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4 mortgage giants on the ropes
At the same time as the biggest banks are repaying their government loans, four giant mortgage backers remain on government life support. American International Group, Fannie Mae, Freddie Mac, and GMAC, are not only unable to repay the government, they are still in need of infusions. They appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts. Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”
Both Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment. Together, the four have been offered nearly $600 billion, and that lifeline could climb to nearly $1 trillion if the commitment to Fannie and Freddie is doubled, as some predict. What’s more, the companies seem short on persuasive strategies for extricating themselves from the government’s embrace.
Unemployment climbs
Initial claims for state unemployment benefits climbed 7,000 to a seasonally adjusted 480,000 in the week ended Dec. 12 from a slightly downwardly revised 473,000 in the prior week, the Labor Department said. It was the second straight week initial claims rose. Analysts polled by Reuters had forecast claims falling to 465,000 from a previously reported 474,000. The four-week moving average for new claims fell 5,250 to 467,500 last week, the lowest level since September 2008, and dropping for the 15th week in a row. The four-week moving average is viewed as a better gauge of underlying trends as it irons out week-to-week volatility.
According to analysts, the four-week moving average needs to drop below 450,000 to indicate labor market stability. The number of workers still collecting benefits after an initial week of aid rose 5,000 to 5.19 million in the week ended Dec. 5. This was above market expectations for 5.15 million. So-called continuing claims are below their peak of 6.9 million in June. The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, was unchanged at 3.9 percent in the week ended Dec. 5.
No second collapse?
According to a report from Radar Logic, delinquencies have reached their highest peak in decades and the most bearish observers believe the inventory will flood the market once the government programs end, boosting supply and decreasing home prices. But Radar Logic analysts side with those like Rick Sharga of RealtyTrac in saying that banks will slowly burn through the shadow inventory, releasing them gradually onto the market. “Thanks to federal bailout money and a general improvement in their financial health, banks have been relieved of the urgent need to liquidate their assets.
As a result, lenders and government entities like Fannie Mae and the FDIC have been able to curtail sales to raise prices and avoid recording losses on properties,” according to the report. If the government and the banks can effectively solve the puzzle of mitigating foreclosures, Radar Logic says that home values could even go up in 2010. Of course, before calling an end to the recession, everyone will keep an eye on unemployment. Many believe the rates will peak in the next two or three quarters and decline. Once that happens, according to the report, housing demand with strengthen even more. “While we are not out of the woods yet, our view is that housing is showing signs of stability, markets are showing signs of rational behavior and everyone is starting to understand the fundamental problems that brought us here,” according to the report. “As such, we think the bears are overdoing it.”
Here comes more spending
By a vote of 217 to 212, the U.S. House of Representatives approved $155 billion additional spending for “shovel-ready” construction projects and money to avoid layoffs of teachers, police and other public employees. No Republicans voted for the bill, and 38 Democrats voted against it. Leftover money from the government’s $700 billion bank-bailout fund would cover $75 billion of the bill’s price tag. Though the recession has eased its grip, the economy is still shedding jobs and voter anxiety remains high, and frankly Obama hopes to bring down the 10 percent unemployment rate before the November 2010 congressional elections, because he is losing popularity fast with Americans. A little bit cynical? You bet. The bill would provide $48.3 billion for infrastructure projects that promise to get workers back on job sites by April. Highway construction projects would get $27.5 billion, while subway, bus and other transit systems would get $8.4 billion. As in the earlier stimulus bill, steel and other products used in these projects would have to come from the United States. “This is nothing short of a taxpayer-funded Christmas shopping tree financed by our friends, the Chinese,” said Representative Jerry Lewis, the top Republican on the House Appropriations Committee.
Walking away from the mortgage
A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a “strategic default,” walking away from their mortgages because they believe it is in their best financial interests. A standard mortgage-loan document reads, “I promise to pay” the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient. George Brenkert, a professor of business ethics at Georgetown University (my alama mater and the best school in the nation), says borrowers who can pay — and weren’t deceived by the lender about the nature of the loan — have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments. A foreclosure stays on a consumer’s credit record for seven years and can send a credit score (based on a scale of 300 to 850) plunging by as much as 160 points, according to Fair Isaac Corp., which provides tools for analyzing credit records. A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue a card.
In addition, many states give lenders varying degrees of scope to seize bank deposits, cars or other assets of people who default on mortgages. Even so, in neighborhoods with high concentrations of foreclosures, “it’s going to be really difficult to prevent a cascade effect” as one strategic default emboldens others to take that drastic step, says Paola Sapienza, a professor of finance at Northwestern University. A study by researchers at Northwestern and the University of Chicago found that as many as one in four defaults may be strategic.. Driving this phenomenon is the rising number of households that are deeply “under water,” owing much more than the current value of their homes. First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes’ value, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Florida, Michigan and Nevada.
The great heist
Just as Russia dropped another bombshell Climategate revelation (the Russian Institute of Economic Analysis (IEA) issued a report claiming that the Hadley Center for Climate Change based at the headquarters of the British Meteorological Office in Devon, England had cherry picked only 25% of the warmest readings from Siberia, wildly inflating warming in the models), U.S. Secretary of State Hillary Clinton proposed that major economies including the U.S. come up with $100 billion a year over the next decade for developing nations to fight climate change, an eleventh hour effort to break an impasse here on climate-change talks. Naturally some African nations that would benefit from the additional funding were thrilled, but a spokesman for the Chinese delegation said: “At first glance, we don’t see the U.S has made much progress in its commitments.” The Copenhagen summit of more than 190 nations, once seen as yielding a legally-binding accord among nations to limit their emissions, has been punctured by mistrust among countries and is now at risk of not even producing a non-binding resolution. Poor countries have blocked efforts by the Danish hosts to draft a negotiating text, fearing it will be tilted in favor of rich nations and skimp on assistance to them.
Now on to our real estate investing educational arena …
Moving Van/Relocation Incentives & More…
As the Obama administration attempts to short up short sales by providing even more incentives to banks, broker and even homeowners some are saying it is going too far. One item in particular seems to have spiked the ire of critics claiming the administration is acting out of fiscal irresponsibility by bribing former homeowners out of their homes with a $1,500 cash subsidy to assist with moving expenses. Advocates point out the very real need – and cost – associated with relocating including the rental of storage space, moving vans, utility hook-up and other necessary expenses associated with a change of housing.
Additional enhancements and incentives to the Making Home Affordable program include $1,000 to banks or brokers that sign-off on short sales; designed to encourage more expedient closings, it’s unclear whether the additional incentive will assist in reducing the time of approvals since without strong verbiage targeting closures dates. Current approvals average six months or nearly triple the typical time required for standard transactions – under the new guidelines, lenders must accept or deny a short sale offer within ten days but actual closing remains less concrete.
Due to take effect by next April, others argue it is too little too late. Even more confusing is the upcoming Congressional proposal that allows homeowners to remain in foreclosed homes as renters even after the bank has taken back the property. It appears to contradict with the MHA program goals of increasing short sales by providing an inverse incentive for default minus the consequences.
So, are the new incentives a futile practice of fiscal irresponsibility, a much needed benefit to distressed homeowners or simply a drop in the proverbial bucket unlikely to make little meaningful difference? It all depends upon who you ask. Certainly distressed homeowners across the nation feel left-out of meaningful assistance provided by the big bail-outs; research seems to support these claims as only a fraction of eligible homeowners have benefited from any programs with millions more not even reaching minimal requirements to apply for assistance. Providing cash assistance for moving expenses benefits banks and short sale investors as well as the homeowner with necessary needs. On the other hand, continued reforms increasingly seem to contradict one another with little to no oversight on how funds are actually used. Critics claim the cost far outweighs the benefits to all involved.
Bottom line for short sale investors – let it work for you while it’s available but don’t count on it to be there for the long term. Think of it as a small boost for you, the homeowner and the banks as the bottle-neck of short sales are worked through.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2009.
All Rights Reserved.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
* Follow me on Twitter: http://twitter.com/mclaughlinchris
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