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.