By MICHAEL R. CRITTENDEN and JESSICA HOLZER
WASHINGTON -- The U.S. government's latest plan to aid struggling homeowners could move as many as three million people into more-affordable mortgages, according to people familiar with the effort.
The proposal, which has been designed by the Treasury Department and Federal Deposit Insurance Corp., is close to being finalized. Estimated to cost between $40 billion and $50 billion, the plan would have the government agree to share a portion of any losses on a modified mortgage offered by lenders.
Funding for the plan could potentially come out of the $700 billion financial-rescue program authorized by Congress earlier this month. The plan, which was previewed during Congressional testimony last week, would represent one of the most aggressive and sweeping moves to address the nation's foreclosure mess, among the last elements of the crisis yet to be addressed by concerted government intervention.
Corinne Hirsch, a spokeswoman with the White House's Office of Management and Budget, said the program "is currently in a White House policy process," suggesting it's in the final stages of being reviewed. Treasury spokeswoman Jennifer Zuccarelli said "the administration is looking at ways to reduce foreclosures."
FDIC spokesman Andrew Gray said: "While we have had productive conversations with Treasury and the administration about options for the use of credit enhancements and loan guarantees, it would be premature to speculate about any final framework or parameters of a potential program."
The program is one of a series of ideas under consideration designed to address the root causes of the financial crisis.
At a conference Wednesday, FDIC Chairman Sheila Bair, who first suggested such a plan, said policy makers need to take additional action to help people stay in their homes, in order to prevent the continued downward spiral of the housing market. "Everyone in Washington now agrees that more needs to be done to help homeowners," she said. Ms. Bair noted the FDIC was working to implement a framework for systematically modifying loans.
The legislation authorizing the Troubled Asset Relief Program required Treasury to take steps to help homeowners avoid foreclosure. As many as 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes, according to Moody's Economy.com, a research firm.
Write to Michael R. Crittenden at michael.crittenden@dowjones.com and Jessica Holzer at jessica.holzer@dowjones.com
Friday, October 31, 2008
Thursday, October 30, 2008
The Fed Rate Cut: How Soon Will It Affect You?
The Federal Reserve has cut interest rates by 50 basis points. What do you need to do about it, and how soon will the cut affect your finances?
Mortgages:
How Soon Could It Affect You?
Impossible to Know
Federal Reserve cuts in the federal funds rate have an unpredictable effect on long-term mortgage rates. So it's impossible to know for sure when -- or even if -- rates will fall as a result of the Fed's rate cut.
Fixed-rate mortgages usually do not change in response to cuts in the federal funds rate. However, adjustable-rate mortgages may be more sensitive to Federal Reserve rate decisions.
Depending on the exact nature of their mortgage, some people with ARMs may see their rate adjust downward the next time the mortgage resets.
Conclusion:
It's impossible to know when -- or even if -- fixed-rate mortgages will fall given the Fed's most recent trim to the federal funds rate. However, it's possible that some homeowners with adjustable-rate mortgages will see lower payments the next time their mortgage rate resets.
Home Equity:
How Soon Could It Affect You?
1 to 2 billing cycles
The Federal Reserve's decision to cut rates by a half-point eventually will mean lower borrowing costs for homeowners who have a home equity line of credit.
Most home equity lines of credit are indexed to the prime rate, a common benchmark for consumer and business loans set by banks. The prime rate moves in lock step with the federal funds rate.
However, don't necessarily expect your HELOC rate to drop overnight. In some cases, it may take one or two billing cycles before consumers see borrowing costs fall.
Rates on new home equity loans are trickier to forecast, as they do not move in lock step with the federal funds rate. In addition, people with existing home equity loans will not see their borrowing costs fall, as rates on these instruments remain fixed.
Conclusion:
The Federal Reserve's latest interest rate cut means you can expect HELOC rates to fall soon. It may take one or two billing cycles before you see the benefits.
Mortgages:
How Soon Could It Affect You?
Impossible to Know
Federal Reserve cuts in the federal funds rate have an unpredictable effect on long-term mortgage rates. So it's impossible to know for sure when -- or even if -- rates will fall as a result of the Fed's rate cut.
Fixed-rate mortgages usually do not change in response to cuts in the federal funds rate. However, adjustable-rate mortgages may be more sensitive to Federal Reserve rate decisions.
Depending on the exact nature of their mortgage, some people with ARMs may see their rate adjust downward the next time the mortgage resets.
Conclusion:
It's impossible to know when -- or even if -- fixed-rate mortgages will fall given the Fed's most recent trim to the federal funds rate. However, it's possible that some homeowners with adjustable-rate mortgages will see lower payments the next time their mortgage rate resets.
Home Equity:
How Soon Could It Affect You?
1 to 2 billing cycles
The Federal Reserve's decision to cut rates by a half-point eventually will mean lower borrowing costs for homeowners who have a home equity line of credit.
Most home equity lines of credit are indexed to the prime rate, a common benchmark for consumer and business loans set by banks. The prime rate moves in lock step with the federal funds rate.
However, don't necessarily expect your HELOC rate to drop overnight. In some cases, it may take one or two billing cycles before consumers see borrowing costs fall.
Rates on new home equity loans are trickier to forecast, as they do not move in lock step with the federal funds rate. In addition, people with existing home equity loans will not see their borrowing costs fall, as rates on these instruments remain fixed.
Conclusion:
The Federal Reserve's latest interest rate cut means you can expect HELOC rates to fall soon. It may take one or two billing cycles before you see the benefits.
Wednesday, October 29, 2008
Existing-Home Sales Rise on Improved Affordability
WASHINGTON, October 24, 2008
Existing-home sales increased last month as buyers responded to improved housing affordability conditions, according to the National Association of Realtors®.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.5 percent to a seasonally adjusted annual rate¹ of 5.18 million units in September from a level of 4.91 million in August, and are 1.4 percent higher than the 5.11 million-unit pace in September 2007.
Lawrence Yun, NAR chief economist, said more markets are seeing year-over-year gains. “The sales turnaround which began in California several months ago is broadening now to Colorado, Kansas, Minnesota, Missouri and Rhode Island,” he said. “The South was hampered by much lower home sales in Houston in the aftermath of Hurricane Ike.”
NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said low home prices and low interest rates have been attracting buyers. “This is the first time since November 2005 that home sales have been above year-ago levels,” he said. “Credit tightened at the end of September, but the improvement demonstrates that buyers who’ve been on the sidelines want to get into the market to make a long-term investment in their future.”
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.04 percent in September from 6.48 percent in August; the rate was 6.38 percent in September 2007.
Yun said there may be market disruptions. “The credit markets are not settled yet, although the mortgage market stabilized with the government takeover of Fannie Mae and Freddie Mac. Inventory remains high, and price declines are pressuring owners,” he said. “Additional housing stimulus would stabilize prices more quickly, which in turn would bring faster stability to Wall Street. Removing the repayment feature on the first-time buyer tax credit and permanently raising loan limits would bring more buyers into the market and further reduce inventory.”
Total housing inventory at the end of September fell 1.6 percent to 4.27 million existing homes available for sale, which represents a 9.9-month supply² at the current sales pace, down from a 10.6-month supply in August. This marks two consecutive monthly declines since inventories peaked in July.
The national median existing-home price3 for all housing types was $191,600 in September, down 9.0 percent from a year ago when the median was $210,500. “Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions. These are pulling the median price down because many are being sold at discounted prices,” Yun explained. “The current market is not being dominated by speculative investors. Rather, 80 percent of current buyers are purchasing a primary residence, which is a bit higher than historic norms.”
Single-family home sales increased 6.2 percent to a seasonally adjusted annual rate of 4.62 million in September from a pace of 4.35 million in August, and are 3.8 percent above the 4.45 million-unit level a year ago. The median existing single-family home price was $190,600 in September, which is 8.6 percent below September 2007.
Existing condominium and co-op sales were unchanged at a seasonally adjusted annual rate of 560,000 units in September, but are 15.7 percent below the 664,000-unit pace in September 2007. The median existing condo price4 was $199,400 in September, down 10.2 percent from a year ago.
Regionally, existing-home sales in the West jumped 16.8 percent to an annual rate of 1.25 million in September, and are 34.4 percent higher than September 2007. The median price in the West was $253,600, down 18.5 percent from a year ago.
In the Midwest, existing-home sales increased 4.4 percent to an annual pace of 1.19 million in September, but are 2.5 percent below a year ago. The median price in the Midwest was $152,500, which is 7.9 percent lower than September 2007.
Existing-home sales in the South rose 2.2 percent in September to a pace of 1.90 million but remain 7.8 percent below September 2007. The median price in the South was $167,200, down 4.1 percent from a year ago.
In the Northeast, existing-home sales slipped 1.2 percent to an annual pace of 840,000 in September, and are 7.7 percent lower than a year ago. The median price in the Northeast was $246,800, down 5.4 percent from September 2007.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.
Existing-home sales increased last month as buyers responded to improved housing affordability conditions, according to the National Association of Realtors®.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.5 percent to a seasonally adjusted annual rate¹ of 5.18 million units in September from a level of 4.91 million in August, and are 1.4 percent higher than the 5.11 million-unit pace in September 2007.
Lawrence Yun, NAR chief economist, said more markets are seeing year-over-year gains. “The sales turnaround which began in California several months ago is broadening now to Colorado, Kansas, Minnesota, Missouri and Rhode Island,” he said. “The South was hampered by much lower home sales in Houston in the aftermath of Hurricane Ike.”
NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said low home prices and low interest rates have been attracting buyers. “This is the first time since November 2005 that home sales have been above year-ago levels,” he said. “Credit tightened at the end of September, but the improvement demonstrates that buyers who’ve been on the sidelines want to get into the market to make a long-term investment in their future.”
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.04 percent in September from 6.48 percent in August; the rate was 6.38 percent in September 2007.
Yun said there may be market disruptions. “The credit markets are not settled yet, although the mortgage market stabilized with the government takeover of Fannie Mae and Freddie Mac. Inventory remains high, and price declines are pressuring owners,” he said. “Additional housing stimulus would stabilize prices more quickly, which in turn would bring faster stability to Wall Street. Removing the repayment feature on the first-time buyer tax credit and permanently raising loan limits would bring more buyers into the market and further reduce inventory.”
Total housing inventory at the end of September fell 1.6 percent to 4.27 million existing homes available for sale, which represents a 9.9-month supply² at the current sales pace, down from a 10.6-month supply in August. This marks two consecutive monthly declines since inventories peaked in July.
The national median existing-home price3 for all housing types was $191,600 in September, down 9.0 percent from a year ago when the median was $210,500. “Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions. These are pulling the median price down because many are being sold at discounted prices,” Yun explained. “The current market is not being dominated by speculative investors. Rather, 80 percent of current buyers are purchasing a primary residence, which is a bit higher than historic norms.”
Single-family home sales increased 6.2 percent to a seasonally adjusted annual rate of 4.62 million in September from a pace of 4.35 million in August, and are 3.8 percent above the 4.45 million-unit level a year ago. The median existing single-family home price was $190,600 in September, which is 8.6 percent below September 2007.
Existing condominium and co-op sales were unchanged at a seasonally adjusted annual rate of 560,000 units in September, but are 15.7 percent below the 664,000-unit pace in September 2007. The median existing condo price4 was $199,400 in September, down 10.2 percent from a year ago.
Regionally, existing-home sales in the West jumped 16.8 percent to an annual rate of 1.25 million in September, and are 34.4 percent higher than September 2007. The median price in the West was $253,600, down 18.5 percent from a year ago.
In the Midwest, existing-home sales increased 4.4 percent to an annual pace of 1.19 million in September, but are 2.5 percent below a year ago. The median price in the Midwest was $152,500, which is 7.9 percent lower than September 2007.
Existing-home sales in the South rose 2.2 percent in September to a pace of 1.90 million but remain 7.8 percent below September 2007. The median price in the South was $167,200, down 4.1 percent from a year ago.
In the Northeast, existing-home sales slipped 1.2 percent to an annual pace of 840,000 in September, and are 7.7 percent lower than a year ago. The median price in the Northeast was $246,800, down 5.4 percent from September 2007.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.
Tuesday, October 28, 2008
Stocks advance as banks, housing stocks gain
By TIM PARADIS,
AP Business Writer Tim Paradis,
NEW YORK – Wall Street turned higher in choppy trading Monday as a surprisingly strong home sales report sent housing sector stocks higher and the implementation of the government's financial bailout plan gave regional bank shares a boost. The Dow Jones industrials rose nearly 130 points.
But the advance was nonetheless tentative as investors remain nervous about the prospects for a protracted global recession; many gains have been quickly given back in this still volatile market. Wall Street also tried to position itself ahead of possible interest rate moves from central banks.
Investors around the world are anxious that the evaporation in available credit in the past month has hurt lending to the point where it will be difficult for the country to avoid a recession. But the U.S. government is carrying out some of its measures this week to help the banking sector.
Investors also grew optimistic that the European Central Bank is moving toward an interest rate cut after President Jean-Claude Trichet said Monday such a step was "a possibility" as inflation pressures ease.
The comments come a day before the start of a regularly scheduled two-day meeting of the Federal Reserve. There is speculation the world's major central banks could announce coordinated rate cuts; the Fed is expected to lower its fed funds rate by a half-point to 1 percent on Wednesday.
Traders are juggling other expectations about the government's next moves. The Treasury said it signed agreements with nine banks and will buy stock in the companies this week. The proceeds from the stock sales are intended to bolster the banks' balance sheets so they will begin more normal lending and help ease the continuing credit crisis. But investors remain worried that stagnant credit has hurt the world economy.
"Clearly, what's most important is that the funding crisis needs to be contained at this point," said Chris Orndorff, director of equity strategy at Payden & Rygel in Los Angeles.
"The banks need to start taking on some more risks," he said. "I think it's going to take months."
Beyond troubles in the financial sector, Orndorff contends investors are focusing on the outcome of the Fed meeting.
In midafternoon trading, the Dow rose 129.75, or 1.55 percent, to 8,508.70, helped by advances in Verizon Communications Inc. and Home Depot Inc.
Broader stock indicators showed more modest gains. The Standard & Poor's 500 index rose 7.77, or 0.89 percent, to 884.54, and the Nasdaq composite index rose 12.98, or 0.84 percent, to 1,565.01.
The Russell 2000 index of smaller companies fell 1.65, or 0.35 percent, to 469.47.
Despite the moves by the major indexes, declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to a light 725.1 million shares. Lighter volume can call into question the conviction behind big market advances or declines.
Light, sweet crude fell 93 cents to $63.24 per barrel on the New York Mercantile Exchange, while gold prices rose slightly.
The gyrations in U.S. stocks have been sizable since the market's peak a year ago, but particularly since last month's bankruptcy of Lehman Brothers Holdings Inc. and the government rescue of insurer American International Group. With investors uncertain about the economy, the market appears to be bouncing along a rocky bottom after falling sharply earlier this month.
Investors were cheered Monday by news that sales of new homes showed an unexpected increase in September. While median home prices have dropped to the lowest level in four years, investors appeared pleased that the market was beginning to chip away at an inventory glut. The Commerce Department reported that sales of new single-family homes rose by 2.7 percent in September to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from August.
The median price of a new home declined by 9.1 percent from a year ago to $218,400, its lowest level since September 2004.
Regional banks advanced after the Treasury began rolling out its investments. Fifth Third Bancorp. rose 99 cents, or 12.3 percent, to $9.06, while SunTrust Banks Inc. rose $1.76, or 5 percent, to $36.87.
Home builders rose after the housing data. Centex Corp. advanced 32 cents, or 3.6 percent, to $9.10, and Lennar Corp. rose 29 cents, or 4.5 percent, to $6.81.
Some companies dependent on the housing sector rose as well. Home Depot rose 71 cents, or 3.8 percent, to $19.22, while Target Corp. rose $1.10, or 3.3 percent, to $34.02.
Verizon rose $3.10, or 12.4 percent, to $28.18, making it the strongest advancer among the 30 stocks that comprise the Dow industrials, after reporting that its third-quarter earnings rose 31 percent after its wireless business showed stronger-than-expected results.
Even with several pieces of welcome news, investors around the world remain worried about the prospects for economic expansion. A surge in the yen illustrated investors' nervousness about how much economic activity could slow. Japan's Nikkei 225 index dropped to its lowest close in 26 years as investors worried that the high yen will hurt Japanese exports and further disrupt economic activity. The yen is seen as a safe haven holding for investors who contend the Japanese economy will fare better in a global recession.
The ongoing selling is due in part to the belief that a worldwide recession is likely inevitable, but it's also being triggered by hedge funds and other investors unloading stock because they're being hit by margin calls. In a margin call, a broker who lent money to an investor calls in the loan, forcing the investor to sell stock to repay the loan.
Greg Church, chief investment officer of Church Capital Management in Yardley, Pa., contends the markets likely will remain volatile as hedge funds and mutual funds step into the market to sell. He also expects that some skittish investors will look to sell their positions as rallies emerge but that the severity of the market's recent sell-off has left it overdue for a rally, even if it's only temporary.
"We probably are due for some type of a bounce. Bear market rallies can be beautiful things. I think we could get one of those things sooner than later," he said.
Investors uneasy about where the market is headed continued to propel demand for the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.71 percent from 3.72 percent late Friday. The dollar was higher against most other major currencies, except the yen, while gold prices rose.
The yield on the three-month bill, regarded as the safest asset around, fell to 0.78 percent from 0.82 percent late Thursday.
A key bank-to-bank lending rate slipped Monday. The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.51 percent from 3.52 percent on Friday.
While Libor has fallen steadily for over 10 days as confidence slowly returns to the banking system, investors remain skittish, particularly overseas.
The Nikkei fell 6.4 percent to its lowest level since October 1982, while Hong Kong's Hang Seng Index tumbled 12.7 percent, its lowest finish in more than four years and its biggest single-session drop since 1991.
The sell-off came even as the seven leading industrial nations on Sunday issued a statement warning about the "recent excessive volatility" in the value of the yen. The G7 said it would "cooperate as appropriate," stirring speculation of an orchestrated intervention to help stabilize currency markets.
Selling spread to Europe. Britain's FTSE 100 fell 0.79 percent, Germany's DAX index rose 0.91 percent, and France's CAC-40 declined 3.96 percent. Stocks in Europe pulled well off their lows after Wall Street sidestepped the steep sell-off that hit Asia and after Trichet raised the prospect of an interest rate cut.
AP Business Writer Tim Paradis,
NEW YORK – Wall Street turned higher in choppy trading Monday as a surprisingly strong home sales report sent housing sector stocks higher and the implementation of the government's financial bailout plan gave regional bank shares a boost. The Dow Jones industrials rose nearly 130 points.
But the advance was nonetheless tentative as investors remain nervous about the prospects for a protracted global recession; many gains have been quickly given back in this still volatile market. Wall Street also tried to position itself ahead of possible interest rate moves from central banks.
Investors around the world are anxious that the evaporation in available credit in the past month has hurt lending to the point where it will be difficult for the country to avoid a recession. But the U.S. government is carrying out some of its measures this week to help the banking sector.
Investors also grew optimistic that the European Central Bank is moving toward an interest rate cut after President Jean-Claude Trichet said Monday such a step was "a possibility" as inflation pressures ease.
The comments come a day before the start of a regularly scheduled two-day meeting of the Federal Reserve. There is speculation the world's major central banks could announce coordinated rate cuts; the Fed is expected to lower its fed funds rate by a half-point to 1 percent on Wednesday.
Traders are juggling other expectations about the government's next moves. The Treasury said it signed agreements with nine banks and will buy stock in the companies this week. The proceeds from the stock sales are intended to bolster the banks' balance sheets so they will begin more normal lending and help ease the continuing credit crisis. But investors remain worried that stagnant credit has hurt the world economy.
"Clearly, what's most important is that the funding crisis needs to be contained at this point," said Chris Orndorff, director of equity strategy at Payden & Rygel in Los Angeles.
"The banks need to start taking on some more risks," he said. "I think it's going to take months."
Beyond troubles in the financial sector, Orndorff contends investors are focusing on the outcome of the Fed meeting.
In midafternoon trading, the Dow rose 129.75, or 1.55 percent, to 8,508.70, helped by advances in Verizon Communications Inc. and Home Depot Inc.
Broader stock indicators showed more modest gains. The Standard & Poor's 500 index rose 7.77, or 0.89 percent, to 884.54, and the Nasdaq composite index rose 12.98, or 0.84 percent, to 1,565.01.
The Russell 2000 index of smaller companies fell 1.65, or 0.35 percent, to 469.47.
Despite the moves by the major indexes, declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to a light 725.1 million shares. Lighter volume can call into question the conviction behind big market advances or declines.
Light, sweet crude fell 93 cents to $63.24 per barrel on the New York Mercantile Exchange, while gold prices rose slightly.
The gyrations in U.S. stocks have been sizable since the market's peak a year ago, but particularly since last month's bankruptcy of Lehman Brothers Holdings Inc. and the government rescue of insurer American International Group. With investors uncertain about the economy, the market appears to be bouncing along a rocky bottom after falling sharply earlier this month.
Investors were cheered Monday by news that sales of new homes showed an unexpected increase in September. While median home prices have dropped to the lowest level in four years, investors appeared pleased that the market was beginning to chip away at an inventory glut. The Commerce Department reported that sales of new single-family homes rose by 2.7 percent in September to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from August.
The median price of a new home declined by 9.1 percent from a year ago to $218,400, its lowest level since September 2004.
Regional banks advanced after the Treasury began rolling out its investments. Fifth Third Bancorp. rose 99 cents, or 12.3 percent, to $9.06, while SunTrust Banks Inc. rose $1.76, or 5 percent, to $36.87.
Home builders rose after the housing data. Centex Corp. advanced 32 cents, or 3.6 percent, to $9.10, and Lennar Corp. rose 29 cents, or 4.5 percent, to $6.81.
Some companies dependent on the housing sector rose as well. Home Depot rose 71 cents, or 3.8 percent, to $19.22, while Target Corp. rose $1.10, or 3.3 percent, to $34.02.
Verizon rose $3.10, or 12.4 percent, to $28.18, making it the strongest advancer among the 30 stocks that comprise the Dow industrials, after reporting that its third-quarter earnings rose 31 percent after its wireless business showed stronger-than-expected results.
Even with several pieces of welcome news, investors around the world remain worried about the prospects for economic expansion. A surge in the yen illustrated investors' nervousness about how much economic activity could slow. Japan's Nikkei 225 index dropped to its lowest close in 26 years as investors worried that the high yen will hurt Japanese exports and further disrupt economic activity. The yen is seen as a safe haven holding for investors who contend the Japanese economy will fare better in a global recession.
The ongoing selling is due in part to the belief that a worldwide recession is likely inevitable, but it's also being triggered by hedge funds and other investors unloading stock because they're being hit by margin calls. In a margin call, a broker who lent money to an investor calls in the loan, forcing the investor to sell stock to repay the loan.
Greg Church, chief investment officer of Church Capital Management in Yardley, Pa., contends the markets likely will remain volatile as hedge funds and mutual funds step into the market to sell. He also expects that some skittish investors will look to sell their positions as rallies emerge but that the severity of the market's recent sell-off has left it overdue for a rally, even if it's only temporary.
"We probably are due for some type of a bounce. Bear market rallies can be beautiful things. I think we could get one of those things sooner than later," he said.
Investors uneasy about where the market is headed continued to propel demand for the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.71 percent from 3.72 percent late Friday. The dollar was higher against most other major currencies, except the yen, while gold prices rose.
The yield on the three-month bill, regarded as the safest asset around, fell to 0.78 percent from 0.82 percent late Thursday.
A key bank-to-bank lending rate slipped Monday. The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.51 percent from 3.52 percent on Friday.
While Libor has fallen steadily for over 10 days as confidence slowly returns to the banking system, investors remain skittish, particularly overseas.
The Nikkei fell 6.4 percent to its lowest level since October 1982, while Hong Kong's Hang Seng Index tumbled 12.7 percent, its lowest finish in more than four years and its biggest single-session drop since 1991.
The sell-off came even as the seven leading industrial nations on Sunday issued a statement warning about the "recent excessive volatility" in the value of the yen. The G7 said it would "cooperate as appropriate," stirring speculation of an orchestrated intervention to help stabilize currency markets.
Selling spread to Europe. Britain's FTSE 100 fell 0.79 percent, Germany's DAX index rose 0.91 percent, and France's CAC-40 declined 3.96 percent. Stocks in Europe pulled well off their lows after Wall Street sidestepped the steep sell-off that hit Asia and after Trichet raised the prospect of an interest rate cut.
Monday, October 27, 2008
New Loan Fix Is Unlikely the Last
WASHINGTON -- The government's latest plan to help struggling homeowners eliminates a major bottleneck by giving mortgage investors more incentive to agree to refinancings. But lawmakers said Thursday they might go further after the November election and force reluctant investors to do more.
[FDIC Chairman Sheila Bair told lawmakers Thursday about new steps being weighed to prevent foreclosures.] Getty Images
FDIC Chairman Sheila Bair told lawmakers Thursday about new steps being weighed to prevent foreclosures.
video
Senate Hearing Focuses on Homeowners
2:16
WSJ's Damian Paletta walks us through the measures being considered by the U.S. government to help homeowners facing foreclosure. (Oct. 23)
At a Senate Banking Committee hearing, FDIC Chairman Sheila Bair confirmed that "the FDIC is working closely and creatively with Treasury" on the the new initiative. The roughly $40 billion plan would encourage mortgage investors to permit struggling homeowners to refinance by having the government guarantee part of the rewritten loans.
Sen. Christopher Dodd (D., Conn.), the Banking Committee chairman, said he was considering a new round of legislation after the November election to address problem mortgages, including changes to allow bankruptcy judges to rewrite them. "I think we've come to the point again where...legislatively we have to try this again and probably some other ideas," he said.
With the U.S. and global economies at risk of recession, policy makers are racing against time to keep the housing market from continuing its steep decline and worsening the broader slowdown. But officials have run into problems persuading investors to rewrite mortgages on more affordable terms, often because of the losses entailed.
Neel Kashkari, the Treasury Department's interim assistant secretary for financial stability, who also testified before the panel, said Treasury was working on new policies to prevent foreclosures. He said the department was "passionate about doing everything we can to avoid preventable foreclosures."
The struggles over how to fix troubled loans, more than two years after the problems began to emerge, reflect the complexity of the mortgage business, thanks to the way loans have been packaged into securities that effectively divide ownership among many investors. Before they can alter a loan, mortgage servicers generally have to show it is better to refinance than foreclose, or they run the risk of being sued by investors.
The latest plan being developed by Ms. Bair and Treasury officials would try to untangle the mess by offering a government guarantee of repayment for some part of the rewritten loan. That might demonstrate that struggling homeowners would be able to repay the new loan, experts say.
"If you throw a Treasury guarantee in, then the net present value [of the new loan] becomes luminously clear," said Karen Petrou, managing partner of Federal Financial Analytics, a consulting firm. "Then it's far easier to refinance."
During the hearing, Sen. Dodd said he spoke with Treasury Secretary Henry Paulson Thursday morning about the plan to spur more loan modifications, and his impression was that the secretary is "determined" to get the program up and running.
Mr. Kashkari seemed hesitant to fully endorse the plan on Thursday and suggested the administration is weighing how the new initiative would mesh with existing programs. In addition, issues are being raised about how the costs would be accounted for, Mr. Dodd said after the hearing.
Provisions for offering new government loan guarantees were a little-noticed part of the $700 billion banking-rescue bill that the Bush administration pushed through Congress earlier this month. That bill says that in addition to other programs created in the legislation, the Treasury Department "may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures."
Some analysts say the loan-guarantee provision doesn't appear to be subject to the bill's overall $700 billion limit, so the government's power to help rewrite mortgages is even broader than it is for aiding banks.
Ms. Bair said the incentive could make a servicer's decision to modify a loan "more powerful, if not irresistible." She said such a plan could allow foreclosure prevention on an industrywide basis, rather than the current ad hoc process.
There are signs that Ms. Bair, an early advocate of more ambitious actions to stop foreclosures, is gaining traction with fellow federal officials. Federal Housing Finance Agency director James B. Lockhart, who also testified before the panel, echoed Ms. Bair's appeal for more loan modifications. "The most critical components of stabilizing the mortgage market are assisting borrowers at risk of losing their homes and reducing foreclosures," he said.
Some industry players say the new government initiative is just one addition to its piecemeal approach. That began with a voluntary mortgage modification program announced by the Bush administration in August 2007, and continued with a housing bill passed by Congress in mid-2008 that used the Federal Housing Administration to guarantee some rewritten loans.
"We'd love to do across the board [modification] but this doesn't seem to do it," said Anne Canfield, executive director of the Consumer Mortgage Coalition, a group that represents mortgage servicers.
In the hearing, Mr. Kashkari said some preventable foreclosures were occurring because homeowners were reluctant to contact their lenders, which he called the "hardest part" of the loan-modification process.
Sen. Dodd responded: "Why can't the lender make that call? They know they have a customer, a borrower in trouble."
Mr. Kashkari said lenders should be trying to reach troubled borrowers. "They need to be making these calls," he said.
—Maya Jackson Randall contributed to this article.
Write to John D. McKinnon at john.mckinnon@wsj.com and Jessica Holzer at jessica.holzer@dowjones.com
[FDIC Chairman Sheila Bair told lawmakers Thursday about new steps being weighed to prevent foreclosures.] Getty Images
FDIC Chairman Sheila Bair told lawmakers Thursday about new steps being weighed to prevent foreclosures.
video
Senate Hearing Focuses on Homeowners
2:16
WSJ's Damian Paletta walks us through the measures being considered by the U.S. government to help homeowners facing foreclosure. (Oct. 23)
At a Senate Banking Committee hearing, FDIC Chairman Sheila Bair confirmed that "the FDIC is working closely and creatively with Treasury" on the the new initiative. The roughly $40 billion plan would encourage mortgage investors to permit struggling homeowners to refinance by having the government guarantee part of the rewritten loans.
Sen. Christopher Dodd (D., Conn.), the Banking Committee chairman, said he was considering a new round of legislation after the November election to address problem mortgages, including changes to allow bankruptcy judges to rewrite them. "I think we've come to the point again where...legislatively we have to try this again and probably some other ideas," he said.
With the U.S. and global economies at risk of recession, policy makers are racing against time to keep the housing market from continuing its steep decline and worsening the broader slowdown. But officials have run into problems persuading investors to rewrite mortgages on more affordable terms, often because of the losses entailed.
Neel Kashkari, the Treasury Department's interim assistant secretary for financial stability, who also testified before the panel, said Treasury was working on new policies to prevent foreclosures. He said the department was "passionate about doing everything we can to avoid preventable foreclosures."
The struggles over how to fix troubled loans, more than two years after the problems began to emerge, reflect the complexity of the mortgage business, thanks to the way loans have been packaged into securities that effectively divide ownership among many investors. Before they can alter a loan, mortgage servicers generally have to show it is better to refinance than foreclose, or they run the risk of being sued by investors.
The latest plan being developed by Ms. Bair and Treasury officials would try to untangle the mess by offering a government guarantee of repayment for some part of the rewritten loan. That might demonstrate that struggling homeowners would be able to repay the new loan, experts say.
"If you throw a Treasury guarantee in, then the net present value [of the new loan] becomes luminously clear," said Karen Petrou, managing partner of Federal Financial Analytics, a consulting firm. "Then it's far easier to refinance."
During the hearing, Sen. Dodd said he spoke with Treasury Secretary Henry Paulson Thursday morning about the plan to spur more loan modifications, and his impression was that the secretary is "determined" to get the program up and running.
Mr. Kashkari seemed hesitant to fully endorse the plan on Thursday and suggested the administration is weighing how the new initiative would mesh with existing programs. In addition, issues are being raised about how the costs would be accounted for, Mr. Dodd said after the hearing.
Provisions for offering new government loan guarantees were a little-noticed part of the $700 billion banking-rescue bill that the Bush administration pushed through Congress earlier this month. That bill says that in addition to other programs created in the legislation, the Treasury Department "may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures."
Some analysts say the loan-guarantee provision doesn't appear to be subject to the bill's overall $700 billion limit, so the government's power to help rewrite mortgages is even broader than it is for aiding banks.
Ms. Bair said the incentive could make a servicer's decision to modify a loan "more powerful, if not irresistible." She said such a plan could allow foreclosure prevention on an industrywide basis, rather than the current ad hoc process.
There are signs that Ms. Bair, an early advocate of more ambitious actions to stop foreclosures, is gaining traction with fellow federal officials. Federal Housing Finance Agency director James B. Lockhart, who also testified before the panel, echoed Ms. Bair's appeal for more loan modifications. "The most critical components of stabilizing the mortgage market are assisting borrowers at risk of losing their homes and reducing foreclosures," he said.
Some industry players say the new government initiative is just one addition to its piecemeal approach. That began with a voluntary mortgage modification program announced by the Bush administration in August 2007, and continued with a housing bill passed by Congress in mid-2008 that used the Federal Housing Administration to guarantee some rewritten loans.
"We'd love to do across the board [modification] but this doesn't seem to do it," said Anne Canfield, executive director of the Consumer Mortgage Coalition, a group that represents mortgage servicers.
In the hearing, Mr. Kashkari said some preventable foreclosures were occurring because homeowners were reluctant to contact their lenders, which he called the "hardest part" of the loan-modification process.
Sen. Dodd responded: "Why can't the lender make that call? They know they have a customer, a borrower in trouble."
Mr. Kashkari said lenders should be trying to reach troubled borrowers. "They need to be making these calls," he said.
—Maya Jackson Randall contributed to this article.
Write to John D. McKinnon at john.mckinnon@wsj.com and Jessica Holzer at jessica.holzer@dowjones.com
Friday, October 24, 2008
Construction Industry Braces for Contraction
By ALEX FRANGOS
The construction industry, already hit hard by the housing downturn, is bracing for serious reductions in commercial and public-works projects that could lead to the industry's deepest and longest contraction in recent years.
In a closely watched report scheduled to be released Thursday, McGraw-Hill Construction estimates the value of new construction projects will fall to $515 billion next year, down 7% from this year and off 25% from its peak of $690 billion in 2006. The decline will be led by cutbacks in the construction of hotels, office buildings, warehouses and factories.
In recent years, as single-family housing slipped into a gulch, the building of hospitals, roads, schools and offices had remained relatively strong. But now states are suffering lower tax revenue, and financing for commercial projects has become prohibitively expensive or impossible to secure as banks pull back lending. For example, educational buildings will see a 3% decline to $55 billion, the McGraw-Hill report says. Health-care construction spending will see a similar percentage decline, to $26 billion. Highways and bridges will see a 4% decline to $50 billion in new projects.
It all adds up to the biggest sustained decline in construction in at least four decades. The length of the decline is also breaking records. Most construction downturns last one or two years. But according to McGraw-Hill, the construction downturn will endure its third year among all property types. It will be the fourth year of decline for construction of single-family homes. The last time that happened was 1979 to 1982.
"It's the most difficult environment for construction since the early 1990s," says Robert Murray, vice president for economic affairs at McGraw-Hill Construction, a unit of New York-based McGraw-Hill Cos. "The big story for 2009 will be how the weakening construction market will spread to nonresidential building and public works," he says.
"Nobody can get a loan if you are a developer, and if you are a state or local government, you may not be able to float a bond," says Kenneth Simonson, chief economist for Associated General Contractors, a trade group. He says developers and governments are canceling or halting projects across the country.
The McGraw-Hill forecast is based on the company's tracking of new-construction projects, including the issuance of building permits by local governments. The data, know as construction starts, are an indicator of future construction spending and often correlate strongly with actual construction spending, which is tracked monthly by the Census Bureau.
Nonresidential construction will drop 10% next year to about $220 billion. In square-footage terms, the country will build 12% less nonresidential space -- including stores, offices and warehouses -- than in 2008.
Write to Alex Frangos at alex.frangos@wsj.com
The construction industry, already hit hard by the housing downturn, is bracing for serious reductions in commercial and public-works projects that could lead to the industry's deepest and longest contraction in recent years.
In a closely watched report scheduled to be released Thursday, McGraw-Hill Construction estimates the value of new construction projects will fall to $515 billion next year, down 7% from this year and off 25% from its peak of $690 billion in 2006. The decline will be led by cutbacks in the construction of hotels, office buildings, warehouses and factories.
In recent years, as single-family housing slipped into a gulch, the building of hospitals, roads, schools and offices had remained relatively strong. But now states are suffering lower tax revenue, and financing for commercial projects has become prohibitively expensive or impossible to secure as banks pull back lending. For example, educational buildings will see a 3% decline to $55 billion, the McGraw-Hill report says. Health-care construction spending will see a similar percentage decline, to $26 billion. Highways and bridges will see a 4% decline to $50 billion in new projects.
It all adds up to the biggest sustained decline in construction in at least four decades. The length of the decline is also breaking records. Most construction downturns last one or two years. But according to McGraw-Hill, the construction downturn will endure its third year among all property types. It will be the fourth year of decline for construction of single-family homes. The last time that happened was 1979 to 1982.
"It's the most difficult environment for construction since the early 1990s," says Robert Murray, vice president for economic affairs at McGraw-Hill Construction, a unit of New York-based McGraw-Hill Cos. "The big story for 2009 will be how the weakening construction market will spread to nonresidential building and public works," he says.
"Nobody can get a loan if you are a developer, and if you are a state or local government, you may not be able to float a bond," says Kenneth Simonson, chief economist for Associated General Contractors, a trade group. He says developers and governments are canceling or halting projects across the country.
The McGraw-Hill forecast is based on the company's tracking of new-construction projects, including the issuance of building permits by local governments. The data, know as construction starts, are an indicator of future construction spending and often correlate strongly with actual construction spending, which is tracked monthly by the Census Bureau.
Nonresidential construction will drop 10% next year to about $220 billion. In square-footage terms, the country will build 12% less nonresidential space -- including stores, offices and warehouses -- than in 2008.
Write to Alex Frangos at alex.frangos@wsj.com
Thursday, October 23, 2008
Builders Help Buyers to Help Themselves
By DAWN WOTAPKA
Home builders are working with potential buyers, enrolling them in programs that address everything from credit-report errors to managing debt, in order to raise their credit scores so they can qualify for a mortgage or a better interest rate.
It is another move by a sector desperate to unload inventory as the credit crisis roils the globe, causing lenders to shun borrowers with blemished credit histories and to demand higher credit scores.
Burnishing Buyers
* Home builders such as D.R. Horton are turning to credit-enhancement programs to help make potential buyers more attractive to lenders.
* Programs address everything from debt-to-income ratios to store-branded cards and budgeting.
* Critics say free credit counseling can be had from independent, nonprofit groups with no ties to builders.
The programs, conducted over the Internet and in face-to-face meetings, have recently become "a very, very high focus," said Dean Bloxom, president of imortgage.com, a mortgage banker that works with builder Meritage Homes Corp.
Florida-based Debt Resource USA, which uses certified credit counselors and works with builders such as Hovnanian Enterprises Inc. and M/I Homes Inc., has seen business triple since it started 18 months ago, said Chief Executive David Vizzi. Hovnanian, an industry trailblazer when it rolled out credit-enhancement programs nationwide last year, has more than 100 enrollees.
D.R. Horton Inc., the nation's largest builder by number of annual closings, offers a free credit-improvement program called Home Buyers Club, which assists with credit coaching and analysis and monthly disputes.
Though no one expects the programs to significantly increase sales -- Hovnanian reports just 51 graduates in the last 18 months -- every sale counts for builders as they see earnings plummet, orders tank and cancellations rise as the worst housing correction in decades shows few signs of letting up.
Critics of the programs say credit reports are available for free, and consumers can challenge errors online. In addition, independent groups with no ties to builders offer complimentary assistance and advice.
Consumer Credit Counseling Service of Greater Atlanta Inc. has developed interactive Web-based podcasts, PowerPoint slides, social networking and journals. The nonprofit group suggests all buyers go through prepurchase counseling and a six-hour buyer's workshop.
Builders make their involvement clear to consumers and say they hope the process will build loyalty and lead to a deal for the builder and its mortgage arm.
"It becomes a win-win," said Dan Klinger, president of K. Hovnanian American Mortgage, which doesn't charge potential buyers to work with Debt Resource USA. "We get to sell one of our homes, and the customer gets to clean up his credit and learn good, fiscal responsibility at the same time."
During the housing boom, money flowed freely, even to those with weak credit scores, and builders raked in big profits. But as those buyers defaulted, scores of lenders went out of business and foreclosures swelled to record levels.
Lenders are avoiding risky subprime loans -- which made up 24% of mortgage originations in 2006 -- as well as most of the no-money-down and adjustable-rate mortgages that once inflated sales.
More recently, builders have been hurt by the loss of seller-funded down-payment assistance, in which third parties contribute to the buyer's down payment via the seller. This summer's housing law banned seller-funded down-payment assistance on mortgages insured by the Federal Housing Administration as of Oct. 1, essentially ending the practice.
Qualifying for even a basic 30-year fixed mortgage also has gotten more difficult. Lenders and mortgage insurance companies are scrutinizing credit reports and scores, which detail housing-payment history and length of credit and debt, helping gauge a borrower's risk.
Builders said they screen applicants for their credit-repair programs. They avoid those who refuse to pay bills on time and seek those willing to change payment behavior and aspiring buyers hurt by life events such as a divorce, illness or identity theft.
Everyone involved is aware there is no way to instantly rebuild a tattered score, though addressing errors is a good start. Depending on what needs to be done, the programs can take weeks or months.
The programs address everything from debt to income ratios to why opening a store-branded card at the cash register might not be a good deal. They also teach students about budgeting -- not spending a fortune on furniture for the new house or forgoing that daily latte to build up a safety net should a pipe break or the homeowner get laid off.
Write to Dawn Wotapka at dawn.wotapka@dowjones.com
Home builders are working with potential buyers, enrolling them in programs that address everything from credit-report errors to managing debt, in order to raise their credit scores so they can qualify for a mortgage or a better interest rate.
It is another move by a sector desperate to unload inventory as the credit crisis roils the globe, causing lenders to shun borrowers with blemished credit histories and to demand higher credit scores.
Burnishing Buyers
* Home builders such as D.R. Horton are turning to credit-enhancement programs to help make potential buyers more attractive to lenders.
* Programs address everything from debt-to-income ratios to store-branded cards and budgeting.
* Critics say free credit counseling can be had from independent, nonprofit groups with no ties to builders.
The programs, conducted over the Internet and in face-to-face meetings, have recently become "a very, very high focus," said Dean Bloxom, president of imortgage.com, a mortgage banker that works with builder Meritage Homes Corp.
Florida-based Debt Resource USA, which uses certified credit counselors and works with builders such as Hovnanian Enterprises Inc. and M/I Homes Inc., has seen business triple since it started 18 months ago, said Chief Executive David Vizzi. Hovnanian, an industry trailblazer when it rolled out credit-enhancement programs nationwide last year, has more than 100 enrollees.
D.R. Horton Inc., the nation's largest builder by number of annual closings, offers a free credit-improvement program called Home Buyers Club, which assists with credit coaching and analysis and monthly disputes.
Though no one expects the programs to significantly increase sales -- Hovnanian reports just 51 graduates in the last 18 months -- every sale counts for builders as they see earnings plummet, orders tank and cancellations rise as the worst housing correction in decades shows few signs of letting up.
Critics of the programs say credit reports are available for free, and consumers can challenge errors online. In addition, independent groups with no ties to builders offer complimentary assistance and advice.
Consumer Credit Counseling Service of Greater Atlanta Inc. has developed interactive Web-based podcasts, PowerPoint slides, social networking and journals. The nonprofit group suggests all buyers go through prepurchase counseling and a six-hour buyer's workshop.
Builders make their involvement clear to consumers and say they hope the process will build loyalty and lead to a deal for the builder and its mortgage arm.
"It becomes a win-win," said Dan Klinger, president of K. Hovnanian American Mortgage, which doesn't charge potential buyers to work with Debt Resource USA. "We get to sell one of our homes, and the customer gets to clean up his credit and learn good, fiscal responsibility at the same time."
During the housing boom, money flowed freely, even to those with weak credit scores, and builders raked in big profits. But as those buyers defaulted, scores of lenders went out of business and foreclosures swelled to record levels.
Lenders are avoiding risky subprime loans -- which made up 24% of mortgage originations in 2006 -- as well as most of the no-money-down and adjustable-rate mortgages that once inflated sales.
More recently, builders have been hurt by the loss of seller-funded down-payment assistance, in which third parties contribute to the buyer's down payment via the seller. This summer's housing law banned seller-funded down-payment assistance on mortgages insured by the Federal Housing Administration as of Oct. 1, essentially ending the practice.
Qualifying for even a basic 30-year fixed mortgage also has gotten more difficult. Lenders and mortgage insurance companies are scrutinizing credit reports and scores, which detail housing-payment history and length of credit and debt, helping gauge a borrower's risk.
Builders said they screen applicants for their credit-repair programs. They avoid those who refuse to pay bills on time and seek those willing to change payment behavior and aspiring buyers hurt by life events such as a divorce, illness or identity theft.
Everyone involved is aware there is no way to instantly rebuild a tattered score, though addressing errors is a good start. Depending on what needs to be done, the programs can take weeks or months.
The programs address everything from debt to income ratios to why opening a store-branded card at the cash register might not be a good deal. They also teach students about budgeting -- not spending a fortune on furniture for the new house or forgoing that daily latte to build up a safety net should a pipe break or the homeowner get laid off.
Write to Dawn Wotapka at dawn.wotapka@dowjones.com
Wednesday, October 22, 2008
Pending Home Sales up Strongly
WASHINGTON, October 08, 2008
Pending home sales activity surged as buyers took advantage of low home prices and affordable interest rates, according to the National Association of Realtors®.
The Pending Home Sales Index,1 a forward-looking indicator based on contracts signed in August, jumped 7.4 percent to 93.4 from an upwardly revised reading of 87.0 in July, and is 8.8 percent higher than August 2007 when it stood at 85.8. The index is at the highest level since June 2007 when it stood at 101.4.
Lawrence Yun, NAR chief economist, said home buyers were responding to improved affordability. “What we’re seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region,” he said. 2 “ It’s unclear how much contract activity may be impacted by the credit disruptions on Wall Street, but we’re hopeful most of the increase will translate into closed existing-home sales.”
The PHSI in the West surged 18.4 percent to 109.5 in August and remains 37.8 percent above a year ago. In the Northeast the index jumped 8.4 percent to 79.8 and is 2.0 percent higher than August 2007. The index in the Midwest rose 3.6 percent to 84.5 in August and is 6.6 percent above a year ago. In the South, the index increased 2.3 percent to 96.0 but is 2.1 percent below August 2007.
Yun notes the unusual timing of contract activity in August. “Home buyers in July were hampered by overly stringent lending criteria in the months before the government takeover of Fannie and Freddie,” he said. “August shows some unleashing of pent-up demand before the credit crisis accelerated in September.”
He cautioned that the sampling size for pending home sales is smaller than the track on existing-home sales, so there is more volatility in the forward-looking series. “We need to see just how much of this gain holds up,” Yun said.
NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said despite all the turmoil in world financial markets, home mortgages are available. “Mortgages have been harder to find, and availability and terms vary depending on credit score and location, but Realtors® can help buyers find reputable lenders while helping them navigate the transaction process,” he said. “The recently enacted economic stimulus package should help housing by gradually freeing the flow of credit.”
Yun now expects growth in the U.S. gross domestic product (GDP) to contract for two consecutive quarters, in the fourth quarter of this year and the first quarter of 2009, before expanding in latter part of 2009 as the housing market begins a steady improvement.
Looking at middle-ground assumptions, existing-home sales are forecast at 5.04 million this year and 5.41 million in 2009. Following national declines of 5 to 8 percent in 2008, home prices are projected to increase 2 to 3 percent next year.
New-home sales should total around 503,000 this year and 471,000 in 2009. Housing starts, including multifamily units, are likely to fall 28.2 percent to 973,000 units this year, and come in around 843,000 in 2009 as builders continue to clear the accumulation in inventory.
The 30-year fixed-rate mortgage will probably average 6.1 percent in the fourth quarter and rise gradually to 6.6 percent by the end of 2009. NAR’s housing affordability index is expected to average 18 percentage points higher this year than in 2007.
The unemployment rate is projected to average 6.4 percent in the fourth quarter and then average 6.6 percent in 2009. Inflation, as measured by the Consumer Price Index, is estimated at 4.0 percent for 2008 and 2.0 percent next year. Inflation-adjusted disposable personal income is forecast to grow 1.7 percent this year and 1.0 percent in 2009.
# # #
¹The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.
²Market information is from unpublished snapshot data; please contact your local association of Realtors® for more information.
Existing-home sales for September will be released October 24; the next Pending Home Sales Index / Forecast will be released at 11:30 a.m. EST on November 7 at NAR’s annual convention in Orlando, Fla. For more information visit: http://www.realtor.org/research/research/phsdata
Pending home sales activity surged as buyers took advantage of low home prices and affordable interest rates, according to the National Association of Realtors®.
The Pending Home Sales Index,1 a forward-looking indicator based on contracts signed in August, jumped 7.4 percent to 93.4 from an upwardly revised reading of 87.0 in July, and is 8.8 percent higher than August 2007 when it stood at 85.8. The index is at the highest level since June 2007 when it stood at 101.4.
Lawrence Yun, NAR chief economist, said home buyers were responding to improved affordability. “What we’re seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region,” he said. 2 “ It’s unclear how much contract activity may be impacted by the credit disruptions on Wall Street, but we’re hopeful most of the increase will translate into closed existing-home sales.”
The PHSI in the West surged 18.4 percent to 109.5 in August and remains 37.8 percent above a year ago. In the Northeast the index jumped 8.4 percent to 79.8 and is 2.0 percent higher than August 2007. The index in the Midwest rose 3.6 percent to 84.5 in August and is 6.6 percent above a year ago. In the South, the index increased 2.3 percent to 96.0 but is 2.1 percent below August 2007.
Yun notes the unusual timing of contract activity in August. “Home buyers in July were hampered by overly stringent lending criteria in the months before the government takeover of Fannie and Freddie,” he said. “August shows some unleashing of pent-up demand before the credit crisis accelerated in September.”
He cautioned that the sampling size for pending home sales is smaller than the track on existing-home sales, so there is more volatility in the forward-looking series. “We need to see just how much of this gain holds up,” Yun said.
NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said despite all the turmoil in world financial markets, home mortgages are available. “Mortgages have been harder to find, and availability and terms vary depending on credit score and location, but Realtors® can help buyers find reputable lenders while helping them navigate the transaction process,” he said. “The recently enacted economic stimulus package should help housing by gradually freeing the flow of credit.”
Yun now expects growth in the U.S. gross domestic product (GDP) to contract for two consecutive quarters, in the fourth quarter of this year and the first quarter of 2009, before expanding in latter part of 2009 as the housing market begins a steady improvement.
Looking at middle-ground assumptions, existing-home sales are forecast at 5.04 million this year and 5.41 million in 2009. Following national declines of 5 to 8 percent in 2008, home prices are projected to increase 2 to 3 percent next year.
New-home sales should total around 503,000 this year and 471,000 in 2009. Housing starts, including multifamily units, are likely to fall 28.2 percent to 973,000 units this year, and come in around 843,000 in 2009 as builders continue to clear the accumulation in inventory.
The 30-year fixed-rate mortgage will probably average 6.1 percent in the fourth quarter and rise gradually to 6.6 percent by the end of 2009. NAR’s housing affordability index is expected to average 18 percentage points higher this year than in 2007.
The unemployment rate is projected to average 6.4 percent in the fourth quarter and then average 6.6 percent in 2009. Inflation, as measured by the Consumer Price Index, is estimated at 4.0 percent for 2008 and 2.0 percent next year. Inflation-adjusted disposable personal income is forecast to grow 1.7 percent this year and 1.0 percent in 2009.
# # #
¹The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.
²Market information is from unpublished snapshot data; please contact your local association of Realtors® for more information.
Existing-home sales for September will be released October 24; the next Pending Home Sales Index / Forecast will be released at 11:30 a.m. EST on November 7 at NAR’s annual convention in Orlando, Fla. For more information visit: http://www.realtor.org/research/research/phsdata
Tuesday, October 21, 2008
No Quick Fix for Housing Prices
By RUTH SIMON and MICHAEL CORKERY
Economists Press for New Programs for Homeowners to Stem Downward Spiral
The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.
[Foreclosures in Stockton, Calif., discourage prospective sellers from putting their houses on the market.] Reuters
Foreclosures in Stockton, Calif., discourage prospective sellers from putting their houses on the market.
The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.
At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. "If the financial system doesn't get working again, then the economic downturn is going to be much worse, and that means the housing market will be a lot worse than it otherwise would be," says Frederic Mishkin, a Columbia University economist who stepped down as a Federal Reserve Board governor in August.
But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein. He proposes that the federal government offer low-interest loans to replace 20% of homeowners' mortgages.
The government's latest intervention comes as mortgage delinquencies continue to climb and home prices are plummeting in many markets. Some 5% of mortgages were at least 30 days past due at the end of the third quarter, according to Equifax and Moody's Economy.com, up from 4.6% in the second quarter and 3.5% a year earlier. In Florida and Nevada, delinquency rates now top 8%.
[double wammy]
Nationwide, house prices have fallen 18% from their peak in the first quarter of 2006, according to Case Shiller. By another measure, from the National Association of Realtors, home prices are off 12% from their peak. They are expected to fall an additional 10% to 15% between now and mid-2009, says Mark Zandi, chief economist at Moody's Economy.com.
Falling prices are feeding a vicious cycle that leads to more mortgage delinquencies and foreclosures. As more Americans end up "under water," or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
The rescue effort could buy the government some time to get other measures up and running -- and to see whether they will help stabilize home prices. Some analysts say one government initiative that appears to be bearing fruit is the increase in loan limits of mortgages backed by the Federal Housing Administration -- to as high as $729,000 in some cities. In September, FHA mortgages financed 28% of home purchases, up from 19% in August, according to Zelman & Associates, a housing research firm, and the number of buyers seeking government-backed mortgages more than doubled from last year, as houses have become affordable again.
"If you want to buy a home, and you have enough money for a modest down payment, it's not that hard to get a mortgage today," says Thomas Lawler, a housing economist in Leesburg, Va.
Over time, the government's rescue effort could make it easier for borrowers in high-cost markets such as California, New York and Boston to get a mortgage by reducing rates for jumbo loans, those too big for government backing, says Richard K. Green, director of the Lusk Center for Real Estate Development at the University of Southern California. Rates on fixed-rate jumbo loans currently average 7.91%, according to HSH Associates, more than a full percentage point above rates on conforming loans eligible for government backing, which jumped nearly a third of a percentage point Tuesday to 6.6%.
But fundamental problems remain. The supply of homes on the market remains stubbornly high, while demand for those homes remains relatively weak. Home builders, including Stuart Miller, chief executive of Lennar Corp., are lobbying for a $15,000 to $20,000 tax credit to spur demand, saying the $7,500 credit passed by Congress in July has failed to jump-start sales.
Prof. Green says the government needs to push mortgage companies to take advantage of the Hope for Homeowners program, which aims to put borrowers into affordable loans, but requires they share any resulting price appreciation with the federal government. The program "pretty much gets the incentives right," he says.
One problem with the refinancing program is that it will help only 400,000 troubled homeowners, according to some estimates, well short of the nearly 12 million Americans who owe more on their mortgages than their homes are worth and are in danger of default.
Chris Mayer, vice dean of Columbia Business School, says the government should push mortgage rates down to 5.25% in order to spur demand. Prof. Mayer has proposed that the government refinance homeowners who live in their homes, can document their income and show they can afford the new mortgage. When borrowers owe more than their homes are worth, he says, the government and the mortgage holder should share the write-down in equity when the loan is refinanced.
Economists Press for New Programs for Homeowners to Stem Downward Spiral
The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.
[Foreclosures in Stockton, Calif., discourage prospective sellers from putting their houses on the market.] Reuters
Foreclosures in Stockton, Calif., discourage prospective sellers from putting their houses on the market.
The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.
At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. "If the financial system doesn't get working again, then the economic downturn is going to be much worse, and that means the housing market will be a lot worse than it otherwise would be," says Frederic Mishkin, a Columbia University economist who stepped down as a Federal Reserve Board governor in August.
But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein. He proposes that the federal government offer low-interest loans to replace 20% of homeowners' mortgages.
The government's latest intervention comes as mortgage delinquencies continue to climb and home prices are plummeting in many markets. Some 5% of mortgages were at least 30 days past due at the end of the third quarter, according to Equifax and Moody's Economy.com, up from 4.6% in the second quarter and 3.5% a year earlier. In Florida and Nevada, delinquency rates now top 8%.
[double wammy]
Nationwide, house prices have fallen 18% from their peak in the first quarter of 2006, according to Case Shiller. By another measure, from the National Association of Realtors, home prices are off 12% from their peak. They are expected to fall an additional 10% to 15% between now and mid-2009, says Mark Zandi, chief economist at Moody's Economy.com.
Falling prices are feeding a vicious cycle that leads to more mortgage delinquencies and foreclosures. As more Americans end up "under water," or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
The rescue effort could buy the government some time to get other measures up and running -- and to see whether they will help stabilize home prices. Some analysts say one government initiative that appears to be bearing fruit is the increase in loan limits of mortgages backed by the Federal Housing Administration -- to as high as $729,000 in some cities. In September, FHA mortgages financed 28% of home purchases, up from 19% in August, according to Zelman & Associates, a housing research firm, and the number of buyers seeking government-backed mortgages more than doubled from last year, as houses have become affordable again.
"If you want to buy a home, and you have enough money for a modest down payment, it's not that hard to get a mortgage today," says Thomas Lawler, a housing economist in Leesburg, Va.
Over time, the government's rescue effort could make it easier for borrowers in high-cost markets such as California, New York and Boston to get a mortgage by reducing rates for jumbo loans, those too big for government backing, says Richard K. Green, director of the Lusk Center for Real Estate Development at the University of Southern California. Rates on fixed-rate jumbo loans currently average 7.91%, according to HSH Associates, more than a full percentage point above rates on conforming loans eligible for government backing, which jumped nearly a third of a percentage point Tuesday to 6.6%.
But fundamental problems remain. The supply of homes on the market remains stubbornly high, while demand for those homes remains relatively weak. Home builders, including Stuart Miller, chief executive of Lennar Corp., are lobbying for a $15,000 to $20,000 tax credit to spur demand, saying the $7,500 credit passed by Congress in July has failed to jump-start sales.
Prof. Green says the government needs to push mortgage companies to take advantage of the Hope for Homeowners program, which aims to put borrowers into affordable loans, but requires they share any resulting price appreciation with the federal government. The program "pretty much gets the incentives right," he says.
One problem with the refinancing program is that it will help only 400,000 troubled homeowners, according to some estimates, well short of the nearly 12 million Americans who owe more on their mortgages than their homes are worth and are in danger of default.
Chris Mayer, vice dean of Columbia Business School, says the government should push mortgage rates down to 5.25% in order to spur demand. Prof. Mayer has proposed that the government refinance homeowners who live in their homes, can document their income and show they can afford the new mortgage. When borrowers owe more than their homes are worth, he says, the government and the mortgage holder should share the write-down in equity when the loan is refinanced.
Monday, October 20, 2008
Realtors® Join With Mayors and Others to Bring Workers Home
CHICAGO, October 06, 2008
Nearly 40 percent of Americans believe there is a shortage of available affordable housing, according to a recent National Association of Realtors® survey. To help combat this trend and promote more affordable housing solutions for the nation’s workforce, hundreds of housing advocates from across the country are coming together today for the first-ever conference on employer-assisted housing benefits.
The one-day Employer-Assisted Housing: Bring Workers Home conference is taking place at the InterContinental Hotel here. The conference will highlight case studies of successful EAH programs from public and private sector employers and local governments and allow key stakeholders to connect and explore opportunities to work together to help increase awareness about EAH benefits.
“Realtors® build communities and care about the lack of housing opportunities available to America’s low- to moderate-income working families, many of whom can’t find affordable housing near their workplace,” said NAR President Dick Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. “This groundbreaking event offers a unique opportunity for Realtors®; national, state and local housing leaders; local and county government officials; and business professionals to come together to work with organizations to help them develop EAH benefits for their employees. Working together, we will help even more families realize the dream of owning a home.”
Rising home prices, increased housing costs, and today’s tightened mortgage market have put homeownership out of reach for many working families. In fact, an NAR survey found that eight out of 10 Americans believe that having enough money for down payment and closing costs is an obstacle to purchasing a home. Another 69 percent think it’s difficult to find a home that they both like and can afford.
EAH benefits − which can take the form of home buying workshops, financial counseling or loans for down payment or closing costs that are forgivable over a period of time − can help meet the needs of both employers and their workforce. Workers achieve their dreams of owning a home while employers benefit from increased employee morale and loyalty and reduced turnover, which leads to lower training and hiring costs.
Conference session topics include why and how to create an EAH benefit, how to advance EAH benefits through partnerships and programs, successful EAH programs in action, and tips for advocating and promoting EAH benefits.
The conference keynote speakers are national housing consultants Beverly Barnes and Beth Marcus; Sharon H. Douglas, vice president of human resources and chief people person, Aflac; and Carl Guardino, Silicon Valley Leadership Group. Other speakers include Ellen Sahli, Chicago Housing Commissioner; and Realtor® John Veneris, NAR region 7 vice president.
The National Association of Realtors® is sponsoring the event in partnership with the Chicago Association of Realtors®, Illinois Association of Realtors®, Metropolitan Planning Council, National Association of Counties, National Housing Conference and the U.S. Conference of Mayors.
For more information about the Employer-Assisted Housing: Bring Workers Home conference, visit www.realtor.org/eahconference.
Nearly 40 percent of Americans believe there is a shortage of available affordable housing, according to a recent National Association of Realtors® survey. To help combat this trend and promote more affordable housing solutions for the nation’s workforce, hundreds of housing advocates from across the country are coming together today for the first-ever conference on employer-assisted housing benefits.
The one-day Employer-Assisted Housing: Bring Workers Home conference is taking place at the InterContinental Hotel here. The conference will highlight case studies of successful EAH programs from public and private sector employers and local governments and allow key stakeholders to connect and explore opportunities to work together to help increase awareness about EAH benefits.
“Realtors® build communities and care about the lack of housing opportunities available to America’s low- to moderate-income working families, many of whom can’t find affordable housing near their workplace,” said NAR President Dick Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. “This groundbreaking event offers a unique opportunity for Realtors®; national, state and local housing leaders; local and county government officials; and business professionals to come together to work with organizations to help them develop EAH benefits for their employees. Working together, we will help even more families realize the dream of owning a home.”
Rising home prices, increased housing costs, and today’s tightened mortgage market have put homeownership out of reach for many working families. In fact, an NAR survey found that eight out of 10 Americans believe that having enough money for down payment and closing costs is an obstacle to purchasing a home. Another 69 percent think it’s difficult to find a home that they both like and can afford.
EAH benefits − which can take the form of home buying workshops, financial counseling or loans for down payment or closing costs that are forgivable over a period of time − can help meet the needs of both employers and their workforce. Workers achieve their dreams of owning a home while employers benefit from increased employee morale and loyalty and reduced turnover, which leads to lower training and hiring costs.
Conference session topics include why and how to create an EAH benefit, how to advance EAH benefits through partnerships and programs, successful EAH programs in action, and tips for advocating and promoting EAH benefits.
The conference keynote speakers are national housing consultants Beverly Barnes and Beth Marcus; Sharon H. Douglas, vice president of human resources and chief people person, Aflac; and Carl Guardino, Silicon Valley Leadership Group. Other speakers include Ellen Sahli, Chicago Housing Commissioner; and Realtor® John Veneris, NAR region 7 vice president.
The National Association of Realtors® is sponsoring the event in partnership with the Chicago Association of Realtors®, Illinois Association of Realtors®, Metropolitan Planning Council, National Association of Counties, National Housing Conference and the U.S. Conference of Mayors.
For more information about the Employer-Assisted Housing: Bring Workers Home conference, visit www.realtor.org/eahconference.
Friday, October 17, 2008
Fannie, Freddie Share Spotlight in Mortgage Mess
By JAMES R. HAGERTY
Fannie Mae and Freddie Mac have become prime suspects in the political debate over who caused the mortgage meltdown.
Last week, Sen. John McCain, the Republican presidential nominee, said the government-backed mortgage investors are "the match that started this forest fire" in the U.S. economy. Others contend that a push by Congress that forced Fannie and Freddie to sharply ramp up lending to lower-income borrowers is what did in the mortgage giants. A television ad campaign by the American Issues Project, a conservative political organization, accuses Democrats in Congress of coddling Fannie and Freddie, allowing them to escape tougher regulation.
[Photo] Associated Press
Fannie Mae President and CEO Herbert Allison Jr., left, and Freddie Mac CEO David Moffett talk during a break in congressional testimony last month.
"That's nonsense," said Rep. Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee. He said in an interview that when Republicans had a majority in Congress they failed to pass legislation improving regulation of the companies.
Even accounting scandals that led to billions of dollars in fines and remediation costs in recent years failed to bring major change. In October 2005, a majority of Republicans in the House of Representatives joined Democrats in rejecting a Bush administration plan that could have drastically shrunk Fannie and Freddie.
Fannie and Freddie do share some of the blame for the mortgage and housing bust. They recorded a combined $14 billion of losses in the 12 months ended June 30, largely because they lowered their credit standards and purchased or guaranteed dubious home loans.
But "they weren't the leaders in lowering credit standards," said Andrew Davidson, a mortgage industry consultant in New York who has done work for Fannie and Freddie and also criticized them for taking excessive risks. He noted that the worst-performing mortgages are those that were originated by subprime lenders and packaged into securities sold by Wall Street, rather than by Fannie and Freddie. And while loans for low-income people -- programs championed by Democrats as well as many Republicans -- have contributed to Fannie and Freddie's losses, they aren't the biggest part of the problem.
[loans for the lower half]
Fannie has said that 50% of its credit losses in the second quarter came from Alt-A loans, which generally go to borrowers with good credit records who don't fully document their income. Fannie officials have said Alt-A loans make up the company's biggest problem area. Fannie has said that about 17% of its Alt-A loans were to real-estate investors and 32% financed homes in California and Florida, where home prices have plunged.
Still, the recent problems that led to the downfall of Fannie and Freddie -- the government seized their operations last month -- weren't the first sign of trouble. For decades the two companies were allowed to grow without close scrutiny as policy makers missed repeated opportunities to rein them in.
Fannie Mae got its start in 1938 under President Franklin Roosevelt's administration, which created it as a federal agency charged with buying mortgages from banks to ensure a steady flow of funds to make new home loans. In 1968, Fannie was put on the path toward private ownership when the Johnson administration wanted to avoid having to put Fannie's growing debt on the government books.
The result was "a strange creature," noted a 1986 report by the Department of Housing and Urban Development. Private shareholders acquired ownership of Fannie, but it still had a charter from Congress, giving it a public mission of supporting the housing market. Because of this close link with the government, Fannie could borrow money at rates almost as low as those on Treasury bonds.
Despite protests from the Federal Reserve about the risks of increased borrowing and mortgage investments by government-backed entities, Congress in 1970 created Freddie as a second source of funds for home loans and gave Fannie authority to buy a wider variety of mortgages.
In the 1970s, Fannie fought off attempts by the Carter administration to impose tighter clamps on the company and require it to do more to help finance homes for the poor. Those battles helped breed a culture of aggressive lobbying of Congress to prevent stricter regulation.
Like thousands of savings-and-loans institutions, Fannie got into trouble when interest rates soared in the late 1970s and early 1980s as the Fed battled inflation. In 1981, Fannie owned about $61 billion of mortgages with average yields of about 9.9%. That portfolio was financed with debt at costs averaging 11%. Fannie's liabilities in 1981 exceeded the estimated current-market value of its assets by $11 billion, according to a report by HUD, then Fannie's main regulator.
"Basically, Fannie Mae was the nation's largest insolvent thrift," says Susan Woodward, who was HUD's chief economist in the late 1980s. "What the government did about them mostly was to cross their fingers and pray for lower interest rates."
Freddie remained profitable throughout the 1980s because, unlike Fannie, it didn't hold large amounts of mortgages and focused on providing guarantees for mortgages held by others.
Fannie installed new management in 1981, led by David O. Maxwell, who had served as a Nixon administration official and headed a mortgage-insurance company. To offset the drag of low-yielding mortgages on its books, Fannie bought large amounts of higher-yielding home loans. Fannie's mortgage holdings grew to $98 billion in 1986 from $57 billion in 1980.
Meanwhile, Fannie got a little help from the Reagan administration. As losses ate into Fannie's capital, HUD in 1982 allowed the company to raise its borrowings to 30 times capital from 25 times. HUD called the move "prudent" and said it would help Fannie support the housing market. Also in 1982, Congress passed legislation allowing Fannie to "carry back" losses to offset taxes paid as much as 10 years before, compared with three years under previous rules.
As interest rates came down in the mid-1980s, Fannie returned to the black and became one of the nation's biggest and most profitable financial institutions. With those profits came more political clout.
The Reagan administration occasionally called for "privatizing" Fannie and Freddie by ending the close relationship with the government that allows them to borrow money at relatively low interest rates. But those calls never led to legislation in Congress, where lobbyists for home builders and Realtors were powerful backers of the companies.
"They beat us politically," says Lawrence Kudlow, who was an associate budget director in the Reagan White House. One reason, he says, is that the administration was distracted by other matters, including the collapse of hundreds of savings-and-loans.
Fannie Mae and Freddie Mac have become prime suspects in the political debate over who caused the mortgage meltdown.
Last week, Sen. John McCain, the Republican presidential nominee, said the government-backed mortgage investors are "the match that started this forest fire" in the U.S. economy. Others contend that a push by Congress that forced Fannie and Freddie to sharply ramp up lending to lower-income borrowers is what did in the mortgage giants. A television ad campaign by the American Issues Project, a conservative political organization, accuses Democrats in Congress of coddling Fannie and Freddie, allowing them to escape tougher regulation.
[Photo] Associated Press
Fannie Mae President and CEO Herbert Allison Jr., left, and Freddie Mac CEO David Moffett talk during a break in congressional testimony last month.
"That's nonsense," said Rep. Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee. He said in an interview that when Republicans had a majority in Congress they failed to pass legislation improving regulation of the companies.
Even accounting scandals that led to billions of dollars in fines and remediation costs in recent years failed to bring major change. In October 2005, a majority of Republicans in the House of Representatives joined Democrats in rejecting a Bush administration plan that could have drastically shrunk Fannie and Freddie.
Fannie and Freddie do share some of the blame for the mortgage and housing bust. They recorded a combined $14 billion of losses in the 12 months ended June 30, largely because they lowered their credit standards and purchased or guaranteed dubious home loans.
But "they weren't the leaders in lowering credit standards," said Andrew Davidson, a mortgage industry consultant in New York who has done work for Fannie and Freddie and also criticized them for taking excessive risks. He noted that the worst-performing mortgages are those that were originated by subprime lenders and packaged into securities sold by Wall Street, rather than by Fannie and Freddie. And while loans for low-income people -- programs championed by Democrats as well as many Republicans -- have contributed to Fannie and Freddie's losses, they aren't the biggest part of the problem.
[loans for the lower half]
Fannie has said that 50% of its credit losses in the second quarter came from Alt-A loans, which generally go to borrowers with good credit records who don't fully document their income. Fannie officials have said Alt-A loans make up the company's biggest problem area. Fannie has said that about 17% of its Alt-A loans were to real-estate investors and 32% financed homes in California and Florida, where home prices have plunged.
Still, the recent problems that led to the downfall of Fannie and Freddie -- the government seized their operations last month -- weren't the first sign of trouble. For decades the two companies were allowed to grow without close scrutiny as policy makers missed repeated opportunities to rein them in.
Fannie Mae got its start in 1938 under President Franklin Roosevelt's administration, which created it as a federal agency charged with buying mortgages from banks to ensure a steady flow of funds to make new home loans. In 1968, Fannie was put on the path toward private ownership when the Johnson administration wanted to avoid having to put Fannie's growing debt on the government books.
The result was "a strange creature," noted a 1986 report by the Department of Housing and Urban Development. Private shareholders acquired ownership of Fannie, but it still had a charter from Congress, giving it a public mission of supporting the housing market. Because of this close link with the government, Fannie could borrow money at rates almost as low as those on Treasury bonds.
Despite protests from the Federal Reserve about the risks of increased borrowing and mortgage investments by government-backed entities, Congress in 1970 created Freddie as a second source of funds for home loans and gave Fannie authority to buy a wider variety of mortgages.
In the 1970s, Fannie fought off attempts by the Carter administration to impose tighter clamps on the company and require it to do more to help finance homes for the poor. Those battles helped breed a culture of aggressive lobbying of Congress to prevent stricter regulation.
Like thousands of savings-and-loans institutions, Fannie got into trouble when interest rates soared in the late 1970s and early 1980s as the Fed battled inflation. In 1981, Fannie owned about $61 billion of mortgages with average yields of about 9.9%. That portfolio was financed with debt at costs averaging 11%. Fannie's liabilities in 1981 exceeded the estimated current-market value of its assets by $11 billion, according to a report by HUD, then Fannie's main regulator.
"Basically, Fannie Mae was the nation's largest insolvent thrift," says Susan Woodward, who was HUD's chief economist in the late 1980s. "What the government did about them mostly was to cross their fingers and pray for lower interest rates."
Freddie remained profitable throughout the 1980s because, unlike Fannie, it didn't hold large amounts of mortgages and focused on providing guarantees for mortgages held by others.
Fannie installed new management in 1981, led by David O. Maxwell, who had served as a Nixon administration official and headed a mortgage-insurance company. To offset the drag of low-yielding mortgages on its books, Fannie bought large amounts of higher-yielding home loans. Fannie's mortgage holdings grew to $98 billion in 1986 from $57 billion in 1980.
Meanwhile, Fannie got a little help from the Reagan administration. As losses ate into Fannie's capital, HUD in 1982 allowed the company to raise its borrowings to 30 times capital from 25 times. HUD called the move "prudent" and said it would help Fannie support the housing market. Also in 1982, Congress passed legislation allowing Fannie to "carry back" losses to offset taxes paid as much as 10 years before, compared with three years under previous rules.
As interest rates came down in the mid-1980s, Fannie returned to the black and became one of the nation's biggest and most profitable financial institutions. With those profits came more political clout.
The Reagan administration occasionally called for "privatizing" Fannie and Freddie by ending the close relationship with the government that allows them to borrow money at relatively low interest rates. But those calls never led to legislation in Congress, where lobbyists for home builders and Realtors were powerful backers of the companies.
"They beat us politically," says Lawrence Kudlow, who was an associate budget director in the Reagan White House. One reason, he says, is that the administration was distracted by other matters, including the collapse of hundreds of savings-and-loans.
Thursday, October 16, 2008
The Rules on Home-Equity Lines
The Rules on Home-Equity Lines
By Benny L. Kass
Saturday, September 20, 2008; Page F09
There are federal laws that can provide you some protection if your lender wants to cancel or reduce your home-equity line of credit.
Home-equity lines are popular with homeowners because they make it easy to tap into cash. But in the wake of the mortgage meltdown, lenders are reducing or canceling many of these credit lines because of concerns over falling home values.
This summer, both the Federal Deposit Insurance Corp. and the Office of Thrift Supervision issued guidance to the institutions they oversee to remind them that when they change these credit lines, they have to follow the laws. Among the federal laws that protect consumers in these situations are the federal Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Federal Trade Commission Act.
The Truth in Lending Act prohibits a lender from terminating the credit line and demanding payment in full before the agreed-upon expiration unless the borrower has committed fraud or provided materially misleading information to the lender in the loan application. The lender also has the right to call the loan if the borrower becomes delinquent and does not make the required payments.
However, even in these circumstances, the Office of Thrift Supervision encourages lenders to "work with borrowers to determine an appropriate strategy for mitigating risk."
Lenders do have the right to take steps short of demanding immediate payment in order to reduce their exposure. "For example, an association [lender] could suspend or 'freeze' further advances, reduce the credit limit, or change payment terms," the Office of Thrift Supervision suggested.
ad_icon
But even should your lender opt to make those kinds of changes, there are legal limitations and restrictions. For example, under the Truth in Lending Act, while a lender has the right to freeze additional draws or reduce the credit limit, it cannot require the borrower to make higher monthly or quarterly payments.
Regulation Z is the implementation of that law as promulgated by the Federal Reserve Board. According to this regulation, for a lender to be satisfied that the value of the house has decreased sufficiently so that protective action can be taken, the difference between the credit limit and available equity today has to be reduced by 50 percent from the time the credit line was first made available.
Lenders cannot make this calculation based on regional statistics. They have to evaluate your house. According to the Office of Thrift Supervision, "while Regulation Z does not require a savings association to obtain an appraisal to determine whether collateral value has significantly declined, an association should have a sound factual basis for reaching this conclusion."
If your lender reasonably believes that you will be unable to continue to make payments because your circumstances have materially changed, the lender would have the right to impose restrictions on your loan. But this requires a two-prong review: your circumstances have to materially change and your lender must have a reasonable belief. I suspect that as more lenders start to put restrictions on equity lines of credit, there will be a lot of litigation requiring that lenders prove both these factors.
Another law that consumers can use to challenge restrictions on their home-equity loan is the Equal Credit Opportunity Act. Lenders cannot discriminate against potential borrowers based on such factors as race, sex, religion or national origin. Redlining -- the practice of not making loans in certain geographical areas -- is strictly prohibited.
Under the Fair Credit Reporting Act, if the lender uses information contained in a credit report to suspend or reduce a credit line, the lender must give the consumer a document known as an adverse action report. This report enables the consumer to understand -- and challenge if necessary -- the lender's decision.
Finally, the Federal Trade Commission Act may be of assistance to consumers faced with equity line problems. According to the FTC, under this act, "the Commission is empowered, among other things, to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; . . . "
Our economy is in a difficult time, and certainly mortgage lenders are feeling the brunt of the problems. They have the right to protect their investments, but they have to do so legally.
If you learn that the terms and conditions of your equity line are about to change, make sure that your lender is in full compliance with the laws. And remind your lender of the recent suggestion from the FDIC, which urged institutions "to work with borrowers to minimize hardships that may result" from any reductions or suspensions of your loan.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site,http://www.kmklawyers.com.
By Benny L. Kass
Saturday, September 20, 2008; Page F09
There are federal laws that can provide you some protection if your lender wants to cancel or reduce your home-equity line of credit.
Home-equity lines are popular with homeowners because they make it easy to tap into cash. But in the wake of the mortgage meltdown, lenders are reducing or canceling many of these credit lines because of concerns over falling home values.
This summer, both the Federal Deposit Insurance Corp. and the Office of Thrift Supervision issued guidance to the institutions they oversee to remind them that when they change these credit lines, they have to follow the laws. Among the federal laws that protect consumers in these situations are the federal Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Federal Trade Commission Act.
The Truth in Lending Act prohibits a lender from terminating the credit line and demanding payment in full before the agreed-upon expiration unless the borrower has committed fraud or provided materially misleading information to the lender in the loan application. The lender also has the right to call the loan if the borrower becomes delinquent and does not make the required payments.
However, even in these circumstances, the Office of Thrift Supervision encourages lenders to "work with borrowers to determine an appropriate strategy for mitigating risk."
Lenders do have the right to take steps short of demanding immediate payment in order to reduce their exposure. "For example, an association [lender] could suspend or 'freeze' further advances, reduce the credit limit, or change payment terms," the Office of Thrift Supervision suggested.
ad_icon
But even should your lender opt to make those kinds of changes, there are legal limitations and restrictions. For example, under the Truth in Lending Act, while a lender has the right to freeze additional draws or reduce the credit limit, it cannot require the borrower to make higher monthly or quarterly payments.
Regulation Z is the implementation of that law as promulgated by the Federal Reserve Board. According to this regulation, for a lender to be satisfied that the value of the house has decreased sufficiently so that protective action can be taken, the difference between the credit limit and available equity today has to be reduced by 50 percent from the time the credit line was first made available.
Lenders cannot make this calculation based on regional statistics. They have to evaluate your house. According to the Office of Thrift Supervision, "while Regulation Z does not require a savings association to obtain an appraisal to determine whether collateral value has significantly declined, an association should have a sound factual basis for reaching this conclusion."
If your lender reasonably believes that you will be unable to continue to make payments because your circumstances have materially changed, the lender would have the right to impose restrictions on your loan. But this requires a two-prong review: your circumstances have to materially change and your lender must have a reasonable belief. I suspect that as more lenders start to put restrictions on equity lines of credit, there will be a lot of litigation requiring that lenders prove both these factors.
Another law that consumers can use to challenge restrictions on their home-equity loan is the Equal Credit Opportunity Act. Lenders cannot discriminate against potential borrowers based on such factors as race, sex, religion or national origin. Redlining -- the practice of not making loans in certain geographical areas -- is strictly prohibited.
Under the Fair Credit Reporting Act, if the lender uses information contained in a credit report to suspend or reduce a credit line, the lender must give the consumer a document known as an adverse action report. This report enables the consumer to understand -- and challenge if necessary -- the lender's decision.
Finally, the Federal Trade Commission Act may be of assistance to consumers faced with equity line problems. According to the FTC, under this act, "the Commission is empowered, among other things, to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; . . . "
Our economy is in a difficult time, and certainly mortgage lenders are feeling the brunt of the problems. They have the right to protect their investments, but they have to do so legally.
If you learn that the terms and conditions of your equity line are about to change, make sure that your lender is in full compliance with the laws. And remind your lender of the recent suggestion from the FDIC, which urged institutions "to work with borrowers to minimize hardships that may result" from any reductions or suspensions of your loan.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site,http://www.kmklawyers.com.
Tuesday, October 14, 2008
Be a Better Borrower
The stories of foreclosure and loss in today's mortgage crisis are painful. If you are in the market, here are five things you should do.
1. Begin with a good understanding of your finances. Examine your budget and income and determine how much you can pay as a down payment and afford each month (mortgage plus bills). Remember to factor in a cushion for unexpected costs such as unemployment.
2. Understand the lending process. Take time to learn about credit, mortgage terms, interest rates and points. Keep in mind that when you assume a mortgage you may be buying your dream home, but are also taking on a significant debt.
3. Get pre-approved. Once you have a handle on your finances and the lending process, get pre-approved for a mortgage. This gives you defined parameters for your home search and makes you a more appealing prospect to sellers.
4. Search out a reputable lender. Ask for recommendations from your real estate professional and from friends and family. Research the lenders you are considering before making a selection. Of course you should shop around for the best rates, but remember there are other important factors at play.
5. Listen to your heart and look ahead. If something seems too good to be true, it probably is. Also, take the time to analyze the fine print and make sure the mortgage terms are still manageable five, ten, and twenty years from now.
1. Begin with a good understanding of your finances. Examine your budget and income and determine how much you can pay as a down payment and afford each month (mortgage plus bills). Remember to factor in a cushion for unexpected costs such as unemployment.
2. Understand the lending process. Take time to learn about credit, mortgage terms, interest rates and points. Keep in mind that when you assume a mortgage you may be buying your dream home, but are also taking on a significant debt.
3. Get pre-approved. Once you have a handle on your finances and the lending process, get pre-approved for a mortgage. This gives you defined parameters for your home search and makes you a more appealing prospect to sellers.
4. Search out a reputable lender. Ask for recommendations from your real estate professional and from friends and family. Research the lenders you are considering before making a selection. Of course you should shop around for the best rates, but remember there are other important factors at play.
5. Listen to your heart and look ahead. If something seems too good to be true, it probably is. Also, take the time to analyze the fine print and make sure the mortgage terms are still manageable five, ten, and twenty years from now.
Monday, October 13, 2008
Understanding the Comparative Market Analysis
| A comparative market analysis is a very important part of understand when looking to sell your home. To better understand how they work, I have pulled information from my monthly e-newsletter. Interested in finding out what your home is worth? Go to my website and request a CMA today. As the old saying goes, "Knowledge is power." This adage can certainly be applied to the real estate transaction. The more you know, from the ins and outs of the process to the market conditions, the better your chance of selling and getting the most from your investment.
Here are some of the elements contained in most reports: 1. Homes for sale. This is an inventory of the current active listings in the Multiple Listing Service (MLS). It will give you an idea of how many other homes will be competing for buyer attention. Consider the asking prices for homes similar to yours, but remember the asking price is just that. It does not reflect what buyers are willing to pay. 2. Pending sales. hese are active listings that are now under contract. Additional data on the sale will likely not be available until after the closing. 3. Comparable sales. This is perhaps the most revealing and interesting component. It details all the sold listings in the last six months and their sale prices. Look carefully at the numbers. Here you can discover how much buyer's are willing to pay. This data can help you and your agent craft a realistic list price. The final piece of the CMA puzzle is to make sure you look specifically at homes that are similar to yours. To make the most of this data, search for a home that is comparable to yours in location, size, age, amenities, etc. Use the expertise of your Realtor® to analyze the numbers and his or her market knowledge to adjust the numbers up or down accordingly. |
The Competitive Market Analysis or CMA is a report that will help you learn more about your marketplace. Many real estate professionals offer this free service or as part of their service package. A CMA offers you a snapshot of the real estate conditions in your area and can be a very useful tool when setting your own asking price.
Friday, October 10, 2008
Finding the Right Home Loan
Thanks for checking out today's blog. Below is info which I have pulled from a real estate website discussing factors to consider when choosing a mortgage. Feel free to take a look and discuss any questions or concerns that you may have. Also don't forget to check out me website. HAVE A GREAT DAY!!
Weigh your options to find the right home loan for you.
Finding the right home loan is all about saving money. You took your time finding the right house – shouldn’t you also carefully evaluate the financing for that home?
When finding the right home loan, there are several factors to consider. What is your financial situation? How much of a down payment do you have? What are current interest rates? How long do you plan to stay in the new home? Consider these factors, plus others, to help you find the right home loan for you.
How long will this be your address?
Let’s start with how long you plan to stay in the home. While no one can know the future with certainty, you can probably make a good guess as to how long you’ll stay. If you know your job will require a transfer in a few years or if you’re self-aware enough to know that you’re part nomad, then this will affect what home loan you choose. If, however, your job doesn’t move you around and you are the type who likes to put down roots, then a different type of home loan may be better for you.
• If you may move soon
If you think you may move again within 4 to 5 years, you have may want to consider several different options for the right home loan. If rates are low, you may want to consider a short-term fixed rate mortgage (such as a 10 or 15-year fixed loan) to build up equity for your short time in the home. Another option to consider is an adjustable rate mortgage (ARM) or a hybrid loan. An ARM gives you a lower interest rate than typically offered with a fixed rate mortgage. The catch is that the ARM’s interest rate changes. A hybrid loan gives you the benefit of an ARM’s lower interest rate, but the security of a fixed loan because there is a fixed period before the rate resets. If you plan to move relatively soon, it may turn out that you sell the house before your rate adjusts.
• If you’re in it for the long haul
If you won’t be moving again anytime in the near future, then a fixed rate mortgage may be the right loan for you, especially if interest rates are low. A 15-year or 30-year fixed rate mortgage can be the perfect fit if you plan to stay in the home for a long period of time and you prefer the security of knowing what your interest rate (and monthly payments) will be. You can lock in a good interest rate that is guaranteed to you for the 15 or 30-year term of the mortgage.
What about down payment options?
Finding the right home loan also means evaluating options for your down payment. The 20 percent down payment is not necessarily the standard these days.
• No-down-payment mortgage
Yes, you read that right. It is possible to get a mortgage without putting any money down. That means that you finance 100 percent of the purchase price of the home. Sounds pretty scary, right? But, sometimes it can be a viable option. If you live in a market with rapidly escalating prices, it may not be that possible for you to save 10 to 20 percent of the purchase price before being priced out of the market. With a no-down-payment mortgage, you’ll get a higher interest rate and you’ll have to pay PMI (private mortgage insurance). Also, it’ll take you longer to build up equity since you didn’t put any money down. Keep in mind that not having equity in your home can be dangerous if home prices fall.
• Piggy-back loan
Another way to finance a home if you don’t have enough for a 20 percent down payment is a piggy-back loan. Basically, A piggy-back loan is a combination of two loans that close at the same time to allow you to purchase a home. The most common types of piggy-back loans are an 80/20 mortgage, an 80/15/5, or an 80/10/10. An 80/20 means that you finance 80 percent of the home’s purchase price through a first mortgage, but the other 20 percent comes from a second mortgage. An 80/10/10 means that you finance 80 percent of the purchase price via a first mortgage, 10 percent from a second mortgage, and that you make a down payment of 10%. With a piggyback loan you avoid PMI, but your second loan often will have a higher interest rate. Still, this can be a good option if you don’t have enough for a 20 percent down payment.
• FHA loan
For the first-time homebuyer, the government runs a program to help you realize the dream of homeownership. An FHA loan lets you get in with as little as 3 percent down.
This really just scratches the surface for your options in finding the right home loan. Know your financial situation and investigate all of the mortgage options so that you can get the right home loan for you.
Thursday, October 9, 2008
Hello
Thanks for everyone who has subscribed to my blog. This Blog has been created to assist anyone who is interested news and updates of the REAL ESTATE world. My goal provide knowledge to everyone regarding the real estate industry. I invite you to not only read the information I provide but also to comment and ask questions regarding real estate.
Once again I thank you for subscribing to my Blog and I look forward to providing you with real estate news.
Please feel free to check out my website
Once again I thank you for subscribing to my Blog and I look forward to providing you with real estate news.
Please feel free to check out my website
Subscribe to:
Posts (Atom)
