As Citigroup Inc. was dealing with billions of dollars in subprime bad credit mortgage-related losses and the departure of Chief Executive Charles Prince, it got an unexpected call from a prominent investment banker suggesting a merger with Bank of America Corp.
Citigroup's board dismissed the informal approach "totally out of hand," and no discussions have taken place, says a person familiar with the matter. "When you're looking for a CEO, that's no time for a transaction," this person says.
Bank of America says it never authorized a formal overture to Citigroup.
Citigroup's board, meanwhile, gave a green light to a smaller transaction -- a $7.5 billion capital infusion from an investment arm of the Abu Dhabi government. In exchange, the Abu Dhabi Investment Authority will receive a 4.9% stake in the form of convertible stock.
More broadly, the Abu Dhabi deal shows that after years of doling out money to corporate clients and consumers, financial companies now need some fresh cash of their own.
Faced with massive losses linked to the subprime-mortgage crisis and accompanying credit crunch, several of the nation's financial institutions -- from Wall Street investment firms to bond insurers -- are assessing their need for new sources of capital. And they are likely to intensify their fledgling efforts in coming months amid signs that they could face billions of dollars in additional losses as the mortgage-market fallout persists.
"It's a bitter pill to swallow to admit that the problems in the market have reached the point that companies that traditionally could fund themselves now need external sources of capital," says David Honold, who invests in financial stocks at Turner Investment Partners in Berwyn, Pa.
Of course, one way to tap external capital is to merge operations. The merger boom that fizzled out this summer was driven by cheap and plentiful financing in the debt markets and a booming stock market. With credit increasingly tight and the stock market looking shakier, Wall Street may now see a round of opportunistic deal making.
Bank of America, based in Charlotte, N.C., has long been one of the most opportunistic acquirers in the banking industry. In the past couple of years, it has scooped up retail bank FleetBoston Financial Corp., credit-card issuer MBNA Corp., wealth-management firm U.S. Trust Co. and, most recently, LaSalle Bank.
This wasn't the first time Citigroup received an overture involving Bank of America; it got a feeler from the bank several months ago, according to a person familiar with the matter. The latest one, though, was quickly disavowed. "Bank of America did not authorize any investment banker to approach any company over the last six weeks," a Bank of America spokesman said.
Wednesday, November 28, 2007
Friday, November 16, 2007
What is a Bad Credit Mortgage Loan?
Five Stars Mortgage has posted an article explaining the mysteries of the bad credit mortgage loan.
Below is an exceprt from the article:
"Bad credit mortgage is no different from an ordinary mortgage except for the fact that it's given to people having a bad credit history. A bad credit mortgage serves as a boon for people having a bad credit history that could have happened due to non payment of debts in time, bankruptcy, black mark from any credit agency, court cases, or even in accurate information or credit fraud. Bad credit mortgage is also referred to as adverse credit mortgage, sub prime mortgage, non standard mortgage, poor credit mortgage or credit impaired mortgage. These are the same as bad credit mortgage refinace, bad credit mortgage home loans, and foreclosure refinance situations. Lenders generally shy away from people having a bad credit. But the situation has changed rapidly and many home mortgage lenders and bad credit mortgage company have sprung up that offer bad credit home mortgages to people having a bad credit history, with almost the same interest rates (just a marginal difference) and terms as in a normal mortgage loan. "
To read the entire article on bad credit mortgage loans in Florida visit: http://www.fivestarsmortgage.com/mortgage-articles/1/
Below is an exceprt from the article:
"Bad credit mortgage is no different from an ordinary mortgage except for the fact that it's given to people having a bad credit history. A bad credit mortgage serves as a boon for people having a bad credit history that could have happened due to non payment of debts in time, bankruptcy, black mark from any credit agency, court cases, or even in accurate information or credit fraud. Bad credit mortgage is also referred to as adverse credit mortgage, sub prime mortgage, non standard mortgage, poor credit mortgage or credit impaired mortgage. These are the same as bad credit mortgage refinace, bad credit mortgage home loans, and foreclosure refinance situations. Lenders generally shy away from people having a bad credit. But the situation has changed rapidly and many home mortgage lenders and bad credit mortgage company have sprung up that offer bad credit home mortgages to people having a bad credit history, with almost the same interest rates (just a marginal difference) and terms as in a normal mortgage loan. "
To read the entire article on bad credit mortgage loans in Florida visit: http://www.fivestarsmortgage.com/mortgage-articles/1/
Friday, November 9, 2007
The nation's fourth-largest bank, which lost $1.3 billion in the third quarter tied to market turmoil, reported a $1.1 billion drop in the value of its asset-backed debt just in October alone.
Bankers' write-downs
The Charlotte, N.C.-based company said in a filing with the Securities and Exchange Commission that it's anticipating loan losses of $500 million to $600 million in the fourth quarter, citing anticipated loan growth and the impact of continuing credit deterioration in its loan portfolio.
"The expected credit deterioration will likely be focused in certain geographic areas that have recently experienced dramatic declines in housing values," the company's filing says.
At last check, shares of Wachovia dropped 1% on trading volume of more than 17 million shares.
Due to the October market deterioration, Wachovia's asset-backed collateralized debt obligations, or CDOs, experienced further declines in value in October 2007 by an amount it currently estimates to be approximately $1.1 billion pre-tax, the filing said.
In the third quarter, market losses totaling $1.3 billion pre-tax included $347 million of subprime-related valuation losses on CDOs.
As of Oct. 31, Wachovia said it had remaining exposure of $676 million to asset-backed CDOs, compared with $1.8 billion the previous month. Wachovia has exposure to subprime residential mortgage-backed securities of $2.1 billion, according to the filing.
Write-downs related to CDOs and subprime mortgage-backed securities totaled $1.11 a share during October, Wachovia said. Net write-downs for the third quarter were 35 cents a share.
The market for these assets "have remained extraordinarily volatile in the first week of November with additional rating agencies' downgrades ... and credit spread widening and illiquidity."
More write-downs coming out of Wall Street have heightened fears the fallout from the subprime turmoil is spreading deeper into credit markets. American International Group Inc. (AIG:
American International Group, Inc earlier this week joined the chorus of firms disclosing subprime-related losses.
"While it is unclear if these write-downs are enough, the remaining CDO exposure of $676 million is well below that of others," wrote analysts at Deutsche Bank in a research note on the Wachovia filing. They estimated that Morgan Stanley has $6 billion in CDO exposure, Merrill Lynch & Co. has $42 billion.
The analysts said the extra loan-loss provisions of between $500 million and $600 million are related to Wachovia's acquisition of mortgage company Golden West Financial. "As such, we believe the company is trying to get ahead of likely higher future mortgage losses in California," they wrote. Last year, Wachovia bought Golden West for $26 billion.
"Nevertheless, we consider this to be negative news," Deutsche Bank said. "Per the investment bank, management indicated that it would stay the course but we wonder if additional changes could be needed. Second, per Golden West, it now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle."
"Perhaps more important than the valuation write-downs is the need to build the loan loss reserves for credit quality deterioration," wrote Stifel Nicolaus & Co. analysts in a report Friday. "The need for additional valuation write-downs was becoming evident in recent weeks, so the Street knew it was coming. But the credit losses may not have been as expected."
The analysts lowered their fourth-quarter profit estimate for Wachovia to 55 cents a share from $1.10.
"Everyone keeps hoping that the worst is over, but we expect to see continued negative news as the fallout from the subprime lending spree spreads," said Walter O'Haire, senior analyst at financial research and consulting firm Celent.
"The hangover is not only painful, but there is no near end in sight," he said. "To complicate matters, there is still disagreement on how to best arrive at a 'market value' for various complex debt derivatives [and] securities, since almost no one wants to own the paper and there is little to no market for it today."
Friday, November 2, 2007
Merrill hedge-fund arrangement in question
After hitting five-year lows a day earlier, financial stocks continued to slide on Friday as investor concerns focused on Merrill Lynch and Washington Mutual. In the past few days, concerns seemed to shift from the companies' poor judgment and weak risk management to the possibility that business practices may not pass regulators' tests.
Shares of Merrill Lynch & Co. fell more than 7% Friday, retreating in the face of a Wall Street Journal report that the company has engaged in deals with hedge funds to delay when it had to record losses on risky mortgage-backed securities.
Washington Mutual may have to set aside some $412 million to $2.1 billion in extra reserves if a lawsuit filed by New York state's attorney general against the mortgage lender succeeds, a Keefe Bruyette & Woods analyst estimated on Friday.
U.S. stocks on Friday shifted in and out of positive territory as investors weighted a surprisingly strong October jobs report and an unexpected rise in factory orders against ongoing credit-related upheaval in financial stocks.
Deutsche's Mayo estimates $10 bln in fourth-quarter write-downs
Deutsche Bank analyst Mike Mayo estimates there will be more than $10 billion in new write-downs during the fourth quarter, including $4 billion each at Citigroup bln subprime hit, Goldman estimates
UBS may take a subprime-related hit of $5.2 billion in the fourth quarter, according to Richard Ramsden, an analyst at Goldman Sachs. He calculated the estimated write-down based on the performance of credit-default spreads since the end of September.
Senate Banking Committee Chairman Christopher Dodd says Merrill Lynch & Co.'s $161.5 million exit package for former Chairman and Chief Executive Officer Stan O'Neal may revive efforts in Congress to give shareholders more power to curb CEO salaries.
Meredith Whitney, whose downgrade of Citigroup Inc. shares helped wipe out $369 billion in U.S. stock market value, said she was the only analyst on Wall Street with the guts to say the bank may cut its dividend.
Commercial Mortgage Lender Five Stars Mortgage continues offering cutting edge products to the National Mortgage Markets. Hard Money Commercial Loans are also being offered by the Commercial Loan Provider.
Shares in Barclays fell as much as 8% to hit two-and-a-half year lows on Friday amid market talk of funding worries and speculation it is telling analysts to trim profit forecasts.
Men like Jim Chanos and Bill Ackman will be watching the collapsing share prices of companies such as Ambac and MBIA with a sense of triumph -- and the warm glow that comes from turning a fine profit. Both hedge-fund managers have long held short positions on the equities of one or other of these bond insurers -- known as monolines -- and have not been shy about condemning their business models or risk positions.
Tuesday, October 30, 2007
S&P/Case-Shiller Home Prices Fell 4.4% in August
Home prices in 20 U.S. metropolitan areas slumped in August by the most in at least six years, a private survey showed today.
Values dropped 4.4 percent in the 12 months that ended August, an eighth consecutive decline, according to the S&P/Case-Shiller home-price index, which has data back to 2001.
The figures reinforce the view among Federal Reserve officials and Treasury Secretary Henry Paulson that the housing slump has further to go. Near-record inventory levels suggest sellers will continue to lower prices, posing a threat to consumer spending because homeowners will have less equity to borrow against.
This is really the No. 1 risk: a sustained, sharp decrease in home prices really squeezing consumers,'' said Meny Grauman, an economist at Scotia Capital Inc. in Toronto.
Economists forecast the gauge would decrease 4.2 percent, according to the median of 11 estimates in a Bloomberg News survey.
The group's 10-city composite index, which has a longer history, dropped 5 percent in the 12 months ended in August, the most since June 1991.
In a separate report, an index of consumer confidence declined to 95.6, the lowest since October 2005, from a revised 99.5 the prior month, the New York-based Conference Board said. The index was forecast to drop to 99, from an originally reported reading of 99.8 for September, according to the median estimate in a Bloomberg News survey of 70 economists.
Compared with July, home prices in the 20-city index fell 0.7 percent after a 0.4 percent decline the month before. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.
``The fall in home prices is showing no real signs of a slowdown or turnaround,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, in a statement. ``There is really no positive news in today's report.''
Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.
The index is a composite of transactions in 20 metropolitan regions. Fifteen cities showed a year-over-year decline in prices, led by a 10 percent drop in Tampa, Florida, and a 9 percent decline in Detroit. The area showing the biggest gain was Seattle with a 5.7 percent increase.
Fed Forecast
Most economists expect housing to extend its slump and continue to be a drag on economic growth as loan foreclosures rise and tougher lending standards make borrowing more difficult.
Traders and economists expect the Federal Reserve to cut its benchmark overnight lending rate between banks tomorrow by at least a quarter point. Policy makers on Sept. 18 reduced the interest rate for the first time in four years, to 4.75 percent from 5.25 percent.
Paulson said today it's too soon to call an end to the housing slump.
``We haven't hit the bottom yet in housing,'' Paulson said at a conference in New Delhi. Still, he added ``there is enough strength in the economy that we can grow through this.''
Homeownership in the U.S. has dropped the last four quarters, the longest string of declines since at least 1981, the Census Bureau said on Oct. 26. Also last quarter, a record 17.9 million U.S. homes were vacant.
Sales of existing homes dropped last month to the lowest level since record-keeping began in 1999. The decline to a sales pace of 5.04 million annual rate brought the inventory of homes for sale to a record high of 10.5 months' supply. The median price of resales fell 4.2 percent from a year earlier.
The price measure from the Realtors group can be influenced by changes in the types of homes sold. Because the S&P/Case- Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track the same home over time, economists say these more accurately reflect price trends.
Recent price cuts may not be enough to bring in some buyers. Pulte Homes Inc., the third-largest U.S. homebuilder said Oct. 25 that the reductions it's enacted didn't boost sales last quarter.
``Time has proven that no one can be sure when this particular downturn will end or begin to show signs of stabilization,'' Chief Executive Officer Richard Dugas said on a conference call. ``Since we are not sure how long this environment will stay this bad, Pulte plans to be prepared for the worst.''
First Time Home Buyer Loans and 100% financing mortgage loans are far more prevalant now more than ever. Five STars Mortgage continues to show clients how to use this buyers market to their advantage with bad credit mortgages.
Wednesday, October 10, 2007
Banks can help in times of distress
Banks must step up and provide loans during times of financial market distress and also help homeowners who find themselves behind in their payments of unfavorable mortgages, said Eric Rosengren, the new president of the Boston Federal Reserve Bank.
There might even be some profit opportunities for banks if they can move into the market for subprime mortgages, Rosengren said. Many of the independent brokers who created the market for subprime mortgages have gone out of business in recent months.
"While the subprime market that was the epicenter of the problem is likely to continue to have difficulties, I am hopeful that financial institutions will play an important role in providing financing for many of the borrowers facing higher rates as their mortgages reset," Rosengren said in his first speech after assuming his new post in July.
"The most critical issue is that financing that supports responsible subprime lending continues," Rosengren said.
Subprime is the industry shorthand for mortgages that are not the highest quality. Many lower middle class families were able to buy homes with such loans, but the sector also includes mortgages for higher-priced homes.
Instead, the central issue was a lack of liquidity, as relatively low-risk financial assets traded between large financial institutions experienced the most difficulty.
Bank balance sheets expanded in August and September as securitization of subprime mortgages and other asset-backed commercial paper declined.
Rosengren said that "conservatively underwritten securitizations and asset-backed commercial paper will find acceptance by investors" but said this will take some time.
In his remarks, Rosengren did not dwell on the economic impact of the recent financial turmoil.
He said that the effect of the problems in housing on consumption has been muted to date.
But he said if housing prices fall further or if the price declines spread across the country, this "would increase the risk of a more adverse impact on consumption."
100% Bad Credit Mortgage Florida are still a viable product through Five Stars Mortgage specialized Subprime Home Loan products.
There might even be some profit opportunities for banks if they can move into the market for subprime mortgages, Rosengren said. Many of the independent brokers who created the market for subprime mortgages have gone out of business in recent months.
"While the subprime market that was the epicenter of the problem is likely to continue to have difficulties, I am hopeful that financial institutions will play an important role in providing financing for many of the borrowers facing higher rates as their mortgages reset," Rosengren said in his first speech after assuming his new post in July.
"The most critical issue is that financing that supports responsible subprime lending continues," Rosengren said.
Subprime is the industry shorthand for mortgages that are not the highest quality. Many lower middle class families were able to buy homes with such loans, but the sector also includes mortgages for higher-priced homes.
Instead, the central issue was a lack of liquidity, as relatively low-risk financial assets traded between large financial institutions experienced the most difficulty.
Bank balance sheets expanded in August and September as securitization of subprime mortgages and other asset-backed commercial paper declined.
Rosengren said that "conservatively underwritten securitizations and asset-backed commercial paper will find acceptance by investors" but said this will take some time.
In his remarks, Rosengren did not dwell on the economic impact of the recent financial turmoil.
He said that the effect of the problems in housing on consumption has been muted to date.
But he said if housing prices fall further or if the price declines spread across the country, this "would increase the risk of a more adverse impact on consumption."
100% Bad Credit Mortgage Florida are still a viable product through Five Stars Mortgage specialized Subprime Home Loan products.
Tuesday, October 9, 2007
trimmed staff at its alt-A/conventional mortgage affiliate
Earlier this year, when Merrill Lynch forked over $1.3 billion to buy subprime lender First Franklin Financial Corp., and some of its affiliates, a handful of executives were dancing in the hallways at National City in Cleveland. NatCity owned FFFC and, indeed, it would seem that they sold the subprime shop at the top of the market (and before the nonprime liquidity crisis reared its ugly head). But let's forget about FFFC for a moment. Does anyone see the irony of Merrill Lynch — known for selling stocks to America's wealthy — trying to make a buck by lending to credit impaired Americans? Let's not forget that Merrill was a major (and I do mean major) warehouse financier of non-banks plying their trade in subprime, including Ownit Mortgage, Mortgage Lenders Network and ResMAE, among others. What do all these lenders have in common? They all filed for bankruptcy protection. Some in the industry even speculated that Merrill was engaged in a plan to reduce the number of subprime lenders so that FFFC would have less competition, a thought that only a conspiracy theorist would hatch. One subprime executive who sold loans to Merrill told me that Merrill "was one of the most aggressive buyers of loans. They paid more than anyone and they did less due diligence." He blamed Merrill's woes on a top trader there, whose identity I'll get to in a future column as I continue to research the roots of this crisis. On Friday Merrill Lynch estimated that it will take $4.5 billion in credit-crunch-related writedowns (net of hedges) on subprime mortgages, collateralized debt obligations and leveraged finance commitments.
Five Stars Mortgage is an upfront mortgage broker business still providing the highest level of 100% bad credit mortgage loans in Florida and Nationwide. For details visit them on the web at http://www.fivestarsmortgage.com
Five Stars Mortgage is an upfront mortgage broker business still providing the highest level of 100% bad credit mortgage loans in Florida and Nationwide. For details visit them on the web at http://www.fivestarsmortgage.com
Sunday, September 30, 2007
Fed cut sends long-term rates up
many would-be home buyers are about to be stripped of a misperception, namely the idea that when the Federal Reserve Board is cutting interest rates mortgage rates will fall as a result.
In a radio interview with Chuck Jaffe, MarketWatch senior columnist, McBride noted that the Fed is combating the economy, but some observers worry that its bigger-than-expected move might be opening the door to inflation, a concern which has pushed mortgage rates up slightly since the Fed's most recent move.
According to BankRate.com, the average 30-year fixed rate mortgage in the country currently carries a rate of 6.4%, which represents a reversal of course. The average mortgage rate had dropped below that level, to roughly 6.25%, in the two weeks leading up to the Fed announcement Sept. 18 that it was cutting the target for the federal funds rate to 4.75% from 5.25%.
McBride noted that the Fed's rate cut is bad news for long-term savers, as rates on certificates of deposit maturing in two or more years have fallen, while short-term rates have remained steady. This erases any risk premium that a saver gets for tying up money for a longer stretch of time.
Finance your Orlando Bad credit mortgage with 100% financing with Five Stars Mortgage before rates continue to rise!
In a radio interview with Chuck Jaffe, MarketWatch senior columnist, McBride noted that the Fed is combating the economy, but some observers worry that its bigger-than-expected move might be opening the door to inflation, a concern which has pushed mortgage rates up slightly since the Fed's most recent move.
According to BankRate.com, the average 30-year fixed rate mortgage in the country currently carries a rate of 6.4%, which represents a reversal of course. The average mortgage rate had dropped below that level, to roughly 6.25%, in the two weeks leading up to the Fed announcement Sept. 18 that it was cutting the target for the federal funds rate to 4.75% from 5.25%.
McBride noted that the Fed's rate cut is bad news for long-term savers, as rates on certificates of deposit maturing in two or more years have fallen, while short-term rates have remained steady. This erases any risk premium that a saver gets for tying up money for a longer stretch of time.
Finance your Orlando Bad credit mortgage with 100% financing with Five Stars Mortgage before rates continue to rise!
Monday, September 17, 2007
Falling home prices could dent economy
Just as rising home prices helped fuel the economic expansion of the past six years by making people wealthier, falling home prices could put a big dent in economic growth in the next few years by making them poorer.
At this point, few economists expect the economy to sink into a recession, but almost all of them agree that consumer spending would slow, perhaps significantly, if home prices were to fall.
With the number of excess homes rising amid falling demand, the negatives in the housing market will "continue putting downward pressure on prices," said Seamus Symth, an economist for Goldman Sachs, who says home prices were plunging at a 9% annual rate in the most recent data. Goldman expects home prices to fall 7% this year and another 7% next year.
The path of home prices could be the key to whether the economy grows or stalls.
"A big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices," San Francisco Federal Reserve Bank President Janet Yellen said in a recent speech. "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant."
Economists are forecasting that home prices will decline more than 5% this year and nearly 4% next year, according to the latest survey by Blue Chip Economic Indicators. Those same economists expect consumer spending to slow from 3.1% last year to 2.8% this year and 2.3% next year.
While a cumulative 8% drop in home prices (after nearly doubling in the previous six years) doesn't sound so ominous, such a decline would be the largest since the Great Depression.
Because most owners are reluctant to sell at a loss unless they are forced to, it's extremely unusual to see nominal home prices fall. In economists' jargon, home prices are "sticky" on the downside, but not on the upside.
By comparison, prices in the stock market adjust quickly to new perceptions about values, as investors take their losses and move on. During market corrections, the volume of shares traded doesn't fall, because the market quickly finds a new equilibrium between supply and demand.
The housing market is completely different. Sellers don't quickly adjust their prices to a new market reality. And because prices don't fall to bring demand into balance with supply, the volume of houses sold plunges during a correction. Home sales are now down 23% from the peak more than two years ago. The housing market can take years to find an equilibrium. In most housing corrections, sales remain very weak until excess supply is worked off. Prices can be flat for years.
So why are prices falling now? There's every reason to believe that supply and demand are getting even further out of balance. The number of vacant homes is at a record level, and more new homes are coming on the market every day. Foreclosures are rising, further increasing supply. More adjustable-rate mortgages will reset to a higher monthly payment in coming months, pressuring more homeowners to sell or default.
At the same time, the rationing of credit is reducing demand. The subprime and Alt-A mortgage markets, which represented about 40% of mortgages last year, have almost completely dried up. Lenders are increasing their standards for approving a loan, and interest rates for jumbo loans have risen substantially.
The difficulties in the mortgage market will not only depress home sales, it will also reduce consumer spending. In recent years, consumers have taken advantage of the mortgage market to withdraw and spend some of the equity they've built up in their homes,
"We've given people the ability to spend more, and it's going away now," said Paul Kasriel, chief economist for Northern Trust.
Economists can't agree on how much spending has been boosted by mortgage-equity extraction, also known as MEW.
Some theorize that each additional dollar of wealth (from appreciation in assets such as housing or stocks) boosts spending by about 3 cents. By that account, the $8.1 trillion gain in real estate values since 2001 added about $243 billion to consumer spending over those six years, an insignificant amount compared with the $46 trillion they've spent.
But other economists say extra housing wealth is more likely to be spent than extra stock market wealth. Former Fed chairman Alan Greenspan and Fed economist James Kennedy concluded in a study published in 2005 that consumers spent about half of what they took out of their homes, and invested the other half in home improvements.
Five Stars Mortgage offers 100% financing Investor Loans in Florida and Nationwide.
At this point, few economists expect the economy to sink into a recession, but almost all of them agree that consumer spending would slow, perhaps significantly, if home prices were to fall.
With the number of excess homes rising amid falling demand, the negatives in the housing market will "continue putting downward pressure on prices," said Seamus Symth, an economist for Goldman Sachs, who says home prices were plunging at a 9% annual rate in the most recent data. Goldman expects home prices to fall 7% this year and another 7% next year.
The path of home prices could be the key to whether the economy grows or stalls.
"A big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices," San Francisco Federal Reserve Bank President Janet Yellen said in a recent speech. "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant."
Economists are forecasting that home prices will decline more than 5% this year and nearly 4% next year, according to the latest survey by Blue Chip Economic Indicators. Those same economists expect consumer spending to slow from 3.1% last year to 2.8% this year and 2.3% next year.
While a cumulative 8% drop in home prices (after nearly doubling in the previous six years) doesn't sound so ominous, such a decline would be the largest since the Great Depression.
Because most owners are reluctant to sell at a loss unless they are forced to, it's extremely unusual to see nominal home prices fall. In economists' jargon, home prices are "sticky" on the downside, but not on the upside.
By comparison, prices in the stock market adjust quickly to new perceptions about values, as investors take their losses and move on. During market corrections, the volume of shares traded doesn't fall, because the market quickly finds a new equilibrium between supply and demand.
The housing market is completely different. Sellers don't quickly adjust their prices to a new market reality. And because prices don't fall to bring demand into balance with supply, the volume of houses sold plunges during a correction. Home sales are now down 23% from the peak more than two years ago. The housing market can take years to find an equilibrium. In most housing corrections, sales remain very weak until excess supply is worked off. Prices can be flat for years.
So why are prices falling now? There's every reason to believe that supply and demand are getting even further out of balance. The number of vacant homes is at a record level, and more new homes are coming on the market every day. Foreclosures are rising, further increasing supply. More adjustable-rate mortgages will reset to a higher monthly payment in coming months, pressuring more homeowners to sell or default.
At the same time, the rationing of credit is reducing demand. The subprime and Alt-A mortgage markets, which represented about 40% of mortgages last year, have almost completely dried up. Lenders are increasing their standards for approving a loan, and interest rates for jumbo loans have risen substantially.
The difficulties in the mortgage market will not only depress home sales, it will also reduce consumer spending. In recent years, consumers have taken advantage of the mortgage market to withdraw and spend some of the equity they've built up in their homes,
"We've given people the ability to spend more, and it's going away now," said Paul Kasriel, chief economist for Northern Trust.
Economists can't agree on how much spending has been boosted by mortgage-equity extraction, also known as MEW.
Some theorize that each additional dollar of wealth (from appreciation in assets such as housing or stocks) boosts spending by about 3 cents. By that account, the $8.1 trillion gain in real estate values since 2001 added about $243 billion to consumer spending over those six years, an insignificant amount compared with the $46 trillion they've spent.
But other economists say extra housing wealth is more likely to be spent than extra stock market wealth. Former Fed chairman Alan Greenspan and Fed economist James Kennedy concluded in a study published in 2005 that consumers spent about half of what they took out of their homes, and invested the other half in home improvements.
Five Stars Mortgage offers 100% financing Investor Loans in Florida and Nationwide.
Friday, September 7, 2007
The number of mortgage loans entering the foreclosure process in the second quarter set another record, according to the latest data from the Mortgage
According to the group's quarterly delinquency survey, a seasonally adjusted 0.65% of loans on one- to four-unit residential properties entered the foreclosure process during the period, the highest level in the survey's 55-year history. In the first quarter, when the previous record was set, 0.58% of loans entered the process; a year ago, 0.43% entered the process.
The delinquency survey covers more than 44 million mortgages, meaning more than 286,000 loans entered the foreclosure process during the quarter. Coverage of home buying and selling, housing prices, mortgage information and home improvement
Driving the numbers were the states of California, Florida, Nevada and Arizona, said Doug Duncan, MBA's chief economist and senior vice president of research and business development, in a news release.
"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty-four states had decreases in their rates of new foreclosure and the increases were very modest in the states with increases, other than those four," Duncan said.
Duncan said there was a "clear divergence" in performance between fixed-rate and adjustable-rate mortgages because of the impact that rate resets have.
"While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed- rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans," he said.
Less clear is whether rate increases in subprime ARMs are causing major problems for those four key states, or whether local market conditions that are causing prices to drop are the main culprit because the lower prices are making it more difficult for people in unaffordable loans to refinance, said Jay Brinkmann, the MBA's vice president of research and economics, in a telephone interview.
California has 17% of the subprime ARMs in the country and more than 19% of the foreclosure starts on subprime ARMs. California, Florida, Nevada and Arizona have more than one-third of the country's subprime ARMs and more than one-third of the foreclosure starts on subprime ARMs.
Home prices have dropped in all four states, and 52 of the 59 metropolitan areas in the four states saw home price declines during the second quarter, according to the Office of Federal Housing Enterprise Oversight, the MBA said. The inventory of new homes for sale in the Western region hit an all-time high at the end of the second quarter, and Florida is dealing with a glut of condo supply, Duncan said.
These are also markets that have experienced a high share of investor loans, Duncan said. The share of non-owner-occupied loans that are 90 days or more past due or in foreclosure, as of June 30, was 32% in Nevada, 25% in Florida, 26% in Arizona and 21% in California. Comparatively, 13% of these loans were in default in the rest of the country.
"Whatever happens in those states is going to drive the national numbers but they don't represent national performance," Brinkmann said.
More statistics
According to the survey, 1.40% of all outstanding loans were somewhere in the foreclosure process during the second quarter, up from 1.28% in the first quarter and 0.99% a year ago.
Greatly factoring into those figures are markets such as Ohio, where mortgages that are 90 days or more past due or in foreclosure was still more than twice the national average, Duncan said. In addition, 1% of mortgages in Michigan entered the foreclosure process in the second quarter, and nearby states including Indiana, Illinois, Kentucky, Tennessee and Pennsylvania are also seeing foreclosure problems, he added.
"While Michigan's problems continue to escalate, however, Ohio's have shown signs of leveling off, albeit at a high level," Duncan said in the release.
The delinquency rate for mortgages on one- to four-unit proprieties was 5.12% in the second quarter, up from 4.84% in the first quarter and 4.39% a year ago.
Looking ahead
The freeze up and turmoil in the mortgage markets that has occurred since June 30 will have an effect on these numbers in the coming quarters, Duncan said during a conference call with reporters.
Because credit availability has been constrained, refinance options are limited for borrowers, curtailing opportunities for homeowners on the margin of being in trouble, he said.
Due in part to the turmoil -- and possibly the affect of resets in 2/28 ARMs that were originated in 2005 and 2006 -- the MBA suspects that the peak in foreclosures and delinquencies hasn't yet been reached and won't until the next two to four quarters, Duncan said.
A research note by Lehman Brothers Economics said that the MBA results are consistent with the view that "the housing recession looks far from over," adding that tighter lending standards and the shrinking availability of credit should cause the performance of mortgage loans to get worse.
"As subprime ARMs continue to reset to higher rates, many borrowers will be forced to default and in some cases ultimately foreclose," the note read. "Higher foreclosures will add to already bloated inventory of homes, extending the housing recession."
Another note from Ian Shepherdson, chief U.S. economist for High Frequency Economics, pointed out the increase in the number of subprime loans compared with 2002, explaining that the number of subprime delinquencies is magnified as a result.
According to the MBA report, the delinquency rate for subprime loans was 14.82% in the second quarter, up from 13.77% in the first quarter. But while in the second quarter of 2002 there were 1.19 million subprime loans outstanding, today there are about 5.9 million, Shepherdson said.
"That's why the problem now is so much worse despite similar headline delinquency rates. Also, note that the rise in delinquencies this time is mostly due to resetting ARMs; the unemployment rate has not moved up. In '02, job losses did all the damage."
"So what happens now if unemployment goes up as resets increase too? Well, you ain't seen nothing yet," he wrote.
The MBA expects the Federal Reserve to cut rates a quarter percentage point in the next two meetings, a response to projections of weaker economic growth and higher unemployment, Duncan said.
He also commented that the rise in delinquencies and foreclosures has been the tradeoff to the steep rise in homeownership, which has come about after a major policy push to create more homeowners. He also pointed out that 35% of people who own a home don't have a mortgage.
-Marketwatch
Daytona Beach Bad Credit Mortgage provider Five Stars Mortgage continues to offer good alternatives to subprime borrwers with fixed rate bad credit mortgages that are affordable.
The delinquency survey covers more than 44 million mortgages, meaning more than 286,000 loans entered the foreclosure process during the quarter. Coverage of home buying and selling, housing prices, mortgage information and home improvement
Driving the numbers were the states of California, Florida, Nevada and Arizona, said Doug Duncan, MBA's chief economist and senior vice president of research and business development, in a news release.
"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty-four states had decreases in their rates of new foreclosure and the increases were very modest in the states with increases, other than those four," Duncan said.
Duncan said there was a "clear divergence" in performance between fixed-rate and adjustable-rate mortgages because of the impact that rate resets have.
"While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed- rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans," he said.
Less clear is whether rate increases in subprime ARMs are causing major problems for those four key states, or whether local market conditions that are causing prices to drop are the main culprit because the lower prices are making it more difficult for people in unaffordable loans to refinance, said Jay Brinkmann, the MBA's vice president of research and economics, in a telephone interview.
California has 17% of the subprime ARMs in the country and more than 19% of the foreclosure starts on subprime ARMs. California, Florida, Nevada and Arizona have more than one-third of the country's subprime ARMs and more than one-third of the foreclosure starts on subprime ARMs.
Home prices have dropped in all four states, and 52 of the 59 metropolitan areas in the four states saw home price declines during the second quarter, according to the Office of Federal Housing Enterprise Oversight, the MBA said. The inventory of new homes for sale in the Western region hit an all-time high at the end of the second quarter, and Florida is dealing with a glut of condo supply, Duncan said.
These are also markets that have experienced a high share of investor loans, Duncan said. The share of non-owner-occupied loans that are 90 days or more past due or in foreclosure, as of June 30, was 32% in Nevada, 25% in Florida, 26% in Arizona and 21% in California. Comparatively, 13% of these loans were in default in the rest of the country.
"Whatever happens in those states is going to drive the national numbers but they don't represent national performance," Brinkmann said.
More statistics
According to the survey, 1.40% of all outstanding loans were somewhere in the foreclosure process during the second quarter, up from 1.28% in the first quarter and 0.99% a year ago.
Greatly factoring into those figures are markets such as Ohio, where mortgages that are 90 days or more past due or in foreclosure was still more than twice the national average, Duncan said. In addition, 1% of mortgages in Michigan entered the foreclosure process in the second quarter, and nearby states including Indiana, Illinois, Kentucky, Tennessee and Pennsylvania are also seeing foreclosure problems, he added.
"While Michigan's problems continue to escalate, however, Ohio's have shown signs of leveling off, albeit at a high level," Duncan said in the release.
The delinquency rate for mortgages on one- to four-unit proprieties was 5.12% in the second quarter, up from 4.84% in the first quarter and 4.39% a year ago.
Looking ahead
The freeze up and turmoil in the mortgage markets that has occurred since June 30 will have an effect on these numbers in the coming quarters, Duncan said during a conference call with reporters.
Because credit availability has been constrained, refinance options are limited for borrowers, curtailing opportunities for homeowners on the margin of being in trouble, he said.
Due in part to the turmoil -- and possibly the affect of resets in 2/28 ARMs that were originated in 2005 and 2006 -- the MBA suspects that the peak in foreclosures and delinquencies hasn't yet been reached and won't until the next two to four quarters, Duncan said.
A research note by Lehman Brothers Economics said that the MBA results are consistent with the view that "the housing recession looks far from over," adding that tighter lending standards and the shrinking availability of credit should cause the performance of mortgage loans to get worse.
"As subprime ARMs continue to reset to higher rates, many borrowers will be forced to default and in some cases ultimately foreclose," the note read. "Higher foreclosures will add to already bloated inventory of homes, extending the housing recession."
Another note from Ian Shepherdson, chief U.S. economist for High Frequency Economics, pointed out the increase in the number of subprime loans compared with 2002, explaining that the number of subprime delinquencies is magnified as a result.
According to the MBA report, the delinquency rate for subprime loans was 14.82% in the second quarter, up from 13.77% in the first quarter. But while in the second quarter of 2002 there were 1.19 million subprime loans outstanding, today there are about 5.9 million, Shepherdson said.
"That's why the problem now is so much worse despite similar headline delinquency rates. Also, note that the rise in delinquencies this time is mostly due to resetting ARMs; the unemployment rate has not moved up. In '02, job losses did all the damage."
"So what happens now if unemployment goes up as resets increase too? Well, you ain't seen nothing yet," he wrote.
The MBA expects the Federal Reserve to cut rates a quarter percentage point in the next two meetings, a response to projections of weaker economic growth and higher unemployment, Duncan said.
He also commented that the rise in delinquencies and foreclosures has been the tradeoff to the steep rise in homeownership, which has come about after a major policy push to create more homeowners. He also pointed out that 35% of people who own a home don't have a mortgage.
-Marketwatch
Daytona Beach Bad Credit Mortgage provider Five Stars Mortgage continues to offer good alternatives to subprime borrwers with fixed rate bad credit mortgages that are affordable.
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