Happy New Year

Be safe and have a great new year!

How low can you go....

Mortgage rates continue to fall, with the average 30-year fixed mortgage rate falling from 5.92 percent to [I have even seen them at 5.6] 5.8 percent . According to Bankrate.com's weekly national survey, the average 30-year fixed mortgage has an average of 0.35 discount and origination points.
The average 15-year fixed rate mortgage dropped to 5.51 percent, while the average jumbo 30-year fixed rate slumped to 7.37 percent. Adjustable rate mortgages largely bucked the trend, with the average 1-year ARM jumping to 6.09 percent and the average 5/1 ARM rising to 6.17 percent.
The average rate on a 30-year fixed rate mortgage has fallen nearly one full percentage point, from 6.77 percent to 5.80 percent, since Oct. 29. Most of that decline has come since the Federal Reserve's Thanksgiving week announcement of $600 billion destined for mortgage-backed securities. Mortgage rate volatility continues, but the highs and the lows are both lower than anything seen in months. Mortgage rates are currently the lowest since February, but borrowers still need to shop around as lenders that are more eager for business are offering the most competitive terms.
The sharp decline in mortgage rates in recent weeks can have a pronounced impact on a borrower's monthly payments. Six weeks ago, when the average 30-year fixed mortgage rate was 6.77 percent, meaning a $200,000 loan would have carried a monthly payment of $1,299.86. With the average rate having since fallen to 5.8 percent, the monthly payment on a $200,000 loan is now $1,173.51.

Very Interesting

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.
Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participantion.

Troubled Asset Relief Program = TARP

Buying up bad mortgage debt was once what the TARP program was at its core. The idea was that banks would begin to lend again if there balance sheets were in better shape and they knew the value of what mortgages were worth. Because no institution was any longer buying mortgages, they couldnt put a value on them. Finally deciding to be prudent (after tanking the entire system) they just stopped lending. The Govts first answer was to create an auction since this would provide a market place and others could bid on bank paper thus establishing a price. The banks would then be able to see what their balance sheets were worth and the Govt would buy up all the bad paper no one else wanted. Happy banks lend money right? Not this time.... Ten banks were given 25 billion dollars to grease the wheels and start the lending process.

The New TARP Program
TARP now agrees that the auction idea was a bad one. It was a give away, whereby we would own the worst of the mortgage debt and banks would get to step away from the problem [that was] created. Decisons [set forth] giving capital to banks in return for preferred stock was a better use of the funds. This makes the Govt an owner and able to direct some of the bank activity as a major owner. I like the idea of this kind of control, if it is exercised on our behalf.
Much of the money earmarked for the auction will now go towards credit card debt, auto loans and student loans, much more directly to the benefit of the people who have been harmed by irresponsible lending.
Some new facilities for commercial paper and a possible liquidity facility for highly-rated AAA asset-backed securities, will help bring back the money flow.
The Bank Can Sort it Out
Bank of America has been ordered to renegotiate some 400,00 mortgages it inherited from Country Wide. A slew of foreclosure-prevention initiatives were announced by Citi. IndyMac is in a similar process.
What Does it Mean for Real Estate
Now that the banks are stabilizing and will be forced to work out loans, we should see less foreclosures on the market, less short sales and eventually a long bottoming out process. With 7-10 million homes late or in default this is finally the beginning of a direct response to that problem.

Jane Stop This Crazy Thing

Fannie Mae and Freddie Mac will reduce principal or interest rates on some loans and extend the terms of others The Federal Housing Finance Agency said. JPMorgan Chase & Co., the biggest U.S. bank, said last month it would stop foreclosures on some loans as it works to make payments easier on $110 billion of problem mortgages, while Bank of America Corp. said it has modified 226,000 loans this year. Citigroup, the fourth-largest U.S. bank by market value, will contact about 500,000 homeowners with $20 billion in mortgages during the next six months, the New York-based company said in a statement today. A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on during the third quarter, the most since records began in January 2005, data compiled by RealtyTrac Inc. in Irvine, California. The Fannie Mae and Freddie Mac plan won't include money from the Treasury's $700 billion bank rescue package. President-elect Barack Obama, in his first news conference , called on the Treasury and other government agencies to ``use the substantial authority that they already have to help families avoid foreclosure and stay in their homes.'' The JPMorgan program is designed to assist 400,000 families with $70 billion in loans in the next two years. Bank of America, based in Charlotte, North Carolina, announced two plans this year to help reduce customers' payments by as much as $11 billion. In total, they will cover more than $120 billion in unpaid balances. Countrywide Financial Corp., the mortgage lender acquired by Bank of America, agreed in October to help about 400,000 customers facing foreclosure or having problems paying their loans as part of settlement with 14 states over fraud complaints. Citit bank The New York-based bank has launched its so-called “Citi Homeowner Assistance” program, which over the next six months, will reach out to 500,000 at-risk homeowners who are not currently delinquent, but may need assistance in remaining that way. States like Florida, California and other high-cost real estate markets will likely benefit the most. Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their gross income, a level considered a threshold for affordability, using a combination of lower principals, interest-rate reductions and extensions.

``As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.'' Federal Deposit Insurance Corp. Chairman Sheila Bair said.

Governor Schwarzenegger Prescribes Solutions to Keep Californians in their Homes

11/06/2008 Live Web Cast @ 10am Click Here

Committed to keeping Californians in their homes and stabilizing the state's economy, Governor Arnold Schwarzenegger today announced an aggressive plan to bring down foreclosure rates by helping both borrowers and lenders modify existing home loans in ways that benefit both parties. Also, to prevent another mortgage crisis in the future, the Governor is prescribing changes to the way mortgages are brokered and originated to make lenders more accountable, guard against risky mortgages and prevent unsustainable bubbles from ever arising again.The plan is among the items the Governor will prescribe for immediate action during the special session of the legislature he plans to call. That session is needed to address both a state budget revenue shortfall and a package of legislation to stimulate California's economy. "The single most powerful action our state can take to shore up its economy is to help Californians stay in their homes - and I am presenting a plan to do just that," said Governor Schwarzenegger. "Curtailing foreclosures will stop the downward spiral of home prices, free up needed cash for homeowners, help save jobs and make an immediate positive impact on our economy."The Governor's plan improves upon other foreclosure-relief programs by incentivizing loan modifications. To reduce foreclosures and encourage loan modifications, the Governor proposes:
A 90-day stay of the foreclosure processes for each owner-occupied home subject to a first mortgage on which a Notice of Default has been filed.
A "Safe Harbor" under which lenders will be able to exempt themselves from the 90-day stay procedure altogether if they provide evidence to the state official that the lenders have an aggressive modification program in place. An "aggressive modification program" is one designed to keep borrowers in their homes where doing so will ultimately bring investors a better return than simply foreclosing and selling at a loss.
Loan modification Model: modifications will be based on a 38% housing debt-to-income ratio so that the modified loan is sustainable for the homeowner. The lenders can achieve that 38% level by invoking some or all of the following modification plans:
1. reducing the interest rate to a lower rate for five years or more; e.g., to a rate as low as 3%; 2. increasing the amortization of the loan to 40 years from the start of the amortization period; and 3. deferring some amount of the unpaid principal balance to the end of the loan term, so that the borrower will repay that amount upon refinancing or sale of the property.
These actions will reduce monthly payments by 25-30%
Governor Schwarzenegger's plan ensures more responsible lending so that Californians will never again be victimized by unsustainable loans. In order to prevent another mortgage crisis in the future, the Governor prescribes a set of proposals, including:
The Department of Real Estate and Department of Corporations will now be able to enforce federal laws and regulations such as the Truth in Lending Act and others, and to discipline real estate licensees who violate those laws and regulations.
Lending practices will be reformed to protect borrowers by expanding fiduciary duties for mortgage brokers so that borrowers can be assured they are getting a loan that suits their circumstances and penalizing lenders who make false or misleading statements.
Licensing requirements for loan originators will be increased and standardized.
California will contribute to a national database for the public to access license status and disciplinary records of all loan originators to prevent dishonest originators from victimizing consumers.
Pre-counseling interviews will be required for borrowers entering into risky "non-traditional" mortgages, as defined by the federal government, to ensure they understand and accept the terms to which they are agreeing.
The Governor's mortgage plan also includes urging the federal government to require loan originators to retain a portion of the loan risk to encourage sound underwriting of loans and encouraging the federal government to promote the use of "covered bonds" which allows lenders to securitize loans but requires them to retain those assets on their balance sheets.Additionally, Governor Schwarzenegger will continue to advocate that the federal government use a portion of the $700 billion Troubled Assets Relief Program to buy up and modify troubled home loans or to guarantee modified home loans. The Governor will also convene a housing summit in the beginning of 2009 to further craft modification and foreclosure abatement solutions.To address California's budget deficit and look at more ways to stimulate our state's economy, Governor Schwarzenegger announced he will call the legislature into special session.These solutions build upon the Governor's previous actions to help stabilize California's housing market, including:
Signing legislation to help protect homeowners by requiring a mortgage holder to provide a 30-day notice to a borrower prior to filing any default notice leading to the foreclosure. The new law also provides tenants of foreclosed properties a minimum of 60 days notice to move and requires holders of foreclosed properties to maintain the property.
Announcing an agreement with major loan servicers to streamline the loan modification process for subprime borrowers living in their homes.
Launching a $1.2 million public awareness campaign to help educate homeowners about options that can help them avoid losing their homes to foreclosures.
Established the Interdepartmental Task Force on Non-traditional Mortgages to ensure a comprehensive and coordinated approach to the issues raised by subprime loans.
Announcing $5.6 million to help mortgage and banking industry workers laid off as a result of the subprime crisis make career transitions to high-demand jobs in other industries.
Joining the OneCalifornia Foundation to announce a bridge loan fund for homeowners facing foreclosure in Oakland.
Awarding $8 million to community based mortgage counseling providers around the state to help avoid foreclosures.

Watch the live webcast at 10:00 a.m. click here at 10am 11/06/2008

Fun With Rates

30 Year Fixed Rates Yearly Average From 1971 to present:

1971: 7.6
1972: 7.38
1973: 8.04
1974: 9.19
1975: 9.05
1976: 8.87
1977: 8.85
1978: 9.64
1979: 11.20
1980: 13.74
1981: 16.63.................wow
1982: 16.04
1983: 13.24
1984: 13.88
1985: 12.43
1986: 10.19
1987: 10.21
1988: 10.34
1989: 10.32
1990: 10.13
1991: 9.25
1992: 8.39
1993: 7.31
1994: 8.38
1995: 7.93
1996: 7.81
1997: 7.6
1998: 6.94
1999: 7.44
2000: 8.05
2001: 6.97
2002: 6.54
2003: 5.83
2004: 5.84
2005: 5.87
2006: 6.41
2007: 6.34
2008: 6.25

Why Do Mortgage Rates Change?
When the Federal Reserve "cuts rates", they are typically cutting the Discount rate and the Fed Funds rate. Many misunderstand this "cut" to mean that mortgage rates were cut. Mortgage rates are affected by many factors but are not "cut" by the Fed. There are many types of interest rates.

Prime rate: The rate offered to a bank's best customers.
Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
Federal Funds Rate: Rates banks charge each other for overnight loans.
Federal Discount Rate: Rate New York Fed charges to member banks.
Libor: London Interbank Offered Rates. Average London Eurodollar rates.
6 month CD rate: The average rate that you get when you invest in a 6-month CD.
11th District Cost of Funds COFI: Rate determined by averaging a composite of other rates.
Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.
Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply-and-demand equation for mortgage rates may be different from the supply-and-demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up.

What's Up With The $700+ Bail Out....

Federal Bureau of Investigation is overwhelmed..

More happy news from the economic front: it is possible that the perpetrators of the mortgage mess, the stock market nose dive, and a whole bunch of other peripheral crimes might just get away with it. The New York Times and the Associated Press are both reporting that the Federal Bureau of Investigation is overwhelmed by reports of possible criminal activity arising out of recent events, and, unless they can increase staffing in some of its divisions, might have to raise its own hands in surrender. At the root of the problem is a recent refocusing of Bureau resources on international terrorism rather than white collar crime. After 9/11 it shifted more than 1,800 agents from various criminal investigative activities to its terrorism and intelligence departments. This is nearly one-third of those agents previously working in the criminal divisions. Now the FBI is confronted with the need to investigate the collapse of Fannie Mae and Freddie Mac, possible [?]misbehavior leading to the demise of Lehman Brothers and the near-death of AIG, various suspected incidents of security fraud, and an ongoing concentration on homegrown mortgage fraud and the subprime market. In response, according to the NYT, the Bureau is planning to double the number of agents working financial crimes by another shuffle of personnel. The prosecution of non-terrorist related crime was already suffering before the recent problems emerged. The Times says that the F.B.I. has disclosed that the number of crimes they have turned over to prosecutors in areas such as drug trafficking and violent crimes has dropped from an annual rate of 11,029 to 8,187 in the last seven years, a decrease of 26 percent. Justice Department prosecutions (including cases referred from other agencies such as the Postal Service) dropped 48 percent from 2000 to 2007; insurance fraud cases were down 75 percent and securities fraud 17 percent.
Statistics from a research group at Syracuse University, the Transactional Records Access Clearinghouse, using somewhat different methodology and looking only at the F.B.I., show an even steeper decline of nearly 50 percent in overall white-collar crime prosecutions in the same period. The article quoted John Miller, an assistant director at the F.B.I as saying, "In white-collar crime, while we initiated fewer cases over all, we targeted the areas where we could have the biggest impact. We focused on multimillion-dollar corporate fraud, where we could make arrests but also recover money for the fraud victims."
According to the F.B.I.'s website, corporate fraud remains the highest priority of the Financial Crimes Section and, as of the end of Fiscal Year 2007, 529 corporate fraud cases were being pursued by FBI field offices throughout the U.S., several of which involve losses to public investors that individually exceed $1 billion. Even before the extent of the subprime situation became apparent, the FBI was concerned about it and other forms of mortgage fraud and, according to the Times, "repeatedly" requested the Bush administration to provide it with more money to hire additional agents. The Bureau says it currently has 42 mortgage fraud task forces and working groups in operation and, as of August, 1,569 pending mortgage fraud investigations. There were 523 indictments or "informations" in Fiscal 2008 with 282 convictions. The Bureau estimates that $4 bill to $6 billion is lost every year to mortgage fraud and the states with the most fraud activity in 2008 were Florida, Nevada, Michigan, California, and Utah.
The Bureau also states as publicly traded subprime lenders have suffered financial difficulties due to rising defaults investigations have determined that many of these bankrupt subprime lenders manipulated their reported loan portfolio risks and used various accounting schemes to inflate their financial reports. In addition, before these sub prime lenders' stocks rapidly declined in value, executives with insider information sold their stocks and profited illegally.
A legal consultant and former prosecutor working for MSNBC said that any delay in investigating some of the alleged financial misdeeds can only work in favor of the dishonest and the criminally greedy as they will have the time to destroy such evidence as emails and otherwise cover their tracks. The Bureau, according to the NYT, is also concerned that its current shortage of personnel will make it possible for crooks to turn the $700 billion rescue package into another opportunity for profiteering.

Some Good Reading......

-Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Foreclosure resales rose to half of all transactions.
A total of 20,497 new and resale houses and condos closed escrow in the six-county Southland in September, up 5.8 percent from 19,366 in August and up 64.6 percent from 12,455 in September 2007, according to San Diego-based MDA DataQuick, a real estate information service.
Last month's sales were the highest for any month since December 2006 and the year-over-year gain was the highest for any month in DataQuick's statistics, which go back to 1988. However, last month's sales were still the second-lowest for any September since 1996 and were 17 percent below the 20-year sales average for that month.
This September's huge annual sales increase stems from the extraordinarily weak activity in September 2007, when sales were at a record low for that month. The year-ago sales plunged after the credit crunch that struck in August 2007 made "jumbo" mortgages for higher-end homes more expensive and harder to obtain. Sales were already hurting from the subprime mortgage industry meltdown earlier in 2007, which undermined demand for entry-level homes.
"The pitifully low September 2007 sales numbers weren't tough to beat. More impressive was that this September's sales volume bucked the seasonal norm and rose above August. Steep price declines, especially inland, have improved housing affordability quite a bit and may keep sales levels well above the record lows we saw late last year and early this year. It will depend on the severity of this economic downturn," said John Walsh, MDA DataQuick president.
"You have to view last month's sales in the proper context," he cautioned. "They represent escrow closings, which reflect purchase decisions made in mid-to-late summer. That was before the dramatic worsening of the nation's economic crisis in recent weeks. Over the next few weeks our sales data will begin to show how the meltdown in financial markets this fall has impacted housing demand."
Bargain shopping continued to fuel the Southland market last month, with sales typically rising the most in areas where prices have dived and foreclosures have soared.
Fifty percent of all existing homes that closed escrow in September had been foreclosed on at some point in the prior year. That's up from 45.5 percent in August and 12.6 percent in September last year.
At the county level, such foreclosure resales ranged from 36.8 percent of September resales in Orange County to 68.9 percent in Riverside County. In Los Angeles County foreclosure resales were 39.1 percent of all resales; in San Diego 47.3 percent; San Bernardino 63.1 percent and in Ventura County 44.0 percent.
The high level of foreclosure resales helped push the Southland's median sale price down to $308,500 in September, the lowest since it was $305,000 in May 2003. Last month's median was 6.5 percent lower than $330,000 in August and 33.2 percent lower than $462,000 in September 2007. The September median stood 38.9 percent below the peak $505,000 median reached in spring and summer of last year.
Several factors explain the sharp drop in the median price: Regionwide home price depreciation, relatively slow high-end sales, and the rising market share of foreclosure resales, which tend to sell at a discount.
Problems in the jumbo mortgage market continue to undermine high-end home sales. Before the credit crunch hit last August, 40 percent of sales were financed with jumbos, then defined as over $417,000. Last month just 13.2 percent of purchase loans were over $417,000.
MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
The typical monthly mortgage payment that Southern California buyers committed themselves to paying was $1,458 last month, down from $1,566 the previous month, and down from $2,198 a year ago. Adjusted for inflation, current payments are 31.9 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 44.4 percent below the current cycle's peak in June 2006.
Indicators of market distress continue to move in different directions. Foreclosure activity is at or near record levels, financing with adjustable-rate mortgages is near the all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable, non-owner occupied buying activity appears flat but might be emerging, MDA DataQuick reported.
An estimated 37,988 new and resale houses and condos were sold statewide last month. That was down 3.8 percent from 39,507 in July and up 13.6 percent from 33,429 for August last year. California sales for the month of August have varied from 29,764 in 1992 to 73,285 in 2005, the average is 49,927. MDA DataQuick's statistics go back to 1988.
Of the homes sold in August, 46.9 percent were foreclosure resales, up from a revised 44.9 percent in July and 9.4 percent in August a year ago.
The median price paid for a home last month was $301,000, down 5.3 percent from $318,000 for the month before, and down 35.3 percent from $465,000 for August a year ago. Around half the drop in median is due to depreciation, the other half due to shifts in the types of homes selling, and how those homes are financed.
The typical mortgage payment that home buyers committed themselves to paying last month was $1,428. That was down from $1,501 in July, and down from $2,251 for August a year ago. Adjusted for inflation, mortgage payments are back to where they were in late 2001. They are 31.0 percent below the spring 1989 peak of the prior real estate cycle. They are 44.2 percent below the current cycle's peak in June 2006.

2009 CONFORMING LOAN LIMITS

(10/17/2008) The Federal Housing Finance Agency (FHFA) expects to announce 2009 conforming loan limits for Fannie Mae and Freddie Mac by November 7. The limits define the maximum loan size of mortgages that can be purchased by the Enterprises.
Under the Housing and Economic Recovery Act of 2008 (HERA) passed in July, FHFA was directed to set conforming loan limits each year for the nation as a whole as well as for high-cost areas. The rules governing how the loan limits are established differ from the rules set forth in the Economic Stimulus Act of 2008 (ESA), which applies to loans originated in 2008. For example, under ESA, loan limits for high-cost areas were set at 125 percent of local house price medians and the maximum high-cost limit was 175 percent of the national conforming limit ($729,750 in the continental U.S.) Under HERA, the high-cost area loan limits are 115 percent of local price medians up to a maximum of 150 percent of the national limit. In 2009, if the national limit remains at $417,000 for one-unit properties, the maximum limit in high-cost areas would be $625,500 for the continental U.S. To determine high-cost area limits under HERA for 2009, FHFA will use median home values estimated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). The FHA median prices will be calculated in the coming weeks by FHA for the purpose of determining its 2009 loan limits. Information concerning its process and calculations can be found in the attached addendum.

A Few Good Men.....Plus My Answer To The Crisis - in part....

If you by error come up short at work you'd been fired long ago for much less. Don't be fooled, lots of this is criminal - on all sides of the ball. Consumers, Bankers, CEO etc.

Not all BIG BRASS are oblivious and absent minded leaders. Here is a mish mash of the good, bad and the ugly.

``There are three reasons why companies go out of business and individuals go out of business: No. 1 is arrogance, No. 2 is arrogance and No. 3 is arrogance,'' said Harvey Mackay, chairman and CEO of Minneapolis-based MackayMitchell Envelope Co. Harvey goes on to add, "They all have chapped lips from kissing the mirror too much.'' Warren Bennis from USC adds, "``They need to man up and take responsibility,'' - founder of the Leadership Institute at the University of Southern California and author of books including ``Leaders'' and ``On Becoming a Leader.'' ``They kept winning, believing in their own omniscience and thinking they can get away with anything.''

Boards bring CEOs aboard to maximize company profits not CEO compensation -

I find this quote to be very interesting.

Richard Fauld - CEO Leham Brothers, " ``horrible about what happened'' and that management did everything we could to protect the firm.''

Did everything to protect the firm? Really?

I have no objection to making big compensation, but should it not be performance based?

Fuld, whose compensation for his last eight years totaled $484.8 million, said Lehman had to seek bankruptcy protection Sept. 15 because of a ``financial tsunami'' that was ``bigger than any one firm or industry.'' -

$484+ million in pay should make you accountable to something - should it not?

What ever happen to taking some responsibility? What ever happen to - "We made some bad decisions" or "As The Leader I take Full responsibility"

A Responsible CEO (Jeff Gault) of Los Angeles-based LandCap Partners, which bought $40 million of land and construction loans from Wachovia Corp. in August. ``You're either the boss or you're not the boss. The CEO is the owner of the deal.''

In closing -

Anyone notice how no body is claiming any sort of error in judgement. Its as if this ALL JUST HAPPENED.

*** Here is a rank and file idea - NO CAPITAL GAINS ON THOSE THAT PURCHASE THESE ASSET BACK SECURITIES? This would be so good on so many differant levels for so many people.

Not All Sub Prime Operations Are Drowing in Red Ink

How can you not like Warren. He lives in the same home he grew up in, makes a ton of money (#1 Richest Man In The World) - fiscal conservative social liberal and

Open your ears for this one and listen real good - NOT EVERY SUB PRIME LENDER DROWING in bad loans. In 2003, Warren Buffett bought a family-run business based in Maryville, Tenn called Claytn. 45% of the loans for the Clayton homes were made to sub prime borrowers. Here's the brass tax. The sub prime home loans Warren's company has been involved with have 1/2 the delinquency rate of the national stick bulit homes. Here is the cherry on top - THE FORECLOSURE RATES FOR CLAYTON HOMES IS DOWN. Clayton is more careful about lending because it keeps all loans on its own books rather than offloading them to others by means of securitization. Imagine that. Holding your own paper. Clayton has banked on homebuyers who can afford their monthly payments and who purchased their houses owner occupied, not for speculation. Clayton also avoided the mortgage industry practice of enticing buyers with low initial payments, followed by much higher payments a few years down the road. Most notably, Clayton's customers aren't likely to walk away from a house simply because it has lost value. "If people purchased a house with the idea that it would appreciate substantially in the next few years, they may elect not to make their payment," Buffett wrote. "Since our borrowers did not come in with those expectations, they will quit making payments only when they can't make the payment."

Libor Libor Libor Libor Libor Libor Libor Libor Libor

The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase of about 18 percent based on Libor rates as of Sept. 30, rather than the 10 percent that would have occurred based on the rates on Sept. 15. Libor rates have soared since the bankruptcy of Lehman Brothers Holdings Inc. last month as financial companies hoard cash.

About 121,000 mortgages will reset for the first time next month, according to the Citigroup report, which looked at only securitized mortgages. About 1.8 million loans have already begun adjusting based on benchmark rates, the report said, while 3.7 million face resets scheduled for after next month.

LIBOR is the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for London InterBank Offered Rate. This rate is that which is charged by London banks, and is then published and used as the benchmark for banks rates all over the world.
LIBOR is compiled by the British Bankers Association (BBA), and is published 11 am each day in conjunction with Reuters. It is comprised from a panel of banks representing countries in each currency.
LIBOR is also used to guides banks in setting rates for adjustable-rate loan, including interest-only mortgages and credit card debt. Lenders typically add a point or two, which is their margin.
What It Means to YouIf you have an adjustable-rate loan, when your rate resets, it is usually based on the LIBOR rate. Even if you have a fixed-rate loan and pay off your credit cards each month, an increasing LIBOR will affect you by making all types of consumer and business loans more expensive. This reduces liquidity, which slows economic growth.

Down Goes Frazier! Down Goes Frazier!

In This little E-Mail Box Of Mine .........

Michael:
Insuring lenders won't help if they don't have the capital to make loans!
Keep in mind, the assets that are currently hurting us so badly have been mostly written down to levels that are blind to any fundamentals. I'm seeing AAA-rated mortgage backed bonds (Alt A) trading at 40-50 cents on the dollar. For one particular issue I looked at today, 5% of the underlying loans are delinquent and there are no option-ARMs in the portfolio.
You can buy this today and not lose a penny of your investment, even if over 80% of the loans eventually default and you only collect 50% on the defaulted loans. On top of that, you get a 15%+ yield. (the numbers are all approximate because there is no real market for these assets, regardless of their intrinsic value)
These are the kinds of assets that the government would be purchasing. Unless you see the end of the world coming, the taxpayer would make money on credits like these, especially if the government is not permitted to buy these at a premium to their current marks (which I believe the bill would have required)
This just highlights the extreme levels of fear in the market. No one is buying. If the government doesn't intervene, this only gets worse.
Panic isn't stopped by panicked investors. Panic is stopped by an entity with a long time horizon and a big balance sheet. Right now, the government is the only player who fits that profile.

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I have been in the camp that believed that the government had not sufficiently made the case for such a massive bailout. The events of the last several days have changed my mind. I read today that banks across Europe are collapsing.
That said, the original bailout plan was conceived too quickly, was too favorable to the finance companies and gave too much power to one person. The revised plan was an improvement but was still insufficient.
There is no doubt that a bailout/rescue bill of some type will be passed before Congress leaves town. However, the odds have improved that we will see a plan that gives taxpayers a better shake.
As much as I hate the idea of a bailout, the alternative would likely be very painful for most of us who read this blog. Very few of us will enjoy Schadenfreude if the economy takes an excessively hard landing.
This isn't about propping-up the housing market...that's probably toast for the next 2 to 3 years at least. Home prices are going to have to reach an equilibrium level and this bailout plan is not designed to keep that from happening

--------------------------------------------------------------------------------------------------"Credit should remain available unless the Chinese change their mind about investing their huge surpluses in the US."
It's not as easy as that, unfortunately. As the world economy downshifts dramatically, much of the "surpluses" that China has been running will disappear. I think we will discover in short order that it really wasn't Chinese "savings". They are a growing economy, with a limited system of financial intermediation and tremendous poverty still, and they have been going flat out investing in their own country.
Much of the "savings" has been an illusion. They are the flip side of our trade balance. We borrow dollars against our houses and assets. We then ue those dollars to buy Vhinese goods. Chinese exporters give those dollars to their central bank. Their central bank "prints" yuan to give to the exporters, who then spend those yuan in domestic investment and consumption. This leads to price inflation in China (because the central bank is printing) and credit inflation in the US. The price inflation in China ultimately destabilizes their economy because of the pressure on profits and on the population. The credit inflation in the US leads to asset bubbles that are unsustainable in that the credit used to elevate the price cannot be repaid out of income. And around it goes.
When the lenders fear they will not be repaid (whether in the US or in China), and the producers cannot profitably run their businesses and/or the population cannot afford to eat (this is starting to be the case in China), the system collapses. All ponzi schemes end, and the fact that this one is collapsing at record low real interest rate levels should tell us volumes about what a mess the Fed has created by consistently trying to force real interest rates below their equilibrium level for so long. Those who on this blog used to argue that the Fed is so much smarter now than in the 1930s should really think about where we have arrived after all this "smart tinkering".
Any attempt to seriously "inflate" away the problem spooks the lenders and they stop lending. Deflation assures that the creditors are at least partially repaid with valuable currency, but it is extraordinarily painful to those leveraged buyers who were counting on "inflation" to bail them out, and iof course certain creditors will be out of luck anyway.
And so, we are at a macroeconomic impasse. I firmly believe that the guys who got us into this mess are not going to be able to get us out. But they sure will try!

Thoughts On The Bail Out

We're just rewarding bad behavior and punishing good. The responsible folks, who don't borrow beyond their means and make all their payments, have to bail out the irresponsible borrowers who took loans they couldn't pay back, and the unscrupulous banks that lent money to irresponsible borrowers.
People and institutions that make bad financial decisions should pay for those decisions. Where's my interest rate reduction, or my loan principal write-down? Oh, that's right, I don't get any breaks, because I pay my bills, so I get punished for my financial responsibility. I just have to pay for your bail out.

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Actually, I wouldn't say it is rewarding the bad behavior.
The owners (stock holders) of those banks already lost almost all their money.
And if there is no bailout, everyone will be punished, in term of economy and jobs. With bailout, at least we won't get into Great Depression 2.
Without bailout, the chance of anyone getting any mortgage is close to nil for the next year or so. It won't matter whether the price tanks...because it will because nobody can buy it. The renters will be locked out of the market, not by price, but by financing (or lack of).
With bailout, the price will still tank. However, buyers will hopefully get reasonable financing options, so we can actually take advantage of the situation.
I hope some people like to see others suffering.... to me, I don't care whether others suffer. I only care if I can take advantage of the situation.

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If the bailout works, it will work because it re-instills confidence in the current economic system. Economists, even today, only really can explain about half of all economic activity.The neoclassical model is particularly bad at modeling actual human behavior because humans don't tend to act like the "rational man" of their theories.
The overwhelming majority of economists agree that the New Deal lessened the effect of the Great Depression, the main problem is that the stimulus was not sufficient enough. This was proven when we entered WWII and government spending rose to 50% of the economy and full employment followed. Even during the period before the war, the economy grew at an average of 9-11%, the fastest economic growth period we have ever seen outside of wartime.

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The overwhelming majority of economists didn't think there was a housing bubble either. In truth, the overwhelming majority of economists are fools

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If we're going to have a socialized mortgage market then let's at least make sure to socialize the profits as well as the losses.

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and the band plays in......

Its getting very interesting.....

"The housing correction poses the biggest risk to our economy," Paulson said the day he announced the Fannie and Freddie seizure. "Our economy and our markets will not recover until the bulk of this housing correction is behind us."

Some experts even argue that the steps being taken to rescue firms like AIG could make a recovery in housing and the broader economy more difficult, as financial firms and investors become more reluctant to lend money.

"We are certainly taking credit and squeezing it tighter and tighter," said Kevin Giddis, managing director of investment bank Morgan Keegan. "Housing needs buyers. Buyers need credit."

1 Year price differance Aug 2007-Aug 2008

ATL -8.5%
Boston -5.5%
CLT -1%
CHI -9.5%
Cleveland -7.3
Dallas -3.2
Denver -4.7
Det -16.3
Vegas -28.6%
L.A -23.3% (Southern Cal)
Miami -28.3%
Minn -13.8%
NY -7.3%
PHX -27.9%
PTL -5.8%
San Diego -24.2%
SF -23.7%
Seattle -7.1%
Tampa -20.1%
Washington DC area -15.7%

A Little Light In This E-Mail Box Of Mine

Cycles: Seen them before, we'll see them again.
We have been through the cycles of the real estate market before , and we will go through them again. Right? We have seen the rise and the fall of the stock market many times, gold, oil ,copper, coal and any number of other markets and will see them again. Right?

When I trained traders on how to handle markets, the lesson was that nothing goes straight up, and nothing goes straight down, but we move and pull back, move and pull back. Everything is cyclical. Right? We have seen the meteoric rise of real estate, and at least in the residential markets a sizable decline. By my reckoning we are now due for a rise. Is that right?

Past Cycles and Fear

We saw it in the late 1980's and early 1990's, when the market pulled back, provided a buying opportunity, and then took off again. Lesson two that I would teach is that you would need to be a buyer when the lump in the pit of your stomach made it the hardest. When fear was the greatest and you were rushing in to buy as the sellers were running past you in the opposite direction. You need to buy when no one else is willing to buy. Is that where we are now?

The Present and The Future

There are some differences this time, primarily that it is not the asset itself that is the problem, but the financing mechanism. In the other real estate recessions we had supply and demand problems: that is to many properties and not enough buyers (although in some geographic areas like Florida and Las Vegas they have both problems). Now what we have is a crisis in the mortgage markets, that have caused even the most credit worthy borrowers to have an extremely diifcult time getting a loan.

We also now have huge institutional investors sitting on the sidelines with a ton of cash at the ready to jump in and buy, when they determine that the time is right. That is a good thing. We are in an extremely news driven environment, where at least at this point in time the news could not be darker. We have financial institutions like Washington Mutual and Lehman Brothers among what will probably be others that are trading as if they appear to be the next in line for a Federal bailout. Is this that time when the bold will jump in? Some may, while other may wait.

The smart money will be buyers, at a time when hindsight says it was the perfect time. Others will get in after they are sure it was a market bottom, while others will be last to the new party and be left holding the bag in this new cycle.

The Moral of the Story

One thing is for certain. We are in the downside of the cycle, that will ultimately bottom at some point, the news cycle will turn suddenly bright, and many "smart" and "bold" people will make a great deal of money. When that is going to be is for smarter minds than me to determine, but one lesson from the past is true.

Real estate is not only location, location, location, but now more than ever it is going to be timing, timing, timing. And "those that cannot remember the past are destined to repeat it."