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Five-Year Mortgage Rate Freeze Looms
Wednesday December 5, 8:42 pm ET
By Martin Crutsinger and Alan Zibel, Associated Press Writers

Bush Mortgage Plan Will Freeze Certain Subprime Interest Rates for 5 Years WASHINGTON (AP) — The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.

The aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of up to seven years and mortgage industry arguments that the freeze should last only one or two years.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The administration said President Bush will speak on the agreement at the White House on Thursday and the Treasury Department announced that Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with mortgage industry officials.

Treasury also announced there would be a technical briefing to explain more of the proposal’s details.

Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes — to ensure the break is not given to real estate speculators.

The plan emerged from talks between Paulson and other banking regulators and banks, mortgage investors and consumer groups trying to address an avalanche of foreclosures feared as an estimated 2 million subprime mortgages reset from lower introductory rates to higher rates.

In many cases, the higher rates will boost monthly payments by as much as 30 percent, making it very difficult for many people to keep current with their loans.

The plan is aimed at homeowners who are making payments on time at lower introductory mortgage rates but cannot afford a higher adjusted rate.

Through October, there were about 1.8 million foreclosure filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif.-based RealtyTrac Inc. With home loan defaults still rising, the trend is expected to worsen next year.

The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed. They opted for a proposal that was along the lines of a plan put forward in October by Sheila Bair, head of the Federal Deposit Insurance Corp.

Paulson and other federal regulators began holding talks with some of the country’s biggest mortgage lenders, mortgage service companies, investors who hold mortgage-backed securities and nonprofit groups that provide counseling for at-risk homeowners.

Under the typical subprime loan — those offered to borrowers with spotty credit histories — the rates for the first two years were at levels around 7 percent to 8 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent.

For a typical $1,200 monthly mortgage payment, the reset could add another $350 to the monthly payment, greatly raising the risks of loan defaults by homeowners struggling with the current payment.

The wave of mortgage foreclosures threatened to make the most severe slump in housing even worse by dumping more foreclosed properties onto an already glutted market, further depressing home prices and shaking consumer confidence.

The deepening housing slump has already roiled financial markets, starting in August, as investors grew increasingly concerned about billions of dollars of losses being suffered by banks, hedge funds and other investors.

The administration plan is designed to deal with the crisis by letting subprime borrowers who are living in their homes and are current on their payments to avoid a costly reset for five years. The hope is that by that time the housing downturn will have stabilized, clearing out the glut of unsold homes and halting the steep slide in prices that is hitting many parts of the country.

With sales and prices once again rising, the expectation is that homeowners will be able to renegotiate their current adjustable rate mortgages into a more affordable fixed-rate plan.

The housing crisis has become an issue in the presidential race with Democrats Hillary Rodham Clinton and John Edwards putting forward their own proposals this week that would go further than the administration.

Clinton said her own proposal that would impose a 90-day moratorium on foreclosures and freeze the rates for five years or until they had been converted to fixed-rate loans was a better approach that would help more people.

“Although the administration is finally giving the foreclosure crisis the attention it deserves, it seems that President Bush is going to give struggling homeowners far less than they need,” she said in a statement.

Mark Zandi, chief economist for Moody’s Economy.com, called the administration plan a good first step, but said the government eventually will have to go further given the problem’s size and the threat to the economy.

“This is the most serious housing downturn we have seen in the post World War II period,” Zandi said. “It is a threat to the broader economy. The risks of a recession are very high.”

Associated Press reporters Deb Reichmann and Nedra Pickler contributed to this report.

Here’s a little history lesson for you, Czar is derived from the word Caesar. Here’s another history lesson for you, when Congress acts, they’re usually reactive not proactive:

Lawmakers called on Wednesday for a ‘mortgage czar’ to help cope with an expected wave of foreclosures from the U.S. housing slump but Alan Greenspan said the credit crunch was past the worst.

“We are beginning to see the frenzy calm down,” the former chairman of the Federal Reserve told a conference in Lisbon. “Unless we get secondary effects the worst is over.”

Fallout from a global credit squeeze, sparked by problems in the U.S. subprime mortgage market, have rattled markets in recent weeks, threatening economic growth and bank earnings.

Read more

According to this article from the Denver Post, it’s impact is quite severe on commercial real estate:

The mortgage meltdown and resulting credit crunch that have rocked the housing market nationwide are reaching their tentacles into commercial real estate.

In metro Denver, several office transactions have fallen through because of the tightened credit markets. The World Trade Center downtown is back on the market after a contract with Broadway Capital Partners fell through; and International Capital Partners pulled out of a deal to buy Plaza Quebec in Englewood, according to people in the commercial real-estate industry.

Read the full article: Credit crunch widens locally

Postive: The Rockies won last night, making it 9 wins in a row.

Negative: This article from the Denver Post:

Home resales, depressed by turmoil in credit markets, fell for a sixth consecutive month in August, pushing activity to the lowest point in five years.

Read the full article: Home resales drop to 5-year low

Mortgage article from the Denver Post:

Consumers and businesses struggling with tight credit markets should find relief from the Federal Reserve’s cut in interest rates Tuesday.

Read the full article: Relief for U.S. credit crunch

Fed Funds Rate down .5%

WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday slashed the benchmark federal funds rate by a half-percentage point in a bold bid to buffer the economy from a housing slump and related financial market turbulence.
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The decision by the central bank’s Federal Open Market Committee took the overnight rate down to 4.75 percent, its lowest level since May of last year. It was the first cut in the interbank rate — the Fed’s main tool to influence the economy — since June 2003 and the first half-point reduction since November 2002.

Financial markets had widely expected the Fed to lower overnight borrowing costs, but were split over whether the move would be a quarter-point or more-aggressive half-point.

In a related move, the Fed also lowered the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.

What does this mean?

According to Marketwatch:

Here’s what consumers can expect:

If a consumer is paying 8.25% interest on a $100,000 loan that is based on the prime rate — such as a home-equity line — a rate reset to 7.75% is likely. That’s the difference of about $500 a year, or roughly $41.66 a month in interest charges.

Resets on some adjustable-rate mortgages will be slightly better. Many ARM interest rates are based on an average of Treasury note yields coupled with a fixed margin, now at about 2.75 percentage points. At Tuesday’s 10-year yield of 4.49%, the rate is 7.24%. In July, it was at 7.77%. That makes the monthly payment on a $200,000 mortgage $1,363, about $73 less than it was in July. But Treasurys could head even lower following the Fed action.

Rates on credit cards, which have taken on a bigger role in consumer financing in recent months, are likely to dip a bit too, lowering minimum monthly payments.

Savings-deposit rates will go down, meaning that your bank balances won’t appreciate at the same rates you’ve seen all year.

Ditto on money market rates, hurting those on fixed incomes — generally the elderly — who rely on cash generated from such safe investments.

Interest rates on new loans for cars will fall, though it won’t have any effect on loans already in place. But Brian Bethune, the U.S. economist with Global Insight, urges consumers to wait until contract negotiations between autoworkers and their bosses are done this month. “They could pull out all the stops,” he said about automakers’ desire to unload inventory. And if the Fed lowers rates again next month, all the better.

I usually rely on Andy Rooney Ben Stein to make sense of whatever ails America. His self-effacing wit tends to overshadow his knowledge. He’s like the “very rich and very eccentric” grandfather we wished we had, the one who was wise beyond his years who spoke from the heart. My maternal grandfather fit this profile except there a distinct language barrier as he spoke Tagalog and I didn’t.

Earlier this month Ben Stein wrote a piece called How Speculators Exploit Market Fears. It discusses what hedge fund managers do to create action in the stock market. Rather than take snippets from the article, here’s the full article:

Here’s a fact: The speculators and hedge fund managers who run today’s stock market need market volatility in order to make money.

They can’t make enough money if the market stays flat or moves only a bit, so they like extreme and unexpected price movements. They especially like sudden, surprise movements down, when they can make money off stocks they borrow and sell — or, as they say, “sell short.”

Money Lust Satisfied

That’s what’s been happening the past couple of weeks. But it’s not interesting to say that the speculators are whipping the market around to satisfy their money lust. So the speculators themselves make up reasons for why the market is fluctuating, flog those reasons to the media, and then profit if some other speculators believe the jive reasons and jump in the way the manipulators want them to.

Supposedly, the market is “correcting” because of worries about the housing slowdown, and also because of fears that the debt markets that support mergers and acquisitions is drying up.

These are interesting theories, and people who don’t know a lot about the stock market or the economy might find them beguiling. What follows are a few truths that show how shallow these “reasons” for the stock market moves are.

Housing a Theory

Yes, the housing market has slowed from a spectacular bubble level to a simply pretty good level. Housing sales and starts are now about what they were in 2002, and no one thought we were in a housing depression then.

In any event, housing is only about 5 percent of the economy. If it falls by 15 percent, that would represent a fall-off of about .75 percent. That’s not trivial, but it’s also not the stuff of which recessions are made.

The fact is that there is no recession. The economy is suffering from a labor shortage, not a surplus of unemployment. The Fed is worried about excess demand, not slack demand.

Corporate profits set new records every day. Whatever’s happening in residential sales and building is simply not slowing down the economy. Why should a Boeing or a Merck or a Pfizer have any reaction to housing at all? Because the speculators sell everything they can when nervousness sets in — and for no other reason.

A Minor Major Mess

Subprime is a mess. But it’s a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That’s 4 percent of mortgages.

Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market — a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it’s nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

There’s simply no connection between subprime and developed or developing nations’ stocks. This by itself shows the thin context of the selling wave late last month.

Money’s Still Cheap

What about the supposed drying up of loans for mergers and acquisitions by private equity firms? Well, here’s a good, simple test of just how valid that explanation is for stock market moves: The majority of private equity takeovers are financed with junk debt.

If there really were a major shortage of funds for these deals, the interest rate on the junk would skyrocket. Instead, while the rate has risen by about 150 basis points in the past month, the spread between junk and investment grade is now about 290 basis points, according to leading junk analyst Martin Fridson.

This is a lot lower than the year-end average of the spread from 2002 to 2006, and far below the almost 800 basis point spread during a true interest-rate crunch like the one after the tech meltdown in 2000-2002.

So that’s phony, too. Interest rates have risen, but not anything like what they’ve done in real crises. And besides, the Dow fell by about 550 points the week before last, yet not one of the Dow stocks is involved as either acquiror or acquiree in a private equity deal.

In short, money is no longer virtually free the way it was for private equity deals in the past year. But it’s not expensive by historical standards, either.

Spreading the Fear

In other words, it’s all the speculators trying to panic us so their sell programs will make money. And they’ll make money as long as they can spread their panic. When they can’t do that any longer, they’ll work the long side — and make up reasons for that, too.

In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don’t sell. With all the shrieking about the market, it only fell to what it was about five weeks ago — and we didn’t think we were poor then.

So let the speculators shout “fire.” As of right now, they’re not blowing anything but smoke.

Two quick points:

131+ mortgage companies have shut down. If you’re a consumer chances are you’ve never heard of these companies. If you’re in the mortgage business, you’ve probably heard of a fraction (i’d say 25%) of these companies. For the most part, those that bet on high risk loans (subprime, alt-a, non-owners, etc.) lost. The ones that bet on low risk loans (conforming) are still open for business.

However, one quick look at Google Trends and you’ll notice that countrywide, mortgage, credit, or liquidity don’t show up as “hot searches” in Google.

Sometimes you need Ben Stein to make sense of a nonsensical world.

When it comes to the grocery store, I leave the hard work to the Mrs. She usually goes on Saturday afternoon armed with a list while I attend to mowing the lawn. Despite my disdain for yard work, I’d much rather mow a lawn on a 95 degree day than go to air conditioned grocery store.

The only time I go to the grocery store is when I have to pick up the items that my wife may have forgotten or to pick up more baby food (Gerber #3 or Graduates) for our daughter. There’s a Safeway on the way home so it’s usually my store of choice. Moreover, Safeway has a great selection of gift cards. Whenever I have a closing I usually stop by Safeway to pick up a Home Depot gift card for my clients.

Safeway cashiers like to say your surname i.e. last name when they hand you the receipt. They probably get your last name if you have a Safeway club card membership or a debit/credit card. The cashiers have never pronounced my surname correctly. My surname, LETO, is fairly short and simple and I pronounce it Lee-toe. In Italy it’s pronounced, Lay-toe. The actor, Jared, likes to pronounce it Leh-toe. If you’re a wise guy from New York (or Boston) you’ll pronounce Lido as in Lido Shuffle.

So which way is correct?

Give me a word, any word, and I show you that the root of that word is Greek. -Gus Portokalos

Lētṓ - Long e and emphasis on the o.

Leto according to wikipedia is Greek in origin. Leto was the daughter of two titans and got knocked up by Zeus (Zeus deflowered everything in sight) and gave birth to Apollo and Artemis.

Oh but wait, the surname Leto is not Greek, it’s Italian. However, if you pronounce Leto, Leh-toe, Italians will think you’re saying letto which means bed. I’m sticking with the Greek pronunciation.

DU recently completed a study that looks to State Legislators to improve lending practices to those that have less than perfect credit according to a Denver Post article entitled States urged to aid loan fitness.

Banks should provide small loans to those with no credit or subprime credit - defined as FICO scores below 660, according to the study’s lead author, Rickie Keys, a senior research fellow for the University of Denver Center for African-American Policy.

The repayment of those loans would then be reported by the bank to the three major credit bureaus. That would provide people an “opportunity to get small loans and use those as a springboard to improve their scores,” said Keys, who is based in Shreveport, La.

Ironically, despite emanating from DU (Denver University) the study didn’t include Denver or any Colorado cities:

The University of Denver study, “Financial Empowerment for the Unbanked and Underbanked Consumer: Crossing the Red Line,” analyzed banking and lending services in 14 markets nationwide, including Atlanta, Charlotte, N.C., and Memphis, Tenn.

Denver was not one of the markets studied, although Keys said the Mile High City will be among the next 14 cities analyzed.

Credit scores range from 350 to 850. Credit scores above 720 is considered superior. Credit scores below 660 is considered sub prime. Most consumers fall below 680. Why? Credit is a topic that most consumers truly don’t understand. To learn more about your credit, simply enter your info in the form below and I will send you a credit guide.

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Interest rates are on the rise and many home owners who have adjustable rate mortgages may see increases in their forthcoming annual adjustments.

Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a measured pace. With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to curb inflation. Some economists believe it won’t stop until the Fed Fund Rate hits 4.0%.

Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides 3% above the current Fed Funds Rate.

Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.

In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.

Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates are going up. This will have an affect on home owners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.

This doesn’t mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current rate of the index the mortgage is tied to.

Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.

This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there is a good chance the borrower may now qualify for a loan with a lower interest rate.

As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower’s long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.

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