Posts Tagged ‘mortgage’
Wednesday, November 17th, 2010
Although millions of Americans are paying their under water mortgages on time – sometimes with difficulty — it still could prove to be a source of trouble. Because home prices are stagnant, many owners are using their hard-earned dollars to pay the mortgage and less on consumer spending. In the long term, that is not encouraging news for economic growth. With an estimated 15 million American homeowners under water, approximately 7.8 million owe at least 25 percent more than their homes were worth in the 1st quarter of 2010, according to Moody’s Analytics.
“At the root it’s ‘the’ problem,” said Mark Zandi, Moody’s chief economist. “If you’re going to put your finger on the one thing that’s gotten us into this fiasco, it’s the fact that millions of homeowners are under water on their homes.” Consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund big-ticket purchases. In a sluggish economy, it’s not difficult to push an under water mortgage into default. “When you’re under water and you have some kind of hit to your income or some kind of unintended expense, that’s when you default. And so now we’ve got this noxious mix of millions of people under water and unemployment,” Zandi said.
Because under water homeowners owe so much, they can’t refinance or get home equity loans that could be used to finance major remodeling projects. A case in point is Heather Hines and her husband, Santa Rosa, CA, residents who owe $415,000 on the house they purchased for $430,000 in 2004. The county recently appraised the house at $246,000, a lower figure than just one year ago. Although the Hines’ house needs a new roof, they have put off replacing it because their mortgage payments eat up too much of their income. “It’s hard to think of making that investment when you’re hundreds of thousands under water,” she said. “It just feels hopeless. What are we supposed to do? It feels like we’re never going to see any equity in our home.”
Tags: consumer spending, credit reports, foreclosures, Moody's report, mortgage, negative equity, underwater
Posted in Economics, Financing, General, Healthcare, Residential | No Comments »
Monday, November 15th, 2010
A financing vehicle that has been used in Europe since it was invented in Prussia in 1769 is finding its way to American shores as a replacement for commercial mortgage-backed securities (CMBS). The vehicle is known as covered bonds, which is a securitized debt instrument backed by a pool of top-quality assets, primarily mortgages. What is different about covered bonds is that the assets – known as a cover pool – are maintained on the issuer’s balance sheet. This acts as a safety measure because the issuer is less likely to underwrite loans that carry significant risk.
Currently, the United States has no established market for covered bonds, although they are a $3 trillion business in Europe. In July, the House Financial Services Committee approved a bill that would establish a regulatory framework for covered bonds. Although the bill just missed being included in the Dodd-Frank financial reform overhaul, the consensus is that the legislation could win House and Senate approval in 2011.
“We have seen the difficulties wrought by the complexity of securitizations,” said Bert Ely, a financial and monetary policy consultant. “Covered bonds, on the other hand, are a very clean and simple tool. A bank makes a loan, keeps the loan on its books, and issues a covered bond. There is no sale and resale of mortgages.” With a covered bond, several elements protect the bondholder. All assets in the covered pool are subject to monthly monitoring by an independent third party. If one of the loans becomes non-performing, the issuer must remove it and replace it with a loan that is performing. Thanks to the safety features, the majority of covered bonds enjoy a triple-A rating.
Despite the fact that many in the investment community support covered bonds, the Federal Deposit Insurance Company (FDIC) has some concerns about them. Primary is the fact that the pools are over-collateralized – sometimes by as much as three times the bonds’ face value. The FDIC wants access to these assets when a bankruptcy occurs. The FDIC argues that if the cover pools protect the bulk of the banks’ assets from being claimed, the depositors are being asked to take on too much risk. “We support covered bond legislation, but not at the expense of our obligation to protect the deposit insurance fund,” said the FDIC’s Michael H. Krimminger.
Tags: bonds, Canada, capital markets, commercial real estate, Europe, Fannie Mae, Federal Deposit Insurance Company, Freddie Mac, mortgage, residential market, securitized real estate market, Triple A ratings, Wall Street
Posted in Development, Economics, Financing, Residential | No Comments »
Tuesday, November 9th, 2010
A recent Washington Post poll found that 53 percent of all Americans are concerned that they will not be able to pay their mortgage or rent, despite the fact that they believe the economy has shown some improvement since the dark days of 2008. The worry is driven by slow job creation, said Karen Dynan, who served as a Federal Reserve economist and on George W. Bush’s Council of Economic Advisors. According to Dynan, “The unemployment rate is still very high, so if you think of it as being about the odds of someone losing their job and not being able to find another there’s good reason to be concerned about being able to make mortgage payments,” according to Dynan, who is now co-director of economic studies at the Brookings Institution.
More than half of Americans want the Obama administration to impose a moratorium on foreclosures on homeowners who are unable to make payments. The president and his economic advisors oppose the idea, saying it is dangerous to a housing market that is still on shaky ground. The push for a moratorium is driven primarily by people’s worries about personal finances and the economy as a whole. Not surprisingly, the people most worried about making their payments are strong supporters of the moratorium. Compounding the situation is the fact that several lenders – notably Bank of America, JPMorgan Chase and Ally Financial – were found to have significant errors in some of their foreclosure documents. Of those polled, 52 percent support the moratorium, while 34 percent oppose it.
So who do Americans think is responsible for the foreclosure mess? The mortgage lenders are to blame, according to 45 percent of poll respondents; 26 percent thought that homebuyers who purchased beyond their means are the guilty party; another 20 percent blames both sides. Cara Habegger of Akron, OH, summed up the last point of view. “Certainly they are both at fault. Most people tend to blame the big institutions and that’s valid but if you’re making poor financial decisions and buying houses you can’t afford, that’s also not excusable,” she said.
Tags: Bank of America, Brookings Institution, Council of Economic Advisors, Federal Reserve, foreclosure, George W. Bush, JP Morgan Chase, mortgage, mortgage payment, Obama administration
Posted in Economics, Financing, Residential | No Comments »
Monday, November 8th, 2010
The ultimate cost of bailing out Fannie Mae and Freddie Mac could cost as much as $154 billion unless the economy improves, according to a government report. The mortgage giants rescue – which has kept the housing market on life supports – already has cost $135 billion to cover losses on home loans in default. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, says the most likely scenario is that house prices will have to fall slightly during a slow economic recovery, then rise a bit. If that occurs, the Fannie and Freddie bailout will cost taxpayers an additional $19 billion. A more upbeat prediction sees the housing market recovering sooner, which would require just $6 billion more for a total bill of $141 billion.
Washington, D.C., research firm Federal Financial Analytics believes the FHFA projection provides a sound indication of what the bailout will cost, but “nowhere near a definitive picture of it.” Fannie and Freddie issued a joint statement that said “It’s simply impossible to forecast reliably now how much foreclosuregate will cost.” Fannie and Freddie’s plight stands in sharp contrast to the success of the Trouble Asset Relief Program (TARP), which is now expected to cost just 10 percent of the $700 billion originally forecast.
Federal regulators seized Fannie and Freddie in September of 2008 in the wake of the financial crisis. Since then, the government has kept the agencies solvent, with President Obama pledging unlimited support. “From the beginning, the Obama administration has made it clear that the current structure of the government’s role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long term,” said Jeffrey Goldstein, Treasury Department undersecretary for domestic finance.
Tags: AIG, bailouts, default, Fannie Mae, Federal Financial Analytics, Federal Housing Finance Agency, foreclosures, Freddie Mac, home foreclosures, mortgage, securities, TARP, Treasury Department
Posted in Economics, Financing, Residential | No Comments »
Thursday, October 28th, 2010
A small, weathered, blue-gray house in Denmark, ME, set off a national uproar about the foreclosure crisis when its owner, Nicolle Bradbury, lost her job and stopped paying her mortgage two years ago. The family, which includes Bradbury’s disabled husband and two children, lives on food stamps and welfare. When the bank started to foreclose on the house, Bradbury contacted Pine Tree Legal Assistance, a non-profit group and was lucky enough to have her file read by retired attorney Thomas A. Cox, who decided to help her as much as possible.
Cox’s act set off a national foreclosure uproar, with the attorneys general of all 50 states opening investigations into the bad paperwork and questionable methods behind many of them. The Senate plans to hold a hearing and the federal government is taking a closer look. The housing market – currently fueled by foreclosure sales – is chaotic. All this occurred because Cox thought something about Bradbury’s foreclosure file didn’t look right.
In reading Bradbury’s filing, Cox noticed that the documents from GMAC Mortgage were approved by an employee whose title was “limited signing officer”, which indicated that the person who approved the foreclosure likely knew little about the case. When Cox won the right to get a deposition from the employee in question, he learned that the individual had signed off on as many as 400 foreclosures a day, and that no one at GMAC Mortgage had actually reviewed the documents.
“A lot of people say we just want a free ride,” according to Bradbury. “That’s not it. I’ve worked since I was 14. I’m not lazy. I’m just trying to keep us together. If we lost the house, my family would have to break up.” Unfortunately, Bradbury is almost certain to lose her house, despite the errors made in the foreclosure process. “Had GMAC followed the legal requirements, she would have lost her home a long time ago,” said Geoffrey S. Lewis, another attorney on the case.
To listen to The Alter Group podcast on solving the foreclosure crisis, click here.
Tags: Bank of America, Fannie Mae, food stamps, foreclosure, GMAC Mortgage, Great Recession, JP Morgan Chase, mortgage, Senate, welfare
Posted in Economics, Financing, Residential | 1 Comment »
Tuesday, October 5th, 2010
Real estate professionals who had been expecting a worst-case scenario – an onrush of distressed commercial properties coming onto the market – are still waiting for that to come to fruition. Ben Johnson, writing in the National Real Estate Investor, notes that “Keep on waiting/lurking seems to be the prevailing view. According to New York-based researcher Real Capital Analytics, the default rate for commercial real estate mortgages held by the nation’s FDIC-insured depository institutions did increase by nine basis points to 4.28 percent in the 2nd quarter, up from 4.19 percent in the 1st quarter. For those of you keeping score on a historical scorecard, at its cyclical low in the 1st half of 2008, the commercial mortgage default rate was 0.58 percent. A mere pittance. Year-over-year, the tale is more striking, with the commercial default rate up by 139 basis points.”
Instead of accelerating, Johnson says that the negative drift seems to be slowing. “Year-over-year increases had been accelerating for 13 consecutive quarters through the end of 2009, but have moderated more recently,” he said. The dollar volume of commercial mortgages in default recorded the smallest increase since the 2nd quarter of 2007. Approximately $46.2 billion of bank-held commercial mortgages currently are in default, an increase of $547 million from the 1st quarter of 2010.
Tags: Ben Johnson, commercial real estate, default, distressed assets, mortgage, Real Capital Analytics
Posted in Financing, General, Industrial, Office | No Comments »
Monday, September 14th, 2009
Despite positive news about rising home sales, the number of Americans with under water mortgages might be as worrying as anything else happening in the economy. When people owe more on their mortgages than their home is worth, it limits their ability to pursue new opportunities because they cannot afford to sell. In Chicago, First American CoreLogic reports that more than 550,000 homes were under water at the end of June. That translates to $134 billion in negative equity.
Statistics from the United States Census Bureau indicate that household mobility is at a 20-year low. According to Sam Khater, a senior economist with the consulting firm of American CoreLogic, under water mortgages are the primary reason why people are less mobile.
Lenders are wary about extending credit in housing markets where values are sinking, which feeds the negative cycle of inactivity in the housing market and pushes prices down even more. This damages the economy because under water homeowners have a tendency to accept the inevitability of foreclosure. Homeowners with negative equity are seven times more liable to go into foreclosure than people whose mortgage and home equity loans total between 95 and 100 percent of their home’s value.
Homes are no longer considered to be sources of future wealth. Consumers aren’t spending because they can’t rely on getting a low-interest home equity loan to buy their way out of a personal credit crunch. Khater notes that “Borrowers are beginning to treat a home more like a home and less like a financing vehicle.”
Economic growth is further impacted because these same homeowners (who, in most cases, have stayed current on their mortgage obligations) are delaying or eliminating home improvements due to fears that any additional investment in the home will not be economically realized in value or returned in the event of a sale. This inactivity is being felt by many home remodeling contractors, as well as retailers.
Tags: Census Bureau, credit, economy, Federal Reserve Bank, home improvement, home loan, homeowner, lender, mortgage, under water mortgage, upside-down homes
Posted in Economics, Financing | No Comments »
Monday, August 31st, 2009
Downtown Chicago apartment buildings – especially Class A properties – are seeing a resurgence in occupancy and rental rates as residents apprehensive about the condominium market choose to rent rather than buy. The average effective rent of downtown apartment buildings climbed to $2.17 PSF in the second quarter, a 2.4 percent increase over the first quarter, according to a report by Appraisal Research Counselors, a real estate consulting firm. During the same time frame, average Class A occupancy rose to 93.4 percent, as compared with 90.9 percent in the first quarter and 91.6 percent a year ago.
The statistics would be even better if there weren’t so many new downtown apartment buildings. More than 2,098 new units have been built downtown since 2008. Add to that the shadow rental market – condominium owners who rent their units when they cannot sell. Many potential buyers are renting for the time being because they are concerned about falling property values and the possibility that they will be unable to obtain a mortgage in a tight credit market.
These numbers show the inherent strength of Chicago’s CBD rental apartment market — proof that downtowns continue to thrive because of the number of highly educated knowledge workers who want to live in the city. As a result, places like River North and the Loop remain highly sought after locations for businesses looking to recruit talent.
Tags: Chicago, Class A landlords, condominiums, credit market, mortgage, mortgage rates, property values, real estate market, rental rates, River North
Posted in Development, Residential | No Comments »
Monday, June 1st, 2009
Las Vegas may be in the middle of a desert, but right now it’s underwater. Fully two-thirds of the once fast-growing city’s housing stock is underwater, meaning that the owners owe more on their mortgages 
than the home is worth.
According to www.zillow.com, borrowers who are underwater totaled 20.4 million at the end of the first quarter of this year, compared with 16.3 million at the end of last year. This represents 21.9 percent of all homeowners.
The irony in these numbers is that falling prices are making homes more affordable for first-time buyers who previously were shut out of the housing market. At the same time, the decline in home prices compounds problems for owners who get into financial trouble by making it harder for them to refinance and take advantage of the current low interest rates.
“What’s going on here is that you don’t have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks of communities where home prices have fallen,” noted Stan Humphries, a Zillow.com vice president.
Zillow.com reports that the nation’s top 10 underwater cities are:
- Las Vegas, NV 67.2 percent
- Stockton, CA 51.1 percent
- Modesto, CA 50.8 percent
- Reno, NV 48.5 percent
- Vallejo Fairfield, CA 46.5 percent
- Merced, CA 44.4 percent
- Port St. Lucie, FL 43.5 percent
- Riverside, CA 42.8 percent
- Phoenix, AZ 41.7 percent
- Orlando, FL 41.7 percent
Tags: borrowers, city housing stock, communities, Dallas, desert, financial trouble, first-time buyers, home, home prices, homeowners, housing market, Las Vegas, low interest rates, Merced California, Modesto California, mortgage, Orlando Florida, Phoenix Arizona, Port St Lucie Florida, refinance, Reno Nevada, Riverside California, Stockton California, underwater, Vallejo Fairfield California, zillow.com
Posted in Economics, Financing, Residential | No Comments »
Friday, April 10th, 2009
The Wells Fargo wagon delivered good news to Wall Street when the San Francisco-based bank announced a record first-quarter profit of approximately $3 billion, or 55 percent per common share. Contrast these numbers with the fourth quarter of 2008, when Wells Fargo reported a $2.6 billion loss.
The news sent the Dow Jones Industrial Average soaring 3.1 percent to finish the day at 8,083.38, the highest closing since February 9.
Wells credited the outstanding results to healthy lending margins driven by low interest rates and the resulting boom in mortgage lending activity. “Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group,” said John Stumpf, Wells Fargo’s CEO. Applications for mortgages surged during the first quarter; Wells reported $83 billion in applications for new and refinance home loans during March alone.
Wells is the nation’s largest mortgage servicer and a leading home loan originator, so it benefited from the refinancing boom driven by extremely low short-term interest rates and the government’s purchases of mortgage bonds.
Although this is evidence that the Obama administration’s efforts to jump-start the economy by freeing up credit are starting to work, it is only the hint of a beginning for banks with significant mortgage portfolios. Wells and competitors such as Bank of America, Citigroup and JPMorgan Chase remain dangerously exposed to falling asset prices, especially for commercial and residential real estate.
Tags: bank, Dow, Dow Jones, Dow Jones Industrial, home loan, home loans, interest rates, mortage bonds, mortgage, refinance, refinancing boom, San Francisco, Wall Street, Wells Fargo
Posted in Economics, Financing | No Comments »