Freezing in NH

Inquiry Assails Accounting Firm in Lender’s Fall

A sweeping five-month investigation into the collapse of one of the nation’s largest subprime lenders points a finger at a possible new culprit in the mortgage mess: the accountants.

Yeah, because accountants are just such edgy law breakers.  I suspect the finger (in all senses of the phrase) goes to the boss of the accountants. 

There are so many people who did things wrong here, it’s hard to pick just one.  In this case, the auditors signed off on some things they shouldn’t have.  But they didn’t make the decisions, just agreed they were okay.  And that makes them a total failure as auditors, but not exactly the main culprit. 

Imagine you’re driving down the road as the sun is going down with your headlights off and you pass a cop.  Now the cop really should pull you over, but if he doesn’t and you crash into a tree when the road curves, it’s still your fault.  You can blame it on him but you’re the one driving in the dark. 

New Century made a whole series of bad choices, some of which may turn out to be illegal.  KPMG audited them, and didn’t catch everything.  So while KPMG should have caught the problems, it was New Century that created those problems. 

I suspect this is far from the last article that will compare this mortgage mess to Enron.

I’ve been thinking about an article in the NYTimes: Foreclosure Aid Rising Locally, as Is Dissent.  This is sort of where I was a couple months ago.  I have a house, with an adjustable rate mortgage, purchased a few years ago.  But because I bought a house that I could afford, I’m not going get any help with the mortgage.  And my feeling was that bailouts were a huge misuse of people’s money, time and effort.

“Just can’t agree with using taxpayer dollars to bail out private homeowners, no matter how the mayor tries to justify it,” read a complaint posted on the “Soundoff” section of The Seattle Post-Intelligencer’s Web site.

But after a few months of thinking about it (not solid thinking of course, just occasionally having it pop into my mind) I realized that if the slightly crazy neighbor next to me went into foreclosure and his house were auctioned off, that would be the most recent comp (comparable sale) when I went to sell my house.  And the auction price for a house that hasn’t been spruced up is not that great, especially here in the winter.  So if he goes into foreclosure, the value of my house (and thus my bottom line) sinks.   

The goal of these programs is not just to keep people from losing their homes, but also to limit broader economic fallout, including plummeting property tax revenues and widespread declines in home values. Still, they pit what some government officials say are practical economic solutions for the common good against individual ideals of fairness and personal responsibility.

 So while I hate the idea of bailing out idiots and liars, it still might be in my best interest. 

I’ve been doing some work on the house, it keeps me busy and out of trouble.  Sheetrock dust goes everywhere:
 

Bush made some half-steps yesterday.  I guess providing insurance is a good thing.  I just feel that the reason some of these folks can’t get a good mortgage right now (to refinance out of their current one) is that they are a bad credit risk.  So I’m not sure I (as a taxpayer) want to be on the hook for their mistakes.  But I don’t want a total market meltdown either.  Eh, whatever. 

Despite the assertion that affecting the markets is not the goal, one administration official said Thursday evening that concern about Wall Street’s reaction did affect the timing of the briefing. He said there was a fear that if the White House announced in the morning that Mr. Bush would be making an announcement on housing, there could be confusion as buyers and sellers of mortgage securities guessed what the announcement would be.

But secondarily, this official said, helping homeowners keep their homes and refinance or renegotiate the terms of the mortgages could have a stabilizing effect on the financial institutions that have these mortgages in their portfolios, and help them write down the value of the mortgages or sell them off at a loss.

Yeah, it will be nice if things stabilize.  It doesn’t seem to take much these days for things to going into a death spiral.

“This is helpful. But you had millions of people taking loans they should not have been taking, and investors lending money at too low interest rates,” Mr. Davidoff said. “Nothing is going to make those bad decisions go away.”

Unfortunately he’s right.  There are going to be repercussions and such in the housing and stock markets for a while.  There will be over-reactions and over-tightening of mortgage standards.  I just hope they don’t enact legislation that’s too restrictive on mortage origination.  Legislation is hard to change and sticks around for a while. 

http://www.msnbc.msn.com/id/20364043/

As foreclosures mount, D.C. debates answer: Should government bail out lenders, homeowners or let situation stay as is? 

As a believer in personal responsibility, I say neither.  As a person who owns a house and therefore has realestate, savings and job all rolled up in the US market, I’m beginning to worry. 

Nearly 180,000 fillings — including default notices, auction sale notices and bank repossessions — were reported during the month. That means that one in every 693 U.S. households was hit with foreclosure in July.

Those are some very frightening numbers.  Those are people who are going to have to put off buying new cars, stop eating out as much, basically stop spending as much money.  Even if they manage to get the lender to do something to help them out a bit, they’re still not going to be dumping much cash into the economy.  That leads to other industries slowing down, and ripples into job losses not just at housing-related businesses, but other areas as well.

Some are suggesting that lenders and borrowers involved in the risky loans that are now going bad should simply suffer the consequences. But supporters of more aggressive measures argue that the government may need to step in before the current mortgage mayhem threatens the wider economy.   

Exactly.  I can see both sides of the arguement.

Though 43 states have seen higher year-over-year foreclosure rates, more than half of the total has been concentrated in just five states — California, Florida, Michigan, Ohio and Georgia.

I’m glad I don’t own a house in one of those states.  But I probably never would have bought in CA or FL because prices were going up too fast.  If I’d been in OH, maybe I would have because total prices were still low.  The fallout with increased strictness in mortgage lending (overall a good thing, but a problem right now for people refinancing) is going to be nationwide.

In April, Sen. Charles Schumer, D-N.Y., proposed spending hundreds of millions of dollars of government funds to help troubled borrowers avoid losing their homes. In May, the House passed a bill that would raise current limits on the size of mortgages that can be insured by the Federal Housing Administration.

But the bill would also allow FHA to insure loans with no money down and charge higher premiums to riskier borrowers. Critics of those moves, including Sen. Richard Shelby, R-Ala., and other Senate Republicans, say the changes that eased lending standards could expose the FHA — and taxpayers — to the kinds of risks that got subprime borrowers and lenders into trouble to begin with. 

This bothers me.  I don’t want to end up the person on the hook because I bought a small run-down house well within my means.  Just because I’m looking out for myself doesn’t mean I want to take care of folks who overspent.  Why should the responsible people have to bail out the irresponsible?  But economy-wise, it’s difficult to tell which would be worse for me in the long run — doing the bailout or not doing the bailout and the economy tanks.

Lehman Closes Subprime Unit and Lays Off 1,200

In the last nine months, about 120 mortgage lenders have shut down, or declared bankruptcy, according to Lehman. 

Wow.

Fed Cuts Lending Rate in Surprise Move

The Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks, saying that it now feels that “tighter credit and increased uncertainty have the potential to restrain economic growth going forward.” Stocks immediately surged when markets opened on Wall Street, but shed much of the gains in morning trading.

 […..]

In a report today, ING Financial Markets said: “This opens the door to cuts of the Fed funds rate itself, should this be deemed necessary. There is still a possibility of an inter-meeting cut, or a cut at the Sept. 18 meeting, though of course, if markets respond favorably, this may be viewed as unnecessary.”

Maybe this will help Countrywide:

Mortgage Lender Moves to Shore Up Cash

Countrywide Financial, the nation’s largest mortgage lender, said today[Aug 16] that it had tapped $11.5 billion in emergency loans from 40 of the world’s largest banks in an effort to shore up its cash position.

Mortgage lending is a bit like a house of cards.  Even when done well (i.e. not sub-prime) the lender needs to keep making new loans to stay afloat.  When bad news drives away new borrowers and credit dries up, it snowballs into a big problem for the lender.

Right off the bat I want to say I feel sorry for these people.  I mention this because I suspect the rest of what I want to say is going to sound a tad harsh.

One Family’s Journey Into a Subprime Trap

Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.

The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting.

I’m tired of not having a really nice sportscar.  Maybe I should just get one.  And a vacation house in the Caribbean.  I can probably get one for $567,000.

Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then “reset” to a much higher level.

Yeah.  I don’t think mortgage debt is bad, but 100% financing, interest only for the first two years, with a reset to something much higher just sounds like a bad idea. 

When the Monteses decided to buy the bungalow in 2005, they had only a so-so credit record and little savings. So they settled for a “subprime” loan, with costlier terms than those available in the prime market.

I know renting can suck, been there done that.  Had a landlord who lived on the bottom floor of a three family (we had the top floor) skip out in the middle of the night one time.  The “heat included” only means “heat included when the landlord pays the oil company”.  Lots of people came round looking for him, e.g. his girlfriend, men in suits, men in uniforms, etc. 

But if you can’t really afford a house, maybe you should rent for a couple more years while you save up.  If your mortgage is $3,200 a month (before the reset) perhaps you should live as if your rent was that much and save the difference between that and rent.  Or find out how much it would be after the reset and use that number. 

Mr. Montes recalls feeling edgy about whether he would be able to afford the higher costs — about $900 more per month — due to take effect after two years. But he says the broker assured him he could refinance before those costs kicked in.

Mr. Montes preferred not to name the broker publicly because the broker has a business connection with a relative of the Monteses. The broker declined to comment.

This is a huge warning sign to me.  You should do the same due-diligence with a friend of a friend (or someone from your church/etc) as anyone you meet on the street.  Just because they know your relative does not make them a good person.  Just because they go to church/temple/etc does not make them a good person.   If you are “edgy” about being able to afford something, perhaps you should get a second opinion.  Or trust your gut and wait.

Mrs. Montes says she was apprehensive about the broker’s assurances. “But I blame that on that I don’t understand the lingo they were talking,” she says. “It’s a scary experience…. All I could see was all these numbers flash before me…. I said, ‘Mario, I hope you don’t get into something that is going to hurt us.’”

Er, yeah.  You are both signing on the line,  you are both responsible.  Don’t be an idiot, make sure you understand what you sign.  This is not your husband’s fault, this is the fault of both of you.

The Monteses received a letter informing them their property taxes had been reassessed based on the $567,000 sale price instead of its previous $389,000 value. That raised their taxes to $6,000 from $2,900 a year and would have increased their monthly payments (including the mortgages and taxes) to $3,931. “Whoa!” Mr. Montes recalls saying. “I can’t afford this. I went into emergency mode.”

I almost have to give them a pass on this.  I expected it when I bought my house, even though none of my friends had yet bought a house.  But then I remember the beginning of the article where it says that they had previously owned a house.  So yeah, you should expect the taxes to go up the property gets reassessed, and it’s common for that to happen when the house sells.  Even if it doesn’t happen then, many communities reassess on a regular schedule (mine is at sale and then every 10 years whether it has sold or not).

Worse for the Monteses, they learned that they faced a $12,000 prepayment penalty if they refinanced within three years of the original mortgages — something that Mr. Montes says wasn’t made clear to him when he took out those loans.

Again, maybe he gets a pass on this.  You’d think if the broker was talking about re-fi in 2 years he’d mention the 3 year pre-payment penalty.  I’m sure it’s written in the giant stack of documents signed at closing, but it’s hard to take time to read them.  Okay, he gets a free pass on this part.

The Monteses now hope for help from the company that services their loan, America’s Servicing Co., a unit of Wells Fargo & Co. Mr. Montes telephoned America’s Servicing Tuesday to ask whether it might consider a modification in the terms of the loans to help him keep the payments affordable beyond the reset date. An employee of the servicing company said that wouldn’t be possible if the family has no home equity, Mr. Montes says.

Unfortunately the Monteses probably don’t understand that the company that services the loan has little or nothing to do with the company that owns the loan.  And the company that owns it may or may not be the one that originated it.  Many loans are sold, and the servicer can’t do anything about the terms of the loan other than suggest (or even originate) a refinance.    I understand that it can be confusing to discover the company where you send your payment has nothing to do with the loan itself.

There is very little wiggle room. Mr. and Mrs. Montes also have two car loans, with payments totaling about $700 a month, and are borrowing more money to help put their elder daughter through college. They recently had to tell their younger daughter they couldn’t afford $70 a month for her to take piano lessons.

Yeah, maybe a slightly cheaper car would help out.  If they could sell one of those ~$350/month cars and get a beater for a couple grand they’d be ahead in a few months.  The size of the payment makes me think that they bought new and relatively recently (in the past couple years) so there’s probably some resale value there.  But maybe they rolled their last loan in and are underwater.  Heck, they may have public transport and/or carpool options. 

The elder daughter should be doing her own college borrowing, and the younger daughter (described as “teenage”)  should get a job to pay for her own piano lessons.  This part about cars and college is making me lose some of the sympathy I was begining to feel about the pre-payment penalty and the servicer/originator/owner issue.

The couple now eat out once or twice a month, instead of once or twice a week before they bought the house. They have yet to visit a nearby jazz club they had hoped to frequent. The trips they used to take to Lake Tahoe now are out of the question.

Er, yeah.  Eat in.  You made some choices, now you have to pay for them.  Perhaps if you buy a beater car (say $2k) in a six months you’ll be able to eat out again.  And did you do a budget to show how you could afford to “frequent” a jazz club before you bought the house?  It’s not hard, just add up everything you bring home in income, and everything you spend.  Subtract your current rent out of expenditures and add in the new mortgage payment.  Is that number now larger than the income number?  Then you shouldn’t buy a house.

To bring in a bit more income, Mr. Montes two weeks ago found a weekend job as a bartender for a catering company. He says he might be able to take on a third job.

Okay, I’m feeling better about this guy now.  But the wife and kids have to chip in (by getting their own loans/jobs and driving the bad car, which is a sin in CA).

“Bottom line, it’s our little home,” Mrs. Montes told a visitor one evening in April as tears welled in her eyes. “We’re going to keep it. Hopefully, we won’t go down and if we do, we’re going to go down with a fight.”

Unfortunately the fight is going to be long, slow and painful.  Stop eating out, sell the cars and buy junkers, cut the older kid off and make the younger one get a job for any extra-curricular activities she wants.  And learn to use a calculator before you buy another house, it will save you some heartache.

 County stops taking Countrywide checks

The Cuyahoga County Recorder’s Office has stopped taking checks from Countrywide Financial Corp., the nation’s largest mortgage lender, because of the California company’s warning last week of possible financial problems.

The beginning of the meltdown?

Money has an article on who can’t get a mortgage now.

The stock market is going crazy. Hedge funds are going under. But for the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.

“Not only is it nothing to worry about, it’s an absolute positive,” said Loni Graiver, president of the Maine-based Cumberland County Mortgage. “Not only have [home] valuations come down, but [interest rates] are still historically low.”

Rates on 30-year fixed loans dipped last week, to 6.41 percent, according to the Mortgage Banker’s Association.

In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices.

The one catch is this: You’ve got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).

Not particularly surprising.  Sub-Prime has been a big problem so they’re only offering loans to A paper and Alt-A.   Good time to buy if you’ve got the cash and the credit score.  This winter or possibly next winter (2008-2009) will probably be the best in northern areas.  Pick the slow season in 2008 for the rest of the country.  That’s my prediction…we’ll start to stabilize in 2009 and might not see a total recovery for a few more years, but I think the bottom will come sooner rather than later.