Requests for home loans and refinancing activity increased last week after falling to 7-month lows the week before.
NEW YORK (Reuters) -- Demand for mortgages to buy homes and refinance loans bounced from seven-month lows last week, with average 30-year borrowing rates unchanged, the Mortgage Bankers Association said on Wednesday.
The industry group's total loan applications index rose a seasonally adjusted 10.9% to 493.1 in the week ended July 3, after slumping the prior week to the lowest level since November.
Last week's report was adjusted to account for the Independence Day holiday on Friday.
A sudden spike in home loan rates from record lows in the spring had derailed a race by homeowners to cut monthly costs by refinancing.
The group's seasonally adjusted refinancing index rose 15.2% last week to 1,707.7, after a 30% plunge in the prior week.
Purchase applications, which lagged refinancing demand all through the spring home sales season, rose 6.7% last week to 285.6.
The average 30-year mortgage rate stayed at 5.34% last week. That was up from the record low 4.61% in late March, based on MBA data, but sharply below 7.04% in the same week a year ago.
On a four-week moving average, which smooths out volatility, the purchase index rose 1.4% and the refinance index fell 10.9%.
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
Showing posts with label mortgage. Show all posts
Showing posts with label mortgage. Show all posts
Thursday, July 16, 2009
Tuesday, April 28, 2009
Real Estate Outlook: Indicators of Recovery
You may not be quite ready to accept the idea that housing on a national basis has moved beyond bottoming out and is now in slow recovery mode.
But think about this: Even if you're bearish on the market, you've got to notice that some extraordinarily positive signs are popping up that point to recovery.
New mortgage applications last week for home purchases and refinancings were up 77 percent from the same week in April 2008, according to the Mortgage Bankers Association. That's a statistic that's hard to ignore!
Mortgage rates continue to average well below 5 percent -- 4.7 percent last week on average for 30-year fixed-rate loans and 4.5 percent for 15 year loans. Rates like these are a major factor pushing applications way up, no question, but sharply lower housing prices in many markets are an important part of the equation as well.
Nearly 600,000 homebuyers have already claimed either the $7,500 tax credit from last year, or the $8,000 credit for this year, according to IRS data cited by the National Association of Home Builders.
Many of these buyers are true first timers, but plenty of others are people who are now jumping back into real estate after not owning for a few years, drawn in by today's much more affordable prices and financing.
The rebound underway in mortgages is even creating a mini hiring boom! The Bank of America has just announced that it will be adding 5,000 new positions around the country -- just to deal with its red hot mortgage business, which closed nearly 400,000 new loans during the first quarter. Other big lenders are hiring loan officers and processors again too.
Hard-hit local housing markets continue to roar back with sales gains. On Florida's west coast, in the Sarasota and Bradenton areas, sales were up 28 percent in March over last year, and pending sales -- pointing to more purchases in the pipeline but not yet closed -- were up 27 percent.
Inventories of unsold houses in the Sarasota-Bradenton area are down 31 percent, to the lowest level since December 2005, according to a report from Trendgrafix.
Nationally, house prices have begun moving up again after many months of declines. According to the Federal Housing Finance Agency, prices rose by seven tenths of a percent on average last month - after falling by six and a half percent during the previous 12 months.
By Kenneth Harney, Published: April 28, 2009, http://realtytimes.com/rtpages/20090428_realestateoutlook.htm
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.Home prices down, but rate of loss eases
S&P/Case-Shiller index of 20 major cities falls for 31st straight month, but annual rate is not a record low for the first time since October 2007.
NEW YORK (CNNMoney.com) -- The weak housing market continued to plague home sellers in February as home prices extended their losing streak to 31 consecutive months, according to a report issued Tuesday.
However, the rate of decline slowed, with the S&P/Case-Shiller 20-city home price index not hitting a record low for year-over-year drop for the first time since October 2007.
"We will certainly need a few more months of data before we can determine if home prices are finally turning around," said David Blitzer, chairman of the index committee at Standard and Poor's.
The index fell 18.6% from February 2008, compared with a 19% year-over-year decline in January. The index was also down 2.2% from January. The index has not recorded a price rise since July 2006 and has fallen 30.7% since that peak.
"I don't think it's great news," said real estate analyst Mike Larson of Weiss Research. "It's just a moderation in the monthly declines and it fits in with the pattern we're seeing of things getting less bad."
"But it's still a weak market. The patient has moved out of intensive care unit but it's still in the long-term care ward," he added.
Moderation: This is the second time in the past several months that the decline trend has seemed to moderate, according to Ken Goldstein, an economist with the Conference Board.
"The first occurrence proved to be a ledge on the way down to the bottom," he said. "We're probably closer to the bottom now."
The leveling off has had a positive impact on consumer confidence, which jumped suddenly this month, although still at historically poor levels.
"Consumers are no longer in despair," said Goldstein. "They're just depressed."
More and more markets are reaching a balance point, according to Bernard Markstein, senior economist with the National Association of Home Builders (NAHB), where prices should level off. He cites other stats, such as stabilizing new and existing home sales, that indicate we're coming to an end of the housing market meltdown.
"By the end of the year, we should be on the slow road to recovery," he said.
Cities: Of the 20 cities tracked by the index, 16 recorded a slower decline in February than the month before.
No index city has fared as poorly as Phoenix, where prices have fallen 35.2% over the past 12 months and 4.5% in January. Prices are down 51% from their peak.
But Phoenix is hardly unique, according to Larson. He said that if you ask any real estate agent in any of the once overheated markets, he or she will tell you that prices in many neighborhoods are off 40% to 50% from their highs.
Las Vegas, which has recorded more foreclosures than any other city, is close behind Phoenix with a 31.7% year-over-year loss and a drop of 3.6% for the month. Prices there are off 48.4% from their peak.
Other big losers include San Francisco, down 31% over the past 12 months and 3.3% for the month; Miami, down 20.5% year-over-year and 3% month-over-month; and Los Angeles, 24.1% lower on an annual basis and down 2% on a monthly basis.
The housing bust has touched some of the cities on the list less severely. In Dallas, prices were down 4.5% annually and 0.2% monthly. Denver showed a 5.7% annual drop and a 1.7% monthly dip, and Boston was 7.2% lower on a yearly basis and 1.3% monthly.
That price declines did not accelerate in February is certainly a positive change, according to Goldstein, showing that the housing crisis is beginning to let up a little.
"Still, we're in a deep hole, one that will be tough to climb out of," he said.
By Les Christie, CNNMoney.com staff writer
Last Updated: April 28, 2009: 12:08 PM ET
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
Hope seen, despite home sales downturn
Realtors say home resales fell 3% in March, but analysts point to signs of a stabilizing market.
NEW YORK (CNNMoney.com) -- Sales of existing homes fell in March, according to an industry report released Thursday, but analysts say the housing market is showing signs of stabilization.
The National Association of Realtors said that existing home sales fell last month to a seasonally adjusted annual rate of 4.57 million units, 3% lower than the downwardly revised rate of 4.71 million in February.
March sales were down 7.1% year over year, and came in weaker than the 4.65 million rate forecast by analysts surveyed by Briefing.com.
Despite last month's decline, existing home sales appear to be stabilizing, according to Ian Shepherdson, economist at High Frequency Economics.
"Sales are volatile month-to-month, but the trend appears to be flattening off," Shepherdson said in a research note.
Single family home sales, which are considered the core of the market, fell at a 10% annualized rate in the first quarter of 2009, after a 17.4% drop in the last three months of 2008. At the current sales pace, existing-home sales will be down "only" 2% in the second quarter, according to Shepherdson.
First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.
"The housing market always heals from the bottom up, and with large numbers of first-time buyers entering the market it will become a little easier for sellers to trade up or down," McMillan said in a statement.
Meanwhile, sales of "distressed properties" accounted for over half of all transactions in March. Foreclosed homes typically sell for 20% less than traditional homes, according to NAR.
"Clearly foreclosure activity is driving the marketplace," said Adam York, an economist at Wachovia Economics Group, in a research report. "Buyers are clearly looking for 'bargains,' if they are looking at all."
Existing home sales in the West declined 4.2% in March. Sales in the South and the Northeast also fell, while sales in the Midwest were unchanged.
The national median existing-home price was $175,200 in March, up 4.2% from $168,200 in February. Still, the median existing-home price was down more than 12% since March 2008, when it was $200,100.
The total number of existing homes on the market at the end of March fell 1.6% to 3.74 million units. At the current sales pace, it would take an estimated 9.8 months to sell that inventory of properties. That's up slightly from 9.7 months in February and January.
"The inventory overhang has stabilized too," Shepherdson said. But the number of existing homes on the market remains historically high, and prices will continue to fall rapidly "for the foreseeable future," he said.
First Published: April 23, 2009: 10:06 AM ET
By Ben Rooney, CNNMoney.com staff writer
Last Updated: April 23, 2009: 1:52 PM ET
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
New home sales show signs of revival
Despite a decline in March, the annual rate remains above what economists expect after an even stronger than originally reported February.
NEW YORK (CNNMoney.com) -- Sales of newly constructed homes are showing indications, ever so slight, that the housing decline may be near an end, a government report showed Friday.
The Commerce Department said new home sales fell 0.6% last month to a seasonally adjusted annual rate of 356,000. But that was from a rate of 358,000 in February that was revised up from the originally reported at 337,000 -- the level economists were expecting for March.
The net revision to the prior three months equals an increase of 31,000 units, according to Wachovia Economics Group.
"This is clearly a better-than-expected number," said Michael Larson, a real estate analyst at Weiss Research. "Technically, yes, sales declined, but the last three months were revised higher and the raw number came in better than expectations."
"All signs are pointing to stabilization in market conditions, which is due to lower prices," Larson said. "We still have a problem with unemployment, and that's why any rebound we see will be muted."
Another signs of a bottom in the market: The estimated number of new homes for sale at the end of last month was a seasonally adjusted 311,000, according to the Commerce Department. Last month, it was 328,000 unsold homes.
At the current sales pace, it would take 10.7 months to sell through that inventory, according to the report. That's down from the previous month, when the estimated months of inventory was 11.2, and was nearly 2 months below January's level of 12.5.
"While the inventory correction will likely overshoot to the downside, we are getting closer to stability in the marketplace," said Adam York, economist at Wachovia Economics Group, in a research note. He added that new home inventory is now approaching late 1990s levels.
"As we have long said, getting the new home market back into equilibrium is an important precursor to broader housing market improvement," York said.
The median sales price of new houses sold in March was $201,400, down 3.5%from the revised $208,700 in February and 12.1% from March 2008, when it was $229,300.
"Median prices fell for the third straight month as builders fought the rising tide of foreclosure sales for buyers' attention," said York.
As buyers bargain shop for deals on foreclosed properties, homebuilders have drastically scaled back production to meet falling demand.
On Thursday, the National Association of Realtors said sales of
existing homes fell 3% in March, after an unexpected rise the month before.
First Published: April 24, 2009: 10:17 AM ET
By Ben Rooney, CNNMoney.com staff writer
Last Updated: April 24, 2009: 11:31 AM ET
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
Tuesday, April 21, 2009
Mortgage aid program will likely help millions
Some questions and answers about how it could affect payments, taxes
NEW YORK - It's welcome relief for homeowners struggling with mortgage payments.
The new federal program to let people refinance or modify their mortgages is expected to help millions of Americans lower monthly payments and avoid foreclosure. So what strings are attached?
You might be concerned about the impact to your credit report or the tax implications, for instance. Others who are still paying low introductory rates might fear their monthly bills could skyrocket.
Here are some questions and answers on concerns people might have about the Making Home Affordable program.
Q: How will my credit profile be affected?
A: Refinancing generally doesn't affect your score since it's simply a rewritten mortgage, according to Norm Magnuson of the Consumer Data Industry Association, a trade group based in Washington.
This is especially true of refinancing under the federal program, since one of the terms of eligibility is that homeowners can't have missed a payment in the past year.
It's not yet clear what impact a federal loan modification — an adjustment to terms of an existing mortgage, rather than a new one — will have on credit profiles, however, Magnuson said. Regulators haven't yet determined how the loan modifications will be reported, if at all.
If you're applying for a loan modification under Making Home Affordable, it means you've already missed payments and hurt your credit profile. A loan modification should improve your credit profile in the long-run since the idea is to get you on track for meeting payments.
It might also free up money to pay off other debts.
Q: Is it possible my payments will be higher?
A: If you're still paying a low, introductory rate, it's possible your monthly mortgage payment will increase slightly under the federal refinancing program. But the idea is to avoid the big interest rate spikes that typically come with adjustable-rate mortgages.
After applying for the Making Home Affordable program, your lender should give you a "good faith estimate" that includes your new interest rate, mortgage payment and the total cost of the loan. Compare the numbers with your current loan; you might decide that refinancing isn't an improvement.
You can also check out the payment reduction estimator on the government's Web site at http://www.makinghomeaffordable.gov/.
Q: Should I wait to see if mortgage interest rates come down in a couple of months before applying?
A: Probably not, since mortgage rates are at historic lows.
Last week, rates on 30-year mortgages inched upward to 4.87 percent, but that's still close to the lowest level in decades. Waiting for the rate to go any lower might backfire, said Ken Inadomi, director of the New York Mortgage Coalition.
Even introductory rates shouldn't be that much lower than fixed rates these days — in some cases, they may even be higher. So it's probably in your best interest to apply for refinancing now.
In case you decide to wait: The Making Home Affordable program expires on June 10, 2010.
Q: What are the tax implications?
A: Charges for refinancing a mortgage are tax deductible. The total cost should be evenly divided to be deducted over the life of the mortgage, Inadomi said. Other costs, such as attorney or appraisal fees, are not deductible.
You'll also have to adjust your mortgage interest deduction if you get a lower rate.
Q: Can I try to refinance or modify my mortgage on my own, without going through the program?
A: Working directly with a lender shouldn't be a problem if you think you're not eligible for the federal program. Just beware of getting a third party involved, especially if they ask for an upfront fee.
Last week, government officials warned homeowners of scammers that charge fees of $1,000 to $3,000 to help with loan modifications. Officials say such operations almost always are fraudulent, and that help is available for free from government-approved housing counselors.
Officials said the scams often go by official-sounding names designed to make borrowers think they are using the Obama administration's program.
http://www.msnbc.msn.com/id/30197516/
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
Demand for home purchase loans jumps
Increase could help gauge the outlook for spring buying season
NEW YORK - U.S. mortgage applications rose last week, as demand for home purchase loans jumped even as interest rates edged up from recent record lows, data from an industry group showed on Wednesday.
Demand for home purchase loans, an indicator of home sales, far outweighed demand for refinancing. The increase may help gauge what is in store for the hard-hit U.S. housing market this spring, the peak home buying season.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended April 3 increased 4.7 percent to 1,250.6.
Cameron Findlay, chief economist at LendingTree.com based in Charlotte, North Carolina, said home loan demand at his company has remained strong and steady the last several weeks.
“In addition, the quality of the borrowers coming to us has remained high with high FICO scores and low loan-to-value ratios,” he said on Tuesday. “This is an encouraging sign as responsible borrowers looking to purchase or refinance their homes are getting the help they need with low rate, high-quality loans.”
FICO scores refer to borrowers’ credit ratings.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.73 percent, up 0.12 percentage point from the a record low the previous week but well below 5.78 percent a year ago. The survey has been conducted weekly since 1990.
“As rates remain at historic lows, we anticipate this trend will continue as more borrowers take the time to shop around for competitive rates on home loans,” he said.
The U.S. housing market is in the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy, as well as the rest of the world.
Low mortgage rates have generated demand for home refinancing loans and should continue to do so, although when it comes to demand for loans to buy homes, the low rates had only a moderate impact until last week.
The MBA’s seasonally adjusted purchase index rose 11.1 percent to 297.7. The index, however, dropped 22.6 percent from its year-ago level of 384.7.
Overall mortgage applications last week were 72.4 percent above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 13.3 percent.
Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Michigan, said home loan activity continued to improve as consumers took advantage of attractively low interest rates.
“While credit guidelines remain stringent, there are plenty of qualified folks who are putting more money back in their pockets by locking in a low rate,” he said.
“Incentives like the first-time home buyer tax credit are helping to generate increased purchase activity,” he said.
The Mortgage Bankers Association’s seasonally adjusted index of refinancing applications increased 3.2 percent to 6,813.5. The index was up 150.1 percent from its year-ago level of 2,724.7.
The refinance share of applications decreased to 77.9 percent from 79.1 percent, while the adjustable-rate mortgage share of activity was unchanged at 1.5 percent.
Fixed 15-year mortgage rates averaged 4.49 percent, up from 4.45 percent the previous week. Rates on one-year ARMs increased to 6.23 percent from 6.20 percent.
http://www.msnbc.msn.com/id/30107144/
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
Obama launches mortgage rescue plan
First participants in the Treasury Department's program to help homeowners avoid foreclosure include some of the nation's largest banks.
NEW YORK (CNNMoney.com) -- The Obama administration's loan modification program is finally underway.
The Treasury Department announced Wednesday the first six participants to sign up for President Obama's plan. They include three of the nation's largest banks: JPMorgan Chase (JPM, Fortune 500), which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo (WFC, Fortune 500), $2.9 billion; and Citigroup (C, Fortune 500), $2 billion. The others are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million.
Additional loan servicers will be added to the list over time, a Treasury spokesman said.
Several major servicers, including JPMorgan Chase and Wells Fargo, said they began modifying loans under the government initiative earlier this month. CitiMortgage signed up for the program on Monday and will start processing applications soon.
"We view this modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership," Wells Fargo said in a statement.
Distressed homeowners and housing counselors have been eagerly awaiting the program's launch since Obama first announced it on Feb. 18. However, it took weeks for the government to clarify the terms and for the financial institutions to update their systems and start accepting applications, frustrating many of those in trouble.
Billed as helping up to 9 million borrowers stay in their homes, the two-part plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages even if the homeowner has little or no equity. The government is allocating $75 billion to subsidize part of payment reduction, as well as provide thousands of dollars in incentives for servicers and borrowers to participate.
The Treasury Department said Wednesday it is capping the payments to servicers to allow more companies to participate. It is allocating $50 billion to the program, with Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and the Department of Housing and Urban Development providing the rest.
The modification plan calls for the servicer to reduce interest rates so that the monthly obligation is no more than 38% of a borrower's pre-tax income, and then the government would kick in money to bring payments down to 31% of income. Servicers can also reduce the loan balance to achieve these affordability levels. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.
Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify. Also, Treasury will not provide subsidies to reduce rates to levels below 2%.
It was not immediately clear whether the servicers must pay the incentives to homeowners and investors out of their funding share.
In addition to subsidizing the interest rates, servicers will use the Treasury funding to pay for incentives for themselves, homeowners and investors. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.
Homeowners, meanwhile, will get up to $1,000 a year for five years if they keep up with payments. The funds will be used to reduce their loan principals.
The Treasury Department set the caps based on public data about the mortgages the servicers handle. Though the program mandates that servicers modify all loans that meet the requirements, the department feels the servicers will have sufficient funds to cover all troubled borrowers' applications.
"We're confident we'll have enough money," said Treasury spokesman Andrew Williams.
Separately, major servicers also recently started accepting applications under the refinance portion of the program.
How to nab a low-rate home loan
Getting a new loan can save you a bundle, but cautious lenders will make you jump through hoops. These strategies can help.
(Money Magazine) -- On paper it seems like the perfect time to refinance. The average rate on a 30-year fixed mortgage recently hit a 20-year low when it fell below 5% in mid-March. And the Fed has said that it will spend $300 billion to buy back government-backed Treasury bonds; that will probably keep loan rates low for months to come.
But wade into the mortgage market, and you may quickly feel as if you're trying to grab a dollar in a game-show booth where the money is blowing around: Those ultralow rates are right in front of you, yet maddeningly elusive.
Lenders, grappling with deadbeat homeowners and shifting regulations, have pared back on mortgage products and upped credit requirements. Still, you have a good incentive to try: If you took out a mortgage two years ago, when rates were in the mid-sixes, you stand to drop your rate nearly two percentage points, saving almost $300 a month on a $300,000 loan. Here's how to navigate the roadblocks.
Figure out if you qualify. Nowadays, credit score and equity are king. To land the best rates, you'll probably need a credit score of at least 740, and 20% equity. "Banks are looking for reasons not to lend you money," says Mark Miskiel of Lighthouse Mortgage in Sedona, Ariz.
If you don't have 20% equity, a refi isn't out of the question - President Obama's housing package allows homeowners who owe as much as 105% to receive government-backed loans. To qualify for that program, however, your original mortgage must be held by one of the government-sponsored entities, Freddie Mac or Fannie Mae; you must prove that you can keep up with payments; and you'll get stuck with fees that tack 0.25% to 3% onto your rate.
Get rid of the HELOC. Home-equity loans and lines have become the enemy of would-be refinancers. Before you can close on a new loan, your home-equity lender must agree to "subordinate" the secondary loan (meaning that your primary lender will get repaid first in the event you run into financial trouble). That can take at least a month, says Bob Moulton of the Americana Mortgage Group in Manhasset, N.Y.
One way to speed up the process is to do a consolidation refi through your home-equity lender. If that's not possible, aim to submit the subordination paperwork as you start shopping for a primary mortgage. And know that other lenders may add up to 0.25% to your rate to cash out the secondary loan.
Know where to look. No matter how stellar your credit, you won't get a great rate without doing some serious shopping. That's because every bank is using different standards for underwriting loans, so while you may look like a risky borrower to one, another may welcome you with open arms. In general, says Keith Gumbinger of mortgage data firm HSH Associates, you're likely to get the best rates from small local banks and credit unions.
Unfortunately, if you need a jumbo loan (typically $417,000, but it can go up to $729,750 in high-cost areas), you can kiss those super-low rates goodbye. While jumbos normally run about half a percentage point higher than smaller ones, today the spread is a point and a half.
Pay a point upfront. A point, which equals 1% of your mortgage amount, typically buys you an eighth to a quarter of a percentage point drop in your rate. Today some overloaded lenders are knocking half a percentage point off for those who pay a point, hoping this extra initial cost will deter serial refinancers.
If you're planning to stay put for about five years, it may be worth it. Conversely, consider adding an eighth of a percentage point to your rate to lock it in for 45 days. Banks and lenders are putting a lot more effort into vetting applications, so it can take up to two months to close a loan, vs. about 30 days in the past; you don't want to risk rates' moving against you while you wait. The payoff for patience: a loan you can live with, for a very long time.
Not so long ago, having a pulse qualified you to take out a mortgage. These days lenders are vetting applicants with the ardor of a Senate committee grilling an AIG executive. Here's a summary of what's changed.
Friday, April 10, 2009
Obama: Timing right for millions to refinance
WASHINGTON — Declaring "good news" in the midst of an economic meltdown, President Obama on Thursday urged families to take advantage of record low mortgage rates by refinancing their homes.
"We are a time where people can really take advantage of this," Obama said, seated with a handful of homeowners who have already lowered their bills.
Rates on 30-year mortgages have fallen and last week hit 4.78% on average, the lowest on record. Rates are down by more than a full percentage point from a year ago.
"The main message we want to send today is there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates," Obama said in a photo opportunity in the Roosevelt Room. "That is money in their pocket."
The president encouraged people to take advantage of a government website —www.makinghomeaffordable.gov— to see how they can get help.
In just a handful of minutes of addressing reporters, Obama read the website address aloud five times.
But the top U.S. housing official said later that interest rates on typical home loans will probably continue to fall from their current, record lows..
"I think you will see them continue to come down, based on everything that we're doing, but recognize that they've already started to make a big difference," Housing and Urban Development Secretary Shawn Donovan said on CNBC.
Donovan was speaking after the White House press event where Obama touted his plans to rescue the housing market.
In late February, the White House announced a plan to help 9 million homeowners win lower mortgage rates or lower their monthly bills to a more affordable level.
"Home purchases are up about 20% since we announced the plan so we are already beginning to see a difference," Donovan said.
The president credited his own government's efforts, in part, for contributing to a recent surge in refinancing. The collapse of the inflated housing market helped contribute to a meltdown in the financial sector and the broader economy, and millions of people have lost their homes or been at risk for foreclosure.
Obama also warned people to watch out for scam artists.
"If somebody is asking you for money up front before they help you with your refinancing," Obama said, "it's probably a scam."
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
"We are a time where people can really take advantage of this," Obama said, seated with a handful of homeowners who have already lowered their bills.
Rates on 30-year mortgages have fallen and last week hit 4.78% on average, the lowest on record. Rates are down by more than a full percentage point from a year ago.
"The main message we want to send today is there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates," Obama said in a photo opportunity in the Roosevelt Room. "That is money in their pocket."
The president encouraged people to take advantage of a government website —www.makinghomeaffordable.gov— to see how they can get help.
In just a handful of minutes of addressing reporters, Obama read the website address aloud five times.
But the top U.S. housing official said later that interest rates on typical home loans will probably continue to fall from their current, record lows..
"I think you will see them continue to come down, based on everything that we're doing, but recognize that they've already started to make a big difference," Housing and Urban Development Secretary Shawn Donovan said on CNBC.
Donovan was speaking after the White House press event where Obama touted his plans to rescue the housing market.
In late February, the White House announced a plan to help 9 million homeowners win lower mortgage rates or lower their monthly bills to a more affordable level.
"Home purchases are up about 20% since we announced the plan so we are already beginning to see a difference," Donovan said.
The president credited his own government's efforts, in part, for contributing to a recent surge in refinancing. The collapse of the inflated housing market helped contribute to a meltdown in the financial sector and the broader economy, and millions of people have lost their homes or been at risk for foreclosure.
Obama also warned people to watch out for scam artists.
"If somebody is asking you for money up front before they help you with your refinancing," Obama said, "it's probably a scam."
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.
Wednesday, April 8, 2009
State of the Housing Market
I’ll start with the subject we all care about the most: housing. First, some good news: Existing Home Sales (for February) came out yesterday and unexpectedly rose by 5.1%. This is the largest monthly rise since July 2003. As you all know, I thought home sales would bottom in November but I was wrong . . . January’s #s were lower than November’s. I expected Obama’s Stimulus package to more aggressively attack the housing problem.
However, keep in mind, the graph above doesn’t take into account interest rates. As I’ve explained before, most people buy homes by getting a mortgage so you really can’t evaluate the affordability of home prices without incorporating current mortgage rates. The graph below shows the % of Monthly Household Income (Median) needed to pay the Mortgage Payment on a Median Priced Home.
This graph shows that for as far as the data goes back, homes have never been more affordable than they are now. HOWEVER, AND THIS IS REALLY IMPORTANT: Notice how the “bubble” in prices really doesn’t show up on this graph like it does in the first graph above. I found this extremely interesting. Why don’t we see the price bubble in this graph??? The reason is that while home prices boomed, mortgage rates dropped almost as fast as prices went up. So, one could make the argument that we really didn’t have as much of a price bubble as people thought . . . it was mostly a result of dropping mortgage rates as opposed to the common belief that people were buying homes that they couldn’t afford. Granted, many people did buy homes they couldn’t afford but the graph above shows that although median home prices went way up, mortgage rates came down so fast that there was only a slight increase in the % of Household Income used for the Mortgage Payment. So, the average home buyer between 2003-2005 wasn’t as overextended as is commonly believed. Clearly, in areas like California and Las Vegas, home prices were way too high relative to Incomes and people did overextend themselves, but this is not the case for most of the rest of the country. As you can see, homes have never been more affordable. Right now, it requires only 20% of the Median Household Income for the Mortgage Payments on the Median Prices Home (and this assumes 100% financing . . . just multiply all #s by .8 to assume a 20% down payment).
Mark-to-Market Accounting
One of the big issues discussed in the media regarding the banks’ health is Mark-to-Market (MTM) Accounting. First, let me explain what this means. Basically, prior to 2007 (FAS 157), when banks purchased securities such as Mortgage Backed Securities, banks would value the securities on their books at the purchase price (more or less). So, if ABC Bank paid $100 for Security X, ABC Bank would report the value of Security X as $100 until they sold the security, at which point, they would recognize a profit or loss on the sale. Mark-to-Market, or Fair Value, accounting states that banks must report the value of their assets at current market prices (whether they sell them or not). This means, that if a security similar to Security X was recently sold by another bank for $80, ABC Bank would be forced to “write down” the value of Security X to $80 and report at $20 loss.
Right now, most banks own a large amount of Mortgage Backed Securities (CDOs, CMOs, etc). A Mortgage Backed Security (MBS) is just a pool of mortgages where the owner of the MBS collects the payment made by all the people who took out these mortgages. Prior to late 2007, there was a fairly liquid market from MBS securities, meaning, banks could easily sell their MBS securities if they didn’t want to keep them on their books. Once home prices started to drop substantially and mortgage default rates increased, nobody wanted to buy MBSs anymore. Nobody knew how bad the housing market would get and how many people would default on their mortgages so it became very difficult to value MBS securities. So, basically, almost overnight, there were no buyers for MBSs. MBSs became “toxic assets”. Because a normal market from MBSs evaporated, the only transactions for MBSs that took place after late 2007 were “distressed sales”. This means that a bank or hedge fund who owned MBSs could only sell them at drastically discounted prices . . . usually less than 50% of par value. In the example above, ABC Bank could only sell Security X if it was willing to accept a price of $30 (30 cents on the dollar).
So, these “distressed sales” became the new market prices for MBSs. This creates a huge problem. These distressed MBS sales combined with the new Mark-to-Market accounting required banks to “write down” their MBS holdings by huge amounts. If a bank owned $10 billion of an MBS security and the latest sale of a similar MBS security occurred at 30% of par value, the bank would be forced to report a $7 billion loss and write their MBS holdings down to $3 Billion. The important thing to recognize is that this phenomenon is forcing banks to write down the value of their MBS Securities way more than is justified by the cash flows generated by these securities. In other words, many of these MBS securities are still comprised of mostly current loans and are still generating significant cash flow. So, from a Discounted Cash Flow valuation standpoint, these securities are still worth 80-90% of their purchase price. However, the MTM rule requires banks to treat these “good” MBS securities as if they are only worth about 30% of their purchase price.
Here’s why this is such a big problem: when a bank writes down the value of their MBS securities by let’s say $10 billion, there is an immediate decrease in the Bank’s retained earnings (and thus Equity) by $10 billion. For every $1 of Equity (Capital) a bank has, a bank typically loans out around $10 (10:1 leverage or a 10% leverage ratio). Banks like to maintain a constant leverage ratio and are required to maintain a minimum leverage ratio by the FDIC. So, when a bank loses $10 billion is Equity, in order to maintain the same Leverage Ratio, the bank would have to decrease the $ amount of their outstanding loans by $100 billion. This is the problem . . . as banks take more and more losses on their MBS portfolio, they need to reduce their lending by 10 times as much as their losses . . . this creates an enormous reduction in new lending and in some cases has caused banks to “call-in” some of their loans just to meet the minimum leverage ratio required by the FDIC. This is the reason banks have stopped lending. Also, another issue making the problem worse is that while the government is publicly telling banks to keep lending, behind the scenes, the bank regulators are scrutinizing everything a bank does and scaring the crap out of banks. Bank regulators (FDIC regulators) are literally threatening to take over or shut down a bank if the bank continues to issue “risky” loans.
Incidentally, you won’t hear this mentioned much by the media (mostly because they don’t know financial history that well) but Mark-to-Market accounting was also required during the Great Depression and is considered one of the reasons for the severity of the Great Depression and also one of the main reasons so many banks failed during the Great Depression. Recognizing the problems caused by Mark-to-Market accounting, FDR repealed the MTM rule in 1938. So, banks lived blissfully without MTM accounting between 1938 and 2007. Also interesting is the fact that Mark-to-Market accounting was required during the 1930s for much the same reason that it was re-instated in 2007: to create more transparency within the financial reporting of banks and other institutions. I can’t help but think of the cliché “Those who don’t know history are destined to repeat it.”
Here’s the real problem with Mark-to-Market accounting: although it seems like a good and reasonable idea, a side effect of MTM is that it greatly amplifies the economic cycle and creates both a positive feedback loop in good times (causing bubbles) and a negative feedback loop in bad times (causing depressions). In good times, banks are able to “write-up” their assets under MTM and thus significantly increase their lending which perpetuates the economic boom. In bad times, banks are forced to “write down” their assets and in order to maintain their capital ratios, they must significantly reduce lending, which perpetuates the economic decline. So, while it is honorable and it makes sense to require banks to use current market prices to value their assets, the negative side effects are devastating. One may even argue that without MTM, the Great Depression would not have occurred because much fewer banks would have failed. As a caveat, there was no FDIC prior to the Great Depression. The FDIC was implemented to prevent the types of “Bank Runs” that destroyed the banks during the Great Depression.
The Toxic Asset Plan
So, there are really two ways the government can help the banks right now: They can either repeal the MTM rule, allowing the banks to value the MBS securities at their purchase price or they can do something to help the banks sell these “toxic assets” and get them off their books. Here are the arguments for and against each method of helping the banks:
Repeal the MTM Rule
Pros: Repealing this rule would literally fix the banks balance sheets overnight and create windfall paper profits for the banks. The assets that these banks wrote down to 30 cents on the $, the banks could “write up” to 100 cents on the dollar, booking a huge profit, and creating a huge increase in equity (capital). Doing so, would allow banks to significantly increase their lending.
Cons: The opponents of repealing the MTM rule claim that all we would be doing is fooling ourselves by allowing the banks to value their MBS securities at values that are clearly not accurate given the state of these mortgages and the housing market. Doing this would simply delay the inevitable loss the banks would have to take when they either sell their MBS securities or let them mature. The argument is that repealing this rule would be financially irresponsible and would just be perpetuating the American way of sacrificing the future prosperity of our children for our own current economic benefit.
Buying the Toxic Assets from the Banks
Pros: this would allow the banks to raise cash and rid themselves of the assets that have been destroying their balance sheets. By selling these assets, the banks would have more cash “reserves” and would thus be able to make more loans. More importantly, once the assets are off the banks books, the uncertainty of how much damage these assets are going to do to the banks will be gone, allowing the banks some breathing room to rebuild and recapitalize.
Cons: The buyer of these toxic assets probably will not be willing to pay a price high enough to induce the banks to sell their toxic assets. Right now, the banks essentially have a “paper loss” on these assets. If the banks sell them for pennies on the dollar, the banks will be locking in a large cash loss on these assets. As I explained above, many of these assets are probably worth a lot more than the current market value assigned to them. So, unless the bank is desperate for cash, it is in the banks best interest to hold the toxic assets and hope that the housing market recovers to the point where these assets start trading at values closer to par.
As you know, the government has chosen the 2nd option above and yesterday announced a public/private toxic asset purchase plan. In my opinion, although this plan is better than nothing and may improve sentiment regarding the safety of the banks, I do not believe many banks will choose to sell their toxic assets under this plan. Banks know that the government will eventually have to fix our housing and economic crisis. Banks don’t want to “Buy High & Sell Low” so most banks will choose to hold these assets on their books until conditions improve and they can sell them at a better price. The Private Hedge Funds involved in the governments plan will only buy these MBS assets at a significantly discounted price (so they can turn a profit). However, I don’t think the banks are going to be willing to sell at this significantly discounted price. We’ll see.
There is some major opposition to repealing the MTM rule so I doubt this will happen either. However, I do think that the government will alter the MTM rule (they already have slightly) in a way that will allow banks to value their MBS assets at a higher value. This will help a lot.
AIG & Credit Default Swaps
If there is any one company involved in this whole mess who is really the villain and is worthy of the blame that has been placed on them, it is AIG. In order to justify why I believe that, I need to explain what Credit Default Swaps are. In one sentence, the Credit Default Swap market is an unregulated insurance market . . . “unregulated” is the key word. Because this market is unregulated (it never should have been), it is open for major abuse and fraud. Basically, a Credit Default Swap is simply a way to provide insurance against the default of a specific company or institution on its debt. So, for example:
Let’s say I own $100 of debt (bonds) of Company A. If I am worried that Company A might go bankrupt and not
pay me my $100 back, I can buy a Credit Default Swap to insure me against losing my $100 if Company A
defaults. So, let’s say AIG agrees to sell me a Credit Default Swap that pays me $100 if Company A defaults
anytime within the next two years (a 2 year term . . . swaps are sold with varying terms, usually 1 year, 2
years, and 5 years). In order to provide me with this insurance, AIG requires me to pay them $2 per year for
the next two years. After two years, the Swap expires. So, if the company does default sometime over the next
two years, AIG pays me $100. If Company A does not default, I will have paid AIG $4 and AIG will have paid me
nothing. I could also sell my swap sometime before it expires if I want.
Here’s the problem: As I mentioned, the Swap Market is an “over-the-counter” unregulated market. What this means is that there is no Exchange or Regulatory Agency (like SEC or CFTC) regulating the purchase and sale of these swaps. This creates a big problem because it allows anyone to Sell these Swaps, even if they person selling the swaps doesn’t have the money to pay in the event that a default event triggers a payment (in the above example, AIG could sell me the swap even if they didn’t have the $100 to pay me if Company A defaulted). When a derivative is regulated, the buyer and seller of the derivative are required to post “margin” in an account in order to ensure the ability of the buyer and seller to follow through on the terms of the derivative contract. If the price of the underlying market moves and jeopardizes the ability of the posted margin to cover the loss of the buyer or seller, the losing party will be required to post more margin $ (a margin call) in order to maintain their derivative contract. For this reason, in regulated derivative markets (currency future, stock index futures, stock options, etc), there really is no “counter-party risk”. In other words, you don’t really have to worry about the solvency of the person on the other side of a transaction because the rules governing the transaction will guarantee that the counterparty is always able to fulfill their obligation under the derivative contract. (Sorry if this is confusing or boring . . . this is an important part of understanding the problem created by CDSs).
So, because the CDS market is unregulated, anyone can sell CDSs to pocket the annual premium paid by the buyer of the CDS. Here’s the problem: What if the debt that the CDS covers actually defaults?? Then, the Seller of the CDS has to pay a large sum of money to the buyer of the CDS. What if the seller doesn’t have enough money to pay the Buyer? The problem is that unregulated swap markets creates somewhat of a legalized Ponzi scheme for immoral Sellers of CDSs. With these markets unregulated, someone (or some company) with little to no money could sell millions of dollars worth of these swaps in an effort to get rich, knowing full well that they have no ability to fulfill their side of the deal in the event that some of the debt covered by the CDSs they sold defaults. The Seller thinks: if this works out for me and the debt covered by my CDSs doesn’t default, I’ll be rich . . . if not, I’ll just declare bankruptcy because I know I can’t pay anyway.
This is basically what AIG did. AIG sold way more CDSs than they had the cash to support. In other words, AIG basically threw a Hale Marry pass and crossed their fingers. If the economy had continued to stay healthy, AIG would have collected millions, if not billions of dollars worth of “Premiums” from the Buyers of the CDSs, showing huge profits for the company. But, if the economy turned down and some of the debt covered by these CDSs defaulted, AIG would be obligated to payout Billions of dollars that they didn’t have. It was an extremely irresponsible and selfish thing for AIG to do. It’s kind of like watching a football game with your friend and betting your friend $50 on the game even though you know you only have $5 in your wallet. If your team wins, you smile and collect the $50 . . . if your team loses, you say, “Oh, whoops, sorry, I don’t have $50”.
The reason the government chose to bailout AIG is that the government thought that if they didn’t bailout AIG, that many other companies who bought CDSs from AIG (including many banks) might go bankrupt. The government felt it was easier to support AIG than deal with the fallout caused by not supporting AIG. I tend to believe the government made a mistake here and should not have bailed out AIG. Here’s why: something like 95% of the Credit Default Swaps issued were bought by speculators who did not actually own the underlying debt covered by the CDS. For this reason, these speculators were merely betting (hoping) that a certain company would default on its debt and they could collect a large payment from AIG. So, using my example above, these speculators were paying AIG $2 per year in hopes that the debt covered by the CDS would default and AIG would pay them $100. So, in almost all cases, the CDS buyer would not suffer a catastrophic loss if AIG failed to pay them the $100. On the contrary, if AIG did pay, the Buyers of the CDSs would experience a windfall profit ($2 investment for $100 payout). The buyers already paid the premium to AIG so there really is no additional loss of funds associated with the failure of AIG to pay them their $100. For this reason, I believe very few, if any, institutions that had purchased CDSs from AIG would have failed if we had let AIG fail. In reality, by funding AIG, all we are really doing as taxpayers is allowing some of these lucky CDS buyers to experience windfall profits. Of course, about 5% of the buyers of CDSs actually bought the CDSs to hedge the debt they own from Company A (using the example). These people or companies would have suffered a real loss but I would argue that because these people or companies had the cash to purchase the debt in the first place, they would have been able to sufficiently absorb the loss if AIG failed to pay.
Unlike many other programs the government has funded that have been termed “bailouts”, we are unlikely to get our taxpayer money back from AIG. We have given AIG $180 billion of taxpayer money . . . very little of which I expect to get back. To give some perspective, this # is equivalent to almost $1,600 per American Household. For all intensive purposes, it’s as if each household has written a check to AIG for $1,600. It really is incredible.
Government Intervention in Free Markets
There has been a ton of discussion over the last few months about the government’s role in business and “free markets”. Some argue that markets work the best with little or no government involvement or regulation and others argue that we need a lot more government regulation over our markets and economy. I used to be in the Free Market camp where I believed the government should stay out of the way and let the markets run themselves. I now realize that I was wrong. I believe now that it is the government’s responsibility to create and enforce rules in each market to ensure the fair, moral, and sound operations of markets. However, I also believe that the government should not get directly involved in the markets and also should not do anything that creates an unfair advantage for certain players in the market. Let me provide an analogy that may shed some light on this:
Let’s take the game of soccer. Free Market proponents would say, “Just give them the ball and tell them that the team that gets the ball in the other teams goal the most wins.” The Free Marketeers would not want a referee to supervise the game and would hope that the players general sense of fairness and morality would compel them to follow the basic rules of the game. What do you think would happen? The game would eventually turn into rugby and be dominated by the team with the biggest players who were willing to punch and push the ball into the goal using their hands and any other method they could think of to win the game. The teams that were trying to play fair and stick to the rules of the game, would always lose. Now, the flipside is the Pro Gov’t Regulation crowd. This crowd would not only want many rules and a referee to supervise the game, this crowd might take it too far and create gov’t owned teams that were allowed to play using slightly different rules. The Pro Regulation crowd may even alter the rules for certain teams in an attempt to keep the good teams from winning too much or force the good teams to give some of their players to the losing teams.
Hopefully the analogy makes sense and illustrates that we certainly need rules governing our markets and that the government or some entity needs to enforce those rules. What we don’t want is the government becoming an active participant in the markets or imposing rules that provide an unfair advantage to certain market participants. The Mortgage Industry is a perfect example of an industry that did not have enough regulation. As you know (especially if you watched “House of Cards” on CNBC), the mortgage brokerage business became a very immoral business between 2003 and 2007. Basically, the most successful mortgage brokers were the people who pushed loans upon people who shouldn’t have them and told these people to lie on their loan apps. They did this because there really was no legal or negative financial consequence to the brokers for doing this. Since the mortgage brokers sold off the loans to banks and investment banks who packaged them into CMOs, the mortgage broker didn’t care of the loans defaulted. Also, since there really isn’t any legal enforcement agency for mortgages (like the SEC for Stocks), there wasn’t really any legal risk involved with issuing loans to unqualified borrowers or encouraging borrowers to lie on their loan apps. Basically, the “good” mortgage brokers who tried to follow the rules and do what was right (morally) for the borrowers and the lenders were forced out of business by the brokers who were willing to bend the rules and game the system. One consequence of lax regulation is that in tends to encourage immoral behavior and put the “good” guys and girls out of business.
An example of the government taking regulation too far (in my opinion) is the compensation restrictions on companies that took the TARP money. By doing this, the government is inadvertently altering the game in a way that is not beneficial for the long term health of the economy. Regulating income has a couple negative effects: 1. It discourages people from working too hard since there is a cap on their income . . . in other words, if there is no benefit to being the best and working the hardest, why do it? 2. It creates an unfair advantage for the banks that didn’t take TARP money. If a bank didn’t take TARP money and can still pay whatever they want, they can “poach” all the best employees from the banks who did take TARP money, making the TARP banks even weaker and the other banks stronger. Government control over compensation in a free market economy is a very bad idea.
Ending on a high note, the light at the end of the tunnel is getting much stronger. 2 months of increasing retails sales, consumer confidence increasing, the stock market going up, existing home sales rising, mortgage rates dropping . . . there’s a lot of good stuff happening.
Unfortunately, the housing problem was pretty much left out of Obama’s $800 billion stimulus package ($8,000 tax credit for 1st time homebuyers doesn’t really help much). As I explained previously, the deflationary spiral in housing is very well entrenched and really requires government intervention to stop it from continuing.
Fortunately, the quantitative easing (explained below) the Fed announced last week should hold mortgage rates low for awhile which should help the housing market. If the uptrend in sales continues, January will be the bottom in terms of Home Sales. However, due to the declining stock market and the extreme negativity of the media, consumer sentiment was very low in the first half of March, so, it is possible that March Home Sales will be lower than February’s. On the bright side, if the stock market keeps going up or at least, doesn’t decline much, I think consumer sentiment will improve dramatically in late March/April. This will definitely help home sales. A 500 point gain on the Dow yesterday will certainly help sentiment.
Home Sales can be thought of as the 1st derivative of Home Prices. In other words, Home Sales reflect the slope of the Home Price curve. As Home Sales start increasing, we will see the pace of Price declines start to moderate. Once home sales rise sufficiently and go above a certain threshold, Home Prices will finally bottom out and start to rise. I expect this to happen late this year on a National level, possibly sooner if we get a dramatic stock market rise or additional housing stimulus.
In the meantime, I would suggest that you use the dramatic and unexpected increase in existing home sales in February as an indication of a bottom in housing to generate some urgency with your prospects. Here’s a good article you may want to email to your prospects to create some urgency: www.cnbc.com/id/29553757
Home Prices & Affordability
It’s very frustrating for me when I hear “economists” in the media speaking about how they believe home prices still have to drop a bit to return to historical levels relative to incomes. Granted, I agree that home prices will indeed drop more but I vehemently disagree that home prices are still too high. I’m not sure what data these “Professionals” are looking at but the Nationals Data reported by the Census Bureau indicate that the housing bubble has sufficiently burst and prices are back to normal levels. In fact, if you factor in current mortgage rates, homes have never been more affordable. I’ll provide some graphs below to illustrate this.
One of the most common stats referred to regarding home prices is the ratio of the Median Home Price to the Median Household income. Historically, as you can see below, home prices are usually between 3 and 3.5 times Household Incomes. Right now, using today’s data, we are at 3.16. Going back prior to 1980 isn’t really that relevant since the 30 year fixed mortgage industry as we know it today didn’t really exist until the 1980s. In fact, pre-1940, if you wanted to buy a house, you had to take out a 5 year loan (imagine how high the payments were on a 5 year loan).
Home Sales can be thought of as the 1st derivative of Home Prices. In other words, Home Sales reflect the slope of the Home Price curve. As Home Sales start increasing, we will see the pace of Price declines start to moderate. Once home sales rise sufficiently and go above a certain threshold, Home Prices will finally bottom out and start to rise. I expect this to happen late this year on a National level, possibly sooner if we get a dramatic stock market rise or additional housing stimulus.
In the meantime, I would suggest that you use the dramatic and unexpected increase in existing home sales in February as an indication of a bottom in housing to generate some urgency with your prospects. Here’s a good article you may want to email to your prospects to create some urgency: www.cnbc.com/id/29553757
Home Prices & Affordability
It’s very frustrating for me when I hear “economists” in the media speaking about how they believe home prices still have to drop a bit to return to historical levels relative to incomes. Granted, I agree that home prices will indeed drop more but I vehemently disagree that home prices are still too high. I’m not sure what data these “Professionals” are looking at but the Nationals Data reported by the Census Bureau indicate that the housing bubble has sufficiently burst and prices are back to normal levels. In fact, if you factor in current mortgage rates, homes have never been more affordable. I’ll provide some graphs below to illustrate this.
One of the most common stats referred to regarding home prices is the ratio of the Median Home Price to the Median Household income. Historically, as you can see below, home prices are usually between 3 and 3.5 times Household Incomes. Right now, using today’s data, we are at 3.16. Going back prior to 1980 isn’t really that relevant since the 30 year fixed mortgage industry as we know it today didn’t really exist until the 1980s. In fact, pre-1940, if you wanted to buy a house, you had to take out a 5 year loan (imagine how high the payments were on a 5 year loan).
However, keep in mind, the graph above doesn’t take into account interest rates. As I’ve explained before, most people buy homes by getting a mortgage so you really can’t evaluate the affordability of home prices without incorporating current mortgage rates. The graph below shows the % of Monthly Household Income (Median) needed to pay the Mortgage Payment on a Median Priced Home.
This graph shows that for as far as the data goes back, homes have never been more affordable than they are now. HOWEVER, AND THIS IS REALLY IMPORTANT: Notice how the “bubble” in prices really doesn’t show up on this graph like it does in the first graph above. I found this extremely interesting. Why don’t we see the price bubble in this graph??? The reason is that while home prices boomed, mortgage rates dropped almost as fast as prices went up. So, one could make the argument that we really didn’t have as much of a price bubble as people thought . . . it was mostly a result of dropping mortgage rates as opposed to the common belief that people were buying homes that they couldn’t afford. Granted, many people did buy homes they couldn’t afford but the graph above shows that although median home prices went way up, mortgage rates came down so fast that there was only a slight increase in the % of Household Income used for the Mortgage Payment. So, the average home buyer between 2003-2005 wasn’t as overextended as is commonly believed. Clearly, in areas like California and Las Vegas, home prices were way too high relative to Incomes and people did overextend themselves, but this is not the case for most of the rest of the country. As you can see, homes have never been more affordable. Right now, it requires only 20% of the Median Household Income for the Mortgage Payments on the Median Prices Home (and this assumes 100% financing . . . just multiply all #s by .8 to assume a 20% down payment).
Mark-to-Market Accounting
One of the big issues discussed in the media regarding the banks’ health is Mark-to-Market (MTM) Accounting. First, let me explain what this means. Basically, prior to 2007 (FAS 157), when banks purchased securities such as Mortgage Backed Securities, banks would value the securities on their books at the purchase price (more or less). So, if ABC Bank paid $100 for Security X, ABC Bank would report the value of Security X as $100 until they sold the security, at which point, they would recognize a profit or loss on the sale. Mark-to-Market, or Fair Value, accounting states that banks must report the value of their assets at current market prices (whether they sell them or not). This means, that if a security similar to Security X was recently sold by another bank for $80, ABC Bank would be forced to “write down” the value of Security X to $80 and report at $20 loss.
Right now, most banks own a large amount of Mortgage Backed Securities (CDOs, CMOs, etc). A Mortgage Backed Security (MBS) is just a pool of mortgages where the owner of the MBS collects the payment made by all the people who took out these mortgages. Prior to late 2007, there was a fairly liquid market from MBS securities, meaning, banks could easily sell their MBS securities if they didn’t want to keep them on their books. Once home prices started to drop substantially and mortgage default rates increased, nobody wanted to buy MBSs anymore. Nobody knew how bad the housing market would get and how many people would default on their mortgages so it became very difficult to value MBS securities. So, basically, almost overnight, there were no buyers for MBSs. MBSs became “toxic assets”. Because a normal market from MBSs evaporated, the only transactions for MBSs that took place after late 2007 were “distressed sales”. This means that a bank or hedge fund who owned MBSs could only sell them at drastically discounted prices . . . usually less than 50% of par value. In the example above, ABC Bank could only sell Security X if it was willing to accept a price of $30 (30 cents on the dollar).
So, these “distressed sales” became the new market prices for MBSs. This creates a huge problem. These distressed MBS sales combined with the new Mark-to-Market accounting required banks to “write down” their MBS holdings by huge amounts. If a bank owned $10 billion of an MBS security and the latest sale of a similar MBS security occurred at 30% of par value, the bank would be forced to report a $7 billion loss and write their MBS holdings down to $3 Billion. The important thing to recognize is that this phenomenon is forcing banks to write down the value of their MBS Securities way more than is justified by the cash flows generated by these securities. In other words, many of these MBS securities are still comprised of mostly current loans and are still generating significant cash flow. So, from a Discounted Cash Flow valuation standpoint, these securities are still worth 80-90% of their purchase price. However, the MTM rule requires banks to treat these “good” MBS securities as if they are only worth about 30% of their purchase price.
Here’s why this is such a big problem: when a bank writes down the value of their MBS securities by let’s say $10 billion, there is an immediate decrease in the Bank’s retained earnings (and thus Equity) by $10 billion. For every $1 of Equity (Capital) a bank has, a bank typically loans out around $10 (10:1 leverage or a 10% leverage ratio). Banks like to maintain a constant leverage ratio and are required to maintain a minimum leverage ratio by the FDIC. So, when a bank loses $10 billion is Equity, in order to maintain the same Leverage Ratio, the bank would have to decrease the $ amount of their outstanding loans by $100 billion. This is the problem . . . as banks take more and more losses on their MBS portfolio, they need to reduce their lending by 10 times as much as their losses . . . this creates an enormous reduction in new lending and in some cases has caused banks to “call-in” some of their loans just to meet the minimum leverage ratio required by the FDIC. This is the reason banks have stopped lending. Also, another issue making the problem worse is that while the government is publicly telling banks to keep lending, behind the scenes, the bank regulators are scrutinizing everything a bank does and scaring the crap out of banks. Bank regulators (FDIC regulators) are literally threatening to take over or shut down a bank if the bank continues to issue “risky” loans.
Incidentally, you won’t hear this mentioned much by the media (mostly because they don’t know financial history that well) but Mark-to-Market accounting was also required during the Great Depression and is considered one of the reasons for the severity of the Great Depression and also one of the main reasons so many banks failed during the Great Depression. Recognizing the problems caused by Mark-to-Market accounting, FDR repealed the MTM rule in 1938. So, banks lived blissfully without MTM accounting between 1938 and 2007. Also interesting is the fact that Mark-to-Market accounting was required during the 1930s for much the same reason that it was re-instated in 2007: to create more transparency within the financial reporting of banks and other institutions. I can’t help but think of the cliché “Those who don’t know history are destined to repeat it.”
Here’s the real problem with Mark-to-Market accounting: although it seems like a good and reasonable idea, a side effect of MTM is that it greatly amplifies the economic cycle and creates both a positive feedback loop in good times (causing bubbles) and a negative feedback loop in bad times (causing depressions). In good times, banks are able to “write-up” their assets under MTM and thus significantly increase their lending which perpetuates the economic boom. In bad times, banks are forced to “write down” their assets and in order to maintain their capital ratios, they must significantly reduce lending, which perpetuates the economic decline. So, while it is honorable and it makes sense to require banks to use current market prices to value their assets, the negative side effects are devastating. One may even argue that without MTM, the Great Depression would not have occurred because much fewer banks would have failed. As a caveat, there was no FDIC prior to the Great Depression. The FDIC was implemented to prevent the types of “Bank Runs” that destroyed the banks during the Great Depression.
The Toxic Asset Plan
So, there are really two ways the government can help the banks right now: They can either repeal the MTM rule, allowing the banks to value the MBS securities at their purchase price or they can do something to help the banks sell these “toxic assets” and get them off their books. Here are the arguments for and against each method of helping the banks:
Repeal the MTM Rule
Pros: Repealing this rule would literally fix the banks balance sheets overnight and create windfall paper profits for the banks. The assets that these banks wrote down to 30 cents on the $, the banks could “write up” to 100 cents on the dollar, booking a huge profit, and creating a huge increase in equity (capital). Doing so, would allow banks to significantly increase their lending.
Cons: The opponents of repealing the MTM rule claim that all we would be doing is fooling ourselves by allowing the banks to value their MBS securities at values that are clearly not accurate given the state of these mortgages and the housing market. Doing this would simply delay the inevitable loss the banks would have to take when they either sell their MBS securities or let them mature. The argument is that repealing this rule would be financially irresponsible and would just be perpetuating the American way of sacrificing the future prosperity of our children for our own current economic benefit.
Buying the Toxic Assets from the Banks
Pros: this would allow the banks to raise cash and rid themselves of the assets that have been destroying their balance sheets. By selling these assets, the banks would have more cash “reserves” and would thus be able to make more loans. More importantly, once the assets are off the banks books, the uncertainty of how much damage these assets are going to do to the banks will be gone, allowing the banks some breathing room to rebuild and recapitalize.
Cons: The buyer of these toxic assets probably will not be willing to pay a price high enough to induce the banks to sell their toxic assets. Right now, the banks essentially have a “paper loss” on these assets. If the banks sell them for pennies on the dollar, the banks will be locking in a large cash loss on these assets. As I explained above, many of these assets are probably worth a lot more than the current market value assigned to them. So, unless the bank is desperate for cash, it is in the banks best interest to hold the toxic assets and hope that the housing market recovers to the point where these assets start trading at values closer to par.
As you know, the government has chosen the 2nd option above and yesterday announced a public/private toxic asset purchase plan. In my opinion, although this plan is better than nothing and may improve sentiment regarding the safety of the banks, I do not believe many banks will choose to sell their toxic assets under this plan. Banks know that the government will eventually have to fix our housing and economic crisis. Banks don’t want to “Buy High & Sell Low” so most banks will choose to hold these assets on their books until conditions improve and they can sell them at a better price. The Private Hedge Funds involved in the governments plan will only buy these MBS assets at a significantly discounted price (so they can turn a profit). However, I don’t think the banks are going to be willing to sell at this significantly discounted price. We’ll see.
There is some major opposition to repealing the MTM rule so I doubt this will happen either. However, I do think that the government will alter the MTM rule (they already have slightly) in a way that will allow banks to value their MBS assets at a higher value. This will help a lot.
AIG & Credit Default Swaps
If there is any one company involved in this whole mess who is really the villain and is worthy of the blame that has been placed on them, it is AIG. In order to justify why I believe that, I need to explain what Credit Default Swaps are. In one sentence, the Credit Default Swap market is an unregulated insurance market . . . “unregulated” is the key word. Because this market is unregulated (it never should have been), it is open for major abuse and fraud. Basically, a Credit Default Swap is simply a way to provide insurance against the default of a specific company or institution on its debt. So, for example:
Let’s say I own $100 of debt (bonds) of Company A. If I am worried that Company A might go bankrupt and not
pay me my $100 back, I can buy a Credit Default Swap to insure me against losing my $100 if Company A
defaults. So, let’s say AIG agrees to sell me a Credit Default Swap that pays me $100 if Company A defaults
anytime within the next two years (a 2 year term . . . swaps are sold with varying terms, usually 1 year, 2
years, and 5 years). In order to provide me with this insurance, AIG requires me to pay them $2 per year for
the next two years. After two years, the Swap expires. So, if the company does default sometime over the next
two years, AIG pays me $100. If Company A does not default, I will have paid AIG $4 and AIG will have paid me
nothing. I could also sell my swap sometime before it expires if I want.
Here’s the problem: As I mentioned, the Swap Market is an “over-the-counter” unregulated market. What this means is that there is no Exchange or Regulatory Agency (like SEC or CFTC) regulating the purchase and sale of these swaps. This creates a big problem because it allows anyone to Sell these Swaps, even if they person selling the swaps doesn’t have the money to pay in the event that a default event triggers a payment (in the above example, AIG could sell me the swap even if they didn’t have the $100 to pay me if Company A defaulted). When a derivative is regulated, the buyer and seller of the derivative are required to post “margin” in an account in order to ensure the ability of the buyer and seller to follow through on the terms of the derivative contract. If the price of the underlying market moves and jeopardizes the ability of the posted margin to cover the loss of the buyer or seller, the losing party will be required to post more margin $ (a margin call) in order to maintain their derivative contract. For this reason, in regulated derivative markets (currency future, stock index futures, stock options, etc), there really is no “counter-party risk”. In other words, you don’t really have to worry about the solvency of the person on the other side of a transaction because the rules governing the transaction will guarantee that the counterparty is always able to fulfill their obligation under the derivative contract. (Sorry if this is confusing or boring . . . this is an important part of understanding the problem created by CDSs).
So, because the CDS market is unregulated, anyone can sell CDSs to pocket the annual premium paid by the buyer of the CDS. Here’s the problem: What if the debt that the CDS covers actually defaults?? Then, the Seller of the CDS has to pay a large sum of money to the buyer of the CDS. What if the seller doesn’t have enough money to pay the Buyer? The problem is that unregulated swap markets creates somewhat of a legalized Ponzi scheme for immoral Sellers of CDSs. With these markets unregulated, someone (or some company) with little to no money could sell millions of dollars worth of these swaps in an effort to get rich, knowing full well that they have no ability to fulfill their side of the deal in the event that some of the debt covered by the CDSs they sold defaults. The Seller thinks: if this works out for me and the debt covered by my CDSs doesn’t default, I’ll be rich . . . if not, I’ll just declare bankruptcy because I know I can’t pay anyway.
This is basically what AIG did. AIG sold way more CDSs than they had the cash to support. In other words, AIG basically threw a Hale Marry pass and crossed their fingers. If the economy had continued to stay healthy, AIG would have collected millions, if not billions of dollars worth of “Premiums” from the Buyers of the CDSs, showing huge profits for the company. But, if the economy turned down and some of the debt covered by these CDSs defaulted, AIG would be obligated to payout Billions of dollars that they didn’t have. It was an extremely irresponsible and selfish thing for AIG to do. It’s kind of like watching a football game with your friend and betting your friend $50 on the game even though you know you only have $5 in your wallet. If your team wins, you smile and collect the $50 . . . if your team loses, you say, “Oh, whoops, sorry, I don’t have $50”.
The reason the government chose to bailout AIG is that the government thought that if they didn’t bailout AIG, that many other companies who bought CDSs from AIG (including many banks) might go bankrupt. The government felt it was easier to support AIG than deal with the fallout caused by not supporting AIG. I tend to believe the government made a mistake here and should not have bailed out AIG. Here’s why: something like 95% of the Credit Default Swaps issued were bought by speculators who did not actually own the underlying debt covered by the CDS. For this reason, these speculators were merely betting (hoping) that a certain company would default on its debt and they could collect a large payment from AIG. So, using my example above, these speculators were paying AIG $2 per year in hopes that the debt covered by the CDS would default and AIG would pay them $100. So, in almost all cases, the CDS buyer would not suffer a catastrophic loss if AIG failed to pay them the $100. On the contrary, if AIG did pay, the Buyers of the CDSs would experience a windfall profit ($2 investment for $100 payout). The buyers already paid the premium to AIG so there really is no additional loss of funds associated with the failure of AIG to pay them their $100. For this reason, I believe very few, if any, institutions that had purchased CDSs from AIG would have failed if we had let AIG fail. In reality, by funding AIG, all we are really doing as taxpayers is allowing some of these lucky CDS buyers to experience windfall profits. Of course, about 5% of the buyers of CDSs actually bought the CDSs to hedge the debt they own from Company A (using the example). These people or companies would have suffered a real loss but I would argue that because these people or companies had the cash to purchase the debt in the first place, they would have been able to sufficiently absorb the loss if AIG failed to pay.
Unlike many other programs the government has funded that have been termed “bailouts”, we are unlikely to get our taxpayer money back from AIG. We have given AIG $180 billion of taxpayer money . . . very little of which I expect to get back. To give some perspective, this # is equivalent to almost $1,600 per American Household. For all intensive purposes, it’s as if each household has written a check to AIG for $1,600. It really is incredible.
Government Intervention in Free Markets
There has been a ton of discussion over the last few months about the government’s role in business and “free markets”. Some argue that markets work the best with little or no government involvement or regulation and others argue that we need a lot more government regulation over our markets and economy. I used to be in the Free Market camp where I believed the government should stay out of the way and let the markets run themselves. I now realize that I was wrong. I believe now that it is the government’s responsibility to create and enforce rules in each market to ensure the fair, moral, and sound operations of markets. However, I also believe that the government should not get directly involved in the markets and also should not do anything that creates an unfair advantage for certain players in the market. Let me provide an analogy that may shed some light on this:
Let’s take the game of soccer. Free Market proponents would say, “Just give them the ball and tell them that the team that gets the ball in the other teams goal the most wins.” The Free Marketeers would not want a referee to supervise the game and would hope that the players general sense of fairness and morality would compel them to follow the basic rules of the game. What do you think would happen? The game would eventually turn into rugby and be dominated by the team with the biggest players who were willing to punch and push the ball into the goal using their hands and any other method they could think of to win the game. The teams that were trying to play fair and stick to the rules of the game, would always lose. Now, the flipside is the Pro Gov’t Regulation crowd. This crowd would not only want many rules and a referee to supervise the game, this crowd might take it too far and create gov’t owned teams that were allowed to play using slightly different rules. The Pro Regulation crowd may even alter the rules for certain teams in an attempt to keep the good teams from winning too much or force the good teams to give some of their players to the losing teams.
Hopefully the analogy makes sense and illustrates that we certainly need rules governing our markets and that the government or some entity needs to enforce those rules. What we don’t want is the government becoming an active participant in the markets or imposing rules that provide an unfair advantage to certain market participants. The Mortgage Industry is a perfect example of an industry that did not have enough regulation. As you know (especially if you watched “House of Cards” on CNBC), the mortgage brokerage business became a very immoral business between 2003 and 2007. Basically, the most successful mortgage brokers were the people who pushed loans upon people who shouldn’t have them and told these people to lie on their loan apps. They did this because there really was no legal or negative financial consequence to the brokers for doing this. Since the mortgage brokers sold off the loans to banks and investment banks who packaged them into CMOs, the mortgage broker didn’t care of the loans defaulted. Also, since there really isn’t any legal enforcement agency for mortgages (like the SEC for Stocks), there wasn’t really any legal risk involved with issuing loans to unqualified borrowers or encouraging borrowers to lie on their loan apps. Basically, the “good” mortgage brokers who tried to follow the rules and do what was right (morally) for the borrowers and the lenders were forced out of business by the brokers who were willing to bend the rules and game the system. One consequence of lax regulation is that in tends to encourage immoral behavior and put the “good” guys and girls out of business.
An example of the government taking regulation too far (in my opinion) is the compensation restrictions on companies that took the TARP money. By doing this, the government is inadvertently altering the game in a way that is not beneficial for the long term health of the economy. Regulating income has a couple negative effects: 1. It discourages people from working too hard since there is a cap on their income . . . in other words, if there is no benefit to being the best and working the hardest, why do it? 2. It creates an unfair advantage for the banks that didn’t take TARP money. If a bank didn’t take TARP money and can still pay whatever they want, they can “poach” all the best employees from the banks who did take TARP money, making the TARP banks even weaker and the other banks stronger. Government control over compensation in a free market economy is a very bad idea.
Ending on a high note, the light at the end of the tunnel is getting much stronger. 2 months of increasing retails sales, consumer confidence increasing, the stock market going up, existing home sales rising, mortgage rates dropping . . . there’s a lot of good stuff happening.
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