Home price decline continues

S&P/Case-Shiller Home Price Indices tracks 2 different indices, ten & twenty metropolitan statistical areas across the country & is released by Standard & Poor's. The report released in January indicates that nationwide price decline for existing family homes has continued into this year also. Sixteen of the twenty metropolitan statistical areas (MSAs) in the survey have reported record declines with 10 of them reaching double digits.

Both 20-City & 10-City Composite Indices now report annual declines exceeding 10%. The 20-City has reported a decline of 10.7% & the 10-City a record annual decline of 11.4%.

Just few months back also Miami & Las Vegas were the boom cities, now price-wise, are the weakest cities in January. Miami & Las Vegas have showed decline in prices year-over-year of 19.3% and Phoenix at 18.2% is closely following these two cities in price declines.

Some other metropolitan statistical areas having double-digit price declines include Los Angeles (16.5%), San Diego (16.7%), Detroit (15.1%), Minneapolis (10%), Washington (10.9%), Tampa (15%), & San Francisco (13.2%).

The base year used by the indices is 2000, & number 100 is assigned to year 2000. So, a present score of 150 will indicate a 50% appreciation in price in last 8 years. The score for 20-City Composite is 180.65 & the 10-City 196.06. With this long view of Home Price Indices data, homeowners in many metropolitan statistical areas are still counting their blessings as some of the worst hit cities as per the present performance are even now showing remarkable appreciation since year 2000, like Log Angeles (224.21), Miami (225.40) & Las Vegas (186.05).

In his remarks on survey results, David M. Blitzer, Chairman of the Index Committee at Standard & Poor's said;

Capital requirement for Fannie Mae & Freddie Mac lowered

In a recent development OFHEO (Office of Federal Housing Enterprise Oversight) announced increase in liquidity of the MBS (Mortgage Backed Securities) market by as much as $200 billion.

According to OFHEO, Fannie Mae & Freddie Mac will be allowed to invest a significant portion of the thirty percent capital surplus they have to maintain into mortgages & mortgage-backed securities. Reduction in capital requirements to 20% has been called as "appropriate" by Office of Federal Housing Enterprise Oversight & it may further reduce this capital requirement in future.

In combination with the increase of portfolio caps this reduction in capital requirement will allow the 2 GSEs (Government Sponsored Enterprises) to guarantee or purchase about $2 trillion in mortgage in this current year. This purchasing capacity will allow the 2 GSEs provide assistance in subprime refinancing, loan modification & also do more of jumbo mortgages, for which they have got permission now.

J.P. Morgan acquires Bear Stearns

J.P. Morgan Chase acquired the investment bank Bear Stearns with a price tag that was a real stunner; it has agreed to pay $2 per share for acquiring Bear Stearns. This purchase price will be paid fully in stock & includes company's forty five storey NY Office Tower. Before the announcement, the price that was talked about was $30 per share. But with $2 per share, the total value of the acquisition, roughly about $236 million is only a fraction of Bear Stearns market value - $3.5 billion.

According to The New York Times, Federal Reserve is providing $30 billion credit line to J.P. Morgan Chase which will be secured by Bear Stearns portfolio less-liquid assets like mortgage securities. In a situation these assets lose more value, Federal Reserve will be affected, not J.P. Morgan.

Bear Stearns was known as one of the biggest gamblers of mortgage securities business. It had provided large lines of credit to many subprime lenders & had underwritten Alt-A mortgages. By last month, foreclosure rate on such mortgage was at 15%, about twice to what was the industry average.

KAMCO to purchase defaulted mortgages in US

Korea Asset Management Corp. has planned to purchase defaulted mortgages in US. KAMCO which is a state-run asset management company was created to settle bad debts of companies which were rescued by government at the time of Asian Financial crisis in 1997-98.

KAMCO has plans of establishing 1 trillion funds in cooperation with financial institutions & local pension funds for investing in US bad debts. It recently sent a group of official with the aim of examining country's debt market & also meet officials of banks run by ethnic Koreans, mortgage lenders & investment banks in LA, NY & FL.

New GFE and changes in RESPA by HUD

A proposed mortgage reform package was recently released by HUD Secretary, Alphonso Jackson for helping borrowers clearly understand terms of mortgage loan they want to take. If enacted, the changes will reform the GFE & thirty year old RESPA, but before that it has to go through a mandatory period of public comment.

One of the main changes is a proposal that lenders & brokers provide borrowers with a standard GFE. The standard GFE when used will enhance disclosure of major aspects of mortgage loan such as,

a.Interest rate & monthly payments
b.Whether mortgage contains balloon payment or prepayment penalty
c.Whether rate & principal balance can go up, if yes, by how much

The new proposals also specify charges which can & cannot change at settlement and if any fee changes, there will be a limit on the amount by which it can change. Another significant feature in the GFE being proposed is that lender payments to brokers known as yield spread premiums will have to be disclosed.

HUD has also proposed legislative changes in RESPA which will give it authority of imposing penalties if some specific sections of RESPA are violated.

The specific sections for which HUD will have authority would be those which deal with:

a.Loan servicing
b.Referral & unearned fees
c.Prohibition against kickbacks
d.Good faith estimate
e.Settlement cost booklet
f.Title insurance
g.Escrow accounts

HUD also wants that

• Secretaries of State as well as other regulators are allowed to seek equitable & injunctive relief if RESPA regulations are violated.
• HUD-1 be delivered to borrowers 3 days before closing
• A uniform statute of limitations be established which would be applicable to both private as well as governmental actions under RESPA.

On why he wants implementation of these proposals, Alphonso Jackson, Secretary of Housing and Urban Development (HUD) has commented that -

HomeSaver Advance program from Fannie Mae

HomeSaver Advance program has been announced by Fannie Mae for helping homeowners delinquent on their mortgages and will be available to all Fannie Mae servicers by April 15, 2008. This program is part of Fannie Mae's larger HomeStay initiative & is an excellent solution for borrowers who are in trouble due to temporary events like medical emergencies.

This program is for borrowers who are capable of continuing their mortgage & would be able to resume normal payments if the arrearage is brought current.

Through HomeSaver Advance program the corporation authorizes its servicers to provide unsecured personal loans which can enable borrowers to recover from payment defaults on Fannie Mae securitized or owned mortgage loans. This unsecured personal loan will have fewer up-front costs & could be put in place quickly.

HomeSaver Advance program will provide funds for payment of past due balances of PITI & also up to 6 months (in some instances twelve months) of HOA fees. Advances for attorney fees & escrow advances are also covered but late fees & few other costs are not eligible under this program.

For getting the funds, borrower has to sign a promissory note payable over a fifteen year term with five percent fixed rate of interest. Additionally, no payments are necessary during first 6 months nor does interest accrue in that 6 months period, so the HomeSaver Advance is amortized over a period of 14.5 years.

A delinquent borrower can get lesser of $15,000 or fifteen percent of the original unpaid balance. This amount is directly applied to arrearage & the borrower does not receive the funds in hand. The cost for the borrower will be the $600 workout fee which is to be paid to servicer.

Proposal to ban use of appraisals arranged by brokers

In a memo distributed to lenders Fannie Mae has proposed ban on use of appraisals arranged by brokers and by a lender's employees.

What this means is that Fannie Mae will not authorize its lending partners to use any appraiser who is an employee of a wholly owned subsidiary. The restrictions will be applicable for mortgage loans which are acquired after Sept. 1. This memo also has reference to setting up of an appraisal clearinghouse to be used for assigning appraisers to any project.

This step is in response to investigations by NY's AG Andrew Cuomo in November last year when Cuomo filed lawsuit against parent company of country's largest appraisal management companies, First American. In the lawsuit they were charged with relaxing their norms under pressure from WaMu, who was a major client & used those specific appraisers who were providing property valuations acceptable by Washington Mutual.

In the original suit Washington Mutual was not included but AG demanded that the 2 GSEs (Freddie Mac & Fannie Mae) appoint independent examiners for reviewing mortgage loans (as well as the underlying appraisals) that they had purchased with emphasis on the ones purchased from Washington Mutual.

Retraining for laid-off mortgage employees

California Governor Arnold Schwarzenegger has proposed initiatives which will utilize various federal & state funds inclusive of $5.6 million federal grant for retraining banking & mortgage workers who were laid off because of mortgage subprime crisis (there has been 8,400 layoffs since last July).

Money for training will be arranged from National Emergency Grant of U.S. Department of Labor. The funds from National Emergency Grant can be used by Department Secretary when unforseen events create urgent need for assistance for unemployed workers & such assistance is beyond state's handling capacity.

Governor recently also awarded $73 million for forty housing projects to help 1,611 families rent or purchase houses in 26 California cities.

Some other projects have also been undertaken to negate the housing slump such as loans with low interest from Proposition 1C housing bonds for $69.5 million, $1.2 million public awareness campaign for homeowners on options which can be used in avoiding foreclosure, and providing assistance of $72 million to first time house buyers from funds available from federal HOME IPP (Investment Partnership Program).

Bank of America putting David Sambol in charge of its mortgage business

David Sambol, president & chief operating officer of Countrywide has been placed in charge of Bank of America's combined mortgage business.

But this decision has raised some eyebrows as he was the spearhead of Countrywide's lunge for growth. Sambol embraced company's pursuit of subprime mortgage loans which had turned Countrywide into largest mortgage lender in the country.

According to 4 current & former executives at the company, David Sambol had brushed aside warnings by company's risk-control managers that Countrywide's lending standards were too laxed.

Right now it is too soon to tell what Mr. David Sambol will be doing at BofA. Some people are sceptical of his appointment with Bank of America.

In a statement CEO of Center for Community Self-Help, Martin Eakes said -

Merger of mortgage companies

In East Bay 4 mortgage companies have merged with BWC Mortgage Services, situated in San Ramon to form a retail mortgage lender which will now have yearly origination greater than $2 billion. With this merger BWC Mortgage Services will be operating in 21 branches with more than 200 mortgage loan agents.

BWC Mortgage Services which is a former division of Bank of Walnut Creek provides multi-state licensing, FHA loans & mortgage banking.

The 4 mortgage companies that have merged with BWC Mortgage Services are; Paragon Mortgage Bankers of Alamo, Bay Area Funding Group of Danville (it was lending division of Re/Max Accord), Stonecastle Land & Home Financial of Danville and Concord branch of All California Mortgage.

Capstead Mortgage reports 4Q profit

Good news for mortgage industry watchers; Dallas based REIT, Capstead Mortgage has posted a fourth-quarter profit. It has reported $15.9 million as net profit for 3 months ending December 31, 2007, same period last year it was at $2.35 million. In this 3 month period interest income also rose to $87.8 million which was $70.3 million last year.

Its shares also rose by eight percent to $17.10 on volume of about 953,000 compared to a thirty day average volume of 865,000 shares.

Subprime mortgage loss assumption increased by S&P

For subprime mortgages which were originated in 2006, packaged into bonds & sold to investors, the credit rating agency - Standard & Poor's is increasing its loss assumption to 19% which was 14% previously because of increasing defaults for such mortgages.

This change has been planned as Standard & Poor's is altering the overall ratings assumptions that are used for reviewing collateralized debt obligations backed by MBS.

Debt & bonds originated in 2007, 2006 & 2005 are expected to be most affected as these are more sensitive to present market downturn.

Standard & Poor's has planned some other changes to assumptions:

It will extend stress-case losses scenarios which presently are run for thirty six months period to span entire life of bonds. This stress-case loss is a test of how bonds are going to perform under worst case scenarios, and

Excess capital that is placed in a deal for covering some portion of losses known as excess spread is also being revised by Standard & Poor's.

Plans by John Kerry on funding of mortgage refinances

In a press statement Sen. John Kerry said that it will be possible to refinance subprime mortgages taken by Massachusetts borrowers using tax-exempt bonds under economic stimulus package cleared by a U.S. Senate Committee recently.

Kerry said that, if the bond provision of the bill which has been developed as an economic stimulus package survives negotiations, it will mean that states would have near about $10 billion for use as tax-exempt bonds. These bonds could be used to help borrowers refinance their subprime mortgages into mortgages with lower rates.

Kerry also informed that communities that have been affected most due to recent foreclosures in Massachusetts like, Lawrence & Brockton will benefit as some share from $10 billion fund will flow into Massachusetts.

This proposed mortgage plan by Kerry & Sen. Gordon Smith has been praised by many including Thomas R. Gleason, executive director of MassHousing, which is a quasi-government agency.

This provision (called as Kerry-Smith provision) in the bill for tax-exempt bonds will help states sell another $10 billion as federally tax exempt mortgage revenue bonds. Part of these funds will flow through to agencies such as MassHousing which will then have more money to make available affordable mortgages for borrowers.

Commerce committee passes mortgage bill

Senate's Commerce Committee has passed the bill which has been created to strengthen monitoring system of mortgage loan originators in Oregon.

This bill (Senate Bill 1064) will empower Oregon's DCBS (Department of Consumer & Business Services) with regulating authority over loan originators in mortgage sales business commonly referred to as "bad actors".

Department of Consumer & Business Services will have the authority to take action against bad loan originators through increase in reporting standards & by increase in the scope of prohibited conducts to include acts on part of loan originators which reflect incompetence or negligence. And violators will have the risk of loosing their license.

Supporting the bill, Sen. Ben Westlund, D-Tumalo, committee's chairman has made a statement that:

Mark Greene - FICO not to be blamed for mortgage mess

Some people are of the opinion that Fair Isaac, the company that developed FICO score and other companies which provide credit score, like, TransUnion, Experian & Equifax are to be blamed for present mortgage mess because their scores were not able to correctly predict subprime default risk.

But Fair Isaac's Chief Executive Officer (CEO), Dr. Mark Greene does not agree with such thoughts. In a recent interview with cnnmoney.com's editor Paul R. La Monica he said that FICO score has performed well & is not to be considered as one of the causes of present mortgage crisis.

He does agree that there is scope for improvement. And in that context, Fair Isaac is about to release a new credit scoring product by May, named, FICO 08. This new credit scoring product will mainly focus on improving predictive accuracy of credit risk of borrowers who are known as subprime borrowers and also of borrowers with little credit history called as "thin file" borrowers.

According to Greene, Fair Isaac is also coming out in May with what has been named as Credit Capacity Index (CCI). This index will help banks calculate capacity of any prospective borrower of borrowing additional debt. This product will help banks & lending institutions correctly estimate any prospective borrower's creditworthiness.

A few things about Interest Only Loans

The first chart above depicts monthly payment schedule for a interest only loan. Borrower pays only the interest in the initial loan period, & afterwards mortgage re-amortizes to pay the balance on the prinicipal amount of $100,000 over the remaining term of the mortgage.

Second chart shows that the principal amount remains constant during the I/O term & begins to decline when borrowers starts making principal balance payment.

Interest only mortgages are basically suitable for borrowers who;

- are trying to prevent negative cash flow during starting period of mortgage,
- expect their property to appreciate considerably
- plan to flip there property,
- have other section where cash is being used which they have to pay as principal.

Mortgage rate fluctuations

The following graph illustrates how different mortgage rates have been doing over the years -

Investigative hearings on Countrywide's acquisition by BofA

U.S. Congressional Banking Committees have been asked by 4 statewide consumer groups to hold investigative hearings on affect acquisition of Countrywide by BofA will have on its employees & borrowers.

Letters in this regard were sent to Barney Frank, Chairman of House Financial Services Committee (HFSC), & Christopher Dodd, Chairman of Senate Banking Committee (SBC), by the 4 consumer groups, namely, Neighborhood Economic Development Advocacy Project, New York (NEDAP), Community Reinvestment Association of North Carolina (CRA), New Jersey Citizen Action (NJCA), & California Reinvestment Coalition (CRC).

Josh Zinner, co-director of NEDAP in a statement said that -





Concerns are rising as BofA has not made public any particular plan which will ensure that efforts will be made to help borrowers keep their homes & local economies and neighborhoods remain intact. Congress has been urged to make sure that a plan is developed to include policies and staffing which will guarantee that borrowers are offered affordable fixed mortgages which will help them keep their homes.

Mortgage Forgiveness Debt Relief Act

In late December Mortgage Forgiveness Debt Relief Act of 2007 came into existence which is meant to provide tax help for people who are selling their house in a short sale or are facing foreclosure.

Before this Act, if value of house declined & lender forgave any portion of your mortgage debt, according to tax code forgiven amount was treated as income and was taxable.

If it is your principal residence & not a investment property or second home then as per MFDR Act you can exclude up to $2 Million of mortgage loan debt forgiven in years 2007, 2008 or 2009. Additionally, this debt relief will be applicable for acquisition indebtedness only.

New Golden Opportunity Mortgage Program

A new mortgage loan is being offered by Cappelli Sales & Marketing named "Golden Opportunity Mortgage Program (GOMP)".

Under this program new home buyers at 3 Cappelli developments in Westchester County are offered low rates of 4.875%. This low rate is for first 3 years & is followed by a 5.875% rate for the next 2 years.

The 5 year mortgage will be based on thirty year amortization schedule with loan for up to 80% ltv & will not have any origination fees, points or prepayment penalties. To qualify for the low interest rates, borrowers will have to commit in writing & lock-in rate in forty eight hours of date of contract's rescission.

Refinance Rush

Federal Reserve's recent rate cut has caused a rush in refinance activity among homeowners. 30 yr FRMs are now available at an average rate of 5.57% which is very close to the historic low of 5.21% in 2003.

Market Composite Index, which is known as a measure of application volume for mortgage loans from Mortgage Banker's Association (MBA) has gone up by 8.3% from where it was a week ago.

Refinance rush is expected to get further boost from the fact that an economic stimulus package has been proposed by government & because of which Freddie Mac & Fannie Mae will be able to buy mortgage loans worth much more than what is allowed presently.

In such scenario, it will become feasible for homeowners to refinance more expensive mortgages also.

Countrywide still the leading mortgage lender

Countrywide Financial Corp. is still country's leading residential mortgage lender.

In 2007, Countrywide (NYSE: CFC) had originated mortgages for $408.2 billion but it was down to what it originated in 2006. In 2006 it had originated $462.5 billion.

We look at the other leading originators last year:

In the ranking at number 2 was Wells Fargo & Co. & it had originated mortgage loans to the tune of $272 billion. Similar to Countrywide, the loan origination was down from what it was in 2006 - $398 billion.

Last year at number 3 spot was JP Morgan Chase & Co. with $207.7 billion in mortgage loan originations. It has been an improvement from 2006, when loan origination was $171 billion.

At number 4 was the Corp. which purchased Countrywide; Bank of America Corp. & it had mortgage loan originations for $188.6 billion, improvement from 2006 when it was at $166.3 billion.

Next at 5th position was Citigroup Inc., with originations up from $142.1 billion in 2006 to $151.9 billion.