Archive for June, 2007
Subprime storm winds will keep blowing
Originally published in USA Today on June 19
By Sue Kirchhoff and John Waggoner
Home foreclosures in Minneapolis doubled in 2006 and are on pace to double again this year. The number of vacant buildings is rising in working-class neighborhoods with high levels of subprime loans. Some families are simply walking away from once-secure homes.
“People are upside down; they owe more than their house is worth,” says Glennis Ter Wisscha, deputy director of Neighborhood Housing Services of Minneapolis, who counsels borrowers. Homeowners “can make it at the (initial) teaser rate, but the adjusted rate is going to go up $400, $800, $1,000 a month.”
The fallout from a years-long surge in subprime lending — higher-cost loans to borrowers with impaired credit — is far from finished. The number of homes entering foreclosure is expected to top 1 million this year, with 60% of those being subprime mortgages, says mortgage giant Freddie Mac.
The Mortgage Bankers Association predicts that adjustable-rate subprime foreclosures, already at a record, will rise into 2008, affecting borrowers, lenders and such Wall Street firms as Goldman Sachs and Bear Stearns, which packaged subprime loans into bonds.
A look at some numbers shows the distress: About 70% of subprime loans made in 2006 impose financial penalties on borrowers who repay or refinance early; 50% were made on stated, not documented income; many included piggyback loans; and few required borrowers to put money in escrow for taxes or insurance, leaving many unprepared for thousands of dollars in bills.
Hundreds of billions of dollars’ worth of adjustable-rate loans reset to higher rates in coming months.
“The market has been overexuberant, we all know, in the last couple years,” Faith Schwartz, a senior vice president at subprime lender Option One Mortgage, told a Federal Reserve hearing last week. But she and other lenders said tightening regulations too much would cut off needed credit to many borrowers.
Others say it’s increasingly clear that much of the subprime market was a financial house of cards that could stay up only if interest rates remained low and home prices soared, allowing people in pricey loans to continually refinance. Both factors have since reversed.
“This isn’t about the economy; it was a preventable problem, and that’s what makes me so angry,” says Prentiss Cox, associate law professor at the University of Minnesota. Noting foreclosures have risen even as the state’s unemployment has fallen, he blames the problem on bad loans and bad regulation.
“Our political system failed,” Cox says.
While the Fed doesn’t expect the foreclosures — about 2% of the total mortgage market — to derail the economy, they could have far-reaching consequences: tighter oversight of Wall Street firms, more stringent rules for lending that affect borrowers at all income levels, and loss of wealth in low-income and minority neighborhoods.
Dominic Tizzano, a single father of four in Willoughby, Ohio, is struggling to stave off foreclosure. Tizzano took out a subprime mortgage several years ago using a “2/28″ loan, on which interest rates adjust after two years, and every six months thereafter, up to a cap. Tizzano fell behind even before his rate rose, but caught up thanks to a grant, counseling from Neighborhood Development Services of Ravenna, Ohio, and other help. His lender says he can’t refinance into a fixed-rate loan until he clocks a year of on-time payments — a big task, because his monthly bill has jumped from $982 to $1,248, and he’s still not near his 14% rate ceiling.
“I wasn’t a genius at it at first; I kind of got forced into doing this,” says Tizzano, who works the swing shift at a chemical plant. “I’m 41 years old. I look like I’m 50, I have so much stress.”
Here’s a look at the subprime mess:
The NAACP and other civil rights groups want a moratorium on foreclosures. Powerful House Financial Services Committee Chair Rep. Barney Frank, D-Mass., says that’s unworkable. Instead, he and other lawmakers are working to get regulators and lenders to help borrowers restructure or refinance.
While they’ve made some progress, there are obstacles. Most subprime loans are resold to Wall Street securities firms, rebundled into bonds and sold to investors. Bonds may have a cap on the number of loans that can be restructured, or require the consent of bondholders for changes. Wall Street has shown flexibility, but Frank now wants help lifting prepayment penalties so borrowers can move into refinance programs by Fannie Mae and Freddie Mac.
Fannie’s program, which should be up later this summer, would help people who’ve made 12 straight monthly mortgage payments refinance into cheaper, fixed-rate loans of up to 40 years. Freddie hopes to have a similar program.
While Fannie estimates it can help as many as 1.5 million people, some analysts are skeptical. Mark Zandi, chief economist at Moody’s Economy.com, notes the peak of adjustable-rate resets is from September to November, leaving little time to work out bond issues and get loan programs running.
Even when loans are restructured, borrowers aren’t out of the woods. Larry Litton Jr., president and CEO of Litton Loan Servicing, says default rates on modified loans are around 30% in a good market. He worries that some firms are extending payments rather than restructuring — delaying the day of reckoning and possibly making things worse.
States are stepping in. In Ohio, where about 16.1% of subprime adjustable-rate mortgages are in default, above the U.S. average of 13.9%, the state’s Housing Finance Agency in April started a loan program for people with income up to 125% of the area median, or about $73,000 to $84,000. The loans have lower rates, loan-to-value ratios as high as 100%, and mandated counseling.
“Demand for the program is huge. The question is … who will qualify,” says Joel Ghitman, director of homeownership for the Ohio Housing Finance Agency, adding the program isn’t a bailout, but a bridge for those with a reasonable chance to salvage their homes. “If we can accommodate maybe (25% to 30%) of the people that call, we’re probably doing pretty well.”
Since April, the state has processed about 90 loans worth about $11 million in the pipeline. An initial bond issue for the program will let the state serve about 800 families, based on an average loan of $125,000.
Ohio will reassess funding based on demand. Other states are working on similar efforts. But they, and many borrowers, have limited resources. Charamaine McKnight, of Hazel Crest, Ill., refinanced her house three years ago to get money for repairs. She was told at the time that she would be taking out two mortgages, including a smaller second mortgage with an adjustable rate.
She later refinanced the second mortgage to a fixed rate. Less than a month later, she got a letter saying the monthly payment on her first mortgage was rising to $901 from $696 — the first time she learned it was adjustable. It will rise in July to $980, or a 9% rate, and can keep going up until it hits 11.5%.
“They did a switch on us, and there was nothing we could do,” said McKnight, working with the National Training and Information Center to get a new loan.
Bondholders are starting to feel the hit. Bear Stearns, the largest packager of subprime mortgages, saw its first-quarter profit rise 8%. But Bear Stearns’ investors may not be doing as well. The company’s special $642 million hedge fund has lost 23% this year. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, designed for wealthy investors, not only invests in subprime mortgages, but borrows money to invest, amplifying gains and losses.
The Bear Stearns experience is extreme, but investors are increasingly feeling pain from subprime mortgages. On Monday, Moody’s Investors Service, a Wall Street rating firm, downgraded 131 securities backed by subprime mortgages. “Second-lien mortgage loans securitized in 2006 are defaulting at a rate materially higher than expectations,” Moody’s said in a press release.
As defaults mount, investors will find themselves with fewer options. Bondholders will have relatively little cause to sue the companies that put together subprime-backed bonds, says Nanci Weissgold, partner at law firm Kirkpatrick & Lockhart Preston Gates Ellis. Typically, the legal language in the bond’s offering literature is broad enough for the packagers to argue that its risks were fully disclosed.
Nevertheless, where there are losses, there are lawsuits. Already, some buyers of mortgage-backed securities are suing investment banks, who, in turn, are suing mortgage originators. In April, Bankers Life Insurance sued Credit Suisse for $1.3 million. Bankers Life had bought mortgage-backed bonds created by Credit Suisse in 2004. The bonds suffered a long series of downgrades, knocking their value down to a small fraction of their original value, according to the law firm of Paul Hastings Janofsky & Walker. Bankers Life says that it wouldn’t have bought the Credit Suisse securities if it had known how risky they really were. Essentially, the lawsuit says, the loans were made improperly, then packaged and sold to investors.
The Federal Reserve, under pressure from Frank and Senate Banking Committee Chairman Sen. Chris Dodd, D-Conn., held a high-profile public hearing Thursday on whether to write tighter subprime rules in areas including prepayment penalties, stated-income loans and escrow and taxes. The Fed is also considering setting standards for what would constitute an affordable loan.
While the Fed has power to regulate, enforcement is spread among federal and state agencies. A recent Supreme Court decision took more power away from the states. Frank says a major issue is who will oversee lenders that are not set up as conventional banks and make most subprime loans.
“When I think about potential, vigorous enforcement of consumer protection, the Fed does not jump immediately to mind,” Frank says. “That’s not why you get into the Fed; you make international policy, you’re not worried about some little old lady in Toledo (Ohio).”
The Fed under Chairman Ben Bernanke, who took office a year ago, has taken a more active regulatory stance on subprime loans. About 30 states have adopted recent Fed guidelines on higher-cost loans. Maine and Minnesota recently joined other states passing predatory-lending laws.
Homeownership is “an American dream, but it’s also (become) an American right. This has led to wrong on both sides,” says Lou Tisler, executive director of the Neighborhood Housing Services of Greater Cleveland. Tisler’s group usually tells prospective buyers it takes 12 to 14 months to get into a house as they build savings and clean up credit.
“They can walk out, look at an (ad), make a call and be in a house in 30 days,” Tisler says. “We see them again in six months, when they’re in way over their heads.”
As housing market softens, foreclosure rate hits historic high
Originally published by the Catholic News Service on Friday, June 15
By Mark Pattison
The housing market has softened, taking a turn for the worse. For some who have already bought homes, it’s possible that they’ll hit a skid before the market can steer out of that turn. Those most at risk are those who used subprime loans to buy homes. A June 14 report by the Mortgage Bankers Association said housing foreclosures have hit their highest rate in 50 years. While the majority of the victims of foreclosure live in the nation’s big cities, “the foreclosure issue is not just a low-income, inner-city phenomenon. We’re seeing it in suburban, upper-class neighborhoods,” said Michele Rodriguez Taylor, a National Training and Information Center organizer specializing in predatory lending practices. The Chicago-based center, a nonprofit resource center for grass-roots organizations funded in part by the U.S. bishops’ Catholic Campaign for Human Development, works with housing advocacy groups in the Midwest and elsewhere to seek solutions.
Diverse Views of Housing Market Provided by Wells Fargo Symposium
14 June 2007
Wells Fargo & Company is a diversified financial services company with $486 billion in assets, providing banking, insurance, investments, 
mortgage and consumer finance through more than 6,000 stores and the internet (wellsfargo.com) across North America and internationally. Wells Fargo Bank, N.A. is the only bank in the U.S., and one of only two banks worldwide, to have the highest credit rating from both Moody’s Investors Service, “Aaa,” and Standard & Poor’s Ratings Services, “AAA.”
Everyone deserves a fair shot at the American dream of homeownership. How to safeguard that dream is the subject of today’s housing symposium, sponsored by Wells Fargo to help commemorate National Homeownership Month.
The symposium will feature diverse voices from across the homeownership spectrum, including economists, consumer advocates, and leaders of the financial services and housing industries. “Wells Fargo’s vision is to help satisfy all of our customers’ financial needs and help them succeed financially. We are driven by this vision which includes helping as many people as possible achieve and maintain the dream of being a homeowner,” says Cara Heiden, division president, Wells Fargo Home Mortgage .
“We believe it is our responsibility to collaborate with industry partners on leading fair and responsible lending and servicing, advancing customer education, and continuing to develop solutions for consumers who face financial difficulties. Our symposium will provide a forum in which to explore the impact of the current economy and the responsibilities of all industry partners in affecting change.” Wells Fargo has long adhered to fair and responsible lending and servicing principles.
The company’s Responsible Lending Principles for Non-Prime U.S. Real Estate Lending have been posted on its Web site since January, 2004. At the symposium, the company’s Responsible Servicing Principles will be distributed publicly for the first time. “We’ve long advocated the adoption of fair and responsible lending and servicing principles across the mortgage industry,” Heiden stated. “By publicizing our practices, we hope to inspire others in the industry to do the same.” The Responsible Servicing Principles are:
We approach every interaction from the customer’s point of view-putting his or her needs first.
We provide clear, simple and timely information to consumers, understanding how complex homeownership and financing can be.
We believe our customers deserve a dedicated and knowledgeable service team; we strive to hire and retain the best.
We provide tools, services and information that help our customers manage their credit.
We believe in homeownership, and do all we can to help keep people in their homes.
The symposium speakers include Secretary of Housing and Urban Development Alphonso Jackson; Washington Post Writers Group Syndicated Columnist Ken Harney, and Managing Director of UBS Securities Hugh Corcoran.
Panelists will include key representatives from: Fannie Mae, ISI Group, National Community Reinvestment Coalition, Consumer Federation of America, National Association of Home Builders, National Association of REALTORS®, Mortgage Bankers Association, National Association of Mortgage Brokers, National Association of Hispanic Real Estate Professionals, National Association of Real Estate Brokers, and Asian Real Estate Association of America. “Safeguarding the American Dream” is the second housing symposium that Wells Fargo has sponsored.
Last year’s, “Breaking Down the Barriers to Homeownership” included the company’s launch of Steps to SuccessSM a program designed to help our customers with nonprime real estate loans better manage their credit and achieve financial success. (The event, held at the Ronald Reagan Building, 1300 Pennsylvania Ave, NW, is open to credentialed media. Reservations for the general public may be made by calling 800-875-0190 starting at 8 a.m. (ET).
How to Get the Best Mortgage
This is a guide on how to get the best mortgage deal. Do not rush into the first offer that is made to you even if you are in a hurry for a mortgage. Take your time, check out what is on offer from local banks, building societies and mortgage brokers. The more time you spend doing this will equate to greater savings on your mortgage. Remember for most people it is something that they will only do once, so do it right!
Shopping around for a mortgage will help you to get the best financing deal. A mortgage—whether it’s a home purchase, a refinancing, or a home equity loan—is a product, just like a car, so the price and terms may be negotiable. You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of pounds.
Get quotes:
Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You can also get a mortgage through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products from which you can choose.
Get Costings:
Be sure to get cost information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved. Knowing just the amount of the monthly payment or the interest rate is not enough.
Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
Ask about the mortgage’s annual percentage rate (APR). The APR takes into account not only the interest rate but also broker fees and certain other credit charges that you may be required to pay, expressed as a yearly rate.
A mortgage often involves many fees, such as underwriting fees, broker fees and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a mortgage and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. “No cost” loans are sometimes available, but they usually involve higher rates.
Negotiate:
Once you know what each lender has to offer, negotiate for the best deal that you can. There’s no harm in asking lenders or brokers if they can give better terms than the original ones they quoted or than those you have found elsewhere. Once you are satisfied with the terms you have negotiated, you may want to obtain a written quote from the lender or broker. The quote should include the rate that you have agreed upon and the period the quote lasts. When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal.
Don’t be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best mortgage deal.
John Mussi
Fixed Mortgages Rates on the Increase
Despite the Bank of England deciding to hold interest rates at 5.5% this month many lenders are still taking steps to increase the rates offered on their fixed rate mortgage deals. 
More than 25 mortgage providers have added 0.5% to their range of fixed rate deals while a handful of UK lenders have removed fixed rate offers with no replacement products being offered.
With over a million fixed rate deals set to end over the next 18 months the banks steps to increase rates despite the BoE’s decision suggests UK borrows who are coming to the end of a fixed rate deal are in for an unpleasant surprise when they try to find a new deal.
These actions by many UK mortgage lenders appear to be driven by profit motives rather than market forces and are bad news for mortgage customers whose combined debt is around the trillion pound mark.
More than ever it is important to shop around for a better deal and not to accept these unjustified rate hikes.
Want a Dream Business? Take Out a Second Mortgage in California
A second mortgage in California might help
I had always dreamed of opening a flower business in my favorite state, California. I did not want to just open up one flower store, but I wanted there to be my flower stores dotted throughout the glorious state of California. California had such stunning flowers and I wanted to make this in to a business. Thankfully, it was my husband s dream too but from a finance point of view; he said if we could get a loan and enough capital, we could do really well from it. Still, we had been married for over 12 years and it did not seem likely that we were going to suddenly fall into this sort of money. But about six months ago, I wondered if a second mortgage in California would help. If we took out a second mortgage in California we may be able to make our dream come true.
We decide to take out a second mortgage in California
So we looked in to the second mortgage in California. Our current mortgage payments were not so bad and we assessed our situation and felt like a second mortgage in California could really help us. We spoke to the bank and were very happy with the terms on the second mortgage in California especially since it would mean we could open our dream business!