It is slow, but there is activity, albeit very little activity, but activity nonetheless! There were 39 new closed real estate transactions in the past week. Below is a break down of what sold.
Single Family - 1,443 (compared to 1,422 on 11/17)
Condo / Town home - 579 (compared to 579 on 11/17
Mobile - 264 (compared to 259 on 11/17)
Multi Family - 4 (compared to 4 on 11/17)
Lots / Land - 303 (compared to 298 on 11/17)
Farms - 7 (compared to 7 on 11/17)
Commercial - 55 (compared to 55 on 11/17)
The average list price, as of October 31, 2008, was $374,225. The average sales price was $348,199. Homes are selling at 93 % of list price, and are averaging 190 days on the market.
Monday, November 24, 2008
Washington Report: Buydowns?
by Kenneth R. Harney
It seems that everybody is looking to Capitol Hill right now for a bailout: the Big Three auto manufacturers, banks, insurance companies, Wall Street titans.
But real estate and housing advocacy groups are floating a very different "b-word" -- "buydowns" -- or interest rate reductions on mortgages to stimulate more purchases of new and existing houses.
The buydown idea is not something dreamed up by builders or Realtors for the current tough market. Rate buydowns were used successfully during the 1970s, when Congress authorized the Government National Mortgage Association, "Ginnie Mae," to subsidize rates on mortgages funded through Fannie Mae.
Ginnie Mae essentially bought low-rate loans from Fannie but paid for them as if they carried higher, prevailing market rates. The government absorbed the difference.
Back then, it was known as the "Tandem Plan." Though neither the National Association of Home Builders nor the National Association of Realtors has spelled out the mechanics, both are urging the incoming Obama administration to include some version of a Tandem Plan-type buydown in its economic stimulus package expected as early as January.
The builders' buydown proposal is the more aggressive -- and expensive. It would cut rates on loans for new and existing homes to 2.99 percent, fixed for 30 years, for people who buy between now and next June 30. On purchases from July 1 through December 2009, mortgage rates would be fixed at 3.99 percent.
The home builders make no bones about their objective here: By slashing mortgage rates drastically, the plan would jolt buyers off the sidelines in droves, stabilize prices, get rid of unsold inventories, and send positive ripple effects through the economy as a whole.
The Realtors also favor some type of buydown plan. Chief economist Lawrence Yun has called for at least a one-point rate reduction, but they want to leave the details up in the air for the moment to see what the new administration might find acceptable.
So how likely is it that we'll see rate buydowns anytime soon? At the moment that's unclear. Any form of national buydown would be expensive -- the builders estimate the one year cost of their plan at $130 billion or more.
But there's precedent and there's little question that buyers would respond to even a modest rate subsidy. The main question is: Can a new Congress and new administration fit this into their already bulging package of promises to other needy causes?
And do they accept the core idea here that if you stimulate the housing sector, you stimulate the economy as a whole?
Published: November 24, 2008
It seems that everybody is looking to Capitol Hill right now for a bailout: the Big Three auto manufacturers, banks, insurance companies, Wall Street titans.
But real estate and housing advocacy groups are floating a very different "b-word" -- "buydowns" -- or interest rate reductions on mortgages to stimulate more purchases of new and existing houses.
The buydown idea is not something dreamed up by builders or Realtors for the current tough market. Rate buydowns were used successfully during the 1970s, when Congress authorized the Government National Mortgage Association, "Ginnie Mae," to subsidize rates on mortgages funded through Fannie Mae.
Ginnie Mae essentially bought low-rate loans from Fannie but paid for them as if they carried higher, prevailing market rates. The government absorbed the difference.
Back then, it was known as the "Tandem Plan." Though neither the National Association of Home Builders nor the National Association of Realtors has spelled out the mechanics, both are urging the incoming Obama administration to include some version of a Tandem Plan-type buydown in its economic stimulus package expected as early as January.
The builders' buydown proposal is the more aggressive -- and expensive. It would cut rates on loans for new and existing homes to 2.99 percent, fixed for 30 years, for people who buy between now and next June 30. On purchases from July 1 through December 2009, mortgage rates would be fixed at 3.99 percent.
The home builders make no bones about their objective here: By slashing mortgage rates drastically, the plan would jolt buyers off the sidelines in droves, stabilize prices, get rid of unsold inventories, and send positive ripple effects through the economy as a whole.
The Realtors also favor some type of buydown plan. Chief economist Lawrence Yun has called for at least a one-point rate reduction, but they want to leave the details up in the air for the moment to see what the new administration might find acceptable.
So how likely is it that we'll see rate buydowns anytime soon? At the moment that's unclear. Any form of national buydown would be expensive -- the builders estimate the one year cost of their plan at $130 billion or more.
But there's precedent and there's little question that buyers would respond to even a modest rate subsidy. The main question is: Can a new Congress and new administration fit this into their already bulging package of promises to other needy causes?
And do they accept the core idea here that if you stimulate the housing sector, you stimulate the economy as a whole?
Published: November 24, 2008
Existing-Home Sales Soften on Economic Volatility
WASHINGTON, November 24, 2008
Existing-home sales declined on the heels of a strong gain in September as uncertainty and economic concerns increased in October, according to the National Association of Realtors®.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 3.1 percent to a seasonally adjusted annual rate1 of 4.98 million units in October from a downwardly revised pace of 5.14 million in September, and are 1.6 percent below the 5.06 million-unit level in October 2007.
Lawrence Yun, NAR chief economist, said consumer hesitation is understandable. “Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions,” he said. “We have favorable affordability conditions, but we need more than that to give buyers with jobs the confidence they need. This is why a housing stimulus is so critical now to encourage more buyers to draw down the inventory and stabilize home prices. Without home price stabilization, there will not be an economic recovery.”
Total housing inventory at the end of October slipped 0.9 percent to 4.23 million existing homes available for sale, which represents a 10.2-month supply2 at the current sales pace, up from a 10.0-month supply in September.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 6.20 percent in October from 6.04 percent in September; the rate was 6.38 percent in October 2007. “Mortgage interest rates have been moving up and down in a historically low range, with the fixed rate down to 6.04 percent last week,” Yun noted.
Even with the overall decline, Yun identified a number of areas with solid sales gains from a year ago, including many California and Florida markets, as seen previously, as well as Boston, Minneapolis, and Denver.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said the need for professional assistance is growing. “Navigating the transaction process is easier said than done without professional assistance in today’s market,” McMillan said. “Proper valuation when many homes are being sold below replacement construction costs is very challenging – buyers remain in the driver’s seat.”
The national median existing-home price3 for all housing types was $183,300 in October, down 11.3 percent from a year ago when the median was $206,700. There remains a significant downward distortion in the current price from a large number of distress sales at discounted prices; the median is where half of the homes sold for more and half sold for less.
Single-family home sales declined 3.3 percent to a seasonally adjusted annual rate of 4.43 million in October from a level of 4.58 million in September, but are unchanged from a 4.43 million-unit pace in October 2007. The median existing single-family home price was $181,800 in October, down 11.2 percent from a year ago.
Existing condominium and co-op sales eased by 1.8 percent to a seasonally adjusted annual rate of 550,000 units in October from 560,000 in September, and are 12.0 percent below the 625,000-unit pace a year ago. The median existing condo price4 was $193,000 in October, which is 13.0 percent below October 2007.
Regionally, existing-home sales in the Northeast slipped 1.2 percent to an annual pace of 830,000 in October, and are 9.8 percent lower than a year ago. The median price in the Northeast was $241,700, down 9.8 percent from October 2007.
Existing-home sales in the West eased by 1.6 percent to an annual rate of 1.21 million in October but are 37.5 percent higher than October 2007. The median price in the West was $231,400, down 27.0 percent from a year ago.
In the South, existing-home sales declined 3.2 percent to an annual pace of 1.84 million in October, and are 10.2 percent below a year ago. The median price in the South was $161,100, which is 5.8 percent lower than October 2007.
Existing-home sales in the Midwest fell 6.0 percent in October to a pace of 1.10 million and remain 9.1 percent below October 2007. The median price in the Midwest was $149,400, down 6.7 percent from a year ago.
# # #
NOTE: References to performance in states or metro areas are from unpublished raw data used to analyze regional trends; please contact your local association of Realtors® for more information.
1The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns. However, seasonal factors cannot compensate for abnormal weather patterns.
Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 percent of total home sales, are based on a much larger sample – more than 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions.
2Total inventory and month’s supply data are available back through 1999, while single-family inventory and month’s supply are available back to 1982. Condos were tracked quarterly prior to 1999 when single-family homes accounted for more than nine out of 10 purchases.
3The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.
4Because there is a concentration of condos in high-cost metro areas, the national median condo price can be higher than the median single-family price. In a given market area, condos typically cost less than single-family homes.
Existing-home sales for November will be released December 23, and the next Pending Home Sales Index & Forecast is scheduled for release at 10 a.m. EST December 9.
For more information visit: www.realtor.org/research/research/ehsdata
Existing-home sales declined on the heels of a strong gain in September as uncertainty and economic concerns increased in October, according to the National Association of Realtors®.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 3.1 percent to a seasonally adjusted annual rate1 of 4.98 million units in October from a downwardly revised pace of 5.14 million in September, and are 1.6 percent below the 5.06 million-unit level in October 2007.
Lawrence Yun, NAR chief economist, said consumer hesitation is understandable. “Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions,” he said. “We have favorable affordability conditions, but we need more than that to give buyers with jobs the confidence they need. This is why a housing stimulus is so critical now to encourage more buyers to draw down the inventory and stabilize home prices. Without home price stabilization, there will not be an economic recovery.”
Total housing inventory at the end of October slipped 0.9 percent to 4.23 million existing homes available for sale, which represents a 10.2-month supply2 at the current sales pace, up from a 10.0-month supply in September.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 6.20 percent in October from 6.04 percent in September; the rate was 6.38 percent in October 2007. “Mortgage interest rates have been moving up and down in a historically low range, with the fixed rate down to 6.04 percent last week,” Yun noted.
Even with the overall decline, Yun identified a number of areas with solid sales gains from a year ago, including many California and Florida markets, as seen previously, as well as Boston, Minneapolis, and Denver.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said the need for professional assistance is growing. “Navigating the transaction process is easier said than done without professional assistance in today’s market,” McMillan said. “Proper valuation when many homes are being sold below replacement construction costs is very challenging – buyers remain in the driver’s seat.”
The national median existing-home price3 for all housing types was $183,300 in October, down 11.3 percent from a year ago when the median was $206,700. There remains a significant downward distortion in the current price from a large number of distress sales at discounted prices; the median is where half of the homes sold for more and half sold for less.
Single-family home sales declined 3.3 percent to a seasonally adjusted annual rate of 4.43 million in October from a level of 4.58 million in September, but are unchanged from a 4.43 million-unit pace in October 2007. The median existing single-family home price was $181,800 in October, down 11.2 percent from a year ago.
Existing condominium and co-op sales eased by 1.8 percent to a seasonally adjusted annual rate of 550,000 units in October from 560,000 in September, and are 12.0 percent below the 625,000-unit pace a year ago. The median existing condo price4 was $193,000 in October, which is 13.0 percent below October 2007.
Regionally, existing-home sales in the Northeast slipped 1.2 percent to an annual pace of 830,000 in October, and are 9.8 percent lower than a year ago. The median price in the Northeast was $241,700, down 9.8 percent from October 2007.
Existing-home sales in the West eased by 1.6 percent to an annual rate of 1.21 million in October but are 37.5 percent higher than October 2007. The median price in the West was $231,400, down 27.0 percent from a year ago.
In the South, existing-home sales declined 3.2 percent to an annual pace of 1.84 million in October, and are 10.2 percent below a year ago. The median price in the South was $161,100, which is 5.8 percent lower than October 2007.
Existing-home sales in the Midwest fell 6.0 percent in October to a pace of 1.10 million and remain 9.1 percent below October 2007. The median price in the Midwest was $149,400, down 6.7 percent from a year ago.
# # #
NOTE: References to performance in states or metro areas are from unpublished raw data used to analyze regional trends; please contact your local association of Realtors® for more information.
1The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns. However, seasonal factors cannot compensate for abnormal weather patterns.
Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 percent of total home sales, are based on a much larger sample – more than 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions.
2Total inventory and month’s supply data are available back through 1999, while single-family inventory and month’s supply are available back to 1982. Condos were tracked quarterly prior to 1999 when single-family homes accounted for more than nine out of 10 purchases.
3The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.
4Because there is a concentration of condos in high-cost metro areas, the national median condo price can be higher than the median single-family price. In a given market area, condos typically cost less than single-family homes.
Existing-home sales for November will be released December 23, and the next Pending Home Sales Index & Forecast is scheduled for release at 10 a.m. EST December 9.
For more information visit: www.realtor.org/research/research/ehsdata
Home Prices Rise in Some Metros, Buyers More Active in Other Areas
WASHINGTON, November 18, 2008
Four out of five metropolitan areas recorded lower home prices in the third quarter from a year earlier, while existing-home sales fell in 32 states from the second quarter, according to the latest quarterly survey by the National Association of Realtors®.
In the third quarter, 28 out of 152 metropolitan statistical areas ¹ showed increases in median existing single-family home prices from the same quarter in 2007; four were unchanged and 120 metros experienced declines. NAR’s track of metro area home prices dates back to 1979.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said price comparisons in many areas are like apples and oranges. “A very large proportion of distressed home sales are taking place at discounted prices compared to more normal conditions a year ago,” McMillan said. “It’s very challenging to understand proper valuation, given the differences between distressed sales and a larger share of traditional homes in sound condition. Under these circumstances, it’s extremely important for consumers to be armed with the professional expertise Realtors offer.”
Distressed sales – foreclosures and short sales – accounted for 35 to 40 percent of transactions in the third quarter, pulling down the national median existing single-family price to $200,500, which is 9.0 percent lower than the third quarter of 2007. A year ago, when there were significantly fewer distressed transactions, the median price was $220,300. The median price is where half of the homes sold for more and half sold for less.
Total state existing-home sales, including single-family and condo, were at a seasonally adjusted annual rate² of 5.04 million units in the third quarter, up 2.6 percent from 4.91 million units in the second quarter, but remain 7.7 percent below the 5.46 million-unit pace in the third quarter of 2007.
Lawrence Yun, NAR chief economist, said conditions continue to range widely. “A pattern of sharply higher sales in areas with large price declines is well established,” Yun said. “Affordability conditions have consistently been a major factor in driving sales. Historically during recessions, buyers have responded to incentives and it’s important for government to keep that in the forefront of stimulus decisions.”
According to Freddie Mac, the national average commitment rate on a 30-year conventional fixed-rate mortgage rose to 6.32 percent in the third quarter from 6.09 percent in the second quarter; the rate was 6.55 percent in the third quarter of 2007. Last week, Freddie Mac reported the 30-year fixed fell to 6.14 percent.
The largest sales gain during the third quarter was in Arizona, up 28.3 percent from the second quarter, followed by California which rose 28.1 percent and Nevada, up 26.2 percent.
The steepest declines in single-family home prices in the third quarter were in three California markets: the Riverside-San Bernardino-Ontario area, where the median price of $227,200 dropped 39.4 percent from a year ago, followed by Sacramento-Arden-Arcade-Roseville at $212,000, down 36.8 percent from the third quarter of 2007, and San Diego-Carlsbad-San Marcos, where the price dropped 36.0 percent to $377,300. “These areas have seen some of the strongest sales gains with some reports of multiple bidding,” Yun said.
The largest single-family home price increase in the third quarter was in the Elmira, N.Y., area, where the median price of $105,000 rose 12.5 percent from a year ago. Next was Decatur, Ill., at $93,400, up 8.7 percent from the third quarter of 2007, followed by the Bloomington-Normal, Ill., area, where the third-quarter median price increased 8.1 percent to $168,400.
The typical seller purchased their home six years ago and is experiencing net equity gains. The national increase in value since the third quarter of 2002 is 18.3 percent, which is a median gain of $31,000. Even with the current downward price distortion, 90 percent of metro areas are showing six-year price gains.
Median third-quarter metro area single-family home prices ranged from an affordable $65,800 in the Saginaw-Saginaw Township North area of Michigan to $650,000 in the San Jose-Sunnyvale-Santa Clara area of California. The second most expensive area was San Francisco-Oakland-Fremont, at $615,700, followed by Honolulu at $615,000.
Other affordable markets include the Youngstown-Warren-Boardman area of Ohio and Pennsylvania at $74,300, and South Bend-Mishawaka, Ind., at $88,000.
In the condo sector, metro area condominium and cooperative prices – covering changes in 57 metro areas – showed the national median existing-condo price was $210,800 in the third quarter, down 7.1 percent from $227,000 in the third quarter of 2007. Sixteen metros showed annual increases in the median condo price and 41 areas had price declines.
The strongest condo price increases were in the Dallas-Fort Worth-Arlington area, where the third quarter price of $149,900 rose 11.1 percent from a year earlier, followed by Bismarck, N.D., at $148,000, up 11.0 percent, and the Houston-Baytown-Sugar Land area, where the median condo price of $134,100 rose 8.1 percent from the third quarter of 2007.
Metro area median existing-condo prices in the third quarter ranged from $112,600 in the Greensboro-High Point, N.C., area to $456,300 in the San Francisco-Oakland-Fremont area. The second most expensive condo market reported was the New York-Wayne-White Plains area of New York and New Jersey at $324,000, followed by Honolulu at $322,000.
Other affordable condo markets include the Indianapolis area at $113,500 and the Cincinnati-Middletown area of Ohio, Kentucky and Indiana, at $117,300 in the third quarter.
Regionally, existing-home sales in the West rose 13.1 percent in the third quarter to an annual rate of 1.15 million and are 12.4 percent above a year ago.
The median existing single-family home price in the West was $266,300 in the third quarter, which is 21.4 percent below the third quarter of 2007. The only reported metro price increase in the West was in Farmington, N.M., at $193,600, up 1.7 percent from a year ago.
In the Midwest, existing-home sales rose 2.7 percent in the third quarter to a pace of 1.15 million but remain 10.6 percent below a year ago.
The median existing single-family home price in the Midwest declined 5.5 percent to $159,900 in the third quarter from the same period in 2007. After Decatur and Bloomington-Normal, the next strongest metro price increase in the Midwest was in the Wichita, Kan., area, where the median price of $125,300 was 5.5 percent higher than a year ago, followed by Champaign-Urbana, Ill., at $146,400, up 2.7 percent.
In the South, existing-home sales slipped 1.4 percent in the third quarter to an annual rate of 1.87 million and are 13.8 percent lower than the same period in 2007.
The median existing single-family home price in the South was $174,200 in the third quarter, down 3.7 percent from a year earlier. The strongest price increase in the South was in the Tulsa, Okla., area, at $139,800, up 5.1 percent from a year ago, followed by Amarillo, Texas, with a 4.2 percent gain to $128,300, and the New Orleans-Metairie-Kenner area of Louisiana at $166,800, up 4.1 percent.
In the Northeast, existing-home sales declined 1.6 percent in the third quarter to a level of 863,000 units and are 11.7 percent below a year ago.
The median existing single-family home price in the Northeast fell 6.5 percent to $267,700 in the third quarter from the same period in 2007. After Elmira, the strongest price increase in the Northeast was in the Trenton-Ewing, N.J., area, at $342,500, up 4.2 percent from the third quarter of 2007, followed by Buffalo-Niagara Falls, N.Y., with a median price of $114,200, up 3.0 percent.
# # #
Data tables for both metro area home prices and state existing-home sales are posted at:
http://www.realtor.org/research/research/metroprice. For areas not covered in the tables, contact your local association of Realtors®.
¹Areas are generally metropolitan statistical areas as defined by the U.S. Office of Management and Budget. A list of counties included in MSA definitions is available at:
http://www.census.gov/population/estimates/metro-city/0312msa.txt
Regional median home prices include rural areas and samples of many smaller metros that are not included in this report; the regional percentage changes do not necessarily parallel changes in the larger metro areas. The only valid comparisons for median prices are with the same period a year earlier due to seasonality in buying patterns. Quarter-to-quarter comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns.
NAR began tracking of metropolitan area median single-family home prices in 1979; the metro area condo price series was launched at the beginning of 2006, with several years of historic data.
Because there is a concentration of condos in high-cost metro areas, the national median condo price sometimes is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes. As the reporting sample expands in the future, additional area will be included in the condo price report.
²The seasonally adjusted annual rate for a particular quarter represents what the total number of actual sales for a year would be if the relative sales pace for that quarter was maintained for four consecutive quarters. Total home sales include single family, townhomes, condominiums and co-operative housing. NAR began tracking the state sales series in 1981.
Seasonally adjusted rates are used in reporting quarterly data to factor out seasonal variations in resale activity. For example, sales volume normally is higher in the summer and relatively light in winter, primarily because of differences in the weather and household buying patterns.
Fourth quarter metro area home price and state resale data will be released February 12.
Four out of five metropolitan areas recorded lower home prices in the third quarter from a year earlier, while existing-home sales fell in 32 states from the second quarter, according to the latest quarterly survey by the National Association of Realtors®.
In the third quarter, 28 out of 152 metropolitan statistical areas ¹ showed increases in median existing single-family home prices from the same quarter in 2007; four were unchanged and 120 metros experienced declines. NAR’s track of metro area home prices dates back to 1979.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said price comparisons in many areas are like apples and oranges. “A very large proportion of distressed home sales are taking place at discounted prices compared to more normal conditions a year ago,” McMillan said. “It’s very challenging to understand proper valuation, given the differences between distressed sales and a larger share of traditional homes in sound condition. Under these circumstances, it’s extremely important for consumers to be armed with the professional expertise Realtors offer.”
Distressed sales – foreclosures and short sales – accounted for 35 to 40 percent of transactions in the third quarter, pulling down the national median existing single-family price to $200,500, which is 9.0 percent lower than the third quarter of 2007. A year ago, when there were significantly fewer distressed transactions, the median price was $220,300. The median price is where half of the homes sold for more and half sold for less.
Total state existing-home sales, including single-family and condo, were at a seasonally adjusted annual rate² of 5.04 million units in the third quarter, up 2.6 percent from 4.91 million units in the second quarter, but remain 7.7 percent below the 5.46 million-unit pace in the third quarter of 2007.
Lawrence Yun, NAR chief economist, said conditions continue to range widely. “A pattern of sharply higher sales in areas with large price declines is well established,” Yun said. “Affordability conditions have consistently been a major factor in driving sales. Historically during recessions, buyers have responded to incentives and it’s important for government to keep that in the forefront of stimulus decisions.”
According to Freddie Mac, the national average commitment rate on a 30-year conventional fixed-rate mortgage rose to 6.32 percent in the third quarter from 6.09 percent in the second quarter; the rate was 6.55 percent in the third quarter of 2007. Last week, Freddie Mac reported the 30-year fixed fell to 6.14 percent.
The largest sales gain during the third quarter was in Arizona, up 28.3 percent from the second quarter, followed by California which rose 28.1 percent and Nevada, up 26.2 percent.
The steepest declines in single-family home prices in the third quarter were in three California markets: the Riverside-San Bernardino-Ontario area, where the median price of $227,200 dropped 39.4 percent from a year ago, followed by Sacramento-Arden-Arcade-Roseville at $212,000, down 36.8 percent from the third quarter of 2007, and San Diego-Carlsbad-San Marcos, where the price dropped 36.0 percent to $377,300. “These areas have seen some of the strongest sales gains with some reports of multiple bidding,” Yun said.
The largest single-family home price increase in the third quarter was in the Elmira, N.Y., area, where the median price of $105,000 rose 12.5 percent from a year ago. Next was Decatur, Ill., at $93,400, up 8.7 percent from the third quarter of 2007, followed by the Bloomington-Normal, Ill., area, where the third-quarter median price increased 8.1 percent to $168,400.
The typical seller purchased their home six years ago and is experiencing net equity gains. The national increase in value since the third quarter of 2002 is 18.3 percent, which is a median gain of $31,000. Even with the current downward price distortion, 90 percent of metro areas are showing six-year price gains.
Median third-quarter metro area single-family home prices ranged from an affordable $65,800 in the Saginaw-Saginaw Township North area of Michigan to $650,000 in the San Jose-Sunnyvale-Santa Clara area of California. The second most expensive area was San Francisco-Oakland-Fremont, at $615,700, followed by Honolulu at $615,000.
Other affordable markets include the Youngstown-Warren-Boardman area of Ohio and Pennsylvania at $74,300, and South Bend-Mishawaka, Ind., at $88,000.
In the condo sector, metro area condominium and cooperative prices – covering changes in 57 metro areas – showed the national median existing-condo price was $210,800 in the third quarter, down 7.1 percent from $227,000 in the third quarter of 2007. Sixteen metros showed annual increases in the median condo price and 41 areas had price declines.
The strongest condo price increases were in the Dallas-Fort Worth-Arlington area, where the third quarter price of $149,900 rose 11.1 percent from a year earlier, followed by Bismarck, N.D., at $148,000, up 11.0 percent, and the Houston-Baytown-Sugar Land area, where the median condo price of $134,100 rose 8.1 percent from the third quarter of 2007.
Metro area median existing-condo prices in the third quarter ranged from $112,600 in the Greensboro-High Point, N.C., area to $456,300 in the San Francisco-Oakland-Fremont area. The second most expensive condo market reported was the New York-Wayne-White Plains area of New York and New Jersey at $324,000, followed by Honolulu at $322,000.
Other affordable condo markets include the Indianapolis area at $113,500 and the Cincinnati-Middletown area of Ohio, Kentucky and Indiana, at $117,300 in the third quarter.
Regionally, existing-home sales in the West rose 13.1 percent in the third quarter to an annual rate of 1.15 million and are 12.4 percent above a year ago.
The median existing single-family home price in the West was $266,300 in the third quarter, which is 21.4 percent below the third quarter of 2007. The only reported metro price increase in the West was in Farmington, N.M., at $193,600, up 1.7 percent from a year ago.
In the Midwest, existing-home sales rose 2.7 percent in the third quarter to a pace of 1.15 million but remain 10.6 percent below a year ago.
The median existing single-family home price in the Midwest declined 5.5 percent to $159,900 in the third quarter from the same period in 2007. After Decatur and Bloomington-Normal, the next strongest metro price increase in the Midwest was in the Wichita, Kan., area, where the median price of $125,300 was 5.5 percent higher than a year ago, followed by Champaign-Urbana, Ill., at $146,400, up 2.7 percent.
In the South, existing-home sales slipped 1.4 percent in the third quarter to an annual rate of 1.87 million and are 13.8 percent lower than the same period in 2007.
The median existing single-family home price in the South was $174,200 in the third quarter, down 3.7 percent from a year earlier. The strongest price increase in the South was in the Tulsa, Okla., area, at $139,800, up 5.1 percent from a year ago, followed by Amarillo, Texas, with a 4.2 percent gain to $128,300, and the New Orleans-Metairie-Kenner area of Louisiana at $166,800, up 4.1 percent.
In the Northeast, existing-home sales declined 1.6 percent in the third quarter to a level of 863,000 units and are 11.7 percent below a year ago.
The median existing single-family home price in the Northeast fell 6.5 percent to $267,700 in the third quarter from the same period in 2007. After Elmira, the strongest price increase in the Northeast was in the Trenton-Ewing, N.J., area, at $342,500, up 4.2 percent from the third quarter of 2007, followed by Buffalo-Niagara Falls, N.Y., with a median price of $114,200, up 3.0 percent.
# # #
Data tables for both metro area home prices and state existing-home sales are posted at:
http://www.realtor.org/research/research/metroprice. For areas not covered in the tables, contact your local association of Realtors®.
¹Areas are generally metropolitan statistical areas as defined by the U.S. Office of Management and Budget. A list of counties included in MSA definitions is available at:
http://www.census.gov/population/estimates/metro-city/0312msa.txt
Regional median home prices include rural areas and samples of many smaller metros that are not included in this report; the regional percentage changes do not necessarily parallel changes in the larger metro areas. The only valid comparisons for median prices are with the same period a year earlier due to seasonality in buying patterns. Quarter-to-quarter comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns.
NAR began tracking of metropolitan area median single-family home prices in 1979; the metro area condo price series was launched at the beginning of 2006, with several years of historic data.
Because there is a concentration of condos in high-cost metro areas, the national median condo price sometimes is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes. As the reporting sample expands in the future, additional area will be included in the condo price report.
²The seasonally adjusted annual rate for a particular quarter represents what the total number of actual sales for a year would be if the relative sales pace for that quarter was maintained for four consecutive quarters. Total home sales include single family, townhomes, condominiums and co-operative housing. NAR began tracking the state sales series in 1981.
Seasonally adjusted rates are used in reporting quarterly data to factor out seasonal variations in resale activity. For example, sales volume normally is higher in the summer and relatively light in winter, primarily because of differences in the weather and household buying patterns.
Fourth quarter metro area home price and state resale data will be released February 12.
U.S. Tries New Tack on Housing
Department of Housing and Urban Development makes changes to Hope for Homeowners plan aimed at increasing participation.
NEW YORK (CNNMoney.com) -- The Bush administration said Wednesday that it was changing its nearly-moribund mortgage rescue plan in an effort to spark more lenders and homeowners to participate.
The Department of Housing and Urban Development's Hope for Homeowners mortgage rescue plan, which Congress toiled over for months before passing legislation last summer, took effect Oct. 1.
The program aimed to help hundreds of thousands of homeowners by putting up government insurance behind cheaper, refinanced mortgages, for people at risk of foreclosure.
But since then, few troubled mortgage loans have been modified under the plan. Now, in an effort to kick start it, HUD is trying to open up the program to more homeowners.
"Clearly, meaningful changes were needed," said HUD Secretary Steve Preston. "These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration."
Smaller writedowns: In the biggest change, lenders that participate in Hope for Homeowners won't have to write down loans as much as they did under the original rules for the program. The new guidelines allow them to reduce mortgage principal to 96.5% of a home's current market value - instead of 90%.
The new ratio guideline only applies to those whose new loan payments would not exceed 31% of their gross incomes. The writedown will remain 90% for borrowers who are paying a larger percentage of their income toward their mortgage debts.
"This balances competing aims of encouraging more borrowers to enter the program while controlling for potential losses due to redefaults," Tom Deutsch deputy executive director of the American Securitization Forum, a group that represents the interests of investors in mortgage backed securities.
The smaller writedowns make it cheaper for lenders to participate in this strictly voluntary program.
The second change involves second lien holders, such as home equity lenders, of homeowners seeking to refinance into HUD loans.
Payments to lien holders: Under the changes announced Wednesday, HUD will make up-front payments to get second lien holders to relinquish their rights to future payments.
Second lien holders often slow the mortgage modification process because they have nothing to gain from agreeing to refinancings, known as workouts. The values of the collateral - the homes - are almost always less than the amounts borrowers owe to the primary lenders.
The amount of payments to second lien holders will be negotiated on a case-by-case basis, according Deutsch. The more a loan is underwater - meaning a borrower owes more than a home is worth - the lower the value of the second lien and the less HUD will likely pay for releases.
Deutsch said he expects the payments to range between 5% of second lien in cases of the most severely underwater loans to as much as 30% for mortgages that are not as far gone as that.
HUD did not immediately respond to a request for comment.
40-year mortgages: Lenders will be able to extend the terms of loans to 40 from 30 years. Extending the number of months borrowers have to repay their mortgages reduces monthly obligations. Sometimes that can make the difference between affordable and unaffordable loans.
No more test runs: In addition, the original legislation mandated a three payment trial term, during which borrowers had to pay faithfully before the modification became permanent. The new guidelines eliminate that requirement.
One of the original bill's chief authors, Rep. Barney Frank, D-Mass., applauded the program changes by HUD.
"These are very helpful steps and reflect a commitment to meeting the need for more aggressive action to diminish foreclosures," Frank said.
NEW YORK (CNNMoney.com) -- The Bush administration said Wednesday that it was changing its nearly-moribund mortgage rescue plan in an effort to spark more lenders and homeowners to participate.
The Department of Housing and Urban Development's Hope for Homeowners mortgage rescue plan, which Congress toiled over for months before passing legislation last summer, took effect Oct. 1.
The program aimed to help hundreds of thousands of homeowners by putting up government insurance behind cheaper, refinanced mortgages, for people at risk of foreclosure.
But since then, few troubled mortgage loans have been modified under the plan. Now, in an effort to kick start it, HUD is trying to open up the program to more homeowners.
"Clearly, meaningful changes were needed," said HUD Secretary Steve Preston. "These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration."
Smaller writedowns: In the biggest change, lenders that participate in Hope for Homeowners won't have to write down loans as much as they did under the original rules for the program. The new guidelines allow them to reduce mortgage principal to 96.5% of a home's current market value - instead of 90%.
The new ratio guideline only applies to those whose new loan payments would not exceed 31% of their gross incomes. The writedown will remain 90% for borrowers who are paying a larger percentage of their income toward their mortgage debts.
"This balances competing aims of encouraging more borrowers to enter the program while controlling for potential losses due to redefaults," Tom Deutsch deputy executive director of the American Securitization Forum, a group that represents the interests of investors in mortgage backed securities.
The smaller writedowns make it cheaper for lenders to participate in this strictly voluntary program.
The second change involves second lien holders, such as home equity lenders, of homeowners seeking to refinance into HUD loans.
Payments to lien holders: Under the changes announced Wednesday, HUD will make up-front payments to get second lien holders to relinquish their rights to future payments.
Second lien holders often slow the mortgage modification process because they have nothing to gain from agreeing to refinancings, known as workouts. The values of the collateral - the homes - are almost always less than the amounts borrowers owe to the primary lenders.
The amount of payments to second lien holders will be negotiated on a case-by-case basis, according Deutsch. The more a loan is underwater - meaning a borrower owes more than a home is worth - the lower the value of the second lien and the less HUD will likely pay for releases.
Deutsch said he expects the payments to range between 5% of second lien in cases of the most severely underwater loans to as much as 30% for mortgages that are not as far gone as that.
HUD did not immediately respond to a request for comment.
40-year mortgages: Lenders will be able to extend the terms of loans to 40 from 30 years. Extending the number of months borrowers have to repay their mortgages reduces monthly obligations. Sometimes that can make the difference between affordable and unaffordable loans.
No more test runs: In addition, the original legislation mandated a three payment trial term, during which borrowers had to pay faithfully before the modification became permanent. The new guidelines eliminate that requirement.
One of the original bill's chief authors, Rep. Barney Frank, D-Mass., applauded the program changes by HUD.
"These are very helpful steps and reflect a commitment to meeting the need for more aggressive action to diminish foreclosures," Frank said.
Monday, November 17, 2008
Sussex County Home Sales - as of November 16, 2008
The weather outside is getting colder, but the real estate market in Sussex County, Delaware is warming up. There were fifty closed real estate transactions in the past week, bringing the total for the year to 2,616. Here is the breakdown per type.
Single - 1,422 (compared to 1,400 on 11/10)
Condo / Town Home - 571 (compared to 556 on 11/10)
Mobile - 259 (compared to 250 on 11/10)
Multi - 4 (compared to 4 on 11/10)
Lots / Land - 298 (compared to 294 on 11/10)
Farms - 7 (compared to 7 on 11/10)
Commercial - 55 (compared to 55 on 11/10)
The total closed real estate transactions totaled 2,616 for the year thus far. The average list price, as of October 31, 2008, was $374,225, and the average sales price was $348,199. Listings have been selling at 93% of list price, and have been averaging 190 days on the market.
Single - 1,422 (compared to 1,400 on 11/10)
Condo / Town Home - 571 (compared to 556 on 11/10)
Mobile - 259 (compared to 250 on 11/10)
Multi - 4 (compared to 4 on 11/10)
Lots / Land - 298 (compared to 294 on 11/10)
Farms - 7 (compared to 7 on 11/10)
Commercial - 55 (compared to 55 on 11/10)
The total closed real estate transactions totaled 2,616 for the year thus far. The average list price, as of October 31, 2008, was $374,225, and the average sales price was $348,199. Listings have been selling at 93% of list price, and have been averaging 190 days on the market.
Thursday, November 13, 2008
Mortgage Rates Down for 2nd Week
Freddie Mac cites weakening economy for easing of long-term rates.
NEW YORK (CNNMoney.com) -- Mortgage rates fell for the second week in a row, finance firm Freddie Mac said Thursday, as the weakening economy resulted in the slowest pace of home purchase applications in nearly eight years.
Freddie Mac said 30-year fixed-rate mortgages averaged 6.14% this week. That's down from 6.20% last week and below the 6.24% rate at this time last year.
Rates for 30-year fixed-rate mortgages have been at 6% or higher for five consecutive weeks. Between the week of Oct. 9 and Oct. 16, the 30-year fixed-rate mortgage posted its biggest weekly jump since April 1987, rising from 5.94% to 6.46%
"Long-term mortgage rates fell slightly this week as signs the overall economy is weakening brought interest rates down market-wide," according to a statement by Frank Nothaft, Freddie Mac vice president and chief economist.
Rates on 15-year fixed-rate mortgages fell to 5.81% from 5.88% last week. A year ago, the rate was 5.88%.
The five-year adjustable-rate mortgage fell to 5.98%, from 6.19% last week. A year ago, the rate was 5.96%.
The rate on a one-year adjustable-rate mortgage rose to 5.33% from 5.25% last week. At this time last year, the rate was 5.50%.
Mortgage applications for home purchase loans fell during the last week in October to the slowest pace since the week of Dec. 29, 2000, according to data from the Mortgage Bankers Association.
On Thursday, the head of the Senate Banking Committee said banks receiving money as part of the $700 billion federal bailout must increase their lending to businesses and consumers.
Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn.
A recent survey of senior loan officers from the Federal Reserve found that about 70% of banks raised their lending standards for prime mortgages, and about 90% of banks that offer nontraditional mortgages did so as well.
In September, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) were on the brink of failure, having racked up nearly $12 billion in losses from declining home prices, mortgage delinquencies and foreclosures.
Federal officials assumed control of the firms and the $5 trillion in home loans they back. The Treasury put up as much as $200 billion to bail them out and placed them in a temporary "conservatorship" overseen by the Federal Housing Finance Agency.
By Lara Moscrip, CNNMoney.com contributing writer
November 13, 2008: 1:05 PM ET
NEW YORK (CNNMoney.com) -- Mortgage rates fell for the second week in a row, finance firm Freddie Mac said Thursday, as the weakening economy resulted in the slowest pace of home purchase applications in nearly eight years.
Freddie Mac said 30-year fixed-rate mortgages averaged 6.14% this week. That's down from 6.20% last week and below the 6.24% rate at this time last year.
Rates for 30-year fixed-rate mortgages have been at 6% or higher for five consecutive weeks. Between the week of Oct. 9 and Oct. 16, the 30-year fixed-rate mortgage posted its biggest weekly jump since April 1987, rising from 5.94% to 6.46%
"Long-term mortgage rates fell slightly this week as signs the overall economy is weakening brought interest rates down market-wide," according to a statement by Frank Nothaft, Freddie Mac vice president and chief economist.
Rates on 15-year fixed-rate mortgages fell to 5.81% from 5.88% last week. A year ago, the rate was 5.88%.
The five-year adjustable-rate mortgage fell to 5.98%, from 6.19% last week. A year ago, the rate was 5.96%.
The rate on a one-year adjustable-rate mortgage rose to 5.33% from 5.25% last week. At this time last year, the rate was 5.50%.
Mortgage applications for home purchase loans fell during the last week in October to the slowest pace since the week of Dec. 29, 2000, according to data from the Mortgage Bankers Association.
On Thursday, the head of the Senate Banking Committee said banks receiving money as part of the $700 billion federal bailout must increase their lending to businesses and consumers.
Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn.
A recent survey of senior loan officers from the Federal Reserve found that about 70% of banks raised their lending standards for prime mortgages, and about 90% of banks that offer nontraditional mortgages did so as well.
In September, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) were on the brink of failure, having racked up nearly $12 billion in losses from declining home prices, mortgage delinquencies and foreclosures.
Federal officials assumed control of the firms and the $5 trillion in home loans they back. The Treasury put up as much as $200 billion to bail them out and placed them in a temporary "conservatorship" overseen by the Federal Housing Finance Agency.
By Lara Moscrip, CNNMoney.com contributing writer
November 13, 2008: 1:05 PM ET
U.S. Mortgage Plan Falls Short
Plan to modify Fannie, Freddie loans will help some, but more needs to be done, experts said.
NEW YORK(CNNMoney.com) -- The federal government's plan to streamline modifications of troubled loans held by Fannie Mae and Freddie Mac won't help the majority of people threatened with foreclosure, experts said.
Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.
The interest rate could be lowered to as little as 3% for five years. After that, it would increase by 1 percentage point a year until it hits either the market rate or the original interest rate, whichever is lower, officials said.
Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.
Also, officials hope the new program, which could help more than 400,000 homeowners, will convince servicers who handle loans held by private investors to follow suit.
Program doesn't cover most subprime loans
While experts and some government officials called the plan a positive step forward, they said much more needs to be done to address the mortgage crisis. The program does not address the heart of the problem -- troubled loans held by private investors.
Though Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.
"This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages, particularly those held in private securitization trusts," said Federal Deposit Insurance Corp. chairman Sheila Bair, who has proposed an alternate plan addressing securitized loans. "As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans."
Problems in the mortgage market remain concentrated in the subprime sector, which are mainly held by investors who have resisted modifying the loan terms.
"Most foreclosures are happening on subprime loans that Fannie and Freddie don't control," said Eric Stein, senior vice president at the Center for Responsible Lending, which has long pressed the federal government to help delinquent borrowers. "More is still needed to address foreclosures on these mortgages. To date, voluntary modifications haven't been sufficient. That's why we still have a foreclosure crisis."
To broaden existing foreclosure fixes, Bair supports using up to $50 billion of the $700 billion financial sector rescue plan to guarantee modified loans. This would give servicers an incentive to adjust the loan terms and could help up to 3 million homeowners, though the number is not firm.
Meanwhile, the FDIC has already adopted a streamlined process to modify troubled loans owned or serviced by the failed IndyMac Bank, which the agency took over in mid-July. Some 3,500 borrowers have accepted the workouts, which also aim to keep payments at no more than 38% of gross income.
Several major servicers -- including Bank of America, JPMorgan Chase and Citigroup -- have recently announced expansions of their foreclosure prevention efforts, which could aid nearly a million more borrowers.
The programs will also seek to make payments more affordable by cutting interest rates or stretching out loan terms, but some homeowners can also get their mortgage principal reduced depending on their servicer and financial situation.
Deferring payment on principal
Reducing principal is key to keeping some borrowers -- especially those whose house values have fallen below their mortgage balances -- in their homes, experts said. It makes both the loan more affordable and gives homeowners more incentive not to walk away.
In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.
"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."
However, to make payments affordable, servicers may choose to defer part of the payment -- with no interest -- until the end of the loan, officials said. For borrowers whose homes are worth less than their mortgages, servicers might defer the difference.
Here's how it would work: Let's say a homeowner has a $200,000 mortgage on a house now worth $150,000. The servicer may defer payment on $50,000 of principal. If the home recovers its value and the borrower sells it, he or she would have to pay back the deferred amount at that time. If it doesn't recover, the borrower would have to work out a deal with the servicer, likely a short sale, in which the bank forgives the difference between the sale price and the mortgage balance.
If the borrower stays in the home, he or she would have to pay the deferred amount within 30 days of the last payment, likely 30 or 40 years from now. Homeowners could take out a new mortgage to cover that balloon payment.
Setting industry standards
Officials hope that Fannie and Freddie's influence in the mortgage market will prompt servicers working with private investors to use this streamlined procedure in their own modifications. Often, investors defer to the mortgage finance agencies to set the methodology.
"I ask the private label mortgage-backed securities servicers and investors to rapidly adopt this program as the industry standard," said James Lockhart, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie. "Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values."
By Tami Luhby, CNNMoney.com senior writerLast Updated: November 11, 2008: 8:48 PM ET
HOPE for Homeowners Program Information
WASHINGTON - The Bush Administration today unveiled additional mortgage assistance for homeowners at risk of foreclosure. The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD's Federal Housing Administration (FHA).
"For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford," said HUD Secretary Steve Preston. "FHA remains a safe and affordable alternative to the high-priced mortgage loans that threaten homeowners' ability to retain their homes. We strongly encourage borrowers to work with their lenders to determine if HOPE for Homeowners is the right program for them."
The HOPE for Homeowners program was authorized by the Economic and Housing Recovery Act of 2008. Since the President signed this vital legislation into law on July 30, 2008, the HOPE for Homeowners Board of Directors has worked diligently to develop and implement the program as directed by Congress. The Board was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage.
The HOPE for Homeowners program begins today and ends September 30, 2011. The program is available only to owner occupants and will offer 30-year fixed rate mortgages - so the borrower's last payment will be the same as the first payment. In many cases, to avoid what would be an even costlier foreclosure, banks will have to write down the existing mortgage to 90 percent of the new appraised value of the home.
Borrower Eligibility
Borrowers are encouraged to contact their lender to determine eligibility, but may be eligible if, among other factors:
- The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.
- Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.
- They are not able to pay their existing mortgage without help.
- As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.
- They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).
How the HOPE for Homeowners program works
"HOPE for Homeowners will add to HUD's existing efforts to make FHA refinancing available to homeowners who need it most," said FHA Commissioner Brian D. Montgomery. "One year ago, FHA expanded refinancing into its FHASecure program. Since that time, we have helped more than 360,000 families keep their homes by refinancing with FHA, and we will assist a total of 500,000 families by the end of this year."
The Board expects that the primary way homeowners will participate in the program is by working with their current lender. HOPE for Homeowners will serve as another loss mitigation tool available to distressed borrowers.
HOPE for Homeowners also includes the following provisions:
- The loan amount may not exceed a maximum of $550,440.
- The new mortgage will be no more than 90 percent of the new appraised value including any financed Upfront Mortgage Insurance Premium.
- The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.
- The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.
- The existing first mortgage must accept the proceeds of the HOPE for Homeowners loan as full settlement of all outstanding indebtedness.
- Existing subordinate lenders must release their outstanding mortgage liens.
- Standard FHA policy regarding closing costs applies, and they may be:
Financed into the new loan provided the value of the mortgage (including the Upfront Mortgage Insurance Premium) does not exceed 90 percent of the new appraised value of the home.
Paid from the borrowers' own assets.
Paid by the servicing lender or third party (e.g., federal, state, or local program).
Paid by the originating lender through premium pricing. - The borrower must agree to share with FHA both the equity created at the beginning of this new mortgage and any future appreciation in the value of the home.
- The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.
The lender will disclose to the homeowner the benefits of the program including home retention, a new affordable mortgage based on the current appraised value, and 10 percent equity. The lender will also explain the prohibition against new junior liens against the property unless directly related to property maintenance, and a minimum of 50 percent equity and appreciation sharing with the Federal government.
The costs to the homeowner include the upfront and annual insurance premiums, as well as a share of the equity created by the write-down associated with the HOPE for Homeowners mortgage and any future appreciation in the value of the home. At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD's appreciation share.
If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years. The lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the amount of available appreciation. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available appreciation is exhausted. All remaining appreciation is remitted to FHA.
The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. They have named the following people to serve on the board as their designees: FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.
Read more about HOPE for Homeowners at www.hud.gov/hopeforhomeowners.
Citi to Modify $20 Billion in Home Loans
A new program aimed at homeowners who haven't defaulted yet could help 130,000 mortgage borrowers stay in their homes.
NEW YORK (CNNMoney.com) -- Citigroup says it will expand its foreclosure prevention efforts and try to keep 130,000 troubled borrowers with $20 billion in mortgages in their homes.
The news follows similar initiatives announced earlier this year by IndyMac Bank, which was seized by the Federal Deposit Insurance Corp. last summer, as well as Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each of which heralded enhanced housing rescue efforts.
Banks are undoubtedly feeling pressured to be more aggressive in aiding home owners, given how many billions of taxpayer dollars have poured into the industry to stem the credit crisis.
The Citi (C, Fortune 500) effort, dubbed the Citi Homeownership Assistance Program, targets 500,000 Citi borrowers. CitiMortgages CEO Sanjiv Das said he expects that more than a quarter of these people, with mortgages worth about $20 billion, will take advantage of the program over the next six months.
"We're reaching out to borrowers in areas of steeper-than-usual falling prices and higher-than-average unemployment," said Das, including California, Michigan, Florida, Nevada, Ohio and Arizona. "These areas are where the concentration of at-risk mortgages are the highest."
The new initiative differs from Citi's existing mortgage mitigation efforts in that it's a much more proactive plan, said Eric Eve, Senior Vice President, Global Community Relations for Citi.
The company will determine where the need for mortgage modification is greatest, based on economic conditions, and send out letters to its borrowers in these areas to tell them that help is available should they need it.
Borrowers on the brink
This new initiative is open only to borrowers who are still current on their loans but are at risk of defaulting - particularly those borrowers who owe more on their mortgages than their homes are currently worth. Additionally, their loans must be owned by the bank, rather than sold off to investors.
Citi already has a program in place to work with borrowers who are delinquent, reducing interest rates to as low as 1% for as long as two years for borrowers who are judged capable of keeping up with lower payments. The bank says that its ongoing mortgage mitigation efforts have produced about 370,000 work outs since the beginning of 2007.
For borrowers who have yet to default, Citi will now aim to reduce their monthly mortgage payment, including property taxes and insurance, to 40% or less of their income. To do that, it will freeze or reduce interest rates, extend the lifetime of the loan or even reduce the loan principal.
Das said the new plan will be implemented immediately and the workouts will be handled in a very fast, streamlined fashion to aid as many homeowners as quickly as possible.
Each of these new foreclosure prevention efforts, from Citi, IndyMac, Bank of America and JPMorgan, represent a significant step forward in resolving the housing crisis, according to Jared Bernstein, senior economist with the Economic Policy Institute. But, he adds, the problem remains overwhelming.
"These programs are helping but the help is marginal - in the hundreds of thousands of homeowners," he said. "But help is needed by millions."
Even after taking these new bank programs into account, Mark Zandi, chief economist for Moody's Economy.com, estimates that 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale. Some 1.9 million are projected to lose their homes in 2009.
It's certainly doubtful that the banks' housing relief programs will be as successful as they hope.
For example, IndyMac's program was launched in late August, and slated to help as many as 40,000 borrowers. But in late October, FDIC chief Sheila Bair told a congressional committee that the bank had only completed 3,500 work outs.
So Bank of America's claim that it will help 400,000 homeowners, and JPMorgan Chase's goal of rescuing another 400,000 borrowers should probably be taken with a grain of salt.
Bigger plans
Still, Bernstein welcomes every effort. "Let a thousand flowers bloom," he said. "It's like an experiment and, if we're smart, we'll see what plans work and what doesn't." Then, the best aspects of the various plans could be applied to as many at-risk mortgages as possible.
But the bottom line is that the bank programs won't be nearly as effective as any massive foreclosure prevention effort that may yet be implemented by the U.S. government, according to Bernstein.
And there is a possibility that such a program may yet emerge. Congress already enacted its Hope for Homeowners initiative, which will allow borrowers to refinance their mortgages into loans backed by the Federal Housing Authority. Now there is talk of a new $50 billion plan that could bail out as many as 3 million homeowners.
"We can keep the number below a million [homes lost] next year with an effective government effort," said Zandi. "It would be very doable but also very costly."
The single best thing about the bank programs, according to Bernstein, is that they don't cost the taxpayers anything.
"You have to be happy about that," he said.
By Les Christie, CNNMoney.com staff writer
Last Updated: November 11, 2008: 10:25 AM ET
NEW YORK (CNNMoney.com) -- Citigroup says it will expand its foreclosure prevention efforts and try to keep 130,000 troubled borrowers with $20 billion in mortgages in their homes.
The news follows similar initiatives announced earlier this year by IndyMac Bank, which was seized by the Federal Deposit Insurance Corp. last summer, as well as Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each of which heralded enhanced housing rescue efforts.
Banks are undoubtedly feeling pressured to be more aggressive in aiding home owners, given how many billions of taxpayer dollars have poured into the industry to stem the credit crisis.
The Citi (C, Fortune 500) effort, dubbed the Citi Homeownership Assistance Program, targets 500,000 Citi borrowers. CitiMortgages CEO Sanjiv Das said he expects that more than a quarter of these people, with mortgages worth about $20 billion, will take advantage of the program over the next six months.
"We're reaching out to borrowers in areas of steeper-than-usual falling prices and higher-than-average unemployment," said Das, including California, Michigan, Florida, Nevada, Ohio and Arizona. "These areas are where the concentration of at-risk mortgages are the highest."
The new initiative differs from Citi's existing mortgage mitigation efforts in that it's a much more proactive plan, said Eric Eve, Senior Vice President, Global Community Relations for Citi.
The company will determine where the need for mortgage modification is greatest, based on economic conditions, and send out letters to its borrowers in these areas to tell them that help is available should they need it.
Borrowers on the brink
This new initiative is open only to borrowers who are still current on their loans but are at risk of defaulting - particularly those borrowers who owe more on their mortgages than their homes are currently worth. Additionally, their loans must be owned by the bank, rather than sold off to investors.
Citi already has a program in place to work with borrowers who are delinquent, reducing interest rates to as low as 1% for as long as two years for borrowers who are judged capable of keeping up with lower payments. The bank says that its ongoing mortgage mitigation efforts have produced about 370,000 work outs since the beginning of 2007.
For borrowers who have yet to default, Citi will now aim to reduce their monthly mortgage payment, including property taxes and insurance, to 40% or less of their income. To do that, it will freeze or reduce interest rates, extend the lifetime of the loan or even reduce the loan principal.
Das said the new plan will be implemented immediately and the workouts will be handled in a very fast, streamlined fashion to aid as many homeowners as quickly as possible.
Each of these new foreclosure prevention efforts, from Citi, IndyMac, Bank of America and JPMorgan, represent a significant step forward in resolving the housing crisis, according to Jared Bernstein, senior economist with the Economic Policy Institute. But, he adds, the problem remains overwhelming.
"These programs are helping but the help is marginal - in the hundreds of thousands of homeowners," he said. "But help is needed by millions."
Even after taking these new bank programs into account, Mark Zandi, chief economist for Moody's Economy.com, estimates that 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale. Some 1.9 million are projected to lose their homes in 2009.
It's certainly doubtful that the banks' housing relief programs will be as successful as they hope.
For example, IndyMac's program was launched in late August, and slated to help as many as 40,000 borrowers. But in late October, FDIC chief Sheila Bair told a congressional committee that the bank had only completed 3,500 work outs.
So Bank of America's claim that it will help 400,000 homeowners, and JPMorgan Chase's goal of rescuing another 400,000 borrowers should probably be taken with a grain of salt.
Bigger plans
Still, Bernstein welcomes every effort. "Let a thousand flowers bloom," he said. "It's like an experiment and, if we're smart, we'll see what plans work and what doesn't." Then, the best aspects of the various plans could be applied to as many at-risk mortgages as possible.
But the bottom line is that the bank programs won't be nearly as effective as any massive foreclosure prevention effort that may yet be implemented by the U.S. government, according to Bernstein.
And there is a possibility that such a program may yet emerge. Congress already enacted its Hope for Homeowners initiative, which will allow borrowers to refinance their mortgages into loans backed by the Federal Housing Authority. Now there is talk of a new $50 billion plan that could bail out as many as 3 million homeowners.
"We can keep the number below a million [homes lost] next year with an effective government effort," said Zandi. "It would be very doable but also very costly."
The single best thing about the bank programs, according to Bernstein, is that they don't cost the taxpayers anything.
"You have to be happy about that," he said.
By Les Christie, CNNMoney.com staff writer
Last Updated: November 11, 2008: 10:25 AM ET
Treasury Secretary Comments on Rescue Package
November 12, 2008
U.S. Treasury Secretary Henry M. Paulson, Jr. Comments on Financial Rescue Package and Provides Economic Update
Current State of Global Financial System
The actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system. Before we acted, we were at a tipping point. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funding and credit. U.S. and European financial institutions were under extreme pressure, and investor confidence in our system was dangerously low.
We also acted quickly and in coordination with colleagues around the world to stabilize the global financial system. Going into the Annual IMF/World Bank meetings in early October, I made clear that we would use the financial rescue package granted by Congress to purchase equity directly from financial institutions – the fastest and most productive means of using our new authorities to stabilize our financial system. We launched our capital purchase program the following week when we announced that nine of the largest U.S. financial institutions, holding approximately 55 percent of U.S. banking assets would sell $125 billion in preferred stock to the Treasury. At the same time, the FDIC announced it would temporarily guarantee all newly issued senior unsecured debt of participating organizations for up to three years. In addition, the FDIC provided an unlimited guarantee on non-interest bearing transaction accounts that expires at the end of next year.
As I assess where we are today, I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world we have already seen signs of improvement. Our system is stronger and more stable than just a few weeks ago. Although this is a major accomplishment, we have many challenges ahead of us. Our financial system remains fragile in the face of an economic downturn here and abroad, and financial institutions' balance sheets still hold significant illiquid assets. Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair.
Housing and Mortgage Finance
Overall, we are in a better position than we were, but we must address the continued challenges of a weak economy, especially the housing correction and lending contraction.
On housing, we have worked aggressively to avoid preventable foreclosures and keep mortgage financing available. In October 2007, we helped establish the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. HOPE NOW created a streamlined protocol to assist struggling borrowers who could afford their homes with a loan modification. The industry is now helping 200,000 homeowners a month avoid foreclosure. In addition, HUD has created new programs to complement existing FHA options, and to refinance a larger number of struggling borrowers into affordable FHA mortgages.
Most significantly, we acted earlier this year to prevent the failure of Fannie Mae and Freddie Mac, the housing GSEs that now touch over 70 percent of mortgage originations. I clearly stated at that time three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.
Fortunately we acted, citing concerns about both the quality and quantity of GSE capital. Unfortunately, our actions proved all too necessary. The GSEs were failing, and if they did fail, it would have materially exacerbated the recent market turmoil and more profoundly impacted household wealth: from family budgets, to home values, to savings for college and retirement.
Earlier this week, Fannie Mae reported a record loss, including write-downs of its deferred tax assets that make up a significant portion of its capital. We monitor closely the performance of both Fannie Mae and Freddie Mac, and both are performing within the range of our expectations. The magnitude of the losses at Fannie Mae were within the range of what we expected, and further confirms the need for our strong actions.
Eight weeks ago, Treasury took responsibility for supporting the agency debt securities and the agency MBS through a preferred stock purchase agreement that guarantees a positive net worth in each enterprise – effectively, a guarantee on GSE debt and agency MBS. We also established a credit facility to provide the GSEs the strongest possible liquidity backstop. As the enterprises go through this difficult housing correction we will, as needed and promised, purchase preferred shares under the terms of that agreement. The U.S. government honors its commitments, and investors can bank on it.
When we took action in September, I said that we would be entering a "time out" – a period where the new President and Congress must decide what role government in general, and the GSEs in particular, should play in the housing market. In my view, government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. In the weeks ahead, I will share some thoughts outlining my views on long term reform.
In the meantime, the GSEs now operate on stable footing. They have strong government support backing both future capital and liquidity needs. We have stabilized the GSEs and limited systemic risk, and our authorities provide us with additional flexibility to use as necessary to accomplish our objectives.
Implementing the Financial Rescue Package
More recently, we have also taken extraordinary steps to support our financial markets and financial institutions. As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again.
During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.
Of course, before that time, the only instances in which Treasury had taken equity positions was in rescuing a failing institution. Both the preferred stock purchase agreement for Fannie Mae and Freddie Mac, and the Federal Reserve's secured lending facility for AIG came with significant taxpayer protections and conditions. As we planned a capital purchase plan to support the overall financial system by strengthening balance sheets of a broad array of healthy banks, the terms had to be designed to encourage broad participation, balanced to ensure appropriate taxpayer protection and not impede the flow of private capital.
Capital Purchase Plan
We announced a plan on October 14th to purchase up to $250 billion in preferred stock in federally regulated banks and thrifts. By October 26th we had $115 billion out the door to eight large institutions. In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions. Although we are moving very quickly it will take time to complete legal contracts and execute investments in the significant number of institutions who meet the eligibility requirements and are approved, but we are on the path to getting this done.
Although this program's primary purpose is stabilizing our financial system, banks must also continue lending. During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators' actions have reinforced this lending restraint in the past. With a stronger capital base, our banks will be more confident and better positioned to play their necessary role to support economic activity. Today banking regulators issued a statement emphasizing that the extraordinary government actions taken by the Fed, Treasury and FDIC to stabilize and strengthen the banking system are not merely one-sided; all banks – not just those participating in the Capital Purchase Program – have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation. I commend this action and I am particularly focused on the importance of prudent bank lending to restore our economic growth.
Since announcing the Capital Purchase Program, we have been examining a wide range of ideas that can further strengthen the financial system and get lending going again to support the broader economy. First and foremost, because the system remains fragile, we must continue to stand ready to prevent systemic failures. That is the basis for Monday's action to purchase preferred shares in AIG. The stability of our system remains the highest priority.
We must also allow markets and institutions to absorb the extensive array of new policies put in place in a very short period of time. The injection of up to $250 billion of capital into individual banks, the FDIC's temporary guarantee of bank debt and the Federal Reserve's multiple liquidity facilities for banks, money funds and commercial paper issuers have all significantly enhanced liquidity and helped improve market conditions.
Priorities for Remaining TARP Funds
We have evaluated options for most effectively deploying the remaining TARP funds, and have identified three critical priorities. First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth. Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit. Third, we continue to explore ways to reduce the risk of foreclosure.
Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.
Further Strategies
First, we are designing further strategies for building capital in financial institutions. Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy. Any future program should maintain our principle of encouraging participation of healthy institutions while protecting taxpayers. We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges. Non-bank financial institutions provide credit that is essential to U.S. businesses and consumers. However, many are not directly regulated and are active in a wide range of businesses, and taxpayer protections in a program of this sort would be more difficult to achieve. Also before embarking on a second capital purchase program, the first one must be completed, and we have to assess its impact and use this information to evaluate the size and focus of an additional program in light of existing economic and market conditions.
Second, we are examining strategies to support consumer access to credit outside the banking system. To date, Fed, FDIC and Treasury programs have been targeted at our banking system, and the non-bank consumer finance sector continues to face difficult funding issues. Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy. With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment. By doing so, we can lower costs and increase credit availability for consumers. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy. While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.
Third, we are examining strategies to mitigate mortgage foreclosures. In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards. Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.
FDIC Chairman Bair has given us a model, in the mortgage modification protocol she developed with IndyMac Bank. Through the end of October, the FDIC has completed loan modifications for 3,500 borrowers, with several thousand more modifications currently being processed. These modifications have reduced payments for participating homeowners by an average of $380 month, or about 23 percent. We have worked with the FHFA, the GSEs, HUD and the Hope Now alliance who yesterday announced a streamlined industry-wide modification program that for the first time adopts an explicit affordability target similar to the model pioneered at IndyMac. With this commitment, the GSEs and large portfolio investors are setting a new industry standard for foreclosure mitigation. Potentially hundreds of thousands more struggling borrowers will be enabled to stay in their homes at an affordable monthly mortgage payment.
Beyond these efforts, there has been significant work to design and evaluate a number of proposals to induce further modifications. Each of these would, however, require substantial government subsidies. The FDIC, for example, has developed a proposal that Treasury and others in the Administration continue to discuss. I believe it is an important idea. As we evaluate the merits of any new proposal, we also will have to identify and justify the means to finance it. We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer, and be recovered under the TARP legislation. Maximizing loan modifications, nonetheless, is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here.
We will continue to pursue the three strategies I have just outlined: how best to strengthen the capital base of our financial system; how best to support the asset-backed securitization market that is critical to consumer finance, and how to increase foreclosure mitigation efforts. All of these strategies are important, but ensuring the financial system has sufficient capital is essential to getting credit flowing to consumers and businesses and that is where the bulk of the remaining TARP funds should be deployed --- in a program to support the system and as a contingency reserve for addressing any unforeseen systemic events.
We are focused on developing and preparing programs which can be implemented for each of these strategies. We will continue to brief President-elect Obama's transition team on all of these issues.
Global Challenge
Of course managing through this market turmoil while mitigating the impact of the credit crisis is a global as well as a national issue. We in the U.S. are well aware and humbled by our own failings and recognize our special responsibility to the global economy. The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions. These institutions found themselves with large holdings of structured products, including complex and opaque mortgage-backed securities. Some European institutions were characterized by high leverage, exposure to their own housing markets, exposure to Central European institutions, weak business models or overly aggressive expansion, while others faced weaknesses because of inadequate depositor protection systems. It should not be surprising that after 13 months of stress in the global capital markets, banks from the U.S. to the U.K., from Germany to Iceland, from Russia to France, had difficulties that exposed some of these weaknesses for the first time. For some of these banks, this proved to be a hurdle too high and government action was necessary to support financial stability.
In that regard the G7 Finance Ministers meeting last month represented a major turning point in stabilizing the global financial system as the ministers came together to support a number of powerful strategies that were soon turned into effective actions in the United States and Europe. It is also clear that our first priority must be recovery and repair. And of course we must take strong actions to fix our system so that the world does not have to suffer something like this ever again. The Leaders summit President Bush will be hosting this weekend marks a very important step in what will be an ongoing process of recovery and reform.
And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us. Of course, it is already clear that we must address a number of significant issues, such as improving risk management practices, compensation practices, oversight of mortgage origination and the securitization process, credit rating agencies, OTC derivative market infrastructure and regulatory policies, practices and regimes in our respective countries. And we recognize that our financial institutions and our markets are global, but our regulatory regimes are national, so we will examine how best to improve cooperation and information sharing to foster global financial system stability.
But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.
If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.
The nations attending this weekend's summit represent the 20 largest economies in the world – over 77 percent of global GDP. President Bush is convening this group of countries to discuss and address problems such as global imbalances, making regulatory regimes more effective, fostering cooperation among regulators, and reforming international institutions to better address today's global economy. We can't simply task the IMF, the FSF or other International Financial Institutions to solve the problems, unless member nations all see that they have a shared interest in a solution. There are no easy answers, because until we reach a consensus on a broad-based reform agenda, we will not reach a solution. This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.
Conclusion
The road ahead, for the U.S. economy and the global economy, is full of challenges. And it will take strong leadership to address them. I am confident the United States, under this and the next Administration, will rise to these challenges. I will do everything I can to put us on the right path, both by working diligently through the end of my term and by working closely to ensure the smoothest possible transition.
U.S. Treasury Secretary Henry M. Paulson, Jr. Comments on Financial Rescue Package and Provides Economic Update
Current State of Global Financial System
The actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system. Before we acted, we were at a tipping point. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funding and credit. U.S. and European financial institutions were under extreme pressure, and investor confidence in our system was dangerously low.
We also acted quickly and in coordination with colleagues around the world to stabilize the global financial system. Going into the Annual IMF/World Bank meetings in early October, I made clear that we would use the financial rescue package granted by Congress to purchase equity directly from financial institutions – the fastest and most productive means of using our new authorities to stabilize our financial system. We launched our capital purchase program the following week when we announced that nine of the largest U.S. financial institutions, holding approximately 55 percent of U.S. banking assets would sell $125 billion in preferred stock to the Treasury. At the same time, the FDIC announced it would temporarily guarantee all newly issued senior unsecured debt of participating organizations for up to three years. In addition, the FDIC provided an unlimited guarantee on non-interest bearing transaction accounts that expires at the end of next year.
As I assess where we are today, I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world we have already seen signs of improvement. Our system is stronger and more stable than just a few weeks ago. Although this is a major accomplishment, we have many challenges ahead of us. Our financial system remains fragile in the face of an economic downturn here and abroad, and financial institutions' balance sheets still hold significant illiquid assets. Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair.
Housing and Mortgage Finance
Overall, we are in a better position than we were, but we must address the continued challenges of a weak economy, especially the housing correction and lending contraction.
On housing, we have worked aggressively to avoid preventable foreclosures and keep mortgage financing available. In October 2007, we helped establish the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. HOPE NOW created a streamlined protocol to assist struggling borrowers who could afford their homes with a loan modification. The industry is now helping 200,000 homeowners a month avoid foreclosure. In addition, HUD has created new programs to complement existing FHA options, and to refinance a larger number of struggling borrowers into affordable FHA mortgages.
Most significantly, we acted earlier this year to prevent the failure of Fannie Mae and Freddie Mac, the housing GSEs that now touch over 70 percent of mortgage originations. I clearly stated at that time three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.
Fortunately we acted, citing concerns about both the quality and quantity of GSE capital. Unfortunately, our actions proved all too necessary. The GSEs were failing, and if they did fail, it would have materially exacerbated the recent market turmoil and more profoundly impacted household wealth: from family budgets, to home values, to savings for college and retirement.
Earlier this week, Fannie Mae reported a record loss, including write-downs of its deferred tax assets that make up a significant portion of its capital. We monitor closely the performance of both Fannie Mae and Freddie Mac, and both are performing within the range of our expectations. The magnitude of the losses at Fannie Mae were within the range of what we expected, and further confirms the need for our strong actions.
Eight weeks ago, Treasury took responsibility for supporting the agency debt securities and the agency MBS through a preferred stock purchase agreement that guarantees a positive net worth in each enterprise – effectively, a guarantee on GSE debt and agency MBS. We also established a credit facility to provide the GSEs the strongest possible liquidity backstop. As the enterprises go through this difficult housing correction we will, as needed and promised, purchase preferred shares under the terms of that agreement. The U.S. government honors its commitments, and investors can bank on it.
When we took action in September, I said that we would be entering a "time out" – a period where the new President and Congress must decide what role government in general, and the GSEs in particular, should play in the housing market. In my view, government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. In the weeks ahead, I will share some thoughts outlining my views on long term reform.
In the meantime, the GSEs now operate on stable footing. They have strong government support backing both future capital and liquidity needs. We have stabilized the GSEs and limited systemic risk, and our authorities provide us with additional flexibility to use as necessary to accomplish our objectives.
Implementing the Financial Rescue Package
More recently, we have also taken extraordinary steps to support our financial markets and financial institutions. As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again.
During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.
Of course, before that time, the only instances in which Treasury had taken equity positions was in rescuing a failing institution. Both the preferred stock purchase agreement for Fannie Mae and Freddie Mac, and the Federal Reserve's secured lending facility for AIG came with significant taxpayer protections and conditions. As we planned a capital purchase plan to support the overall financial system by strengthening balance sheets of a broad array of healthy banks, the terms had to be designed to encourage broad participation, balanced to ensure appropriate taxpayer protection and not impede the flow of private capital.
Capital Purchase Plan
We announced a plan on October 14th to purchase up to $250 billion in preferred stock in federally regulated banks and thrifts. By October 26th we had $115 billion out the door to eight large institutions. In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions. Although we are moving very quickly it will take time to complete legal contracts and execute investments in the significant number of institutions who meet the eligibility requirements and are approved, but we are on the path to getting this done.
Although this program's primary purpose is stabilizing our financial system, banks must also continue lending. During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators' actions have reinforced this lending restraint in the past. With a stronger capital base, our banks will be more confident and better positioned to play their necessary role to support economic activity. Today banking regulators issued a statement emphasizing that the extraordinary government actions taken by the Fed, Treasury and FDIC to stabilize and strengthen the banking system are not merely one-sided; all banks – not just those participating in the Capital Purchase Program – have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation. I commend this action and I am particularly focused on the importance of prudent bank lending to restore our economic growth.
Since announcing the Capital Purchase Program, we have been examining a wide range of ideas that can further strengthen the financial system and get lending going again to support the broader economy. First and foremost, because the system remains fragile, we must continue to stand ready to prevent systemic failures. That is the basis for Monday's action to purchase preferred shares in AIG. The stability of our system remains the highest priority.
We must also allow markets and institutions to absorb the extensive array of new policies put in place in a very short period of time. The injection of up to $250 billion of capital into individual banks, the FDIC's temporary guarantee of bank debt and the Federal Reserve's multiple liquidity facilities for banks, money funds and commercial paper issuers have all significantly enhanced liquidity and helped improve market conditions.
Priorities for Remaining TARP Funds
We have evaluated options for most effectively deploying the remaining TARP funds, and have identified three critical priorities. First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth. Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit. Third, we continue to explore ways to reduce the risk of foreclosure.
Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.
Further Strategies
First, we are designing further strategies for building capital in financial institutions. Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy. Any future program should maintain our principle of encouraging participation of healthy institutions while protecting taxpayers. We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges. Non-bank financial institutions provide credit that is essential to U.S. businesses and consumers. However, many are not directly regulated and are active in a wide range of businesses, and taxpayer protections in a program of this sort would be more difficult to achieve. Also before embarking on a second capital purchase program, the first one must be completed, and we have to assess its impact and use this information to evaluate the size and focus of an additional program in light of existing economic and market conditions.
Second, we are examining strategies to support consumer access to credit outside the banking system. To date, Fed, FDIC and Treasury programs have been targeted at our banking system, and the non-bank consumer finance sector continues to face difficult funding issues. Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy. With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment. By doing so, we can lower costs and increase credit availability for consumers. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy. While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.
Third, we are examining strategies to mitigate mortgage foreclosures. In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards. Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.
FDIC Chairman Bair has given us a model, in the mortgage modification protocol she developed with IndyMac Bank. Through the end of October, the FDIC has completed loan modifications for 3,500 borrowers, with several thousand more modifications currently being processed. These modifications have reduced payments for participating homeowners by an average of $380 month, or about 23 percent. We have worked with the FHFA, the GSEs, HUD and the Hope Now alliance who yesterday announced a streamlined industry-wide modification program that for the first time adopts an explicit affordability target similar to the model pioneered at IndyMac. With this commitment, the GSEs and large portfolio investors are setting a new industry standard for foreclosure mitigation. Potentially hundreds of thousands more struggling borrowers will be enabled to stay in their homes at an affordable monthly mortgage payment.
Beyond these efforts, there has been significant work to design and evaluate a number of proposals to induce further modifications. Each of these would, however, require substantial government subsidies. The FDIC, for example, has developed a proposal that Treasury and others in the Administration continue to discuss. I believe it is an important idea. As we evaluate the merits of any new proposal, we also will have to identify and justify the means to finance it. We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer, and be recovered under the TARP legislation. Maximizing loan modifications, nonetheless, is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here.
We will continue to pursue the three strategies I have just outlined: how best to strengthen the capital base of our financial system; how best to support the asset-backed securitization market that is critical to consumer finance, and how to increase foreclosure mitigation efforts. All of these strategies are important, but ensuring the financial system has sufficient capital is essential to getting credit flowing to consumers and businesses and that is where the bulk of the remaining TARP funds should be deployed --- in a program to support the system and as a contingency reserve for addressing any unforeseen systemic events.
We are focused on developing and preparing programs which can be implemented for each of these strategies. We will continue to brief President-elect Obama's transition team on all of these issues.
Global Challenge
Of course managing through this market turmoil while mitigating the impact of the credit crisis is a global as well as a national issue. We in the U.S. are well aware and humbled by our own failings and recognize our special responsibility to the global economy. The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions. These institutions found themselves with large holdings of structured products, including complex and opaque mortgage-backed securities. Some European institutions were characterized by high leverage, exposure to their own housing markets, exposure to Central European institutions, weak business models or overly aggressive expansion, while others faced weaknesses because of inadequate depositor protection systems. It should not be surprising that after 13 months of stress in the global capital markets, banks from the U.S. to the U.K., from Germany to Iceland, from Russia to France, had difficulties that exposed some of these weaknesses for the first time. For some of these banks, this proved to be a hurdle too high and government action was necessary to support financial stability.
In that regard the G7 Finance Ministers meeting last month represented a major turning point in stabilizing the global financial system as the ministers came together to support a number of powerful strategies that were soon turned into effective actions in the United States and Europe. It is also clear that our first priority must be recovery and repair. And of course we must take strong actions to fix our system so that the world does not have to suffer something like this ever again. The Leaders summit President Bush will be hosting this weekend marks a very important step in what will be an ongoing process of recovery and reform.
And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us. Of course, it is already clear that we must address a number of significant issues, such as improving risk management practices, compensation practices, oversight of mortgage origination and the securitization process, credit rating agencies, OTC derivative market infrastructure and regulatory policies, practices and regimes in our respective countries. And we recognize that our financial institutions and our markets are global, but our regulatory regimes are national, so we will examine how best to improve cooperation and information sharing to foster global financial system stability.
But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.
If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.
The nations attending this weekend's summit represent the 20 largest economies in the world – over 77 percent of global GDP. President Bush is convening this group of countries to discuss and address problems such as global imbalances, making regulatory regimes more effective, fostering cooperation among regulators, and reforming international institutions to better address today's global economy. We can't simply task the IMF, the FSF or other International Financial Institutions to solve the problems, unless member nations all see that they have a shared interest in a solution. There are no easy answers, because until we reach a consensus on a broad-based reform agenda, we will not reach a solution. This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.
Conclusion
The road ahead, for the U.S. economy and the global economy, is full of challenges. And it will take strong leadership to address them. I am confident the United States, under this and the next Administration, will rise to these challenges. I will do everything I can to put us on the right path, both by working diligently through the end of my term and by working closely to ensure the smoothest possible transition.
Tuesday, November 11, 2008
Federal Mortgage Rescue Plan Due
Fannie Mae, Freddie Mac and the administration officials are set to announce program to help at-risk homeowners.
NEW YORK (CNNMoney.com) -- The Bush administration is set to unveil on Tuesday a potentially extensive new program to modify mortgages and help at-risk homeowners and stabilize the battered real estate market.
The plan centers on Fannie Mae and Freddie Mac, which between them own or back about $5 trillion in loans. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.
While a number of major banks, including Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500), have announced loan modifications programs in recent weeks, they hold only a fraction of the nation's mortgages compared with Fannie and Freddie.
Despite calls from members of Congress and some housing advocates for the government to take a more direct role in preventing foreclosures, federal agencies have been slow to present their own plans to modify the loans of millions of homeowners at risk.
Sheila Bair, the chairman of the Federal Deposit Insurance Corp. whose agency took over home lender IndyMac in July, testified to the Senate Banking Committee on Oct. 23 that her agency was working "closely and creatively" with the Treasury Department on a mortgage rescue plan but revealed few details.
She suggested the government would establish standards for loan modifications and provide guarantees for loans meeting those standards so that "unaffordable loans could be converted into loans that are sustainable over the long term."
But in the three weeks since then there has been little in the way of new direct federal help for homeowners, even as the government pumped nearly $50 billion into regional banks and reworked the bailout of American International Group, while pressure mounted from Congress to help the nation's automakers and state and local governments.
Most of the mortgage modification programs announced by banks so far try to cap the payments of homeowners at risk of losing their homes at a level they can afford, typically about 34% to 40% of their income, through lower interest rates, longer repayment schedules or reductions in loan balances. There are reports that the Fannie-Freddie plan will cap payment at the 38% level, though those details could not be confirmed ahead of the meeting.
Representatives of another major bank, Wells Fargo (WFC, Fortune 500), are also set to attend a 2 p.m. ET briefing by the Federal Housing Finance Agency, the government regulator of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).
It is clearly in the interest of the mortgage finance firms as well as banks to take steps to halt foreclosures. The market is already flooded with far more new and existing homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures in the future.
Moody's Economy.com forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009.
On Monday, Fannie reported a $29 billion loss in the third quarter. The company also reported sharp increases in loan default rates and the amount it is setting aside for future loan losses.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: November 11, 2008: 12:26 PM ET
NEW YORK (CNNMoney.com) -- The Bush administration is set to unveil on Tuesday a potentially extensive new program to modify mortgages and help at-risk homeowners and stabilize the battered real estate market.
The plan centers on Fannie Mae and Freddie Mac, which between them own or back about $5 trillion in loans. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.
While a number of major banks, including Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500), have announced loan modifications programs in recent weeks, they hold only a fraction of the nation's mortgages compared with Fannie and Freddie.
Despite calls from members of Congress and some housing advocates for the government to take a more direct role in preventing foreclosures, federal agencies have been slow to present their own plans to modify the loans of millions of homeowners at risk.
Sheila Bair, the chairman of the Federal Deposit Insurance Corp. whose agency took over home lender IndyMac in July, testified to the Senate Banking Committee on Oct. 23 that her agency was working "closely and creatively" with the Treasury Department on a mortgage rescue plan but revealed few details.
She suggested the government would establish standards for loan modifications and provide guarantees for loans meeting those standards so that "unaffordable loans could be converted into loans that are sustainable over the long term."
But in the three weeks since then there has been little in the way of new direct federal help for homeowners, even as the government pumped nearly $50 billion into regional banks and reworked the bailout of American International Group, while pressure mounted from Congress to help the nation's automakers and state and local governments.
Most of the mortgage modification programs announced by banks so far try to cap the payments of homeowners at risk of losing their homes at a level they can afford, typically about 34% to 40% of their income, through lower interest rates, longer repayment schedules or reductions in loan balances. There are reports that the Fannie-Freddie plan will cap payment at the 38% level, though those details could not be confirmed ahead of the meeting.
Representatives of another major bank, Wells Fargo (WFC, Fortune 500), are also set to attend a 2 p.m. ET briefing by the Federal Housing Finance Agency, the government regulator of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).
It is clearly in the interest of the mortgage finance firms as well as banks to take steps to halt foreclosures. The market is already flooded with far more new and existing homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures in the future.
Moody's Economy.com forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009.
On Monday, Fannie reported a $29 billion loss in the third quarter. The company also reported sharp increases in loan default rates and the amount it is setting aside for future loan losses.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: November 11, 2008: 12:26 PM ET
Sussex County Homes Sales - as of November 10
The market is slowly moving, and homes are selling. See below for the closed real estate transactions for 2008, as of November 10.
Single Family - 1,400 (compared to 1,362 on 11/3)
Condo / Town Home - 556 (compared to 540 on 11/3)
Mobile - 250 (compared to 241 on 11/3)
Multi - 4 (compared to 4 on 11/3)
Lots / Land - 294 (compared to 289 on 11/2)
Farms - 7 (compared to 7 on 11/3)
Commercial - 55 (compared to 54 on 11/3)
For a total of 2,566 closed real estate transactions for 2008 thus far. Average list price, as of October 31, is $374,225, with an average sales price of $348,199. Homes have been selling at 93% of list price, and are averaging 190 days on the market.
Friday, November 7, 2008
Obama’s Priority: A Better TARP?
What should President-elect Barack Obama’s first priority be as he considers the state of the economy?
Much attention has attached to the question of who will serve as Obama’s Treasury secretary. Fortune’s Andy Serwer says Larry Summers, a former Treasury chief now with Harvard, is the leading candidate, with the support of his former boss, Citi (C) senior counselor Robert Rubin. A Summers appointment would come as no surprise, though there are those who note that Summers and Rubin were among the officials who oversaw the dismantling of the financial regulatory structure that began under former President Bill Clinton — a move that now looks less than prescient, to say the least.
But some people say the Treasury secretary question pales in comparison to the need to unlock the credit markets, which, despite some recent thawing, remain largely frozen. Jeff Miller, CEO of NewArc Investments, writes that the biggest threat to the economy stems from the lack of confidence in financial institutions, a mistrust he attributes to the presumption that big banks’ mortgage-related holdings are worthless.
While that may overstate the point, it’s become clear during the markets’ shellacking over the past two days that questions about financial companies’ health are far from settled. Citi has dropped 19% and Bank of America (BAC) 17% since Tuesday’s election-day rally. The only way out of the death spiral, Miller says, is to find a way to match the sellers of troubled assets with private-sector buyers.
“We hope that you will use your power to create a price discovery mechanism where we can find stability in financial assets,” Miller wrote in a blog post styled on a memo to the president-elect. “There is no single action that you can take before Inauguration Day that will have more impact.”
Trying to set prices for debt instruments that no one wants to buy except at a steep discount takes us back to the earliest versions of the Troubled Asset Recovery Plan, proposed in September by Treasury Secretary Hank Paulson. The Treasury never said exactly how such price discovery would work, beyond pointing to the possible use of reverse auctions. In the rush to shore up the financial system, though, the focus soon turned to pouring money into banks in a bid to rebuild their capital and, hopefully, get them lending again.
Despite the detour, a price-discovery effort is eminently workable, Finacorp Securities chief economist David Merkel argues. He sketches out one possible scenario in a post on his Aleph Blog, though he cautions that even a well-designed reverse auction might reveal some casualties.
“Finding the market clearing price will make the markets start moving again,” he wrote, “but it also might prove that some financial institutions are inverted (negative net worth), if not insolvent (can’t get enough cash to pay all immediate claims).”
Which brings us back to the too-big-to-fail problem that Paulson, Fed chief Ben Bernanke and other policymakers have been struggling with ever since Bear Stearns went belly-up in March. Despite government actions like last month’s TARP capital purchase plan, which showered $125 billion on nine big financial institutions, there’s still no game plan in place for what to do when a big bank’s poor health is exposed and possible buyers — as in Wells Fargo’s (WFC) purchase of Wachovia (WB) — aren’t available.
Merkel says one answer is to set up an expedited Chapter 11 bankruptcy proceeding that would allow bad debts to be renegotiated or reduced. Another advocate of the so-called cramdown approach is University of Chicago Professor Luigi Zingales, who wrote in September that the government should force the creditors of troubled institutions to swap their debt for equity, or forgive some of their debt claims.
Calling such an arrangement a “lesser evil” than the initial Paulson approach, which proposed government purchases of troubled assets, Zingales says cramdowns make sense for taxpayers, though they won’t be popular with the well-connected investor class.
“It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain,” he wrote. “Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition.”
But while forced restructurings may be unpopular with creditors, Zingales says they would be good for the economy and even, believe it or not, for investors. He notes that stock and bond prices actually rose after the government instituted such a plan during the Great Depression.
“For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system,” he wrote. “The time has come to save capitalism from the capitalists.”
By Colin Barr, Fortune Magazine, www.cnnmoney.com, November 7, 1008, 6:51 AM
Much attention has attached to the question of who will serve as Obama’s Treasury secretary. Fortune’s Andy Serwer says Larry Summers, a former Treasury chief now with Harvard, is the leading candidate, with the support of his former boss, Citi (C) senior counselor Robert Rubin. A Summers appointment would come as no surprise, though there are those who note that Summers and Rubin were among the officials who oversaw the dismantling of the financial regulatory structure that began under former President Bill Clinton — a move that now looks less than prescient, to say the least.
But some people say the Treasury secretary question pales in comparison to the need to unlock the credit markets, which, despite some recent thawing, remain largely frozen. Jeff Miller, CEO of NewArc Investments, writes that the biggest threat to the economy stems from the lack of confidence in financial institutions, a mistrust he attributes to the presumption that big banks’ mortgage-related holdings are worthless.
While that may overstate the point, it’s become clear during the markets’ shellacking over the past two days that questions about financial companies’ health are far from settled. Citi has dropped 19% and Bank of America (BAC) 17% since Tuesday’s election-day rally. The only way out of the death spiral, Miller says, is to find a way to match the sellers of troubled assets with private-sector buyers.
“We hope that you will use your power to create a price discovery mechanism where we can find stability in financial assets,” Miller wrote in a blog post styled on a memo to the president-elect. “There is no single action that you can take before Inauguration Day that will have more impact.”
Trying to set prices for debt instruments that no one wants to buy except at a steep discount takes us back to the earliest versions of the Troubled Asset Recovery Plan, proposed in September by Treasury Secretary Hank Paulson. The Treasury never said exactly how such price discovery would work, beyond pointing to the possible use of reverse auctions. In the rush to shore up the financial system, though, the focus soon turned to pouring money into banks in a bid to rebuild their capital and, hopefully, get them lending again.
Despite the detour, a price-discovery effort is eminently workable, Finacorp Securities chief economist David Merkel argues. He sketches out one possible scenario in a post on his Aleph Blog, though he cautions that even a well-designed reverse auction might reveal some casualties.
“Finding the market clearing price will make the markets start moving again,” he wrote, “but it also might prove that some financial institutions are inverted (negative net worth), if not insolvent (can’t get enough cash to pay all immediate claims).”
Which brings us back to the too-big-to-fail problem that Paulson, Fed chief Ben Bernanke and other policymakers have been struggling with ever since Bear Stearns went belly-up in March. Despite government actions like last month’s TARP capital purchase plan, which showered $125 billion on nine big financial institutions, there’s still no game plan in place for what to do when a big bank’s poor health is exposed and possible buyers — as in Wells Fargo’s (WFC) purchase of Wachovia (WB) — aren’t available.
Merkel says one answer is to set up an expedited Chapter 11 bankruptcy proceeding that would allow bad debts to be renegotiated or reduced. Another advocate of the so-called cramdown approach is University of Chicago Professor Luigi Zingales, who wrote in September that the government should force the creditors of troubled institutions to swap their debt for equity, or forgive some of their debt claims.
Calling such an arrangement a “lesser evil” than the initial Paulson approach, which proposed government purchases of troubled assets, Zingales says cramdowns make sense for taxpayers, though they won’t be popular with the well-connected investor class.
“It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain,” he wrote. “Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition.”
But while forced restructurings may be unpopular with creditors, Zingales says they would be good for the economy and even, believe it or not, for investors. He notes that stock and bond prices actually rose after the government instituted such a plan during the Great Depression.
“For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system,” he wrote. “The time has come to save capitalism from the capitalists.”
By Colin Barr, Fortune Magazine, www.cnnmoney.com, November 7, 1008, 6:51 AM
2009: Year of the Thaw
Why the great credit freeze of 2008 won't turn into the Great Depression of 2009.
(Money Magazine) -- Well, we were partly right. At this time last year, we said that the stock market would be increasingly volatile in 2008, that home prices would fall further and that a subprime blowup could propel the economy downward.
But not in our wildest dreams did we foresee anything like the kind of jaw-dropping, stomach-churning ride that lay ahead. The economy in recession (as most experts now believe)? The Dow off 40%? Credit markets frozen worse than Sarah Palin's hometown? Precious few saw all that coming.
Peering into the future is tricky in the best of times. But even though predictions always turn out to be flawed - it's impossible for even the smartest experts to nail this stuff perfectly - you cannot build a future without first guessing what challenges you'll face on the way there.
History is your best guide. It has taught us that recessions tend to push inflation lower; that stocks usually recover before the economy does; and that jobs recover later. Most of all, history shows us that downturns don't last forever - and that it's when people are most disheartened that rebounds begin.
THE ECONOMY
The prediction: The recovery will begin in the second quarter of the year.
As 2008 draws to a close, fears of a recession seem almost quaint. For many people spooked by the vicious credit crisis and the 2008 stock market meltdown, the real fear now is the D-word. Six in 10 Americans believe a depression is somewhat or very likely, according to a recent poll by CNN/Opinion Research Corporation.
Take a deep breath, people. The catastrophic 10% annual decline in economic output that marks a depression is simply not going to happen, according to even the most pessimistic mainstream economic forecasters. The gloomiest of the bunch aren't calling for anything remotely close to the crushing 25% unemployment rate seen during the Great Depression that began in 1929.
That's partly because back in the days when people were cooking up bathtub gin, the unprecedented actions taken by the U.S. and European governments this past fall to help stabilize the global financial system weren't even imaginable.
Still, few of us will feel like popping champagne corks in 2009. The consensus among nearly 50 economists polled each month by Blue Chip Economic Indicators is that a recession (officially defined as two or more consecutive quarters of declining gross domestic product) started in July and will continue throughout the first three months of 2009 (see the chart to the right).
The economists estimate that the economy - staggering under the credit crunch and one of the worst housing busts this nation has ever seen - will continue to shrink by 0.1% in the first quarter. It will then start growing again, but sluggishly. GDP growth is forecast to hit about 2.5% by the end of 2009, below the U.S. economy's long-term annual growth rate of about 3%.
But this recession, even if it's relatively short and shallow, is likely to leave you feeling queasy for quite some time after it's officially over. One reason: The unemployment rate is expected to keep rising throughout 2009, to 7% by the end of the year (see the chart). Many other economists think it could top 8%.
"If you define recession by GDP, it could be over by the spring," says Maury Harris, chief U.S. economist at UBS. "If you define it instead by the unemployment rate, which tells you a lot more about how people are feeling, you'll probably have to wait until 2010 for things to start improving."
To be sure, the U.S. government has been pulling out all the stops to alleviate the credit crisis, including a massive injection of capital into the troubled financial system.
But it's not just banks that need cash. Thanks to the bursting of the housing bubble, consumers can no longer borrow against their homes with abandon. Because consumer spending represents 71% of gross domestic product, any reduction in it could be a big drag on the economy.
Meanwhile, home prices are set to fall further. "You can throw every policy you want at the housing market, but you can't stop the fundamental price correction that is still required to offset the speculative excesses of the bubble," says Jared Bernstein, a senior economist at the Economic Policy Institute.
Add the cost of the bailout to the record $455 billion federal deficit (some economists think the deficit could reach close to $1 trillion in 2009) and you can expect still more pain - in the form of higher taxes to pay for it all.
"I don't care who gets elected in November," says Barry Ritholtz, CEO of research firm Fusion IQ. "Your taxes are going up."
THE WILD CARD
The mideast tensions over Iran's nuclear program are already mounting. If there's a military flare-up in the region, the price of oil - about $65 a barrel at press time, down from a record high of $147 in mid-July - could skyrocket again, sending the U.S. economy into a much longer and deeper recession.
THE ACTION PLAN
Keep your eye on three key signs that the overall economic picture is improving. These clues can help you decide when to make moves you may have put on ice for now, such as starting a business or moving to a bigger home.
Check the three-month TED spread
It's the difference between the interest rate at which banks borrow from one another (known as Libor) and the rate on three-month T-bills. The wider the spread, the more skittish banks are about lending. It's now just under 3%, far above historical levels; when it drops below 1% you'll know the credit market is almost back to normal.
Where to find it: Go to Bankrate.com, search for the three-month Libor rate and the three-month T-bill rate, and then subtract the T-bill rate from Libor.
Track real estate inventory
Historically, the number of months' worth of inventory on the market has reliably predicted home prices. Six months of inventory appears to be the sweet spot for a healthy market; right now it's 10 months. The National Association of Realtors puts out the inventory data each month, usually between the 22nd and the 25th.
Where to find it: Go to the Research section of realtor.org.
Watch initial jobless claims
The number of new people filing for unemployment benefits, released every Thursday morning by the Labor Department, has been running between 450,000 and 500,000 a week lately.
"When you see those numbers start to come down below 400,000, that'll be a very good sign that the worst of the pain is over," says Brian Wesbury, chief economist at First Trust Advisors.
Where to find it: Do a search for jobless claims on our Web site
By Janice Revell, Money Magazine senior writerLast Updated: November 4, 2008: 2:28 PM ET
A Wakeup Letter to Washington
Note to lawmakers: It's high time to take care of unfair costs for consumers. Let's have some change for fair play.
Take a memo.
To: Our new Congress; the President-elect
From: Nickeled-and-dimed Americans
Re: The (other) financial mess
Congratulations on winning your elections. We trust you won't spend too much time celebrating, though. We taxpayers have had to lay nearly $1 trillion on the line to keep the banking and credit system from collapsing. Cross our fingers, it just might work.
Your task now is to reform the financial industry that helped get us into this jam in the first place. Already there's a fervor in Washington to clamp down on the wholesale side of Wall Street's business, to tighten capital requirements and to get on top of derivatives and the other kooky securities investment banks trade.
All good. But please don't ignore the retail end - that is, the way lenders and brokers do business every day with us consumers. That's a mess too. You've allowed these companies, including some of the very ones we're bailing out now, to do pretty much whatever they want to drain us of our money.
Even the most responsible and savvy borrowers among us have trouble avoiding the tricky fees and rate-hike triggers on our credit cards. You've allowed our kids to get sucked into the debt culture before they've even gotten a job to pay the bills.
And then there are the financial products that are just plain poison, like mortgages that homeowners can't possibly repay and loans with interest rates to rival what guys with names like Sammy Knuckles used to charge.
As we're seeing now, irresponsible lending doesn't just hurt the people who take the bait. It can undermine the whole economy.
We aren't saying that lenders shouldn't make a profit. And we aren't saying that we borrowers aren't responsible for our own choices. We just want transparency and safeguards against faulty financial products.
Here's what you should be working on:
Curb credit-card gotchas
We understand the basic bargain behind credit cards (or think we do). For the convenience of charging, we have to pay some interest. If we pay on time, we should get a lower rate because we've proven that there's little risk we won't pay back.
But if we miss payments, we'll pay more - and even get dinged with some penalties. The card issuers call this risk-based pricing. And whenever lawmakers discuss new regulations, issuers strenuously argue that this system must never be undermined, for the good of consumers.
Ken Clayton of the American Bankers Association says that if lenders aren't allowed to charge their riskier customers a penalty, "some people will lose access to credit at reasonable prices."
Well, sure. Of course lenders ought to be able to set rules for borrowers - the only trouble here is the complexity. It seems to us that card companies aren't pricing for risk so much as teasing us with one low rate and then building multiple traps into their contracts to get us to shell out more, no matter how creditworthy we are. After all, virtually anyone can occasionally incur a late fee.
For starters, there are contracts that stipulate that the terms of the loan can change "at any time, for any reason" - which makes us wonder what all the rest of the gobbledygook is there for.
Among the reasons a card lender might choose to hike our rates: We missed a payment owed to someone else. (The lenders' jargon for this is universal default.) And when we're hit with a new rate, it's generally applied not only to new purchases but to any outstanding balances.
Penalty fees have become an important part of the card lenders' business model. According to IndexCreditCards.com, the average late fee is up to $35; the fee for going over the credit limit is about the same. (And those charges accrue interest too.)
Bills are often mailed out uncomfortably close to the due date. Sometimes the deadline isn't just a date but a specific hour. You can even be charged when paying on time: A Washington Mutual card assesses a $15 fee for paying online on the due date.
And then there's the stuff that seems intentionally perplexing. Many cards, for example, offer tantalizing 0% rates on balance transfers while charging a higher rate on regular purchases.
If a customer doesn't pay off the balance transfer immediately, all the monthly payments go to that 0% loan while the balance for the other, higher-rate charges just compounds and compounds.
Another common trick is "double cycle" billing. Here's how it works: Say a cardholder with no previous balance charges $1,200 and pays off $500 when the bill is due. You might think that interest would be assessed only on the remaining $700.
And with some cards that's true. But with double-cycle cards, a customer would owe interest in the next billing period on $1,900 - first on the original $1,200 and then on the $700 left over.
It's tough enough for full-fledged grownups with steady incomes to navigate this credit-card maze. So it worries us when we see that credit-card companies are aggressively pulling in college students. If they're over 18, they don't need a parent's consent to sign up.
A 2008 survey of new college grads for the credit bureau TransUnion found that 24% start their adult lives with more than $5,000 in credit-card debt. Many students have no means of support other than their parents, scholarships or loans.
But if kids don't or can't repay, says Robert Manning, author of Credit Card Nation, lenders "send bill collectors after parents saying, 'Do you really want to ruin Sally's life over $6,000?'"
How to fix it: We're hopeful that change is coming. "A critical mass is building for reform," says Travis Plunkett, legislative director of the Consumer Federation of America (CFA). Last year the Federal Reserve, which regulates banks, proposed new rules and asked for public comments. An unprecedented 62,000 consumers wrote in.
The Fed's proposal is a good start. If chairman Ben Bernanke actually approves the new rules, they'll ban double-cycle billing, prohibit applying rate increases to old balances and force companies to consider a payment on time if received by 5 p.m. of the due date.
The Fed would also require card companies to apply payments above the minimum proportionally. So if a cardholder who owes $2,000 for new purchases at 19% and $3,000 for transfers at 0% made a payment of $500 over the minimum, the bank would have to apply $200 to the new purchases and $300 to the cash advance. How perfectly sensible.
If the Fed doesn't act or waters down its ideas, then Congress, it's up to you. The Credit Cardholders' Bill of Rights, sponsored by Carolyn Maloney, D-N.Y., passed the House in September.
It would do much of what the Fed proposed and then some. It would bar universal default and "any time, any reason" rate hikes and require card companies to send out bills 25 days in advance of the due date.
The measure would also cut down on surprises. Card companies would have to notify customers of any rate increase 45 days before it went into effect. That would give us more time to make other plans or shop around for a better rate.
In an ideal world, we'd like Congress to go further. If a card has a credit limit, the lender should enforce it, instead of letting the transaction go through and then spanking us with a big fine.
And lawmakers should forget about those complicated deadlines and require lenders to accept a payment if it's postmarked on the due date. If that's good enough for the IRS, it should be good enough for a card company.
But most important, we've really got to protect students. Manning proposes a common-sense solution: Those between ages 18 and 21 should be allowed to have credit, but only if they have some income. Student loans and bailouts from the Bank of Mom and Dad shouldn't count.
By Marlys Harris, Money Magazine editor-at-large
November 5, 2008: 9:47 AM ET
Take a memo.
To: Our new Congress; the President-elect
From: Nickeled-and-dimed Americans
Re: The (other) financial mess
Congratulations on winning your elections. We trust you won't spend too much time celebrating, though. We taxpayers have had to lay nearly $1 trillion on the line to keep the banking and credit system from collapsing. Cross our fingers, it just might work.
Your task now is to reform the financial industry that helped get us into this jam in the first place. Already there's a fervor in Washington to clamp down on the wholesale side of Wall Street's business, to tighten capital requirements and to get on top of derivatives and the other kooky securities investment banks trade.
All good. But please don't ignore the retail end - that is, the way lenders and brokers do business every day with us consumers. That's a mess too. You've allowed these companies, including some of the very ones we're bailing out now, to do pretty much whatever they want to drain us of our money.
Even the most responsible and savvy borrowers among us have trouble avoiding the tricky fees and rate-hike triggers on our credit cards. You've allowed our kids to get sucked into the debt culture before they've even gotten a job to pay the bills.
And then there are the financial products that are just plain poison, like mortgages that homeowners can't possibly repay and loans with interest rates to rival what guys with names like Sammy Knuckles used to charge.
As we're seeing now, irresponsible lending doesn't just hurt the people who take the bait. It can undermine the whole economy.
We aren't saying that lenders shouldn't make a profit. And we aren't saying that we borrowers aren't responsible for our own choices. We just want transparency and safeguards against faulty financial products.
Here's what you should be working on:
Curb credit-card gotchas
We understand the basic bargain behind credit cards (or think we do). For the convenience of charging, we have to pay some interest. If we pay on time, we should get a lower rate because we've proven that there's little risk we won't pay back.
But if we miss payments, we'll pay more - and even get dinged with some penalties. The card issuers call this risk-based pricing. And whenever lawmakers discuss new regulations, issuers strenuously argue that this system must never be undermined, for the good of consumers.
Ken Clayton of the American Bankers Association says that if lenders aren't allowed to charge their riskier customers a penalty, "some people will lose access to credit at reasonable prices."
Well, sure. Of course lenders ought to be able to set rules for borrowers - the only trouble here is the complexity. It seems to us that card companies aren't pricing for risk so much as teasing us with one low rate and then building multiple traps into their contracts to get us to shell out more, no matter how creditworthy we are. After all, virtually anyone can occasionally incur a late fee.
For starters, there are contracts that stipulate that the terms of the loan can change "at any time, for any reason" - which makes us wonder what all the rest of the gobbledygook is there for.
Among the reasons a card lender might choose to hike our rates: We missed a payment owed to someone else. (The lenders' jargon for this is universal default.) And when we're hit with a new rate, it's generally applied not only to new purchases but to any outstanding balances.
Penalty fees have become an important part of the card lenders' business model. According to IndexCreditCards.com, the average late fee is up to $35; the fee for going over the credit limit is about the same. (And those charges accrue interest too.)
Bills are often mailed out uncomfortably close to the due date. Sometimes the deadline isn't just a date but a specific hour. You can even be charged when paying on time: A Washington Mutual card assesses a $15 fee for paying online on the due date.
And then there's the stuff that seems intentionally perplexing. Many cards, for example, offer tantalizing 0% rates on balance transfers while charging a higher rate on regular purchases.
If a customer doesn't pay off the balance transfer immediately, all the monthly payments go to that 0% loan while the balance for the other, higher-rate charges just compounds and compounds.
Another common trick is "double cycle" billing. Here's how it works: Say a cardholder with no previous balance charges $1,200 and pays off $500 when the bill is due. You might think that interest would be assessed only on the remaining $700.
And with some cards that's true. But with double-cycle cards, a customer would owe interest in the next billing period on $1,900 - first on the original $1,200 and then on the $700 left over.
It's tough enough for full-fledged grownups with steady incomes to navigate this credit-card maze. So it worries us when we see that credit-card companies are aggressively pulling in college students. If they're over 18, they don't need a parent's consent to sign up.
A 2008 survey of new college grads for the credit bureau TransUnion found that 24% start their adult lives with more than $5,000 in credit-card debt. Many students have no means of support other than their parents, scholarships or loans.
But if kids don't or can't repay, says Robert Manning, author of Credit Card Nation, lenders "send bill collectors after parents saying, 'Do you really want to ruin Sally's life over $6,000?'"
How to fix it: We're hopeful that change is coming. "A critical mass is building for reform," says Travis Plunkett, legislative director of the Consumer Federation of America (CFA). Last year the Federal Reserve, which regulates banks, proposed new rules and asked for public comments. An unprecedented 62,000 consumers wrote in.
The Fed's proposal is a good start. If chairman Ben Bernanke actually approves the new rules, they'll ban double-cycle billing, prohibit applying rate increases to old balances and force companies to consider a payment on time if received by 5 p.m. of the due date.
The Fed would also require card companies to apply payments above the minimum proportionally. So if a cardholder who owes $2,000 for new purchases at 19% and $3,000 for transfers at 0% made a payment of $500 over the minimum, the bank would have to apply $200 to the new purchases and $300 to the cash advance. How perfectly sensible.
If the Fed doesn't act or waters down its ideas, then Congress, it's up to you. The Credit Cardholders' Bill of Rights, sponsored by Carolyn Maloney, D-N.Y., passed the House in September.
It would do much of what the Fed proposed and then some. It would bar universal default and "any time, any reason" rate hikes and require card companies to send out bills 25 days in advance of the due date.
The measure would also cut down on surprises. Card companies would have to notify customers of any rate increase 45 days before it went into effect. That would give us more time to make other plans or shop around for a better rate.
In an ideal world, we'd like Congress to go further. If a card has a credit limit, the lender should enforce it, instead of letting the transaction go through and then spanking us with a big fine.
And lawmakers should forget about those complicated deadlines and require lenders to accept a payment if it's postmarked on the due date. If that's good enough for the IRS, it should be good enough for a card company.
But most important, we've really got to protect students. Manning proposes a common-sense solution: Those between ages 18 and 21 should be allowed to have credit, but only if they have some income. Student loans and bailouts from the Bank of Mom and Dad shouldn't count.
By Marlys Harris, Money Magazine editor-at-large
November 5, 2008: 9:47 AM ET
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