Financial Market Unsure About Size of Mortgage Disaster
The AP is reporting some troubling news this morning:
The U.S. mortgage-lending business is a sprawling, varied enterprise that no one regulator oversees, making it impossible to know how many mortgages or lenders not insured by the government are in trouble.
Even worse, no public records are available to show who holds the trillions of dollars worth of mortgages that investment banks pooled and sold as securities to investors around the globe. The value of many of those securities plunge as mortgage defaults soar.
With an unregulated industry, that formally gave massive numbers of loans to borrowers with poor credit, no down payment, and often, no way of documenting their income, is there any wonder as to why disaster hit?
Such a mess makes this homeowner seriously consider his options to pay off mortgage loans of his own, so as to be done with the whole corrupt industry once and for all.
Really, one must wonder how the lenders managed to stay in business as long as they have, considering all the mistakes that have thus far been made throughout the industry.
Mortgage Insurers Hurt by Defaults
Triad Guaranty, in recent filings, has made known its intention to tap an $80 million credit line in an effort to preempt any cash shortages they might see amid (meaning they can barely afford the…) rising defaults on U.S. home loans.
Bloomberg, making note of Triad’s huge decline in value on the stock market, proceeded to quote:
“We’re seeing an increase in defaults in Florida and California along with the rest of the industry, but this is more to demonstrate our financial flexibility than to meet any immediate need,” Triad Chief Financial Officer Ken Jones said in an interview.
The company placed the funds in short-term investments, the filing said.
While being foreclosed upon generally hurts banks the worst, there are options to homeowners that wish to keep their homes. One such option is to explore the use of a Home equity line of credit.
Homeowners can often manage the payments required on their home by creatively using funds from a home equity line to cover months when they fall behind, and pay extra to their mortgage when they can afford to do so.
Sales of Expensive Homes Plummet
As a result of fewer jumbo loans (loans over $417,000) many homeowners are now unable to obtain mortgage financing in order to purchase a home over $500,000. Such problems with financing are making one of the busiest times of year for home buying much less successful.
The AP writes:
Banks until recently were able to offload the risk of many jumbo mortgages by selling the loans to investors. But now, as investors burned by the subprime debacle have become extremely picky about what they will buy, banks are having to keep more of these loans on their own books and as a result are charging higher rates.
Some lenders _ such as Countrywide Financial Corp. _ have made a point of saying they’re now most focused on making loans that can be guaranteed by Fannie and Freddie.
(Fannie and Freddie are government backed/packaged loans)
With such a decline in lending availability, homeowners are forced to save more, or build equity in their homes through methods, such as here in Utah, use of a Utah home equity loan.
A buildup of equity allows for the purchase of a more expensive home, and makes large down payments affordable.
Slow Crash is a Myth
The fact that bankers and large investment firms have lost huge volumes of money in the recent housing decline, indicates that this crash was a surprise for everyone.
Just as there is often little time to react prior to a car or other vehicle’s crash, the latest financial trouble has left the country severely injured and unprepared.
Even the Fed is unsure how to react, with their daze being mentioned in article by Eric Janszen:
If slashing the discount rate half a percent ten days after hoping that the markets might self-correct appears flip floppy, remember that the Fed considered rate hikes as recently as May when inflation remained the Fed’s predominant concern. Investors have reason to worry that this Fed does not know how to apply, now that the fire is burning, what it learned during the drills.
With the crash comes the question many homeowners are asking: “What Now?” Receiving a 2nd mortgage is now difficult to accomplish, and will likely get increasingly so as more lenders close, rates increase, and the few lenders that remain tighten their belts to avoid ever being hurt again.
No Paychecks for First Magnus Employees.
First Magnus Financial Corp., one of the victims of the recent lending decline, is still not issuing paychecks to its former employees. The Tucson based mortgage lender recently announced the creation of an assistance fund of $1 million in a small attempt to assist the many workers left jobless and penniless.
This last Thursday, almost 6,000 of their employees across the nation learned that they were now unemployed, and apparently, unpaid.
The creation of this fund, with a whopping $200 per employee, will likely do little to stem the problems resulting from sudden job loss, as well as unpaid paychecks.
The company was forced to shut down operations last week because it could no longer sell the loans it originates on the secondary market. The release said shareholders and executives of the company have pledged more than $1 million of their own money to assist Tucson-based former employees who “face significant hardship as a result of the payroll delay.”
Such a terrible situation for the employees reminds everyone of the importance there is to get out of debt and save for a rainy day. Should job loss occur, individuals need to be able to afford to survive until another job can be found, something that can be particularly hard living paycheck to paycheck.
CountryWide Exposed
The Motley Fool has written regarding the many transgressions of easy finance lender CountryWide, with the following:
Among the reported transgressions: keeping borrower cash holdings out of the subprime system software in order to bias the sales pitch toward pricier loans. Charging exorbitant document delivery fees. Oh, and something the IRS might like to look into: Refusing to send contract loan writers 1099 forms.
With such taking place, it seems like no surprise that lenders such as CountryWide are now finding their greed to have failed them in their business.
One thing borrowers may wish to consider, is carefully documenting all ’shady’ practices observed when receiving their first or second mortgage loans, so as to protect themselves should they every find a problem with the loan they receive.
Sadly, lenders such as CountryWide seem to have sacrificed honest business practices in an effort to increase profits. One would certainly hope that punishment, rather than a bailout becomes their reward for such action.
Consumers on the other hand, will hopefully learn from the risks found in lending, and be wiser the next time they deal with a lender.
Lenders Still Not Safe Investments
Reuters is reporting that lenders are increasingly having problems obtaining credit with which to purchase and issue further mortgage loans. Finding themselves unable to payoff mortgage debt, many financial firms are making grim predictions for the future of such lenders.
In Reuter’s report on the downgraded status of many lenders they write:
Merrill Lynch, meanwhile, downgraded Bear Stearns Citigroup Inc and Lehman Brothers Holdings to “neutral” from “buy” on Tuesday and lowered estimates for the banks’ earnings, due to credit and mortgage market troubles.
“The only thing that is certain is that more uncertainties in the direction of asset prices and volatility are on their way,” Bank Julius Baer said in a report.
Stating that things are bad and likely to get worse certainly seems like a safe bet to us. A statement that perhaps, should not have taken quite so long to be made. As investors are finding, having anything invested in mortgage lenders is a losing prospect at this current time.
IndyMac Mortgage Lender Announces Focus on Prime Lending
According to the LA Times:
IndyMac Bancorp Inc., one of the country’s 10 largest mortgage lenders, outlined Tuesday a drastic strategic transformation in response to radical changes in the industry and said its loan volume would drop considerably as a result.
At the same time, however, the Pasadena-based savings and loan sent a signal that the market for “jumbo” mortgages — large loans that are especially common in California and other high-priced states — might be returning to normal.
As lenders continue to shy away from jumbo and sub prime lending, one looking to perhaps move up to a more expensive home could explore a home equity line of credit as a manageable means of accomplishing such. Nicer homes, particularly in urban areas of the nation, frequently sell for more than $400,000 and as a result, can be difficult to afford unless one is able to manage a fairly large down payment to reduce the loan required to purchase. Down payments are quite manageable if you hold a large sum of equity in a property.
Housing Crisis Reminds of the 1990s
According to Innman news:
It’s beginning to look a lot like the early 1990s for the housing market, officials for the National Association of Home Builders trade group said during a “Credit Crunch” presentation Tuesday.
“The housing market is down, it’s hurting, and it doesn’t look like it’s going to bounce back as quickly as we’d hoped,” said Jerry Howard, CEO for the builders’ group. The focus of the presentation was on problems in the mortgage market and the impacts on the overall real estate market and economy.
With home builders, lenders, and banks seeing red across the nation, many worry that a backlash from Wall Street could proceed to hurt Utah, one of the few states still relatively untouched by the collapse of the national housing market. Should the economy suffer on the national level, Utah could see a lending crunch soon that would limit the ability of buyers to afford homes, and perhaps even drive home prices down. Loans would become quite difficult to obtain as a result. Some homeowners in the state are finding it prudent to obtain a Utah home equity loan as a means to protect themselves from future rumbles in the market, as well as pay down their home loans now.
One thing remains clear, preparation now can be a lifesaver for the future.
Obama Unveils Strict New Plan for Dealing With Lending Collapse
Writing in today’s Financial Times the Presidential Candidate Barrack Obama wrote:
“While predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m lobbying Washington to let them get away with it,” citing figures from the Centre for Responsive Politics.
Obama said the government should
“stop the unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low- income borrowers into loans they can’t afford”.
Adding that:
“Washington needs to stop acting like an industry advocate and start acting like a public advocate”.
While certainly an innovative plan, the government may find it extremely difficult to fine mortgage lenders for their predatory lending tactics, as most lenders practice suck tactics knowing that they’re completely able to get away with doing so. Such prosecution with the intent to payoff mortgage loans past due by borrowers would likely fail to net the funds necessary to make much of a difference for the many who have been hurt by bad loans.
Such legislation while refreshing, is perhaps far too little and far too late to help borrowers with their high rate loans.