One casualty of the mortgage crisis that we’ve covered here before is the jumbo mortgage — loans over $417,000 in some jurisdictions and over $729,000 in others.  If you are (or were) a millionaire with a big house and a big mortgage, chances are it was a jumbo.  In the mortgage bubble days jumbos generally carried a half-percent interest rate premium over conventional (non-jumbo) loans. Then all heck broke loose and jumbos disappeared entirely only to reappear recently, though after a somewhat different fashion.

Lenders are leaping into the jumbo mortgage business and offering aggressive rates — easily as aggressive as in the bubble days in terms of rate premiums.  But there’s a catch.  The catch is that jumbo mortgages today are a lot harder to qualify for than they used to be.

Want a jumbo loan?  Then be ready to make a 30-40 percent down payment on your new house.  This immediately eliminates refinancing most of the older jumbo loans in California, for example, where more than half of the mortgages were already of jumbo size.  If your jumbo mortgage is underwater don’t expect to be able to refinance — or even to apply for a mortgage modification, since the Obama plan, for example, doesn’t even cover jumbos.

The reason lenders are jumping into jumbo mortgages is because under these terms it is a great business.  Wall Street still won’t touch jumbos for securitization, but that doesn’t matter because the banks are tending to hold these loans in their own portfolios.  And for good reasons: 1) the lenders have plenty of equity down so the properties are worth more than the loans against them; 2) it costs little more to foreclose on a jumbo than on a conventional loan so for the lender the downside is the same while the upside is much larger, and; 3) under current Fed policy the banks are making these 6-percent jumbos with 0.25-percent money — a fantastic spread by historical standards.

So welcome back jumbo.  Too bad most of us can’t qualify.

cringely Blog banks, jumbo mortgages, mortgage crisis, mortgage rates, mortgages

“I’m from the government and I am here to help,” those are words that cause varying degrees of alarm in most Americans.  Now the Obama Administration wants banks to simplify their many credit products including mortgages and credit cards and — this time at least — they may actually be here to help.  But the lenders hate it, of course, and are working hard to oppose any changes to the current system that got us in our present mess.

In the eras of our fathers and grandfathers people bought houses, got mortgages, paid those mortgages off and sometimes had a ceremony where they burned the mortgage document, itself.  Today, however, we are in an era of continuous debt.  People buy houses, get mortgages, pay some on the mortgage, refinance with a new mortgage (often taking cash out) then the cycle starts all over again.  The only time most modern homeowners are truly out of debt is if they decide to go from being owners to renters, which usually happens late in life.  This transition from paying-off our mortgages to not paying-off our mortgages isn’t something invented by consumers but by lenders who realized keeping us in as much debt as possible for as long as possible was good for profits — very good.  But it’s not so good for homeowners.

The Obama Administration is trying to force product simplification on the banks.  This means simpler loan and credit agreements written in plain English and the elimination of many exotic loans like 100 percent financing and interest-only.  Unfortunately for the banks, these products tend to have higher profit margins, especially as consumers fall behind and are hit with penalties and punitive rates.  Eliminating junk and deceptive credit products will eliminate a lot of bank profit and the bankers don’t like that.

There’s an interesting cycle here.  Banking used to be a pretty mundane industry with relatively low profit margins and accompanying lower rates of pay for bank executives.  Then came bank deregulation, exotic loans, booming bank profits, and huge annual bonuses — all paid for by American homeowners who were, frankly, pretty dumb about their finances.

So to save us from ourselves the Obama Administration wants to force simplification and — frankly — common sense on the lending industry.  It’s a whole new take on Truth in Lending. That ought to be good, right?  Not if you are a bank president expecting to give yourself a multi-million dollar  year-end bonus.  So there is an inherent conflict here that will be played-out in the months to come.  What Obama is trying to do is clearly the right thing, but it will be an uphill battle against very entrenched special interests with a lot of money to throw at the fight.

It is very doubtful that Obama will win and that’s a shame because the longer term implications here should be very troubling to everyone — even to the bankers.

cringely Blog banks, financial crisis, mortgage crisis, Obama Administration

Take a look at the chart, above, which comes courtesy of the Federal Reserve.  It makes the point that private label mortgages, which are mortgages securitized by Wall Street firms, mainly investment banks, are responsible for most of the mortgage mess we are in as a nation.  There is a lot to understand here and it is particularly damning if examined closely because it shows Wall Street to be at best incompetent and at worst criminal.

All of these organizations and organization types do the same thing — they buy or fund mortgages then package thousands of those mortgages together into securities they sell on the open market.  If the quality of every security was the same then the percentage of bad mortgages would exactly match the percentage market share for each player.  Yet that is far from the case.

Let’s do some numbers:

Organization        Mortgages (millions)          Troubled (100,000)              % Troubled

Banks/Thrifts              8                                            397                            4.9

Fannie Mae                18                                            444                            2.4

Freddie Mac               13                                            232                            1.7

Ginnie Mae                   6                                            378                           6.3

Private Label                8                                           1734                         21.6

All of these organizations perform similar functions, all employ the same staff functions, all buy, for the most part, from the same pool of available mortgages, except of course there are varying requirements for each organization like the maximum loan, minimum credit score, etc.  Yet the variation from best to worst is as high as 10-to-1.  How can that be?

From a strictly statistical standpoint it CAN’T be.  In theory the population of mortgages, like the population of homeowners, should be represented by a normal (bell shaped) curve, with the bad mortgages taking up a small section on the left side of that curve.  It should be a small section because, since these mortgage pools are designed by statisticians, in order to be statistically acceptable the risk must generally be within two standard deviation from the norm.

Here’s how it SHOULD look:

About 2.15 percent of mortgages are expected to go bad, which means that some of the government-backed and bank/thrift mortgages were a little better and some were a little worse, but they are all clustered not too far from that 2.15 percent number, which is as it should be.  And remember this is during an unprecedented world financial melt-down.

Then ther eare the private-label numbers, which are precisely TEN TIMES worse than expected.  Statistically that’s crazy, but NOT crazy if the population of mortgage holders isn’t normal.  fir example, if the population included a large number of people who had no intention to actually make their mortgage payments, which seems to be the case here.

Remember that these private label numbers include those from all Wall Street firms, including — presumably — some that weren’t intending to be crooks.  So the bad numbers within these numbers are actually even worse — far worse.

What’s particularly damning about these data is that the non-private label numbers are so good, yet some of those government programs DON’T EVEN TAKE CREDIT SCORES INTO ACCOUNT.

One particular irony here is the notion that the Clinton Administration, forcing an end to blue-lining and encouraging lenders to make more lower-income mortgages, exacerbated the mortgage crisis.  Some people claim this policy change is the entire basis of the current problem.  Then why isn’t it reflected in the bank/thrift and various Federal program numbers?  Because those people are wrong and theiur claim is simply a ruse.

What these data say about the private label (Wall Street) mortgage securities is that there was systemic fraud.  Wall Street would like to pin that fraud on homeowners, but itis so pervasive that it really has to be more properly pinned in the statisticians who allowed it to happen and on their bosses who ORDERED it to happen.  These aren’t just bad decisions, they are statitically impossible with a normal population.  These are CRIMINAL acts costing billions of dollars and damaging the nation as a whole.  Yet who is going to jail for it?

Nobody so far.

cringely Blog banks, fannie mae, FHA, foreclosure, foreclosures, freddie mac, mortgage crisis

Federal Deposit Insurance Corp. Chairman Sheila Bair said banks involved in the U.S. Public-Private Investment Program won’t bid on their own assets to clean-up their balance sheets, which would effectively be an accounting dodge.

“There should be no confusion: Banks will not be able to bid on their own assets,” Bair said today at a Washington news conference.

The FDIC is helping the Treasury Department set up and run the PPIP, which will use $75 billion to $100 billion of Troubled Asset Relief Program funds to entice private investors to buy as much as $1 trillion in distressed mortgage-backed securities and other assets.

Banking groups and the Clearing House Association LLC, a group of 10 lenders including JPMorgan Chase & Co. and Bank of America Corp., are pressing the FDIC to let them use the program to buy their own troubled assets, the Wall Street Journal reported today.

Meanwhile, it seems that enthusiasm may be waning entirely for the proposed PPIP sales, which may be called-off altogether for lack of seller interest. Pressure for the banks to sell the assets has evaporated with changes in the mark-to-market accounting rules and the demonstrated ability of big banks lately to raise capital in the private markets.

It remains to be seen how much interest the fund managers who have applied to take part in the scheme actually bring to the program. While the government subsidies are attractive, fund managers may be leery of making too big a profit in a government program, or being involved at all.

“A significant and growing obstacle to private participation in government bailout plans is that many investors are wary of political backlash and the imposition of additional restrictive conditions post-investment,” wrote accounting firm PriceWaterhouseCoopers in an analysis published this week.

cringely Government News, News bank bail-out, banks, FDIC, Obama Administration, PPIP, TARP

Banks don’t like home foreclosures.  Though losing your house is the inevitable result of failing to pay your mortgage that doesn’t mean bankers look on foreclosures as a way to make money.  Just the opposite; they lose money on almost every one.  There are legal costs, administrative costs, the loss of revenue (you’ve stopped paying, remember?), and because the eventual resale is rushed and distressed, the bank often sells for less money overall.  Add to this the fact that homes sit empty for months while the system churns away and there are issues of wear-and-tear or even vandalism.  Banks HATE foreclosures.

So there is a real incentive for lenders to work with homeowners to keep them in their homes through mortgage modifications.  Even though a modified mortgage costs lenders money through reduced payments, the cost is nearly always less than it would be if the property was foreclosed.  It’s simple math: if your lender loses less through modification, then they won’t foreclose.  Or that’s the way it is supposed to be.  Unfortunately there are way more foreclosures than ought logically to happen under these rules.

This happens for two reasons.  Foreclosure is an EXTERNAL process handled mainly by outside lawyers working for the bank and there is always another lawyer.  So foreclosure is a process that SCALES — it can grow or shrink as needed.  Mortgage modification, on the other hand, is an INTERNAL process handled by the lender and there isn’t a lender in America who was prepared for an 8.1 percent default rate.  Many foreclosures are happening simply because the banks don’t have the trained manpower to do anything else.  That’s crazy.

But there is also a reason built into bank accounting rules why we have so many foreclosures and so few mortgage modifications.  If a lender modifies your mortgage the new reality of that arrangement is supposed to be reflected in the bank’s financial statements IMMEDIATELY, while the even greater hit to the bank’s books of a foreclosure only has to be reported EVENTUALLY and often hits a year or more after the event.  Bankers prefer some flexibility in giving bad news so even though foreclosures are worse for everyone in absolute terms, the lender will often opt for a foreclosure anyway.

cringely Blog, Library banks, financial crisis, foreclosure, mortgage modification, mortgage rates, mortgages

Jumbo mortgages, those in excess of $417,000 or $729,000 depending on the market, practically disappeared with the burst of the housing bubble, but now they are coming back with major lenders like Bank of America and ING putting some real effort into the segment. But that doesn't mean people are actually buying homes that require jumbo mortgages, according to lenders. There is a jumbo REFI boom of sorts, but nobody seems to be buying big houses that aren't short sales or foreclosures.

Jumbo mortgages have stringent requirements, including hefty down payments. Buyers are still waiting to see if the real estate market has bottomed out, and few people these days want to commit to a big down payment if it means selling securities that are already down..

Rates for 30-year fixed-rate jumbo mortgages have dropped from an average of 7.28 percent a year ago to 6.44 percent last week, the lowest since April 2007, according to HSH Associates, which tracks consumer loan information. Rates for smaller 30-year mortgages were averaging 4.97 percent last week.

Jumbo mortgages are those too large to be backed by the federal government through Fannie Mae and Freddie Mac. Mortgages that are under those limits — $417,000 or $729,000 depending n the market — are so-called “conforming” loans.

Jumbo rates are also higher because the secondary market — where mortgages are sold to generate new funds — has dried up. Now, lenders need to keep loans on their own books, assuming the risk themselves.

Keith Gumbinger of HSH, which is based in New Jersey, said the difference between conforming and jumbo mortgage rates used to run around one-fourth of a percentage point, or 25 basis points. “So if a conforming rate was 5 percent, a jumbo would be around 5 1/4. Right now, that gap is extraordinarily wide. Last week, it was exactly 150 basis points.”

The Federal Reserve's influence to lower conforming mortgage rates has produced the larger gap, he said. “The gap remains extraordinarily wide, not because jumbos aren't doing their part. They are. But because other prices have been artificially influenced lower.”

He advised anyone looking for a mortgage or to refinance to shop around more than ever. “Some lenders are in a better position to make you a competitive loan than others. You've got to go out and scour around your marketplace. Shop it effectively.”

Some large lenders, including Bank of America, are starting to promote jumbo rates below 6 percent.

In time the combination of falling home prices and lower mortgage rates will improve the affordability of higher-end properties and sales will start to rise. The concern about waiting for the bottom is the only way you know you've hit bottom is when it is on the way up.

cringely Lender Updates, News, Uncategorized Bank of America, banks, housing prices, jumbo mortgages, LendersME, mortgage crisis, refinance

When Barack Obama was running for President one of his favorite sound bites was that any financial bailout should not just involve Wall Street, but Main Street, too – that the government's responsibility was to help both bankers and homeowners. But now that the election is won and Obama is in office, the two streets are still being treated very differently, with Main Street getting a lot less help from Washington.

This is a HOUSING crisis, not a BANKING crisis, yet $700+ billion has gone to help bankers and only $75 billion to “help” homeowners. The banker's money has mainly been spent and the homeowner money has hardly been touched. If this is a HOUSING crisis, why aren't more resources being devoted to housing?

It comes down to an issue of morality, believe it or not, with homeowners expected to be moral and bankers not. Everybody blew it, but the homeowners are being disproportionately punished for their actions.

There is no morality issue in the bank bailout. Banks are having their capital boosted based not on whether they are well run or in some way “deserving,” but purely on the basis of whether they are viewed as being in three groups: 1) doomed; 2) capable of being saved through injecting government funds, or; 3) too big to be allowed to fail no matter how poorly run. This means the least-deserving banks tend to get the most help.

But the Obama Administration's attempt to help mortgage holders is different. If you hope for government help in restructuring your mortgage you'd better not be behind in your payments. If you missed a mortgage payment months into this crisis, you are out of luck. If your mortgage isn't guaranteed by Fannie Mae or Freddie Mac, you are out of luck. If your mortgage is jumbo you are out of luck. And if you owe more than 105 percent of the value of your home you are out of luck.

That's a lot of homeowners out of luck. No wonder the Obama Administration thinks it needs only $75 billion to do the job, it is excluding so many people.

Let's try applying the homeowner rules to the banks. If both played by the same rules, then banks with mortgage portfolios that have dropped by more than about 15 percent (are five percent or more underwater) would be ineligible for government assistance. Banks that MADE jumbo loans would be ineligible for assistance. Banks that made loans with private insurance or no insurance would be ineligible for assistance. Banks that had shown themselves unable to meet capital requirements (had effectively missed a payment) would be ineligible for assistance. In each case, these criteria define EVERY bank that has received assistance. They ALL have mortgage portfolios down in value by 15 percent or more, ALL made jumbo loans, ALL made uninsured loans, and ALL are under capitalized.

So if we apply to banks the same rules that are being applied to homeowners, then no banks deserve support and there should be no bank bailout. Well that can't be, can it? So screw the rules, screw the idea of there being a moral issue with bankers, just start handing out cash without even requiring that they use any of it to make or restructure loans.

So that's what the Treasury and the Fed have done – bailed out the bankers without regard to their past OR FUTURE behavior. And $700+ billion later do we really truly feel better as a result?

Hell no we don't, because we still can't pay our mortgages!

This bailout is broken, it is unfair, and it is incredibly inefficient as a result. The bank bailout is based entirely on providing INCENTIVES to the banks – bribing them to THINK ABOUT doing the right thing. The government won't MAKE the banks do anything. They just ENCOURAGE the banks by giving money.

Where are the incentives in the much smaller housing bailout? There are incentives. THEY ARE ALL BEING GIVEN TO THE BANKS. It is very difficult to find in the new Federal mortgage modification rules much of anything that truly helps homeowners. Banks aren't REQUIRED to do anything; they can reject any mortgage holder for any financial reason. The banks are PAID to restructure the mortgages and the way those mortgages are being restructured (primarily through increasing term and adding balloon payments) not only costs the banks nothing, it tends to make them MORE money over the life of the loan.

So that $75 billion allocated to modifying mortgages and keeping people in their homes, how much of that $75 billion will actually go to homeowners? About 25 percent, or $18 billion almost entirely in first-time buyer tax credits. This means the bank bailout isn't $700+ billion, it is $758+ billion or FORTY-TWO TIMES the size of the housing bailout.

And why only first-time buyers? What makes them more deserving of help? The theory is that these are new homeowners so they'll be buying-up excess inventory and helping to firm prices. They aren't people selling one house to buy another. In another view they are virginal and uncorrupted by the housing bubble. It wasn't their fault, so they are being rewarded. More morality, inequitably applied.

Main Street isn't doing very well under this policy. Main Street is being cheated.

This is a bad plan, unfair and poorly executed. It places a moral burden on individuals and not on banks, yet there is no good explanation for why it has to be so.

What is it about banks that make them deserving of 42 times as much support as your Mom?

Nothing.

Like the Bush Administration before it, the Obama Administration has a bias for helping Wall Street. They couch this as a claimed inability to come up with any better ideas. Yet better ideas – ideas NOT couched in moral argument (or more appropriately couched in EQUAL moral justification) were presented right in this spot in the post titled The Not So Bad Bank. That's a plan that helps banks and homeowners equally, doesn't require incentives to work, acts faster, and costs a tenth as much.

What's wrong with doing the job better, faster, and cheaper?

cringely Blog, Uncategorized bank bail-out, banks, financial crisis, foreclosure, mortgage modification, mortgages, Obama Administration

When is a hedge not a hedge? When it is hedging an Alt-A or Sub-prime mortgage, according to Democrats who are proposing that lenders not be allowed to substantially shift repayment risk from such exotic loans.

The legislation proposed this week in the U.S. House of Representatives would prohibit lenders from “directly or indirectly” hedging or transferring a minimum retained credit risk on most nontraditional mortgages, including some loans that have adjustable interest rates or require little documentation of a borrower’s income. The bill, introduced yesterday, is being sponsored by Representatives Barney Frank of Massachusetts, and Melvin Watt and Brad Miller of North Carolina.

The bill is designed to curb “predatory” lending and encourage the use of traditional 30-year, fixed-rate loans. “The growth of exotic, non-traditional mortgages was a major factor in the current housing and foreclosure crisis,” Frank, Watt and Miller said in a statement.

Alt-A loans were primarily sold to borrowers who wanted atypical terms such as proof-of-income waivers, investment- property collateral or delayed principal repayment, without enough positive compensating attributes. Subprime loans were made to people with poor or limited credit histories.

About 20 percent of Alt-A mortgages securitized with bonds not backed by Fannie Mae, Freddie Mac or the federal government are at least 60 days past due, in foreclosure or already seized. The Alt-A market expanded to $400 billion in 2006 from $55 billion in 2001, according to newsletter Inside Mortgage Finance.
The legislation would make permanent rules that prohibit lending to borrowers who don’t have a “reasonable ability” to repay. It also restricts so-called yield spread premiums, which are upfront commissions paid to mortgage brokers when a loan is closed. The legislation builds on a measure Frank said lacked political support last year to pass.

“We don’t know whether this would work for individual mortgage lenders” that rely on warehouse lines of credit — a form of interim financing — to fund the loans they originate, said Francis Creighton, the chief lobbyist for the Mortgage Bankers Association in Washington. For smaller independent mortgage firms, it may be difficult to repay those credit lines if they cannot sell off 100 percent of the loan, Creighton said.

“The political climate has changed,” Miller said in the statement. “The foreclosure crisis has wreaked havoc on middle- class families and our economy as a whole.”

cringely Government News, News banks, legislation, mortgage crisis, mortgages, News

Yes.

Now what should be done about it?

Blogger, MIT professor, and former International Monetary Fund chief economist Simon Johnson says the big banks should be broken apart.  It's a pretty compelling argument.

Watch it here: [youtube]http://www.youtube.com/watch?v=YEvwhqoUjMI[/youtube]

And here: [youtube]http://www.youtube.com/watch?v=9B_wIISpZ-Q[/youtube]

cringely Blog anti-trust, banks, Bill Moyers, Blog, financial crisis, Obama, oligarchy, Simon Johnson

The Obama Administration may help distressed homeowners by subsidizing lenders who cut mortgage interest rates, according to sources familiar with the discussions.

The Treasury Department has set aside $50 billion for a homeowner relief program, which officials said was likely to be announced Wednesday. The sources spoke on condition of anonymity because the plans are not final.

The initiative would endorse legislation to allow bankruptcy judges to change the terms of mortgage loans, a measure opposed by the banking industry. But the program would also include legal protections for lenders that modify loans to protect them from investor lawsuits.

Under one proposal the government would share the cost to lenders of reducing interest rates. It is unclear how the program would be administered, but mortgage financing companies Fannie Mae and Freddie Mac would likely be involved, according to one source. Homeowners could be required to apply for the program and submit to an affordability test as well as receive an appraisal of their home.

Under this plan the government would also be able to reach homeowners before they fell into delinquency — a problem with many existing loan modification plans.

But deciding who would qualify for such a program could be difficult, said Edward R. Morrison, a professor at Columbia Law School. And in some cases, lowering a borrower's interest rate is not enough to make the home affordable, he said. “Not every homeowner can afford a mortgage, so we have to carefully target these plans.”

So far, government and industry loan modification efforts have failed to stem the growth of foreclosures. Many borrowers fall back into delinquency even after receiving help, including lower interest rates.

cringely News banks, fannie mae, foreclosure, freddie mac, homeowner relief, mortgage crisis, News, Obama Administration