Fed interest rate cut

polktiger

I believe the 20% is set by FHA and Mannie Mae/Freedie Mac along with the "jumbo" level for what is a conforming loan when these mortgages are packaged and resold by the loan originator to the holders like Fannie and Freddie. In fact I am not sure Fannie and Freddie are permitted to buy non-conforming loans or loans that don't have 20% equity involved.

Kex - You hit on a big issue. Ours is not as bad as California, but in the last 10 years, the wage base in tourism heavy (read extremely low/minimum wage) coastal SC (combined with virtually no companies writing homeowners insurance) has caused many people that work in our area to buy houses they can not traditionally afford becuase of all the retirees coming down here and people buying vacation homes. (This also leads to the high number of illegals living in the area becuase they are willing to live 10 to an apartment and make what tourism jobs are able to pay. The "locals" are having to move away becuase they can't afford to work and live here. It will become a real problem in about 15 years, but our local politicians are both too stupid and too concerned about re-election to care. All they do is whine about why no "high paying" businesses locate here. Duh, they can't afford to pay their employees enough to live here.

polktiger

One last piece of the rant - The real culprits are the ones that were pushing and buying all these mortgages. Very, Very few, if fact less than 10 mortgage originators (and no brokers) actually hold this paper. It is packaged and sold as an investment product to US Banks, foreign banks, state pension plans, etc. These are the people that made the market that provided the funds for these loans. In my opinion they are the cause of the problem. I don't want to hear that this is just capitalism. Pure capitalism exists in college economics classes. It does not exist in the real world. The people buying and selling this paper were merely creating a market for junk debt, calling it investment grade mortgage backs and banking a huge commission. (Note the commission is paid to the seller and the agent for the buyer. There are lots of state retirement plans that are really being hosed in these deals due to lack of knowledgeable oversight.)

shack

polktiger wrote:

I believe the 20% is set by FHA and Mannie Mae/Freedie Mac along with the "jumbo" level for what is a conforming loan when these mortgages are packaged and resold by the loan originator to the holders like Fannie and Freddie. In fact I am not sure Fannie and Freddie are permitted to buy non-conforming loans or loans that don't have 20% equity involved.

They can as long as there is PMI attached. At one time the Fannie Mae guidelines were that the borrower could do a 80/15/5 (80% first, 15% second and 5% cash down) and were VERY strict as to where the 5% came from. You had to prove that the cash was available and seasoned (meaning you had to have it for more than 6 months). They even did away from allowing parents and relatives to "gift" downpayments without substantial proof that it was a gift. Those guidelines went out the window which was a mistake. Even greater problems IMO were things like "Low Doc" and "Stated income" deals that were predicated solely on credit scores and the value of the R/E. Interest only, negative amortization, "teaser" rates on ARMs were also big factors.

It was all a house of cards that was doomed from the beginning. Hopefully reason will take hold for the long term.

polktiger

Don't get me started on the "no doc" crap. I am a CPA in public practice. You would not believe the "doc" they wanted from the CPA profession to go along with a "no doc" loan. Fortunately not many of our clients use the no doc route, but we did have a couple. They would ask for a letter (had to come from a CPA) "certifiying" certain things that the borrower would supply in a typical "with doc" loan. We refused to issue the letters and every other CPA I know of refused to issue the letters. It makes mortgage brokers furious, but the letter basically opens up the CPA that wrote the letter to a litigation should the borrower fail on the loan. Its very technical, but in most states when a CPA drafts the letter the way those mortgage brokers wanted it worded, the CPA basically guaranteed whatever the lie was that was being told, so when the loan goes south, the CPA is on the hook to the lender for the losses.

carpenter

I'm afraid there's a major down side to the interest cut.
The USD downward spiral means that the government will have an easier time paying off
existing debt, but a harder time raising money from the markets (selling new debt). essentially this means that investors would demand higher interest rates for the money they loan to the US treasury, as the risk becomes greater (an ever weakening USD means that the principle is not guaranteed).
Now, here comes the nugget, if the government can not raise enough money to execute it's plans, there are three courses of action.
1. sell more debt => we just explained why its gonna be a problem
2. decrease government spending => yeah right ...
3. raise more taxes from the people. => something that a newly elected administration can get away with, as it has enough time till reelection.
new taxes are also a way to fight inflation, as they decrease the amount of money the public has.


a comment about the mortgage rates:
when you buy money form the bank (borrow for a house) the bank calculates the rates based on the risk, and the cost of raising the money in the fixed income inter-dealer markets. the turbulence in the stock markets pushes prices in the Fixed income markets up, as investors a seeking a safer place for their money. The the sub prime earth quake, didn't help either.
this is why IMHO expectations for a dramatic decrease in mortgage rates might be a little early. they might even go up.


P.S.
Personally, if the taxes go to a good place, I can live with paying a little more.
but this is completely beside the point of this discussion, especially because each of us has a different idea on what would be the best use for public money.

Strong Bad

Alot of factors kept me out of the market. Years back, I didn't have nearly the income as I do now. During the big boom, I witnessed some people first hand supposedly affording these big mortgages on incomes that, to me, just didn't add up. Then, when my income starting shooting up, the prices of homes got to the point that just screamed "market correction coming soon" as they seemed way overpriced. All of these things just didn't add up to me. I refused to take on an Interest Only mortgage, again, because it just didn't make sense.

I've been patiently waiting and watching from the sidelines to make a smart purchase. I will be a first time home buyer and am told (correct me if I'm wrong) that there are terrific programs out there for first time buyers. I know what I can afford. I will not get in to a home and be "house poor" just so i can say "HA HA, look what I got" then be stuck eating Ramen Noodles.

Shack, thanks for all the info. It did help clarify things. I should have you banned though for not agreeing with me that it's all a scam! j/k

John

PhantomOG

carpenter wrote: »

P.S.
Personally, if the taxes go to a good place, I can live with paying a little more.
but this is completely beside the point of this discussion, especially because each of us has a different idea on what would be the best use for public money.

ugh.... I can just feel the new taxes coming my way. Did you watch the debate last night? My stomach turned when I heard the words "shared prosperity" from the front runner :mad:

carpenter

PhantomOG wrote: »

Did you watch the debate last night?

Yup, and I should have watched what I really wanted: ****.
would have been a much better usage of my time.

in any case, I can see this thread getting locked, if we keep talking about it

... back to $$$$$

polkatese

Shack, question for you: on a typical variable rate HELOC, maximum credit limit is granted based on LTV of the property, and appraised value. What happen if during this correction the appraised value decrease to the point that LTV > appraised value?

thanks.

Strong Bad

Maurice wrote: »

As for me, I'm gonna sit on the side lines until prices have bottomed out, then start picking up pieces and hold em' til the next upswing. The greatest wealth is always built during hard economic times by those who have the means to scoop up assets when they are selling cheap. Some of the greatest fortunes ever made in this country came out of the depression.

Exactely! With some common sense and patience, I really feel I can make out very well from all of this. It's my plan anyway.

Some very good info has come out of this thread though. Thanks to all!

PhantomOG

shack wrote: »

The appraisers are the one's who piss me off. I've fired more that one who comes to me and asks "What value do you need to make this work?" I hire them to tell me what the property is "reasonably worth"...not what it takes to make my loan. I want to know that I can recover the amount I loan.

Yeah... those guys suck... so where can I find one and a broker to use them?

Seriously though, I know my house has appreciated since I bought it two years ago and I would love to refi my 80/20 into a single 80 but I don't know how the appraisal will go.

polktiger

polkatese wrote: »

Shack, question for you: on a typical variable rate HELOC, maximum credit limit is granted based on LTV of the property, and appraised value. What happen if during this correction the appraised value decrease to the point that LTV > appraised value?

thanks.

From what I have seen, it can vary. So, in some cases you may have to pay in the reduction or lose some availability. Also a true LOC should renew each year or two in which case the rollover may require a partial repayment of the original advance.

Early B.

shack wrote: »

I already did....Post #18.

And banks are not able "make a profit" off of a foreclosed property. When a propety is sold, the proceeds go first to cover the first mortgage and any expenses incurred due to the foreclosure, then to any amounts and expenses due to subordinate lenders and if any funds are left over then back to the mortgagor.

The reality is that there are a variety of factors that determine if a bank will make a profit from a foreclosed property. In my neck of the woods, for example, a house can go into foreclosure with a zillion bucks of equity build into the sale of it, and the bank is not repsonsible for notifying the previous homeowner of the equity that belongs to him. The bank simply keeps what doesn't belong to them. Of course, most homeowners aren't aware that they are entitled to equity, less arrears to the first lienholder, the subs and expenses. This happens all of the time, especially in less affluent neighborhoods. The laws regarding such issues can change depending upon municipality.

shack

polkatese wrote:

Shack, question for you: on a typical variable rate HELOC, maximum credit limit is granted based on LTV of the property, and appraised value. What happen if during this correction the appraised value decrease to the point that LTV > appraised value?

thanks.

If the note is typical, there is a "catch all" clause that the bank can use to create an event of default that may read something like: "default occurs if at the determination by the bank that it is insecure for any reason;" which could allow them cancel the line, accelerate the maturity of the note. Deterioration of the value of the collateral could fall under that clause. It is a unilateral clause that you agreed to when you signed the note.

HOWEVER, banks do not like to own real estate and will do just about anything to avoid doing so. If you are paying the line on time and meeting all of their other criteria it is doubtful they would call the note in that circumstance. Secondly, most HELOCs are second mortgages and in order for them to forclose sucessfully, they would have to buy out the first mortgage holder's note and most banks would consider that good money after bad. Keep your payments current and you should not have any problems.

shack

carpenter wrote:

I'm afraid there's a major down side to the interest cut.
The USD downward spiral means that the government will have an easier time paying off existing debt, but a harder time raising money from the markets (selling new debt). essentially this means that investors would demand higher interest rates for the money they loan to the US treasury, as the risk becomes greater (an ever weakening USD means that the principle is not guaranteed). Now, here comes the nugget, if the government can not raise enough money to execute it's plans, there are three courses of action.

a comment about the mortgage rates:
when you buy money form the bank (borrow for a house) the bank calculates the rates based on the risk, and the cost of raising the money in the fixed income inter-dealer markets. the turbulence in the stock markets pushes prices in the Fixed income markets up, as investors a seeking a safer place for their money. The the sub prime earth quake, didn't help either.
this is why IMHO expectations for a dramatic decrease in mortgage rates might be a little early. they might even go up.

This has some validity. Mortgage rates are driven by bond and treasury yields moreso that short term interest rates. As investors get more concerned about the volitility of the equity markets, they are more willing to take the lower returns but more stable fixed instruments like bonds and CDs which could drive bond prices up. If that is the case, mortgage rates could increase. We have been in a situation of an inverted yield curve for quite some time. A typical yeild curve will have short term rates lower than long term rates due to the uncertainty of the future. Currently long term rates are significantly lower...which indicates a correction could happen and mortgage rates increasing to some extent. Not a certainty by any means...but a possibility.

shack

Strong Bad wrote:

I will be a first time home buyer and am told (correct me if I'm wrong) that there are terrific programs out there for first time buyers.

Yes there are. But be aware that there are often income limitations with some of these programs. Most oftern these are State run programs and differ by State, so it would be good to check to see what the limitations (if any) are in Maryland.

DollarDave

Shack, I have read your posts. I have been in and around banking now for 20+ years and you know what you are talking about.

Keep up the good wrok; there are some folks that can learn a thing or two about what they don't even know they don't know.

shack

Early B wrote:

The reality is that there are a variety of factors that determine if a bank will make a profit from a foreclosed property. In my neck of the woods, for example, a house can go into foreclosure with a zillion bucks of equity build into the sale of it, and the bank is not repsonsible for notifying the previous homeowner of the equity that belongs to him. The bank simply keeps what doesn't belong to them. Of course, most homeowners aren't aware that they are entitled to equity, less arrears to the first lienholder, the subs and expenses. This happens all of the time, especially in less affluent neighborhoods. The laws regarding such issues can change depending upon municipality.

Perception...but not fact. GA has the 4th highest foreclosure rate in the nation and it is one of the easiest to do so. But that does not allow the financial institution to recover more than what they are owed (including principal, interest, fees and penalties). If they are doing so it is against GA law and federal law. Additionally GA residents have a "right of redemtion" and can go back an reclaim the property under certain guidelines. You may be thinking of people that buy properties at tax sales, where someone can buy the property for the amount of delinquent taxes and reap the windfall equity. Individuals and companies can do this. Banks cannot.

shack

DaveMuell wrote:

Shack, I have read your posts. I have been in and around banking now for 20+ years and you know what you are talking about.

Keep up the good wrok; there are some folks that can learn a thing or two about what they don't even know they don't know.

Thanks Dave. If I haven't learned a thing or two about my industry after 30 years...then it's time to move on to something else.

polkatese

shack wrote: »

If the note is typical, there is a "catch all" clause that the bank can use to create an event of default that may read something like: "default occurs if at the determination by the bank that it is insecure for any reason;" which could allow them cancel the line, accelerate the maturity of the note. Deterioration of the value of the collateral could fall under that clause. It is a unilateral clause that you agreed to when you signed the note.

HOWEVER, banks do not like to own real estate and will do just about anything to avoid doing so. If you are paying the line on time and meeting all of their other criteria it is doubtful they would call the note in that circumstance. Secondly, most HELOCs are second mortgages and in order for them to forclose sucessfully, they would have to buy out the first mortgage holder's note and most banks would consider that good money after bad. Keep your payments current and you should not have any problems.

Thanks, Shack, your explanation is very helpful. My HELOC rate is actually goes down below my first mortgage by more than quarter point (mine is PRIME minus 3/4 after today's emergency cut). That doesn't happen too often.

tonyb

shack wrote: »

Perception...but not fact. GA has the 4th highest foreclosure rate in the nation and it is one of the easiest to do so. But that does not allow the financial institution to recover more than what they are owed (including principal, interest, fees and penalties). If they are doing so it is against GA law and federal law. Additionally GA residents have a "right of redemtion" and can go back an reclaim the property under certain guidelines. You may be thinking of people that buy properties at tax sales, where someone can buy the property for the amount of delinquent taxes and reap the windfall equity. Individuals and companies can do this. Banks cannot.

Very true....even in my state,on tax sales,previous owners still have a period of redemtion.And if they do redeem,you get some good interest on your dough.

rskarvan

Shack, your financial knowledge is very educational. Thanks for sharing.

Personally, I think this sub-prime mess is just a result of stupid lenders making stupid loans. What would be wrong with letting the banks/institutions just "EAT THE LOSS" and go bankrupt? Let the government bail-out the FDIC-insured losses. Other than that, let those who participate in the risk... share in the results of the risk.

Those who HELOC in a balloon market deserve to eat the loss.
Those who experimented with variable rates deserve to eat the loss.
Those who invested in the banks deserve to eat the loss.

Ok... lets say the economy tanks due to irresponsible banks.
How is the FED "bailing them out" going to force them to be responsible in the future?

I think its incredibly irresponsible of the FED to deflate the value of US currency by increasing "cheap money" to banks. Joe average retired US Citizen with no-debt didn't sign-up for the risk that the sub-prime market took. Why should he have to suffer the effects of the bad monetary policy for imported goods (deflated dollar)?

There is no free lunch. Maybe that is a lesson that must be forced on the financial community.

sucks2beme

Some of the loans out there were amazing. Interest only is one I don't get.
The theory is the owner would be able to flip the house in a year or two for big bucks.
BIG PROBLEM. They were giving equity loans on homes in some areas in as little as
6 months after purchase. Also amazing.
This all assumed that homes could go up in price forever. Sorry, bad
assumption. This made flipping easy. Which in turn, invited idiots to try.
All this turned ugly fast when the market slowed.

If the bulk of buyers in a market can't afford the house, guess what happens to prices?
What's sad is we, the public, have to now foot the bill to bail out lenders that
took these huge risks.

Wait til the commercial/retail crunch comes. That's next on the hit parade.
In some areas, like here in Dallas, you can't throw a rock without hitting a strip mall.
The same stuff repeats itself every six miles along any highway.
How many damn Starbucks and BB's do we need?

polksda

sucks2beme wrote: »

Some of the loans out there were amazing. Interest only is one I don't get.

Yup. There was a time that it was simply assumed that as a homeowner (I'm not talking commercial or investment property) you got a 30-year fixed-rate mortgage. If you had a bit better income compared to what you were buying, you went for a 15- or 20-year fixed rate mortgage.

Then all these "special" mortgages started coming out seemingly with one goal in mind: to lower the perceived (initial) monthly payment as far as as possible, thus luring people into buying bigger/better housing than they could afford. Only problem: At some point the bill comes and you have to pay the check.

Interest-only mortgages? Are ya kiddin' me?

What's next, multi-generational mortgages like the Japanese have?

Granted, I'm looking at all of this from a lay perspective, but it seems like there are a lot of Johnny-come-lately mortgage schemes that make the used car business seem ethical.

Of course, I can't afford high-end housing; I live in the low rent district. My house is a shack, comparatively speaking, but it's a shack on a 20-year fixed rate 5.25% mortgage...

shack

Banks are allowed to fail all the time. I have been involved in the asset purchase of a couple of them and the years of lawsuits that followed...and it is not pretty.

The banks and investors that participated in the "subprime" mortgage market ARE paying a heavy price in terms of lost revenues, depletion of capital, deterioration of stock value. There is more to come as credit card defaults will be the next big hit IMO. The free market will sort this all out. HOWEVER....the govt. can simply not allow one of the 10 largest US banks to fail. A failure by Chase, Citi or BOA would immediately throw the enconmy into a tailspin and most likely a depression. It CAN'T and WON'T be allowed to happen.

As far as the fed lowering the interest rate...those who believe that the problems of the economy are caused soley by the "subprime" crisis are paying too much attention to the TV talking heads who wouldn't know micro economics from micro wheels toy cars. Since they don't have a clue, they spout the only thing they know over and over (subprime) and I would bet they couldn't tell you what a suprime mortgage was if you asked.

Increased cost of fuel and food, increased personal debt, R/E speculation, an inverted yield curve leading to a decrease in long term investment, rising medical care costs, disincentive for investment, too much financial market speculation, etc, etc, etc, are all factors. The economic issues were going to happen and the mortgage problems just moved it along a little more. If you look at historic economic cycles...we are long overdue for the correction that is happening now. Instead of real growth, a lot has been smoke and mirrors by speculators. Both in the R/E and financial markets there has been too much valuation based on speculation as opposed to REAL intrinsic values.

If you understand what the fed does when it lowers the discount rate and monetary economics, you see what they are doing is more symbolic than direct intervention. They haven't devalued the US dollar vs other currencies per se by doing so, but if the economy recovers the dollar will actually gain as foreign investment funds flow back into the US .

The largest free market economy in the world will work its way out of the current issues and we will be just fine.

Maurice

I hearby nominate SHACK for Secretary of the Treasury!!

Strong Bad

Maurice wrote: »

I hearby nominate SHACK for Secretary of the Treasury!!

+1

Ya got my vote man!

shack

Maurice wrote:

I hearby nominate SHACK for Secretary of the Treasury!!

And have to deal with all those damn politicians...NO THANKS.

...but thanks for the complement...

rskarvan

"After the manipulations of the U.S. gold market by European buyers which led to the crash of 1907, the public was looking for a solution to the gold problem as America moved from an agrarian to an automobile economy.

So with popular support, the twelve regional Federal Reserve Banks (Fed) were created with the enactment of the Federal Reserve Act, December 23, 1913 , to regulate the value of money by controlling its supply. Changing from a gold-based currency backing to a fiat money system would free the United States from the risk of more foreign manipulation of her economy.

The U.S. government had no debt when the Federal Reserve Act was passed in 1913. "

-- A Study by Rand Fanshier 3/1/2004

I wonder, would the FED of 1913 approve the role the FED plays today?

shack

The Fed of a 100 years ago would have no clue about ANYTHING the Fed is dealing with in 2008.

Believe it or not...much has changed since then. :rolleyes: