in the program and congressional oversight.

- Insurance of Troubled Assets - If the Secretary establishes the TARP program, the Secretary is also required to establish a program to guarantee troubled assets.  The Secretary is required to establish risk-based premiums for the guarantees sufficient to cover any such claims.

- In using the authority, the Secretary is required to take a number of considerations into account, including risk to tax payers and the national debt, providing stability to financial systems, and preserving homeownership. The Secretary is also required to gauge the longterm viability of the financial institution in determining whether or not to purchase assets.

- Financial Stability Oversight Board - Congressional oversight intended to review actions of the Secretary to protect taxpayers. The board is comprised fo the Chairman of the Board of Governors of the Federal Reserve, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, Chairman of the Securities and Exchange Committee, and the Secretary of HUD.

- Reporting - monthly reports of exercise of authority, Tranche Reports for each $50 billion spent including a list of transactions and a description of the pricing mechanism used, and Regulatory modernization reports to prevent future problems.

- Rights; Management; Sale of Assets - Establishes the right of the Secretary to exercise authority at any time, and provides the Secretary with the authority to manage troubled assets, including the ability to determine the terms and conditions associated with the disposition of troubled assets. Requires all profits from the sale of assets to be applied toward the national debt.

- Contacting Procedures - allows the Secretary to waive provisions of the Federal Acquisition Regulation which requires a compelling reason to purchase assets.

- Conflicts of Interest - The Secretary is required to issue regulations to deal with conflicts of interest in the administration of the program. 

- Foreclosure Mitigation Efforts - For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures.  Requires the Secreatary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to taxpayers.

- Assistance to Homeowners - Requires the federal entities that hold mortgages and mortgage backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures.  Requires federal entities to work with servicers to minimize foreclosure, encourage loan modifications, and consider present value to taxpayers.

- Executive Compensation and Corporate Governance - Provides that the Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets.   Where the Secretary buys assets directly, the institution must observe standards limiting incentives, allowing clawback and prohibiting golden parachutes.  When the Treasury buys assets at auction, an institution that sells more than $300 million in assets is subject to additional taxes, including a 20% excise tax on Golden Parachute payments to executives triggered by events other than retirement, and limits tax deduction to compensation up to $500,000.

- Coordination With Foreign Authorities - Requires the Secretary to coordinate with foreign authorities and central banks to establish programs similar to TARP.

- Minimize Long Term Costs - In order to cover losses and administrative costs, as well as allow the taxpayer to share in equity appreciation, requires that the Treasury receive non-voting warrants from participating financial institutions.

- Market Transparency - 48 hour reporting requirement - the Secretary is required within 2 business days of exercising authority under the Act to publicly disclose all details of a transaction.

- Graduated Authority to Purchase - Authorizes the full $700 Billion for implementation of TARP.  Allows the Secreatary to immediately use up to $250 Billion. Under Presidential certification of need, the Secreatary can accesas an additional $100 Billion.  The final $350 Billion may be accessed if the President transmits a written report to Congress requesting such authority.  The Secretary may then access this authority if Congress within 15 days does not deny such authority by resolution.

- Oversight and Audits - Requires the Comptroller General of the United States to oversee and audit the program.

- Study and Report on Margin Authority - Directs the comptroller general to provide a report to congress on the role in which leverage and sudden deleveraging played in the financial crisis.

- Funding - Provides the authorization and appropriation of funds.

- Judicial Review - Provides the standards for judicial review, including injunctive and other relief.

- Termination of Authority  - Provides the authorities to purchase and guarantee assets terminate on December 31, 2009.

- Special Inspector General for Asset Relief Program - Establishes the Office of the Special Inspector General for the Troubled Asset Relief Program to conduct, supervise, and coordinate audits of the program.

- Increase in the Statutory Limit on the Public Debt - Allows debt ceiling increase from $10 Trillion to $11.3 Trillion.

- Credit Reform - Details the manner in which the legislation will be treated for budgetary purposes under the Federal Credit Reform Act

- H4H (Hope for Homeowners) Amendments - Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.

- Congressional Oversight Panel - Establishes a Congressional Oversight Panel to review the state of the financial markets, the regulatory system, and the use of the authority under TARP.

- FDIC Enforcement Enhancement - Prohibits the Misuse of the FDIC logo and name to falsely represent that deposits are insured. 

- Cooperation with the FBI - Requires any federal financial regulatory agency to cooperate with the FBI and other law enforcement agencies investigating fraud, misrepresentation, and malfeasance with respect to development, adverisement, and sale of financial products.

- Acceleration of Effective Date - Provides the Federal Reserve with the ability to pay interest on reserves.

- Disclosures on Exercise of Loan Authority - Requires the Federal Reserve to provide a detailed report to Congress, in an expedited manner, upon the use of its emergency lending authority.

- Technical Corrections - Makes technical corrections to the Truth in Lending Act

- Exchange Stabilization Fund Reimbursement - Protects the Exchange Stabilization Fund from incurring any losses due to the temporary money market mutual fund guarantee by requiring the program created in this Act to reimburse the Fund.

- Authority to Suspend Mark to Market Accounting  - Restates the Securities and Exchange Commission's authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and sufficiently protects investors.

- Study on Mark to Market Accounting - Requires the SEC in consultation with the Federal Reserve and Treasury to conduct a study on mark-to-market accounting standards including the effect on balance sheet, impact on the quality of financial information, and other matters and report to Congress within 90 days.

- Recoupment - Requires that in 5 years, the President submit to Congress a proposal that recoups from the Financial Industry any projected losses to the taxpayer.

- Temporary Increase in Deposit and Share Coverage Insurance -  Temporarily increases the FDIC and the National Credit Union Share Insurance Fund limits from $100,000 to $250,000.

Title II - Budget Related Provisions

- Information for Congressional Support Agencies - Requires the information used by the Treasury Secretary in connection with activities under this Act be made available to the CBO and JCT.

- Analysis in the President's Budget - Requires that the President include in the annual budget submission to the Congress certain analyses and estimates related to costs incurred as a result of the Act

- Emergency Treatment - Specifies the scoring of the Act for purposes of budget enforcement

Title III - Tax Provisions

- Gain or Loss from the Sale of Exchagne or Certain Preferred Stock - Details certain changes in the tax treatment of losses on the preferred stock of certain GSEs for financial institutions

- Special Rules for Tax Treatment of Executive Compensation of Employers Participating in the Troubled Assets Relief Program - Applies limits on executive compensation and golden parachutes for certain executives of employers that participate in the auction program

- Exclusion of Income From Discharge of Qualified Principa Residence Indebtedness - Extends the current tax law foregiveness on the cancellation of mortgage debt

The country's major lenders... the same ones being bailed out in the "troubled asset program'...  seem to be making it much more difficult for the Housing Bill programs to help troubled homeowners.

Apparently, they are not liking many provisions in the bill, specifically the ones allowing the FHA to short-refinance underwater mortgages, probably held by these lenders.  This is apparent that the taxpayers are good enough to hand them corporate welfare, but not good enough so that the banks would rather foreclose and take a loss, rather than work out a way for the homeowner to stay in the home they purchased.

By significantly raising fees and interest rates offered on FHA loans... it makes it just as difficult for the homeowners to look at that as a solution, and continues to diminish alternatives.

We can also bet that the homeowner falling behind on the Chase home loan, is also probably behind on the Chase credit card, and their attack dogs are relentless, I'm sure.

Congress needs to wake up, and look at the horrible anti-American and anti-human behavior of these banks... while I am a supporter of the fact that we need to get out of this mess, in addition to regulating compensation of their executives, maybe we need to regulate their behavior in the name of common decency. 

We started out this week with Wall Street in a panic, and then financial stocks advanced regularly through the week building up to a hope that the government would yet pass a different version of the bill... then... nothing...

Once the bill passed, Wall Street dropped like a stone.  Seems like you can't win for losing.

While Middle America decrys the bailout bill as "bailing out the rich", let's take a real look at what the mortgage meltdown has done for California...

In Sacramento, most houses lost a net value, of about $175,000 as an average.   In almost every zipcode in the region, prices now are about $175,000 less, than before the meltdown.  Most of this is due to a lack of financing more than any other factor.  We are seeing the same thing in the car business... at a time with $4.00 / gallon fuel, we would expect cars to be flying off the shelves in a change from thirsty trucks to something smaller... but we are not seeing that.  With the lack of financing for cars, new car dealerships are failing right and left, and Ford (F), as of today, is trading at $4.75 / share.   GM & Chrysler are no better.

Let's look at the drop of $175,000... that is more than the average house price in many cities in the midwest, so of course, it's easier to be critical about either a disease, or cure, when it's not happening on your street.

How much money have Californians, the wealthiest state in the US, given in relief to hurricane ravaged areas of the south, tornadoes in the midwest, or other catastrophes?   How many times do we see search & rescue teams from the Sierras, the best in the nation, leave immediately to help elsewhere when needed, and frequently ahead of even being asked?

How many people in the US benefit directly from the innovation of Silicon Valley, or what would they do without the stream of entertainment from Hollywood?

I don't agree with the criticism that has been mounted on Ben Bernanke.  After all, he inherited most of the mess, and what many people don't realize is that he is an expert in economic history.  There are few people in the US that rival his knowledge of the Great Depression, or any recession since then.  Every action he has taken, has been based on a wealth of knowledge with regards to triggers for significant downturns in the past.

Why are these actions so important?   Well, let's look at one basic fact - the Baby Boomers are retiring, and they didn't have as many kids as they should have - so there simply are not enough investors on Wall Street to buy the securities their 401k's and mutual funds are selling...

Inevitably, we will probably see Wall Street languish in the duldrums for quite a while.