FDIC to Test Principal Reduction

The Federal Deposit Insurance Corporation is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from Foreclosure.

Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they keep up their payments on the mortgage over a long period of time. Their thought is "an earned principal forgiveness", says Shelia Bair FDIC Chair, "this would only be for homes that are significantly underwater".

This program would only be for Banks that are taken over by the FDIC and amounts to less than 1% of all mortgages.

Lenders have been reluctant to cut the principal balance of borrowers fearing that it would encourage current borrowers to become delinquent even if they can afford the payments.

This is just a limited PR stunt to me, Almost no one will qualify, and the Banks believe it or not have more of an incentive to let borrowers default, since there are shared loss agreements with the Treasury for most of the Big Banks. Again it is all about Wall Street's profits and not main streets needs.

The belief that if this were to become mainstream, millions of homeowners would default immediately. The only thing these programs, the Treasury programs, and the Obama Administration HAMP programs are going to do is delay what is going to happen anyway.

24% of all Mortgages Nationwide are Underwater

First American Core Logic released its 4th quarter negative equity report today and the results were worse than expected.

According to First American Core Logic, "More than 11.3 million homes or 24% of homes with a mortgage had negative equity at the end of 2009, up from 10.7 million and 23% at the end of the third quarter of 2009. An additional 2.3 million were approaching negative equity by the end of the year, meaning they had less than 5% equity. Together the negative equity and near negative equity mortgages accounted for 29% of all residential properties with a mortgage nationwide."

California was among the 5 highest states with negative equity, with 35% of all loans statewide upside down. Although California, Nevada, Florida, Michigan and Arizona made up 70% of all the negative equity, 2o additional states had growing negative equity problems. This means that the problem is widespread throughout the country.

"The dollar value of negative equity was $801 Billion up from $764 at the end of the quarter 3 2009. The average negative equity for an underwater borrower was $70,700 up from $69,700 at the end of the 3rd quarter 2009. The segment of borrowers that are 25% or more in negative equity account for over $660 Billion in negative equity."

Not all borrowers underwater will default, and for now their numbers, which aren't good, are still at a point where the banks can absorb the losses. But if the numbers keep on rising and more borrowers exceed the 25% negative equity mark, which is likely to happen, we definitely will be seeing more foreclosures and more banking troubles. Hold on, by the time the Government figures out what to do, if anything, we will be in the middle of yet another housing crisis.

Flood Coming of Foreclosures?

I have written about this over and over again. The flood of foreclosures is coming, but when? Is this all just gloom and doom or is this real? It is real and today Standard and Poors reports why.

Standard and Poors, the credit reporting agency, tells investors what mortgage backed securities are really worth, and also reports that the increase in values was just an illusion. It predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down.

"Blame the shadow inventory" - the nearly 2 million homes that were foreclosed upon but for whatever reason have not been brought to market yet.

Many homeowners have fallen behind on their mortgages or stopped paying, but foreclosure has not yet arrived. Mortgage servicers, the folks who send you the bills and file for foreclosure when you can't pay them, are overwhelmed. Courts are backed up as well with all the filings. Mortgage modifications and foreclosure moratoriums have put off the day of reckoning for borrowers but not forever. And unemployment is sabotaging more and more homeowners every day.

Out of the more than $1,600,000,000,000 (Trillion) in existing mortgages that were packaged into mortgage backed securities or MBS, by Wall Street, some $425 Billion worth are extremely late on their payments and therefore likely to go into foreclosure. Only a small fraction of borrowers who fall seriously behind are able to catch up, with the help of loan modifications. Even if they catch up with loan modifications, the majority of borrowers fall behind again. The amount of bad mortgage debt has been spiking up every month, slowing only for a moment by government intervention, but still continuing to rise.

"Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market".

The current shadow inventory of homes is estimated to be at the same level as all homes available for same in America today. And that is not counting what is in the pipeline or what is expected to be coming down the road.

Banks are going to have to release these inventories soon whether by choice or force, and when that inevitably happens home prices will drop again.

Treasury Worried About Next Wave of Foreclosures.

Treasury Officials stated yesterday they are still concerned about a coming wave of foreclosures, many from pay option arms and many from the prime jumbo basket, hit particularly hard by unemployment. The Treasury Home Affordable Modification Program or HAMP is also reporting that 1/3 of all loan modifications are delinquent.

Loan Servers seem to have exhausted the supply of plausible candidates for loan modifications, and will find many loans beyond saving.

HAMP is also gearing up for the April 5th launch of the Home Affordable Foreclosure Alternatives program, or HAFA, and is specific to 2 segments of the distressed markets. Deed in Lieu and Short Sales are the main focus here and the requirements are clearly spelled out for lenders and borrowers. The bulk of these programs are designed for Fannie Mac and Freddie Mac liquidation, but many other lenders are also included. For some borrowers this will be a good thing, for others they may not qualify.

Obviously the Treasury sees the tsunami of problems still ahead, but I doubt their actions will fix the housing market in the near future. I believe they have underestimated the numbers, they have not addressed the commercial defaults, and finally until unemployment shrinks, all these programs, are too little too late. Incedently the banks benefit from these programs far more than the consumers do, so what else is new from our wonderful government.

Indy Mac Video is Blatantly False!

Last week I saw a video forwarded to me done by two guys from Fairfield. In their video for "Think Big, Work Small" these two guys reported on a sweetheart deal Bank One West got for the purchase of Indy Mac which went bust in 2008.

Basically the video suggested that Bank One West, and their Goldman Sachs investors, paid 70 cents on the dollar for 1st deeds. Then they sold them at market rates and charged back the FDIC with a loan loss provision and made the borrower sign a promissory note for $75000. It strongly suggested that Bank One West was milking the FDIC and taxpayers.

I thought about posting the video then, but couldn't verify any of the allegations the video made. This proved to be right. Although the video is well done it is inaccurate in its facts, and thereby the video is blatantly false as reported by the FDIC.

FDIC Director of Public Affairs Andrew Gray said Friday, "It is unfortunate but necessary to respond to blatantly false claims in a web video that is being circulated about the loss sharing agreement between the FDIC and One West Bank. Here are the facts: One West Bank has not been paid one penny by the FDIC in loss-share claims. The loss share agreement is limited to 7% of the total assets of Bank One West, and One West must take more than 2.5 Billion in losses before it can make a loss-claim on owned assets. In order to be paid through loss share, One West must adhere to the Home Affordable Modification Program.

The producers of this video perpetuate other falsehoods. The FDIC has not requested to borrow money from the Treasury Department. Indeed, we continue to be funded by the banking industry through assessments, not by taxpayers as indicated in the video.

The video has no credibility. Regardless of the personal or professional motivations behind its production, there is always a responsibility factually correct and transparent. The FDIC made available a fact sheet on the day that the sale of Indy Mac was announced that details the terms of the contract. Its too bad the creators of this video opted to premise it on falsehoods."

What video producers and the FDIC both missed or chose not to mention is under the HAMP any property supported by the loss share provision, the original borrower is released from any further financial obligations to their property and cannot be pursued for any loss. The borrower in the video would not have had a $75000 promissory note to sign since the HAMP program strictly prohibits it.

The Indy Mac terms are posted on the FDIC website and it is true. Too bad for the Fairfield Boys, I liked the idea but before you go public you better get the facts right!

Watchdog Group Warns of Commercial Real Estate Defaults

A special congressional panel's recent report is sending shock waves throughout the commercial Real Estate Industry, not to mention giving bankers much worry and grief. It is also creating headlines in the media from coast to coast.

The message from the Congressional Oversight Panel, which is charged with overseeing the 700 Billion Dollar bailout program should come as no news to many, Housing watch and many other media outlets have been reporting the troubles for months. The prediction: "A significant wave of commercial real estate defaults could create a downward spiral that could touch the lives of nearly every American".

"Over the next few years, a wave of commercial real estate failures could threaten America's already weakened financial system", reports the panel. "The Congressional Oversight Panel is deeply concerned that commercial losses could jeopardize the stability of many banks, particularly the mid size and smaller banks, and as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Dr. Elizabeth Warren, the Governments head of the bailout, states plainly "Well it's pretty bad". Nothing more needs to be said.

The New York Times recently reported that the losses in the commercial market could be well over $300 Billion in the next year alone. Trade organizations claim that the panel has overstated the problem, however, I find this statement to fall on deaf ears, especially mine.

By 2014 over 1.4 Trillion dollars of loans will expire and need to be refinanced. Half of those loans are already underwater, as stated by the panel.

This is one time I think the Government's forecast is closer to the truth than the trade, and this problem is looming like a "class 4 hurricane" waiting to come ashore.

Citi's Deed in Leiu Program

Citibank announced today that it will allow homeowners to stay in their homes for up to 6 months in exchange for the deed to the property. The deed is given back to Citibank in "lieu of foreclosure" at the end of the 6 months and Citibank will offer a $1000 relocation allowance as well. In certain circumstances Citibank may even pay some additional monthly property expenses if Citibank determines the borrower can no long afford them. As part of the agreement, the borrowers must maintain the property in current condition and agree to bi-monthly meetings in which trained relocation professionals will help the borrower on the next step of their lives.

This is a pilot program and is part of the deed in lieu of foreclosure and short sale program the Treasury is doing in the HAFA (Home Affordable Foreclosure Alternative)Program, part of the larger HAMP (Home Affordable Modification Program).

One note here is that Citibank doesn't mention this tidbit, but HAFA requires a full release of debt and waiver of all claims against the borrower. In short the borrower is permanently off the hook. First program of its kind and it will be interesting to see what happens down the road. What will they do it 1/3 or more off all their mortgages are given back? Sounds very expensive to me.

Foreclosures Decline in January but Surge Expected

Realtytrac announced today that foreclosure filing dropped in January from December's numbers but is still 15% higher than a year ago.

Over the next months banks are expected to aggressively foreclosure on delinquent loans, where loan modifications, short sales and deed in lieu options no longer work. Beginning in February many of the trial modifications will expire and as of now over 50% of these modifications didn't work out.

Although the foreclosures have not hit the market for resale, short sales have increased. This is due to no inventories in so many markets, a direct result of both the banks and the government trying to stabilize the housing market.

Nothing that the President, Congress or the Banking Sector is doing has stopped the rise of theses distressed properties. All aspects of the housing section is still getting worse not better.
More of the same talk and no action. Where are the lender regulation changes, where are the jobs, where is the common sense? Couldn't they at least start with one of these requests?

Freddie Mac to Buy Back all Bad Loans

Freddie Mac issued a release today that stated Freddie Mac was going to buy back all the loans it insures that were late on their payments or in the foreclosure process, since the cost to buy the inventory back is less than the cost to carry the bad loans. In 2007 Freddie Mac stated it would pursue this course of action should this happen so it comes as no surprise.

It does however show that the mortgage giant is also buying out the inventories from the banks since more foreclosures are on the way to banks. This could ease the impact for a little while but eventually these foreclosures are going to have to be sold. The real question is can Freddie afford the next round of foreclosures, short sales and deed in lieu defaults?

So, as of March 2010 Freddie will buy back all loans that are 120 days delinquent or more for all fixed and adjustable rate loans. Total cost for the buy back have not been disclosed as of yet.

This does not affect the Home Steps buyers program, which helps first time buyers with the purchase of a Freddie Mac owned property.

Prime Jumbo Loan Defaults Hit New High.

Fitch Rates of Business Wire reported that all prime jumbo loans performance continued to weaken in January for the 32ND consecutive month to all time delinquencies level of 10%. The loans originally began to default in 2007 but by 2009 the numbers had more than tripled. Florida and California were the hardest hit states and the top five default states account for more than 2/3's of all jumbo mortgages.

California, New York, Florida, Virginia and New Jersey were the top 5 states and California alone accounts for 44% of the market, and 11.3% of it's loans going delinquent. Like the conventional loans this is a real concern for banks as wealthier clients start to look at their loans as business decisions, their rate of defaults will definitely rise, the question is by how much? Jumbo loans are roughly between $500,000 to $2,000,000 so the losses will be much higher per default and will add more pressure on the banks. Luxury homes making up the majority of all jumbo loans have been declining steadily in value over the last 2 1/2 years. A 30% decline in values on a $2,000,000 property is a $600,000 loss on the loan. Big numbers and big headaches are definitely ahead for banks. Does anyone have an aspirin?

Contrary to belief that the loans defaulting were sub prime borrowers this is in stark contrast to this is the triple A rated top shelf borrowers going delinquent. It's just more news that markets still are in serious trouble with virtually all mortgage delinquencies across the board rising, this is not just a sub prime mess anymore. This is a house of cards and it is going come tumbling down really soon.

Rising FHA defaults, more Foreclosures Coming

The amount of the FHA insured loans that are behind in their payments jumped by 1/3 last year, foreshadowing a crush of foreclosures to trouble an agency responsible for a large segment of home loans today, as reported in the Washington Post.

The rise in delinquencies is growing at a rapid pace now, and the foreclosures are stemming from loans made in 2007 and 2008. This was reported in October by Commissioner David Stevens in his October Report, and the rest of the report wasn't good news either.

Current delinquency rates are at 9.1% up from 6.4% a year ago. This rate has been eating away at the cash in the agency and it seems to be speeding up in the last 2 quarters. Most of the problem loans date back to 2007 and 2008, however more newer loans are in jeopardy as well, mainly due to the continued decline in housing values in some areas and the high unemployment.

It is feared that if these loses continue, the government will have to use Taxpayers Dollars to bail out the FHA, something that has never happened before. In the last quarter alone the agency reported a 26% increase in delinquent loans.

This is further exasperated by the fact that many FHA borrowers are the middle class working people most affected by the high unemployment, and certainly the most vunerable to fall behind in their payments.

Just another reason that the first bailout should never had occurred and now the Taxpayer is forced to pay out good money after bad. The government is now faced with bailing out their own agencies, a sorry first in America, and should this occur before November, look out!

Banks in Trouble Jumps to 599

The Banks in FDIC trouble jumped to 599, including the removal of 11 failed banks including the 5 banks last week and the addition of 26 new banks to the list.

The new tab is $322.5 Billion up from the $305.3 billion last week. That's a jump of 17 billion in loses in two weeks. Although the FDIC won't officially release these figures, they were gathered from the public records and compiled unofficially. What bothers me is that this is just an estimate and the FDIC is probably shielding so much more. And how much have we bailed out these failed banks.

Why is it these banks fail and others are "too big to fail". Capitalism is supposed to correct the markets on it's own, isn't it? So as we see the banks who are "too big to fail", coming back into financial trouble later this year, Let them fail!

Congress can't legislate the corrections needed in the market and the banks can't be trusted. The collapse of the markets is a necessary for capitalism to correct. Not to mention the top executives of these institutions would be out of a job. If the banks fail, other banks will change the way they do business in order to stay in business. This is what needs to happen!

Borrowers Pay Credit Cards not Mortgages

The credit reporting agency Trans Union said today, borrowers, especially in California, continue to focus on their credit card payments and ignore their mortgages. This is the second study conducted by the company to show the same trend.

This is the first time that more consumers are on time with their credit cards and delinquent on their mortgage. The payment priorities are more pronounced int California and Florida, the biggest housing bubble states.

It could be that with a tight job market, homeowners are using their credit cards to stay afloat while looking for employment opportunities. Trans union Reported that 10.2% of delinquent loans had current credit cards. Up 4% from a year ago.

This adds pressure to the banks since the loss from the mortgage loans are much higher dollar values than the credit card exposure. The next 6 months will be the telling sign for banks. If unemployment is still hoovering at 10% there is greater exposure to loan losses and credit card defaults could rise as well.

This trend to pay your credit cards and not your mortgage sends a real powerful message to Wall Street. Homeowners prioritize their debts to survive these turbulent times, and now with home values plummeting homeowners figure their investment has now gone bad. No sense in spending good money after bad. In the meantime credit cards enable the homeowner to use credit for daily needs.

We'll see if this trend gets worse, but maybe Wall Street will start to feel whats happening on Main Street.

Mortgage Delinquencies increase to 10%

Home loan Delinquencies rates in the US reached a record high 10% in December, up from 9.97% in November, which was the previous high, according to Lender Processing Service or LPS.

Accounting for the foreclosures in the pipeline now, the delinquency rate is expected to rise to 13.3% in the next few month. Nationwide 7.2 million loans are now behind in their payments. This figure is sure to rise with unemployment staying above 10%.

Despite all the hype about stabilization in the housing sector, the government literally controlling the mortgage market and the high amount of loans in trouble, I don't see how this market can stabilize. Hold on this ride is going to get ugly.

More Articles reporting Walk Aways are rising

David Strietfield of the New York Times recently wrote an article titled "No end or Rebound in Sight, More Homeowners Just Walk Away"

"We're now at the point of maximum vulnerability. People's emotional attachment to their property is melting in mid air", so says Sam Khater of First American Core Logic.

New research suggests that when a home falls below 75% of the amount owed on the mortgage, the owner starts thinking hard about walking away, even though he may be able to make the payments. At this level of negative equity homeowner will not qualify for any loan modification.

In 2006 almost no one in America was underwater as such, but over the last 3 years that number has surged to 4.5 million homeowners who were 75% under water. This negative equity report was also part of the First American report.

Nearly 10.7 million homeowners or 23% of all mortgages were under water by the end of 2009. An additional 2.7 million homes were approaching negative equity in the next few months. All in all over 28% of all mortgages nationwide are at risk. The wave of negative equity is bringing more and more homeowners to leave emotion aside and opt out for just walking away, without any emotion.

Take a homeowner in Fairfield who bought a home for $340,000 in early 2006. By the end of 2009 that homes value was at $100,000. That's a negative equity drop of 71% and likely to fall beyond 75% by mid summer. If the property were to appreciate at 10% per year it would take over a decade just to get back to break even. If the homeowner defaults he could recover in 4 years or less on his credit and have saved thousands of dollars. Moral responsibility is gone, thanks to the arrogant greed of the banks themselves.

Judging from my earlier report (1/26/2010) on walk aways and the amount of attention the national media is giving,(5 Articles in the last 2 months on this topic alone) this problem is for real. Granted there are some potential issues banks can use in certain states, like default judgements, which is when the banks are going after homeowners for the difference between the foreclosure price and the loan. That being said so many upside down homeowners say they're willing to take the chance. In California for instance, if the loan is the original purchase money, meaning the home has never been refinanced, a non recourse law means banks cannot go after the homeowners for the loss. So California and states with these consumer protections could see a disproportionate share of these walk aways. It's about time these banks share in the fear that so many will give back these homes and they could be in real trouble. I for one, won't feel sorry for them.

Government Programs May Be Creating New Bubble

In the Quarterly Report to Congress from the Office of the Inspector General for the Troubled Asset Relief Program, it stated "Government Programs Risk re-inflating Bubble."

"To the extent that the crisis was fueled by a bubble in the housing market, the Federal Governments concerted efforts to support home prices risks re-inflating that bubble in light of the Government's effective take over of the housing market through purchases and guarantees, either direct or implicit, of nearly all the residential mortgage market."

Here is the break down of support for the residential mortgage market.

*Support of Primary Mortgage Market - Insure Mortgages of Homeowners
FHA - insured at $757 Billion
VA - insured at $269 Billion
USDA - insured at $56 Billion

*Support of Secondary Mortgage Market - Guarantee and Purchases Mortgages
Fannie Mae $2.1 Trillion for Guarantees
Freddie Mac $1.9 Trillion for Guarantees
Ginnie Mae $864 Billion for Guarantees
Federal Home Loan Banks $1 Trillion
Fannie Mae $752 Billion Purchased
Freddie Mac $762 Billion Purchased

*Emergency Support During Crisis - Buying MBS, Tax Subsidies, and Support GSEs
Federal Reserve $1.1 Trillion Purchased
Treasury $331 Billion Purchased and Senior Preferred Stock
Treasury TARP $40 Billion to support PPIP
Treasury IRS 2009 First Time Home buyers Tax Credit Tax Subsidies

Grand total $9,931,000,000 - Almost 10 Trillion Dollars!

The Government believes these are the mechanisms to support housing prices. Keeping Interest Rates Low, offer tax credits, buying bad loans are all aimed at creating a demand for housing. One of the fundamental problems here is that the Institutions that became "To Big To Fail" are ironically now even bigger.

The amount of money the Government has put into the mortgage market virtually guarantees control over the housing sector. The big question is two fold; first what is Government going to do with all the purchases, Insuring and Stock it has or will purchase; and second what's going to happen when the Commercial Real Estate Market needs Government Life Support too? A Government Run Mortgage Market, and still Wall Street manages to get subsidies for their "even larger" "too big to fail institution", changes little in the way the business is being done from the practices that brought the collapse of the markets and continues business as normal.

As the markets dry up due to these purchasing of loans, the low interest rates and add the tax credits, then what? Another bubble, if banks have more inventories, interest rates rise, no more tax incentives and home sales will drop fast.

Somehow knowing that 10 Trillion Dollars of the Government's Money, our Tax Dollars, literally owns the home mortgage market doesn't make me feel too confident about our chances to avoid a second bubble. I hope we don't hear a "pop" in the future.