AIG Under Pressure

An article published by Market Watch gives details about the expected pressure that housing market weakness will be place on American International Group Inc.’s mortgage-guaranty business in 2008. According to the article:

The stock has been hit by concerns about the insurer’s exposure to rising subprime-mortgage delinquencies and foreclosures. The company sells mortgage insurance; its investment portfolio is in subprime-related assets, its derivatives unit has exposure and the company’s American General Finance business is a big mortgage lender.

With AIG’s stock falling, the insurer has come under pressure from Maurice “Hank” Greenberg, the former chief executive who is still a big shareholder. A group of investors led by Greenberg said on Friday that AIG should consider strategic alternatives, including the sale of some businesses. They’re also planning to talk with other AIG investors.

Even though it is never good news for a company to be under pressure, at least nobody is predicting the collapse of AIG. This subtle optimism, or at least contained pessimism, could strengthen the confidence of investors, which confidence will help fight against a collapse of the financial system.  Consumers on the other hand, currently have low confidence in the system with dropped demand for loans such as home equity line of credit ones.

IndyMac Struggling to Curb Losses

An article in the Wall Street Journal takes a look at IndyMac’s recent planned changes after suffering from a “wider-than-expected third quarter loss.” According to the article:

IndyMac — the ninth-largest U.S. home-mortgage lender by volume, according to trade publisher Inside Mortgage Finance — posted a net loss of $202.7 million, more than five times wider than the Pasadena, Calif., lender had projected two months ago but much smaller than the $1.2 billion third-quarter loss posted by its bigger rival, Countrywide Financial Corp.

IndyMac Chief Executive Michael Perry blamed a sharp jump in past-due loans in September, including both home mortgages and loans to home builders. As a result, the company decided to set aside more money for future loan losses.

During the third quarter, IndyMac turned its focus from “Alt-A” mortgages — or near-prime loans — intended for sale into the secondary market to mortgages eligible for sale to the two government-sponsored mortgage-finance giants, Fannie Mae and Freddie Mac.

The move raises questions about IndyMac’s ability to make money on potentially far fewer — and less profitable — loans. Mr. Perry said he expects the company’s retooled mortgage-production business to be profitable this quarter, “excluding credit costs from discontinued products and start-up costs from our retail-lending initiative.”

Financial collapse seems to be working itself down the list of major mortgage lenders and those that once were able to provide a home equity line of credit. Having seen what has happened to other major companies, will IndyMac be able to make the necessary changes to save itself from a similar disaster? Or is it already too late to stop the impending doom? We’ll just have to wait and see.

Bleak Outlook for Housing in 2008

An article published by Money Magazine holds no optimism for the housing scenario of 2008. According to the article:

The problem stems from that classic economic conundrum: too much supply and too little demand. As of September, some 4 million existing homes were languishing on the market - almost double the number three years ago - in addition to 523,000 new homes.

Homes in foreclosure, projected to jump 25 percent next year to 1 million, further add to the backlog. Lenders, meanwhile, have dramatically tightened their borrowing requirements as defaults have risen, shrinking the pool of qualified buyers.

If you were hoping to sell a home anytime soon, it’s a pretty grim picture. Prices aren’t expected to rebound until 2009 at the earliest, and most experts think it will take several years for home values to get back to pre-bust levels.

Hoping to buy a new home? You’ll find listing prices in many areas lower than they have been in the past couple of years - and plenty of anxious sellers willing to offer you an even better deal.

Times like this have a mixed multi-faceted effects. These are bad times for sellers. Yes, this is good news for buyers. But the tightening on loan requirements could hinder potential homeowners from making those purchases. The housing scenario can only be defined as good news for some, bad news for most.  Many homeowners may find that taking out a home equity line of credit will be a budget saver.

Citigroup CEO Resigns

An article on Reuters discusses the increasing troubles at Citigroup (a provider of products such as a Home Equity Line of Credit) and the coinciding resignation of CEO Charles Prince. According to the article:

Citigroup Inc reduced its third-quarter earnings a day after embattled Chairman and Chief Executive Charles “Chuck” Prince quit, as the U.S. bank’s losses on subprime mortgages and other risky securities climbed.

Citigroup, which announced Prince’s resignation on Sunday, had said it may write off $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down already reported last month.

“I am responsible for the conduct of our businesses,” Prince said in a memo to employees. “The size of these charges makes stepping down the only honorable course for me to take as chief executive officer. This is what I advised the board.”

Prince’s departure came after he told investors on Oct. 15, four days after an investment banking management shake-up, that the board thought Citigroup had a “good, sustainable strategic plan,” and that further management changes weren’t needed.

His exit ends a tumultuous four-year tenure marked by heavy turnover among senior executives, questions over strategy, and the mounting loan and credit losses.

Was it incompetence or just bad luck that got Prince into this situation? There are undoubtedly many speculations. But the problem now is finding a way to get out of the mess that the former CEO left behind, while dealing with the decrease in shares and the national mortgage crisis.

An Imminent Economical Collapse

An Australian based news site, The Age, published an editorial about the financial crisis in the U.S. The journalist had several insights worthy of note:

The investigation will begin, the collusion will be uncovered, some will be punished, many disgraced, most will walk free and maintain their riches. Most of the men and women responsible for the sacking of the US and much of the world’s capital will be covered by the absence of laws enacted to protect investors from the theft and carnage to come, or through the interpretations of laws by juries confronted by matters deeply arcane.

The “toxic loans” that will poison the troth of Wall Street have been sold to the “advanced” nations of the world and Australia and Europe will catch the disease, not because of the supremacy of the US as a capitalist nation, but because of our failure to learn from the wildly blinking light that introduced a new age of accounting procedures with Enron.

Trillions of dollars are gone. The dollar is gone. Soon, havens such as the euro and yen will be revealed to be nothing more than paper. A physical market is already emerging, not dissimilar to barter, and when all this is past we will return to currencies, but they will be based on value not calculated to a model or even the market, but to what people trust. Trust will take a long time to return.

Sure the editorial is marked by cynical pessimism, and we can write it off as a foreigner’s lack of faith in the American economy. But will ignoring the facts help America pull out of this crisis? Maybe it’s better to face the truth and prepare for the worst. After all, it’s better safe than sorry.

Many Americans are preparing by taking out Home Equity Line of Credit loans.  Such lines can allow one to borrow in the future, should a rainy day arrive.

Mortgage Lenders Permitted to Defraud

Major banks took full advantage of the housing boom, creating mortgage subsidiaries in an attempt to issue confusing adjustable mortgages and home equity line of credit loans to everyone.

Now, as the nation suffers from the fallout, many are starting to realize just how rampant fraud and deceit ran over the past few years.

Brandweek investigates:

In light of what many have termed America’s subprime mortgage crisis, the Federal Trade Commission has been keeping a close eye on mortgage companies’ advertising and marketing campaigns. Last month the FTC decided it had seen enough, and

warned more than 200 lenders about “potentially deceptive” mortgage advertisements that may give borrowers false impressions surrounding the cost of home loans. During a recent Morning Edition spot on National Public Radio, business reporter Jim Zarroli noted that over the past decade, the FTC has brought 21 actions against companies in the mortgage-lending industry, particularly in the subprime market. Several of these cases have resulted in large payouts from mortgage lenders, with courts collectively leveling more than $320 million in fines.

The FTC’s primary complaint? Many mortgage lenders have been hiding important loan terms and conditions in the fine print of advertisements. A Sept. 12, 2007 Associated Press article noted that experts on this issue believe that “this kind of advertising is one reason why consumers—particularly the elderly, minorities and the poor—signed up for subprime loans.”

And these are the companies which the nation is struggling to bailout? Something is definitely wrong with this picture.

Mixed Feelings on US Lenders

Foreign banks are watching with interest and fear as the US works frantically to rescue it’s troubled housing sectors.  With $100 billion promised by US banks, it seems that something may actually result from the intervention.  Whether that result will be positive remains to be seen.

Marketwatch has an interesting commentary regarding this:

The world’s top banking overseer has reservations about the $100 billion rescue package planned by U.S. banks and believes U.S. banks could be temporarily at a competitive disadvantage to their foreign rivals because of the slowed implementation of new capital requirements.

Nout Wellink, the chairman of the Basel Committee on Banking Supervision who is also president of the Dutch central bank and a member of the European Central Bank’s Governing Council, discussed the recent credit-market turmoil with Joellen Perry of The Wall Street Journal and Damian Paletta of Dow Jones Newswires.

WSJ/Dow Jones: What are your thoughts about this new superconduit that’s been proposed?

Wellink: For the time being, I have mixed feelings. …What is exactly the idea behind it? Is it a way of escaping your fate? Because if there is no market, at a certain price, then you’re confronted with losses. Take these losses. …As long as it’s meant to create an orderly process, okay. But if these artificial elements are involved, then immediately the supervisor and the central banker uses the phrase moral hazard.

With refinances and home equity line of credit loans made available, the housing crisis may be averted.  Many fear that all of this will only be delaying the inevitable, and have no positive long term affects.

Mortgage Rates Remain Steady

Further indication that the mortgage market is still in an unknown state, rates have remained at a somewhat stable level despite the many downturns within the lending industry.

A blurb from Reuters indicates:

Average rates on U.S. 30-year mortgages were unchanged in the latest week, mortgage giant Freddie Mac said on Thursday.

U.S. 30-year mortgage rates remained at an average of 6.40 percent, as fifteen-year mortgages rose slightly to 6.08 percent from 6.06 in the prior week.

One-year adjustable rate mortgages inched upward to an average of 5.76 percent from 5.73 percent last week.

Freddie Mac said the “5/1″ ARM, set at a fixed rate for five years and adjustable each following year, averaged 6.11 percent, down slightly from 6.12 percent a week ago.

With rates being steady, this is certainly a good time to lock in a rate on a home equity line of credit.  Rates are almost certainly going to jump in the near future.

Rent vs Own, What to do in California?

Home sales continue to plummet across the state of California as buyers begin to contemplate renting over buying a home as a result of falling home prices. Unlike in Utah, prices in the golden state have taken a beating. Purchasing a property now could result in a loss of tens if not hundreds of thousands for a buyer. While buyers in Utah can easily acquire a Utah Home Equity loan as a means of dealing with unexpected dips in home value, such loans are increasingly difficult to obtain in California.

Frankly, banks do not like losing massive amounts of money by having to foreclose on homes. This leads to higher interest rates and higher down payment requirements which prohibit, or at the very least prevent many potential buyers from purchasing a home in California. Often home buyers decide that it is simply more affordable to rent rather than to purchase a home. Others choose to rent simply because they are frightened off by high interest rates. Second mortgage loans can occasionally be used to pay down a loan early as a means to avoid 30 years of high interest.

Here’s one blogger’s take on the debate:

But what about the tax benefits of owning? Aren’t all renters simply flushing their money down the porcelain toilet of perpetual loserville? First, there is a mistake in believing renting provides no economic benefit. Everyone needs shelter unless you are going the way of the nomad and living under the San Gabriel river. Renting provides the same economic substitute as owning a home aside from tax benefits, equity buildup, and the ability to take a sledge hammer into your kitchen wall should your heart desire. The only problem in hyper bubble markets like Southern California, renting an equivalent place will cost you 2 times less than owning. So for example, you may be able to rent a home for $2,200 that would cost you $4,000 if you were to buy it. And that $1,800 is being invested ideally at a rate outpacing inflation. The way housing is currently going, you’d be better off playing Keno at your local Indian casinos.

This is certainly a valid point. Well, the analysis regarding the cost of renting vs buying is (I wouldn’t advocate the Keno). If one looks at a home as a thirty year purchase with a high interest rate, it could seem like a lifetime liability in which a homeowner can never possibly get out of debt.

Few realize that the proper use of a 2nd mortgage loan could easily reduce a thirty year loan to a 15 year loan. Obtaining such a home equity line of credit can be extremely rewarding for a homeowner who dislikes debt.

Bank of America Set to Write Off Whopping One Billion Dollars

Subprime fallout is affecting the last of the major lenders as Bank of America considers writing off $1 billion in mortgage securities resulting from sub prime mortgages and home equity line of credit loans..  At this point one can only speculate at what madness American banks have been infected with over these past few years.  The Charlotte Business Journal has the latest.

Bank of America Corp. may be the next big U.S. bank to suffer consequences from the subprime mortgage crisis.

According to analysts at Sanford Bernstein, Charlotte-based BofA is looking at a $1 billion write-down of mortgage securities and leveraged loans when it reports its third-quarter earnings next week.

In a note to investors, analysts Howard Mason and Michael Howard write that BofA (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) are expected to reveal a combined $3 billion in losses for the quarter.

BofA, JPMorgan Chase, Charlotte-based Wachovia Corp. , Washington Mutual Inc.  and Wells Fargo & Co.  are all scheduled to report their third-quarter results between Oct. 17 and 19.

BofA’s leveraged loan losses could be $700 million, the analysts wrote, and mortgage write-downs could be $300 million.

While one can honestly hope the best for the American Economy, it is a wonder that so many profitable banks could have made so many mistakes.  This certainly seems to indicate that there exists some serious trouble in the US banking system.

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