Sub Prime Bailout

As many of you have probably heard, the Federal government has implemented a policy which would give an estimated 1.2 million homeowners out there an extention on their 'teaser rate' loans which are scheduled to go up in the next 6 months.

These rates would be locked or up to five years pending a rebound in the economy and an improvement in the housing industry in general.

It is an interesting yet controversial move because some feel it is only a bandaid and that this may postpone the foreclosure situation until the next administration.

Time will tell.

Here is an article from Inman news on the topic:

Administration, lenders defend rate freeze plan

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Backers say up to 1.2 million loans eligible for refis, workouts
Thursday, December 06, 2007

By Matt Carter
Inman News


A plan to refinance or freeze the interest rates on up to 1.2 million subprime adjustable-rate mortgages for five years is not a "silver bullet" solution for all homeowners, but will help reduce the impact of the housing downturn on the economy and communities affected by foreclosures, Treasury Secretary Henry Paulson said Thursday.

Paulson was the point man as the Bush administration rolled out a much-anticipated agreement with mortgage lenders and loan servicers in the face of criticism not only from consumer advocates -- some say it won't help enough borrowers -- but warnings from some in the lending industry who said an interest rate freeze could discourage investors from financing future loans.

The agreement has the backing of the American Securitization Forum, which represents companies that issue mortgage backed securities, as well as investors, loan servicers and rating agencies. ASF Executive Director George Miller said the agreement provides a common framework to evaluate borrowers’ situations, and expedites processes for loan servicers to pursue refinancing and loan modification options on a more systematic basis.

The ASF today published a 34-page document outlining procedures for servicers to follow in streamlining refinancings or loan modifications on ARM loans that are scheduled to reset in the next 2 1/2 years.

Paulson said he hoped that the guidelines would be adopted as "customary standard practice across the entire servicing industry," because the current system would "not be sufficient" to handle the 1.8 million owner-occupied subprime ARM resets expected in 2008 and 2009.

According to the framework, loans eligible for streamlined refinancing or modification such as an interest rate freeze must be ARM loans on owner-occupied homes originated between Jan. 1, 2005 and July 31, 2007, with an initial interest rate reset between Jan. 1, 2008 and July 31, 2010.

Under the guidelines, only borrowers with FICO scores less than 660 and facing an increase in monthly payments greater than 10 percent will be eligible for fast-track loan modifications. Borrowers who don't meet the "FICO test" may qualify for loan modifications after individual reviews of their current income and debt obligations.

Although the Bush administration says up to 1.2 million ARM loans may be eligible for refinancing or modifications, the Center for Responsible Lending, estimated that a much smaller number of families -- perhaps 145,000 -- will actually see any relief.

The administration's estimate is based on the belief that nearly two-thirds of the 1.8 million homeowners with subprime ARM loans facing interest rate resets in the next two years can afford their introductory rate, but won’t be able to afford higher payments after their loans reset.

But many subprime borrowers have second, "piggyback" mortgages that pose obstacles to loan modifications, CRL warned, and loan servicers will still have financial incentives to foreclose on loans, rather than engage in workouts.

"The plan relies on voluntary decisions by individual mortgage servicers and investors, (and) does not remove the strong financial and legal incentives servicers have to foreclose on loans rather than modify them," CRL said in a statement. "Recent experience shows that the likelihood of widespread modifications is small under this 'business as usual' approach."

CRL said Congress should also allow bankruptcy judges to modify the terms of mortgage loans for borrowers who file for Chapter 13 bankruptcy protection, saying it could prevent up to 600,000 foreclosures. The lending industry opposes pending legislation that would change the bankruptcy code to do just that, saying it would raise the cost of borrowing (see Inman News story).

The rating agency Standard & Poor's issued a report raising concerns that wholesale interest rate freezes on subprime ARM loans could force it to lower its ratings on subprime mortgage-backed securities (MBS). Such concerns have prompted others in the industry to warn that wholesale loan workouts will discourage investment in MBS, worsening the ongoing credit crunch.

Paulson said the plan, while not perfect, is part of a broader effort the Bush administration has undertaken to address the housing downturn. Those efforts are in two areas, he said: limiting the impacts of the current downturn, and taking steps to protect housing and credit markets in the future by tightening regulations.

To limit the impact of the current downturn, the administration's FHASecure program allows some homeowners who are already in default to refinance into loans guaranteed by the Federal Housing Administration (FHA). HUD Secretary Alphonso Jackson said today that FHA has received 118,000 refinance applications since the program was announced in September, and that 35,000 homeowners have already refinanced into FHA-backed loans.

Jackson said FHA expects to process another 50,000 refinance loans by the end of the year, and that a pending bill to lower FHA down payment requirements, allow it to insure larger mortgages, and expand "risk-based" pricing, would allow FHA to back an additional 250,000 loans by the end of 2008. All told, Jackson said, FHA may be able to guarantee up to 800,000 loans in fiscal year 2008.

On the regulatory front, President Bush said at a press conference today that the Federal Reserve will announce stronger lending standards later this month. HUD and federal banking regulators, Bush said, are taking steps to improve disclosure requirements.

Bush chastised Congress for failing to pass an FHA modernization bill or legislation to reform oversight of the government-sponsored enterprises Freddie Mac and Fannie Mae.

Paulson and James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), echoed the president's call for a GSE modernization bill.

Lockhart said Fannie Mae and Freddie Mac "have played an extremely important role in supporting the mortgage market as all the problems erupted this summer," growing their market share of all new mortgages to more than 60 percent, up from 38 percent last year.

Although the House passed a GSE reform bill in May, there is disagreement in the Senate over limits on Fannie and Freddie's loan portfolios and whether to raise the $417,000 conforming loan limit.

FNMA Sells $7 Billion in Stock

Fannie Mae, the country's largest buyer of mortgages on the secondary market decided the risks to continue with the housing market decline put too much pressure on their return for investors and sold its preferred stock to raise capital.

The news cannot be greated with a reflection of optimism for the state of affairs for Fannie Mae and their involvement in the secondary market.

Just another sign that even FNMA bit off more than it could chew and is trying to create stability for its investors in this turbulent market.

This from Inman News


Mortgage repurchaser Fannie Mae said Tuesday it would issue $7 billion in preferred stock to raise capital and reduce the company's quarterly common stock dividend beginning in the first quarter of 2008.

Fannie Mae on Nov. 9 reported $1.4 billion in third-quarter losses, but said it had $41.7 billion in core capital on hand, $2.3 billion above minimum requirements set by the Office of Federal Housing Enterprise Oversight (OFHEO).

In a press release Tuesday, Fannie Mae officials said the preferred stock issue -- along with a smaller $500 million issue last month -- will help the company maintain a solid capital position through 2008.

The additional capital will "strengthen Fannie Mae's ability to manage the effects of ongoing volatility in the mortgage credit markets, continue to grow its securitization activities, and pursue attractive investment opportunities," the company said.

But Fannie Mae officials warned that worsening housing and credit markets, continued losses on guaranty contracts, substantial credit-related expenses, and losses on derivatives and securities “will adversely affect in a material way the company's fourth quarter 2007 results.”

In addition, the company said, conditions in the housing and credit markets, including expected further declines in home prices, “will negatively affect the company's financial condition, and results of operations in 2008.

Chicago Spire Gets $2.2 Billion Loan

Chicago's much talked about controversial spire highrise slid in under the press radar and was granted the $2.2 billion loan this week for the 115-story residential tower located at 400 E. North Water Street in downtown Chicago's Streeterville neighborhood. The project is scheduled to begin September 2008.

Bush against Anti-Predatory Bill

The Bush administration has come out strongly against the anti-predatory lending bill being introduced by Congress. Their biggest objections are the limitations being imposed on lenders premiums, the bills attempt to prohibit penalties on subprime loans (the biggest focus on the national spotlight these days) and a very controversial measure which would create a limited liability of the companies buying loans on the secondary market.

This measure would in effect get the security backed mortgages a huge insurance against default--switching the liability from those Wall Street companies.

The adminstration was quoted in Inman News as having said they are against the provisions that "could overly constrict the primary and secondary markets for mortgage finance" include the bill’s specific underwriting standards, assignee liability provisions, and subjective obligations for mortgage originators."

Worst Quarter Since 1994

This article was written by Chicago Crain's columnist Alby Gallun. The state of affairs in the residential real estate market has not seen such a significant slow down in this quarter since 1994.


By Alby Gallun
Oct. 29, 2007

Local homebuilders endured more pain and suffering in the third quarter as new-home sales continued a slide that began two years ago.

Residential developers in the Chicago area sold 3,796 homes in the quarter, down 34% from the year-earlier period, according to Schaumburg-based Tracy Cross & Associates Inc. On a seasonally adjusted, annualized basis, sales totaled 15,296 units, down 40% from last year and their lowest level since 1994.

"It's the same old story," says Tracy Cross, president of the real estate consulting firm. "I think we are at the bottom right now. How long it stays in this trough, I'm not so sure."

After a prolonged boom fueled by easy credit and speculative buying, the residential market faltered in 2005 as rising prices and mortgage rates curtailed demand for new homes. More recently, lenders have tightened their loan criteria amid the subprime lending crisis.

The downturn has rippled through the industry, forcing widespread layoffs at homebuilders and subcontractors.

"On our end, it's terrible. It's awful," says Jim Venhuizen, owner and president of Cimarron Construction Inc., a New Lenox-based carpentry contractor that serves the residential market.

Cimarron employs about 25 carpenters now, down from roughly 100 a couple of years ago. Though the firm is still profitable, its net profit margin has shrunk to the low single digits, well below the 10% that is the norm for the carpentry industry, he says. Work is scarce, and homebuilders that do have work for firms like Cimarron are demanding price cuts.

"Everybody's going to be working real cheap for the next year, for sure," Mr. Venhuizen says.

Another apparent victim of the downturn in the new-home market is Neumann Homes Inc., which last week said it plans to file for Chapter 11 bankruptcy protection (ChicagoBusiness.com, Oct. 22).

The Warrenville-based homebuilder, which had 15 subdivisions in the works in Illinois, has laid off most of its employees and closed all of its sales, production and customer service offices.

The new-home business is especially bad in the suburbs, where sales fell 42% in the quarter, to 2,502 units, according to Tracy Cross. Sales in the city fell 14%, to 1,294 units.

A growing number of people who signed contracts to buy new homes are canceling, either because they can no longer qualify for a mortgage or they simply don't want to buy anymore, Mr. Cross says. The average cancellation rate is about 30% now, up from the more typical 15% to 20%, he estimates.

"Some are walking away from earnest money," he says. "Others are coming up with creative ways to get out."

The average Chicago-area new home sold for $416,329 in the third quarter, up 16% from the second quarter. But that number reflects a shift in the sales mix toward expensive condominiums in the city rather than any broader pickup in the market.

Though the downturn is deeper and longer than most observers expected, sales are so low that they can't drop much further, Mr. Cross says. Only 77 of the 817 condo and townhouse developments the firm tracks had eight or more sales during the quarter, and 327 either logged no sales at all or suffered a net loss of sales as buyers canceled contracts.