Real Estate Blog

I’m sad to share news that you’ve likely already heard, that Calculated Risk’s “Tanta” has passed away.  Doris Dungey (aka Tanta) was 47 and lost her battle with cancer.

Tanta was a hero of mine - she wrote with clarity, experience, wit and insight that I always admired.  I believe whole-heartedly that she was the best of the financial bloggers that have been covering this meltdown for years.

She was greatly respected and will be fondly remembered.  While I never met her, I did correspond via email with her and she was smart, sharp and warm in those exchanges.  I wish her and her family peace.  Thank you Tanta for opening the eyes of literally millions and bringing an insight that would have otherwise been lost.  You will be deeply missed.

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Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

The derivatives time bomb that Warren Buffet warned about several years ago has exploded. Here’s how it’s playing out around the world.

From the US:

The Fed:
“Federal Reserve chairman Ben Bernanke acknowledges he was wrong in believing that there would be limited fallout to financial markets from risky mortgages that soured after the housing market’s collapse.” ***Is this possible? Not his admission of having been wrong, but that he really didn’t know? I knew. Since you’re reading BlownMortgage you knew too***

”I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke says in an article in the December 1 issue of The New Yorker magazine. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,” he said in the piece titled ”Anatomy of a Meltdown.”

***Actually no, it wasn’t hard to predict at all. One thing has followed the other in—guess what—predictable fashion. The blogosphere has been plotting the course of the meltdown with stunning precision for a few years***

Almost as an aside, as of early this week, the Fed has now spent, guaranteed or promised about $8.5 trillion. This is up from $4.3 trillion on November 19, which was up from $3.8 trillion on October 31. And now we know that this spending is based on the judgment of someone who thought subprime could be contained.

The Auto Industry:

The WSJ reports: “Though it’s under pressure to trim costs and update its business plan to get federal bailout funds, Ford doesn’t like the idea of cutting its CEO’s salary. CEO Alan Mulally made $21 million last year; was asked in testimony last week on Capitol Hill if he’d accept a $1 salary, he replied, “I think I’m OK where I am.”

Via Bloomberg: General Motors doesn’t want the public tracking a private jet used by its executives, and has asked the Federal Aviation Administration to block it from its public service. “We availed ourselves of the option, as others do, to have the aircraft removed,” said a GM spokesman, though he didn’t say why the automaker, blasted on Capitol Hill for using private planes, took the step.

***The auto industry is a long way from sanity let alone solvency***

Caption: Car dealers stage a protest using this year’s unsold vehicles.

Banks:

There have been 73 mergers and 10 bank failures so far this year plus bailouts for Citigroup (2x), a little help from friends for JPMorgan and Bank of America, and a little something under the table for Goldman Sachs and Morgan Stanley. The FDIC has just added 54 more banks to its watch list, which now stands at 171.

Real Estate

The latest S&P/Case-Shiller Indices are out. What could I possibly add except to say that the chart will have to be redrawn since the Y axis does not go far enough into negative territory to plot next month’s decline.

Caption: If your house fell off this cliff you might be eligible for a bailout.

From Asia:

On November 26, China cut interest rates by 1.08 percentage points to 5.58%, the lowest level in 11 years and the largest one-off cut since the Asian Financial Crisis in 1997. The economy is crumbling and millions of jobs will be lost before Christmas.

It is also the fourth interest rate cut by the Chinese central bank in the last ten weeks. “China is out to save itself,” said Patrick Bennett, an analyst with Societe Generale in Hong Kong.

Caption: Christmas spirit in China: Rioting over toy factory layoffs.

In recent weeks, laid-off factory workers have rioted across central and southern China. Government officials in Beijing have warned that dissent and threats to social stability will be crushed.

***Some things never change***

From the Middle East:

According to the UKTimesOnline, Gulf sovereign wealth funds (SWF) are now investing in their own struggling economies with several Gulf-based banks getting American-style bailouts. Local stock markets have collapsed and some sovereign wealth funds are supporting markets by buying shares of local companies. Investment in the West is being reduced, in particular in the UK and US where the SWFs have lost billions of dollars this year. *** I thought these people had a lot of money—our money, in fact—I guess not***

Caption: Fires in the UAE have spread from the oil fields to the highway: Accident on road between Abu Dhabi and Dubai

Sovereign wealth funds are among the few sources of liquid capital available in the world and many companies have sought cash injections from the Middle East. Fund managers feel they were lured into investing before the full extent of the crisis was known. One fund, the KIA, said two months ago that it had lost $270 million on a $3 billion investment in Citigroup, which was made at the beginning of 2008. Citigroup’s stock has fallen by two thirds since then, and it the bank is now being supported by the US government. *** This sounds like another wrong-headed judgment call by Bernanke. If this was the reason Citi was bailed, it would have been cheaper, way cheaper, to give KIA their money back ***

From Europe:

Things are no better in the EU countries. The Baltic Dry Index, the most reliable measure of international trade, is down significantly. Deutsche Bahn AG, the German railway company, is planning on 40% fewer cargo trains for next year, another leading indicator.

Caption: Car of local bank manager in France who does not know which end is up.

There are only four more weeks left in 2008. We’re headed into a new year, with a new President, but with a number of the same people who laid the groundwork for the world we’re living in today. What else can go wrong? We’ll see, won’t we.

Caption: The ship of state.

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Startling News from the Fed and Economic Wrecks from Around the World

We can now enter a new acronym into our lexicon: TALF. And what is TALF? The Federal Reserve and the Treasury announced on November 25^th that a Term Asset-backed securities Loan Facility will be created to provide liquidity for purchasers of ABS’s (Asset-Backed Securities, which include mortgage-backed securities). Asset-backed securities also include student loans and car loans, which under normal conditions are packaged and sold to investors willing to take a risk that has been evaluated by another institution.

The trouble is, no one can be certain how thorough those institutions (specifically banks) were in their risk assessment process. Banks need to package and sell these securities in order to remove potential liabilities from their balance sheets, but when it becomes virtually impossible to slog through the tranches of loans within those securities, investors can easily become gun shy. To witness the headaches that these loans are causing banks, take a look at the chart below.

So as our trusted officials continue their efforts to restore confidence in the markets, and as the demand-led recession deepens, this task seems increasingly Herculean. Paulson & Company have resorted to some extremely desperate measures to pull this one off. To fund the TALF, approximately $600-800 billion will have to be committed, which nearly equals the amount of the original bailout plan. $20 billion of that money is, in fact, coming from the bailout plan. The other remaining billions are being leveraged, a fairly astonishing fact whose implications remain unclear. One thing is for certain: if the Fed wishes to avoid an inflationary spiral, destruction of money will become a necessity once this crisis begins to abate.

It would appear that the Fed’s announcement caused a positive reaction in the mortgage markets, however, Mortgage prime rates dropped from 6.3% to 5.5%, a relatively massive decline, and a huge wave of refinancing ensued…in a matter of hours, essentially. Could that be a forward indicator? Credit Suisse Group mortgage strategist Mahesh Swaminathan thinks so, saying that he expects to see rates drop below 5% in the near term. While there are some strict requirements for homeowners hoping to refinance, this is obviously a positive for the consumer. And while these measures do little to halt the rising tide of foreclosures, it does help the demand side of the issue. And in a demand-led recession, such as the one we are in, has the Fed finally stumbled upon the right combination to stimulate the markets?

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Can the TALF Return Demand to the Markets?

People are not the only ones left homeless by foreclosure. Nearly three-quarts of all American households include a family pet, according to No Paws Left Behind and when families face tough economic times, it is often the animals who fare the worst. It is believed that as many as 4 million Americans and 1.25 million pets my lose their home in the current economic crisis.

“In an eforst to help families coping with the devastating foreclosure process, we are bringing awareness to the growing trend of abandoned pets and offering possible solutions,” said Cheryl Lang, founder of the non-profit No Paws Left Behind and president of Intergrated Mortgage Solutions. “We founded No Paws Left Behind to provide homeowners facing foreclosure with a resource for finding alternative housing for their pets during this difficult time. Through visiting our website, borrowers are provided with an array of housing options for their pets, whether a no-kill shelter or temporary foster care. No Paws Left Behind will also provide monetary assistance for pet deposits required by new landlords.”

No Paws Left Behind’s mission includes drawing attention to outdated legislation preventing the removal of pets from abandoned properties prior to the completion of the eviction process as well as educating homeowners on their options when facing foreclosure. A link on the website also allows visitors to sign a petition advocating changine the laws regarding abandoned pets at the national level. The website also includes helpful information from the American Humane Society for both homeowners and lenders. The most important piece of advice for homeowners is not to leave pets when a home is vacated or abandoned. It may be weeks or longer before a lender is legally able to enter the property and it is unlikely pets will survive that long without food or water. For lenders the most important advice is to listen for any sounds of abandoned pets whenever they visit the property and to make inquiries among neighbors as to whether or not the owners had pets and where those pets may be. If pets are suspected to have been abandoned inside the property lenders should contact local animal control officers immediately for assistance.

The problem of pets being abandoned along with houses recieved considerable attention from bloggers earlier this year when photographs of emaciated animals were widely circulated online. Since the it is likely the problem and the number of abandoned pets has only increased. Unfortunately, USA Today reports that no one keeps track of the actual number of pets left behind when homes are forclosed upon.

Animal shelters and agencies throughout the nation are doing their best to keep pace with the problem. Many organizations are suffering from shrinking budgets as well as growing demand for their services. Still, if someone you know is facing foreclosure or suspects a neighbor has abandoned a pet along with the home, there is always room in the shelter for one more. And if you are looking for organizations to make charitable donations to this holiday season don’t forget local shelters.

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Fitch Ratings and Standar & Poors (S&P) Ratings services both published their methodology and assumptions for evaluating residential mortgage-backed securities (RMBS) in November. Look for both services to issue updated ratings over the next few weeks.

Fitch Ratings has revised its surveillance methodology for U.S. sub-prime RMBS to reflect increased emphasis on ResiLogic, their loan-level and loss model. Going forward, ResiLogic will be used to guide collateral loss projections by estimating the frequency of foreclosure for all mortgage pools regardless of seasoning and the loss severity of pools seasoned less than 30 months. For pools seasoned more than 30 months, Fitch believes actual loss severity trends exhibited by the pools are the best indicator of future severity trends. This loan-level analysis will be used in conjunction with Fitch’s existing break loss analysis to determine each bond’s loss coverage ratio.

The ResiLogic stressed mortgage pool loss scenarios will also be used in determining targeted loss multiples at each rating category resulting in pool-specific category thresholds as opposed to using a static set of thresholds. Other adjustments to the methodology include:

• An adjustment to the ResiLogic derived default rates for performing loans to account for the actual performance of each transaction relative to original expectations.
• The use of historical loan-level loss severities on seasoned (greater than 30 months) pools.

Fitch is reviewing its rated transactions for 2005, 2006 and 2007 and will be releasing revised ratings soon. The current revised cumulative loss expectations for these years are 12 percent, 27 percent and 31 percent respectively. The Updated Surveillance Criteria for U.S. Subprime RMBS are available online at www.fitchratings.com.

Standard & Poor’s Rating Services also recently published the methodology and assumptions fo rating U.S. RMBS backed by non-performing or re-performing mortgage loans. Given the current market conditions and the stresses on lenders, borrowers, and the real estate industry, S&P aexpects the volume of transactions backed by non-performing or re-performing collateral submitted for review to increase.

Collateral for RMBS can be real property or loans. Loans which are more than 90 days delinquent are considered non-performing if the borrower has not exhibted consistent payment behavior. Re-performing loans are loans which have been delinquent more than 90 days in the past year but are currently less than 90 days delinquent or that are 90 days delinquent but the borrower is exhibiting consistent payment behavior. When assessing the expectations regarding the timing and liquidation values of non-performing loans the following factors are taken into account:

• The accuracy of a licensed real estate broker’s opinion of the property’s value (the so-called broker price opinion or BPO value.
• State foreclosure and REO time-line variations and expenses.
• Housing market conditions.

Re-performing loans are assessed using substantially credit analysis to estimate foreclosure frequency and loss severity. The analysis of the age of credit scores, treatment of arrearages and loan seasoning adjustments differ for re-performing loans.

S&P continues to update methodologies and assumptions for the analysis of non-performing and re-performing loans based upon performance trends and updated economic projections. In addition, S&P believes unique risks must be evaluated in proposed transaction structures with regard to liquidating trusts. The methodologies are published on the S&P web site at www2.standardandpoors.com.

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Ratings Services Release RMBS Rules

In a recent story published on BusinessWeek’s website, the subprime mortgage industry is taken under the microscope and picked apart, bit by scandalous bit. The article, entitled “Sex, Lies, and Subprime Lending,” presents many of the familiar excesses of subprime lending (pressure from investment banks and mortgage-backed securities brokers, data manipulation by loan officers) with a new twist: that’s right, a Babylonian saga of loan officers and mortgage lenders exchanging sexual favors for subprime loans to unqualified borrowers. For what purpose? Commissions of course.

At this point, it would be virtually impossible to further demonize the world of subprime lending. It doesn’t get much worse than the predatory and sinful actions that are described by the “Sex, Lies, and Subprime Lending” article. So do these tales of excess spell an end for the subprime lending industry?

The simple answer is yes and no. Everyone now understands that the much of subprime loan origination functioned on the sort of irrational exuberance that are often induced by bubbles in economies. That bubble is burst, and the lending practices that went along with it have all but disappeared. Subprime lending, however, has been in practice for over two decades, gaining traction in the 1980s after Congress eased lending laws for first-time home buyers. For a bubble to exist, there has to some sort of substantive material to prop it up.

An article written for Slate by Daniel Gray highlights a number of virtuous institutions in the business of lending to subprime borrowers, some of whom have also been able to turn million dollar profits for the services. These include credit unions and other community-based banks, and CDFI’s (Community Development Financial Institutions), and they do share a few things in common with the Ameriquests and Countrywides who are now infamous for inflating the housing bubble. Most significantly, they intentionally look past the credit scores of applicants in determining creditworthiness. Where they differ is what they look for in applicants, which is significant.

Where the Ameriquests and Countrywides were willing to manipulate and disregard data in order to originate loans, the CDFI’s simply used a different set of criteria when evaluating applicants. These criteria included their ratio of savings to income, affordability of the house in relation to income, and their ability to manage their budgets and monthly bills.

These institutions also do not incentivize lending or bundle and re-sell loans, and thus were able to avoid the excessive risk taken on by others in the subprime industry. Tellingly, their delinquency and foreclosures statistics are much lower than the national average. For example, compared to the national rate of subprime delinquencies as cited by the Mortgage Bankers Association, which is nearly 19 percent, the National Federation of Community Development Credit Unions delinquency rate is 3.1 percent. That is an absolutely staggering difference. For Clearinghouse CDFI, a California-based institution, the difference is even greater. Less than 1 percent of their subprime loans have been foreclosed on, compared to the national average, which is over 11 percent. Clearinghouse, a for-profit company, expects to report record profits, proof that trickle-up economic

While the era of the subprime bubble may have ended, responsible subprime lending will, and should be, a part of any healthy economy. For further macroeconomic insight into the virtues of this sort of lending, I would point you to the success and benefits generated by the microfinance industry in the developing world, for which Bangladeshi economist Muhammad Yunus won the Nobel Peace Prize 2006. Responsible microfinance lending, which conceivably includes the practice of subprime lending in the developed world, is an example of trickle-up economics having a perceivable and beneficial effect on society. And correct me if I’m wrong, but isn’t that why we chase the promise of economic growth?

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In the grips of a brutal financial crisis that continues to worsen despite all efforts by the governments across the world to stop it, and foreclosures continuing their unstoppable climb, there’s no question that things are pretty bad out there. Banks, in particular, have been given no reprieve at all by shareholders even as they tap into government provided funds to shore up their balance sheets and (supposedly) use that money to continue lending. With all of this chaos and hardship caused by an industry that lost sight of any sense of risk management and proper diversification, someone has to be responsible right? This wasn’t all one big mistake, obviously, someone was there to knowingly pull the trigger. The question is, two years into this crisis, who?

The answer, according to William Black, who was counsel to the Federal Home Loan Bank Board during the Savings and Loan Crisis and one of the men who blew the whistle on the “Keating Five” in 1989, says that while we know the lenders that were involved (looking at you IndyMac and Countrywide), we don’t have the investigative power or resources to know yet. The answer to why not is actually pretty straightforward, according to Black: “There is no poster child [for the housing scandal] because you need to investigate, and you need to bring cases and we haven’t done either against the major players.”

That’s because the FBI made a “strategic alliance” with the Mortgage Bankers Association which, as you might have guessed, served the major industry players. So while investigations were focused on individual mortgage brokers, major industry leaders were responsible for plenty of recurrences of fraud as well. So, as the article puts it: “In this case, the foxes truly were guarding the hen house”

What’s that mean for the future? There will undoubtedly be investigations and arrests and someone will be punished along the way, but it’s going to take time as the FBI ramps up investigations that they should have opened previously. It’ll be especially difficult for them to gather that evidence since these firms in many cases have already shut their doors, so the FBI can’t send in undercover agents to catch them in the act. The FBI will also need a lot of additional resources if we expect them to track these fraud cases down and prosecute those responsible. Unfortunately for all of us, however, plenty will still get away.

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Mortgage Fraud: Where Will the Hammer Fall?

Which is more unbelievable: that “How to Get Rich Quick in Real Estate” courses are still actively being marketed or that people might still be buying them?

LEARN FROM THE AUTHORITY IN REAL ESTATE INVESTING

Looking to jump into the realestate market? Don’t know where to turn for help?

Now you can learn from the world’s most TRUSTED NAME in REAL ESTATE EDUCATION…for FREE!

Carleton Sheets, nationally known Real Estate educator, is offering his new online course Real Profit$ in Real Estate - a $250 Value - for FREE!

Since 1983, nearly 3 million people got their start in Real Estate investing thanks to Carleton Sheets. Now he is going to help YOU do the same!

Who are they kidding? And who is falling for it?

Sure, money can be made in down markets, whether it’s real estate or the stock market. BUT not quickly. The individuals and organizations who will ultimately make money in depressed markets are those who can buy and hold properties or securities which will increase in value as the markets recover. Chances are, those individuals already have a solid understanding of the markets, know what properties are undervalued and therefore a good buy/investment and have the financial security to park money in long term investments. That is NOT the description of anyone responding to such SPAM, direct mail, telemarketing calls or other attempts to sell these types of courses.

Even more frightening, is that there are still people out there who have fallen for these pitches. Back in December 2007, Carleton Sheets was the 10th most popular term entered into online search engines, according to Transactional Marketing Partners (TMP). The last complaint about the program of the 146 listed on infomercialscams.com was posted N

Normally, unsolicted messages

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They Are Still Selling This Stuff?

When there is a stock market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them,” he elucidated. “Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this–just wait for the depression which will come sooner or later.” When this depression–or panic–becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.

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The Stock Market

Homeowners are not the only ones having difficulty paying their mortgages. Owners of commercial properties, from office buildings and industrial parks to malls and resorts to hospitals and medical buildings are all feeling the pressure. And as of Tuesday, the cracks are officially beginning to show.

Bloomberg reports that, according to RBS Greenwich data, delinquencies on debt backed by comercial real estate reached 0.78 in October. Further, payment on approximately 35 percent of all sub-prime mortgages backing bonds are 30 or more in arrears. Two large borrowers, Westin and Promenade, are about to default on $334 million in loans bundled into bonds. Both loans were made by J.P. Morgan Chase & Co.

These loans may be among the largest and first on the verge of default, but they are not the only one. Extrapolating on the level of enrivonmental site assesments (ESAs) which are the first step in most commerical real estate transactions, the commerical real estate market is slowing down. The number of ESAs conducted across the U.S. fell by 17 percent during the third quarter of 2008 compared to the same quarter in 2007, MarketWatch reports. The deepest decline occured in the West where ESA activity was off by 25 percent. The only region showing an increase in ESA activity was the Northeast with a gain of 11 percent. Unfortunately, the Northeast regional only accounts for about 4 percent of all ESA activity in the nation. Preliminary indications for October reveal a decline in ESA activity of 21 percent nationwide hinting that conditions will continue to worsen as the year ends.

At the local level, select metropolitan areas including Washington, DC, Boston, MA and California’s Inland Empire experienced increased ESA activity according to MarketWatch. Washington, DC also appears on Forbes‘ list of top five places to invest in commercial real estate in 2009.  Seattle, WA leads the list, which is based on a survey of 700 real estate professionals conducted by the Urban Land Institute, followed by San Francisco, CA, Washington, DC, New York, NY and Los Angeles, CA. The $209 million Westin loan is backed by hotel properties in Tucson, AZ and Hilton Head, SC while the Promenade Shops at Dos Lagos in Cornona, CA back another $125 loan. If either do default it is likely to have a chilling effect on the commercial real estate markets in those cities and possibly beyond.

Some fear defaulting on these two large loans will user in the next phase of the financial crisis. Up to this point the commercial mortgage-backed securities (CMBS) market has survived the credit crunch sweeping the nation with minimal delinquency rates.

“It’s pretty unheard-of for tow large loans to go this bad early on,” Richard Parkus, head of CMBS research at Deutsche Bank told the Wall Street Journal. “This has shaken the market up.”

As it should.

“It blows my mind how fast this has happened. We had thought commercial real estate would be ok because it wasn’t overbuilt,” the Associated Press (AP) quotes Robert Bach, chief economist at Grubb and Ellis as telling the panel at the company’s 2009 Real Estate Forecast.

Falling consumer confidence, higher unemployment rates and fewer people traveling are all beginning to take their toll on commercial real estate. Loans, like the Westin and Promenade loans, made at the height of the commercial real estate market with the presumption that they would continue generating increasing amounts of cash are not just having trouble meeting payments when they come due. They are also finding it difficult to refinance the loans or sell the properties. And even if consumers started spending again immediately the commercial real estate market, which lags about a year behind the consumer economic cycle, will continue to decline.

“It’ll be awhile,” Bach told the AP. “Defaults on these loans could continue for several years.”

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Default Risk: Not Just for Homeonwners Anymore

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

“People have begun to feel like a Christian Scientist with appendicitis.” — Tom Lehrer

It is difficult to believe but earlier this year people were still debating whether or not we were in a recession. The debate broke down along the lines of, “We haven’t met the technical definition of a recession” vs. “If it smells, like a duck, quacks like a duck and looks like a duck then it’s a duck.”

One of the reasons for the debate was because there are so many different definitions of a recession.

The standard definition used by idiots and journalists (like me!) is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

Idiots and economists (like them!) don’t like this because it leaves out the unemployment rate and consumer confidence as indicators. “By using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.” Sadly, that’s not going to be an issue this time around.

National Bureau of Economic Research (NBER) says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” A recession runs from when business activity has reached its peak and starts to fall until business activity has bottomed out. When business activity picks up again is called an expansionary period. I like this definition because it would let us say that a depression is the period from the end of the recession until the start of the expansionary period. If there’s no gap between the two then there’s no depression.

Like so many other things that we take for granted today, the “recession” idea was invented as a response to (more…)

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Even with bargain hunters starting to come out of the wood work and credit just barely starting to thaw out, things are still fairly bleak in the real estate market. Home prices saw a record decline in the third quarter, with foreclosures doing the most damage. Bailout money has been plentiful, from the $350 billion spent so far to help struggling financial institutions to Freddie Mac eating such huge losses that it had to tap taxpayer money already. What about struggling mortgage owners, though? The government has clearly stated that they aim to help out the homeowners too, but how will Uncle Sam decide who will get the helping hand? That answer may not come easy.

The Bush administration recently announced a new foreclosure prevention program that aims to help troubled borrowers and keep them in their homes. The plan, spearheaded by the Federal Housing Finance Agency, has worked with a coalition of lenders, servicers, investors and community groups called Hope Now to target the “most-at-risk” homeowners. Who does that mean specifically?

At present, Fannie and Freddie are looking to extend aid to homeowners that are more than three months past due on their loans so that the most troubled borrowers get the most immediate attention. You’ll have to jump through a few hoops, of course, including having to write a “hardship letter” to explain why you fell behind on your payments for a “good reason.” Good reasons could or could not include job loss, divorce, and medical bills. Borrowers will also have precious little equity in their homes, and if you exceed the mortgage balance by more than 10%, you’re too “well off” to get help. Other homeowners are so far deep underwater that there’s no way to pull them out. If you were already up to your eyeballs in debt and then lost your job for example, you’re out of luck there, too. Prepare for bankruptcy and giving up your home.

Lenders participating in the program will be sending out letters to those who qualify and requesting information like pay stubs and bills and the aforementioned hardship letters. If you’re busting your ass to keep your mortgage current, don’t expect anything but a hefty tax bill somewhere down the line.

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Mortgage Aid: Who is Worthy of Help?

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don’t think anybody thinks we’re going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, he said “What this crisis reveals is a broken financial system like no other in my lifetime,” he told a conference at Lombard Street Research in London. Mr. Volker is 81 years old. Normal monetary policy can’t restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.
Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year.

However, with a new administration coming in, 2009 could be another story.

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Fed Implode-o-Meter Update

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Thus far, all indications seem to lead us to believe that the Federal Reserve can solve economic problems by throwing massive amounts of money at it. From lowering interest rates from 1 percent from 4.25 percent this year, to putting billions of dollars into the commercial paper markets in order to stimulating lending, to the $700 billion financial bailout that’s constantly shifted from a package aimed squarely at aiding struggling financial institutions to helping out consumer debt firms as well. With all of this money being tossed around and historic, unprecedented actions taken place, is there anything at all left that the Federal Reserve can do to stop us from going into a recession? According to Kansas City Federal Reserve President Thomas Hoenig, no, no there is not.

“The Fed has done about as much as it can do, we might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively.” If Hoenig is right on the mark with that statement, and the recession continues to worsen, then there isn’t much more that the Fed can do to help us out of it. If and when it comes to it, we’re just going to have to suck it up and continue to tighten the belt.

Unfortunately that certainly isn’t the answer that automakers in the U.S. want to hear. Talks between congressional Democrats and the Bush administration seemed to be bottoming out recently. Democrats in the Senate insisted that they’ll try and allocate a portion of the bailout to pay for loans to the industry, but talks have been ground out to a stalemate, and they don’t have the votes to do so without that support. Republicans, for their part, believe that the $25 billion loan should actually come from a loan program previously approved to help them develop more fuel-efficient vehicles.

That could change when Obama takes office, however. The Bush administration recently told top lawmakers that half of the $700 billion bailout fund will not go anywhere before Obama takes office. Treasury Secretary Henry Paulson will leave $350 billion left over for when Obama takes office and his administration will be able to decide how the rest of it should be spent. You can be sure that this could change the state of negotiations to have that portion of the bailout.

With the second largest economy in the world heading into an official recession as well, it’s probably best to start preparing yourself now. If things continue to get worse, there won’t be much that the Fed, or anyone, will be able to do to stop it from running it’s course.

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Federal Reserve Out of Firepower

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

I guess it’s not all that surprising given the increasing number of foreclosures across the nation over the past few months, but the FDIC officially came out with detailed plans as to how the government will come to the rescue of delinquent borrowers. The announcement was made earlier today by FDIC Chairwoman Shella Bair, and caught a number of experts off guard.

Apparently, the proposal is built upon 2 crucial points. The first is that housing payments on delinquent borrowers two months or more late would be reduced to 31% of gross monthly income. How do they intend to do that? By setting mortgage rates lower for awhile…possibly as low as 3% for five years. Loan terms are also likely to be extended to as long as 40 years (so you’ll be dead before you actually own your home…?). In addition, the FDIC will “encourage” servicers to participate as well, as the government would share 50% of the losses if the borrower they help still doesn’t pay up and ends up defaulting anyhow.. is this really what it’s come to? The FDIC will also start paying servicers who process mortgages $1,000 for reworking loan terms to keep homeowners in their homes and to prevent additional foreclosures. The cost? An estimated $24.4 billion, which will come from the $700 billion bailout program that Congress approved in the previous month. The FDIC also released a statement Friday stressing the importance of reducing foreclosures: “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.”

So..if delinquent homeowners are getting a piece of the bailout, what about everyone who happens to pay their mortgage on time and live within their means? Will they get a check in the mail to say hey thanks for doing a good job with your finances..sorry you have to eat trillions of dollars in debt over the coming years? The bailout’s focus has been constantly expanding, and there’s been no shortage of people and organizations lining up for their “share.” The mayors of Philadelphia, Phoenix, and San Jose among others have already requested that cities be added to the bailout list as well.

So that means for the bailout candidates list we have banks, delinquent home owners, credit car companies, failing U.S. Automakers, insurance companies, and cities (I’m sure I missed some).

Everyone except the average taxpayer.

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FDIC Unveils Homeowner Help