Archive for the ‘Foreclosures’ Category

Last week I told you that the mortgage crisis is not over. This week, the message I want you to come away with is that the mortgage and credit crisis do not present a doomsday scenario.

Don’t misunderstand — I am not cavalier about the financial crisis the U.S. is going through. It is scary stuff. Probably the worst crisis this country has seen since the Great Depression.

However, it is not the end of the U.S. nor is it the end of the world.

And I do not believe that it is going to lead to another depression. Quite the contrary, it’s going to lead — as you well know from reading my column — to much higher inflation.

I see seven reasons why the mortgage and credit crisis is not as bad as some seem to believe …

Reason #1: Only 0.83 percent of U.S. mortgages are currently in foreclosure.

True, that’s a record high. But let’s put it into perspective.

There are 44 million mortgages in the U.S. with an average balance of about $200,000. That’s a total mortgage market of $8.8 trillion. At a default rate of .83%, you’re talking about $73.4 billion in losses.

Even if the default rate were to explode to 10% — you’re talking about $734 billion in losses, less than the damage inflicted by the tech wreck of 2000-2001.

And keep in mind — the value of the collateral, the real estate underlying mortgages — does not fall in value to zero. The above assumptions assume it does.

That’s important to understand. Because it means that even in foreclosure, a mortgage in default is not a total loss to the creditors.

While foreclosures are a real problem, they will not break the back of the U.S. financial system.
While foreclosures are a real problem, they will not break the back of the U.S. financial system.

Using the above example and assuming a 50% decline in real estate values and a 10% default rate, instead of looking at $734 billion in losses, you’re looking at about $367 billion in real losses.

What about the current delinquency rate, also at a record high of 5.82%?

First, mortgage delinquency is not a guarantee of default.

Second, even if it was, and every single mortgage in delinquency ended up in default, the same rule above applies: The underlying collateral is not worthless.

Yes, that is a somewhat simplistic analysis that does not account for a lot of variables … like loans stacked on top of loans, leverage … derivatives and other things that can go wrong.

But it does shed some positive light on the crisis. And it’s worth repeating, after all, the collateral underlying all the credit laid on the real estate markets is not completely worthless.

Reason #2: Mortgage markets have tightened, but they are still more liquid than they were in previous real estate declines.

Much is being made about how no one knows who owns what these days when it comes to the mortgage companies and banks. This is chiefly because most mortgages are now underwritten by agencies rather than your local bank. They are then sold off to servicing agents … pooled in collateralized debt obligation (CDOs) … and all that other scary stuff you’re hearing about.

But look at all of this another way, with the glass half full rather than half empty: Imagine if the mortgages that are going bad today were owned and serviced by local banks in every town and city across America, and that the lending risks were not spread out via millions of mortgage investors, both domestic and foreign?

The banking problems you’re seeing now would be absolutely devastating. Local banks all over the country would be collapsing, going bust. They would all be stuck with their own bad loan portfolios in local real estate markets and none of the risk would be spread through the system.

In my opinion, that would be a dramatically worse and far more illiquid crisis than we have today! There would be no hedge funds providing liquidity … no major investment banks … and no foreign investors putting money in our mortgage and property markets.

The same can be said about the derivatives markets. The downside of derivatives is counterparty risk. But the positive side of the derivatives markets is that they help spread out — and hence reduce — overall risk and increase liquidity.

Reason #3: Big bankers have cash and strength to endure.

What? Am I crazy? Citibank has already needed a cash infusion. Bear Stearns had to be bailed out. Merrill Lynch needed $11 billion.

Foreign investment and government intervention will help U.S. financial companies.
Foreign investment and government intervention will help U.S. financial companies.

To be sure, some banks will fail in the weeks and month ahead. Perhaps even more investment bankers will collapse.

But the banking industry is just coming off of four years of record earnings … and is flush with cash … a record $1.35 trillion as of the end of 2007, according to the FDIC. And the banks are sitting on over $12.2 trillion in total assets.

Moreover, the U.S. banking system is more international than ever. That has helped it weather the storm by diversifying bank earnings to overseas economies, and at the same time, opened our economy to more foreign investment. And like it or not, foreign investment in the U.S. is helping to keep the economy going.

Reason #4: The Federal Reserve has unlimited resources.

The Fed’s just-announced new regulatory push will help, long-term. But short-term, over the next few years, the Fed will continue to behave exactly as I have predicted all along for years now — pumping in liquidity and printing money like there’s no tomorrow.

Keep in mind the Fed has unlimited resources. It can and will do everything to prevent the financial crisis from turning into a great depression.

If Lehman Brothers, for instance, is looking like it will fail, you will see another bailout like the Bear Stearns deal. If JP Morgan goes down, the Fed will bail it out, too.

The Federal Reserve will stop at nothing to save the U.S. economy!

That will create its own problems down the road — namely a continued long-term plunge in the dollar and much, much more inflation, maybe even hyperinflation.

Indeed, according to John Williams of Shadow Government Statistics, for the two weeks ended March 26, the seasonally-adjusted monetary base rose at an annualized rate of 20.1% from the prior two weeks. And a broader measure of the money supply is increasing at a record annual rate of over 17%!

Reason #5: Overseas exposure to U.S. subprime risk is limited.

Investors, bankers, and governments around the globe have been obsessing that America’s crisis will cause the world to collapse as well. And to be sure, there is some fallout.

But I’ve done loads of research on this and I’ve found no indication that the U.S. credit contagion will seriously infect the global economy.

Of course, not all areas have complete immunity. Here’s a breakdown of known foreign exposure to U.S. mortgage debt:

China: Holds more U.S. mortgage debt than any other country, but due to capital controls in China, their domestic economy is at minimal risk to the U.S. turmoil.

Japan: The world’s second biggest holder of U.S. mortgage debt, totaling as much as $200 billion. But the majority of banks in Japan report only 2% to 4% of their investments are at risk.

Taiwan: Only about $50 billion in total exposure. Minimal risk.

Korea: Same, only about $50 billion at risk in U.S. mortgage debt.

Singapore: Minimal risk, only about 2% of its investments at risk in U.S. mortgage debt.

Hong Kong: According to Fitch Ratings, none of the banks surveyed had direct exposure to U.S. mortgages through CDOs or asset-backed paper.

Thailand: No threat of insolvency at any of Thailand’s banks due to the U.S. mortgage crisis.

Malaysia: No direct exposure and only modest indirect exposure ($60 million, 1% of total equity) to U.S. subprime debt.

Indonesia: No significant exposure to risky U.S. mortgage debt.

Eurozone: Worst case estimates put the exposure at about $280 billion.

Australia and the United Kingdom have the most total exposure, but even if all their U.S. mortgage investments and the Eurozone were to go bad — an estimated total of $60 billion — it would hardly put a dent in the $65 trillion global economy.

Reason #6: Cheap dollar boosting overseas investment in the U.S.

I alluded to this above. The cheap dollar — worth a third less than it was five years ago — makes it possible for overseas investors to buy more with their euros and yen and pounds and Australian dollars.

In fact, practically all currencies buy more in dollar terms these days. And the greenback will only get cheaper as the Fed keeps the printing presses running overtime and, possibly, cuts rates further.

With so many cheapening dollars flowing to Asia to pay for Americans’ insatiable appetite for inexpensive imported goods, Asian consumers have more buying power than ever before.

That’s why you’re already starting to see some Asian and other foreign money buy up Manhattan real estate.

For example, in through the first quarter of this year one-third of all commercial properties being bought in Manhattan are from foreign buyers, almost triple the amount for all of 2007.

Reason #7: Asian demand offsets U.S. economic softness.

On paper, the United States has the world’s largest economy. But it has become essentially static. Instead, the real powerhouses of expansion are China and India, the globe’s two fastest-growing economies.

Rising consumption in Asia can help power the global economy.
Rising consumption in Asia can help power the global economy.

There’s simply no stopping the tidal wave of demand coming from 2.4 billion people in China and India (nearly 40% of the world’s population) as they race to modernize and catch up with the developed world.

Other parts of Asia — Singapore, Vietnam, Thailand, Malaysia, Indonesia — have caught the boom fever and are coming into their own. Even Japan is awakening from its long coma to show signs of renewed economic vigor.

Without this demand and the rising economies of Asia, the global economy — and the U.S. — would be particularly vulnerable. But that’s not the case. The world has changed dramatically in the last 10 years. And there is no question in my mind that the economic growth being seen in Asia is a positive for the U.S.

So What Should You
Be Doing Right Now?

I suggest staying the course with the investment philosophy I’ve laid out in previous issues.

In my opinion, gold or silver is still your best hedge against a falling dollar and rising inflation.

And natural resource stocks will continue to benefit from demand by more people than ever before in the history of this planet.

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Top Economist Expects Foreclosures Won’t Peak Until Later This Year


Real estate signs sit in front yard of four houses on one a block February 14, 2008 in Detroit, Michigan. The Detroit area, hit hard by a combination of unemployment and a slumping housing market, had the highest foreclosure rate in the nation last year.

 A record number of homeowners lost their homes to foreclosure in the final months of 2007.

“We don’t expect to see the peak in delinquencies or foreclosures until mid- to late 2008,” said Doug Duncan, the chief economist of the Mortgage Bankers Association.

The group reported this morning that 2.04 percent of mortgages nationwide were in foreclosure from October to December of last year. A record number of homes also entered the foreclosure process during the three-month period.

Additionally, the number of homeowners more than 30 days late with their monthly payment rose to 5.82 percent, up from 5.59 percent in the previous three-month period. That earlier rate had been the highest on record since 1985.

The bankers association National Delinquency Survey covers nearly 46 million outstanding loans nationwide.

At the same time, an increasingly larger number of borrowers were late making their payments, setting the stage for possibly even more foreclosures in the months ahead.

There was more bad housing news today. The Federal Reserve announced that Americans’ percentage of equity in their homes has fallen below 50 percent for the first time since 1945.

Home equity is equal to the percentage of a home’s market value minus mortgage-related debt. On average, housing is Americans’ single largest asset.

Not surprisingly, subprime borrowers were most likely to have trouble making their monthly payments. Nearly 14 percent of subprime mortgages with fixed interest rates were more than 30 days late. A total of 3.8 percent of fixed rate subprime loans were in foreclosure.

For subprime borrowers with adjustable rate mortgages, the situation was even direr. One in five was delinquent and 13.4 percent of the loans were in foreclosure. Many of the homeowners fell into trouble even before their payments reset higher.

“Many of the loans were already entering foreclosure well before their interest rate resets hit, which indicated an underlying credit quality problem as the main driver,” Duncan said, adding that the decline in house prices was also having an effect.

That implies that even more subprime borrowers who will see rate increases in the months ahead could begin to fall behind in their monthly payments.

The surge in mortgage foreclosures and delinquencies underscores the precarious state of the housing market nationwide. Prices for existing homes fell 4.6 percent in January, compared to a year earlier and sales dropped more than 23 percent.

As home prices drop precipitously in certain parts of the country, millions of homeowners now owe more than their home is worth.

And the number could rise even higher. Already, Moody’s Economy.com estimates that as many as 10 percent, or 8.8 million homeowners, face this dilemma, a situation not seen since the Great Depression. Housing analysts worry that homeowners struggling to make their payments could simply walk away from their homes, further damaging the housing market as more homes would go into foreclosure.

Economists and forecasters do not expect the housing sector to recover until the end of 2008 at the earliest. They worry that the housing market could push the nation into recession, and, in a vicious cycle, that in turn could further exacerbate the housing situation, leading to even fewer sales and even greater price declines.

As in previous reports, the mortgage bankers report concluded that the once red-hot housing markets of California and Florida now represent a disproportionate share of the problems in the housing market.

“California and Florida are the two largest states in terms of mortgages outstanding and are the key drivers of the increase in national foreclosure rates,” Duncan said.

Together, the two states have 21 percent of outstanding loans nationwide and account for 30 percent of mortgages that entered into the foreclosure process during the three-month period ending in December. The mortgage bankers group said that the number of homes entering foreclosure tripled year over year for Florida and doubled for California

The Bush administration, Congress, the Federal Reserve, other bank regulators and even state and local governments have been implementing and considering additional proposals to help struggling homeowners with the goal of preventing further losses to consumers and the overall economy.

On Friday, the government will release unemployment figures for February, something the Federal Reserve will be watching closely.

It meets March 18 to vote on whether to lower a key interest rate with the goal of preventing the economy from falling into recession due to the troubles in the housing and financial markets.

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The Fed Chairman Says More Can be Done By Lenders to Prevent Foreclosures

Federal Reserve Chairman Ben Bernanke called Tuesday for additional action to prevent more distressed homeowners from falling into foreclosure.”This situation calls for a vigorous response,” Bernanke said in a speech to a banking group meeting in Orlando, Fla.Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise “for a while longer,” Bernanke warned.

Rising foreclosures threaten to worsen the problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.

“Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole,” Bernanke said. “Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done,” the Fed chief said.

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. “They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again,” Bernanke said.

Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. “When the mortgage is `under water’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,” he said.

To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.

“Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs,” Bernanke said.

Lenders last year were on pace to initiate roughly 1.5 million home foreclosure proceedings, up from an average of fewer than 1 million new foreclosures in the preceding two years, the Fed chief said. More than one half of the foreclosures started in 2007 were on subprime loans given to borrowers with blemished credit histories or low incomes.

The housing collapse dragged down home values, especially clobbering these subprime borrowers. Many were left with mortgages that exceeded the value of their homes. They were further socked by low introductory rates on their adjustable mortgages resetting to higher rates, making their monthly payments difficult or impossible, to afford. Problems in the credit markets have made refinancing a mortgage harder.

This year, about 1.5 million loans — representing more than 40 percent of the outstanding stock of subprime adjustable-rate mortgages — are scheduled to reset to higher rates, Bernanke said. The Fed estimates that the interest rate on a typical subprime ARM slated to reset in the current quarter will increase to about 9.25 percent from just above 8 percent. That would raise the monthly payment by more than 10 percent, to $1,500 on average, he said.

Declines in short-term interest rates and a Bush administration-promoted initiative involving rate freezes will “reduce the impact somewhat, but interest rate resets will nevertheless impose stress on many households,” Bernanke said.

On Capitol Hill, a number of measures have been offered to help stressed homeowners.

Overhauling the Depression-era Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, could help, Bernanke said. He also called for strengthened supervision of mortgage giants Fannie Mae and Freddie Mac.

Bernanke, who last week signaled that the Fed stands ready to lower a key interest rate again, did not talk interest rate policy in his speech or in a brief question-and-answer session afterward. The Fed, which has been slicing rates since September to help the economy, is expect to reduce them again on March 18, the Fed’s next meeting.

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Minority Neighborhoods Have Disproportionate Burden of Subprime Loans

Nita Gardner stands along East 113th Street in Cleveland near a house she owns in this Jan. 17, 2008 file photo. The majority of homes on her street are vacant – victims of foreclosures. (AP Photo/Mark Duncan) 
Subprime lenders that went out of business with the industry’s collapse targeted minority neighborhoods, leaving them to struggle disproportionately with foreclosures and crumbling home values, according to a new report.

These companies’ high-risk loans made up 20 percent of all loans in predominantly minority communities, compared with 4 percent of total loans in mostly white areas, according to the report released Thursday by an alliance of policy, research and advocacy organizations.

“These high risk lenders were targeting their loans to particular neighborhoods — to communities of color,” said Saara Nifici of the Neighborhood Economic Development Advocacy Project in New York, one of the organizations participating in the study. “That’s where they focused their marketing practices.”

Part of their growth in those areas can be explained by the lack of other available resources — simply not having another lender in the neighborhood, Nifici said. But researchers believe there’s more to the issue.

“It’s a question of access and a question of steering,” Nifici said. “If you walk into the local subprime office, there’s no incentive for them to send you to a different lender where you can qualify for a prime loan. People are steered downward, not upward.”

The study analyzed the geographic operating patterns of 35 high-risk lenders that were very active in 2006 but that went bankrupt, were closed or sold in 2007 as the industry imploded. Chief among them were New Century Mortgage Corp., WMC Mortgage Corp., Fremont Investment & Loan, and Argent Mortgage Co.

The survey focused on lending to minority urban markets in New York, Los Angeles, Chicago, Boston, Cleveland, Charlotte, N.C., and Rochester, N.Y. In six of these seven urban areas, high-risk lenders’ market share in minority neighborhoods was at least three times the share in white neighborhoods.

Many subprime loans to borrowers with blemished credit or low incomes featured low introductory or “teaser” rates. When the adjustable mortgages reset to higher rates, it made the monthly payments unaffordable for many people and put their homes at risk of foreclosure.

Advocacy groups have said poor and minority borrowers who qualified for traditional loans were nevertheless steered into risky adjustable mortgages.

The concentration of subprime loans happened in low-income areas, but also in middle-class minority communities like the predominantly African- and Caribbean-American areas of southeast Queens in New York, Nifici said.

In these cases, “race and ethnicity played a bigger part” in lending decisions than income, she said.

This concentration means these minority communities will shoulder most of the negative impacts of the subprime crisis — foreclosures, sinking property values, lower tax bases, abandoned homes and higher crime.

The report recommended that policy makers protect borrowers and tenants from foreclosures and pass mortgage reform legislation.

The city of Baltimore filed a federal lawsuit against Wells Fargo Bank in January, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites in violation of federal law and targeted black neighborhoods for high-risk and unfairly priced loans.

Wells Fargo has said it does not consider race when making loans.

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