FHFA warns Basel III may increase mortgage rates

-Housingwire

Basel III will increase capital requirements for big banks, resulting in higher mortgage rates, the Federal Housing Finance Agency said.

The FHFA made that assertion in a paper released this week on proposed mortgage servicing compensation rules.

Basel III capital requirements were designed with the intent of ensuring systemically significant banks possess enough capital to cover future risks.

Because capital requirements are going higher, FHFA says "some of the largest originators, who are market leaders in setting mortgage rates, will need to either raise the mortgage rates offered to borrowers while reducing servicing released premiums paid in order to compensate for any incremental capital required, or accept lower returns."

Corporate borrowing costs – especially in Europe – also will feel the headwinds of stricter regulations spawning from Basel III, Standard & Poor's noted this week.

"The Basel III regulations, due to come into force in stages between 2013 and 2018 are likely to result in a repricing and even a rationing of credit for corporates globally, and change the behavior of lenders and borrowers," S&P said in its report. "Yet, European corporates will feel the effect more harshly than their U.S. counterparts because they typically rely more heavily on banks for funding relative to capital market sources, the report states."

The  global Basel III requirements for systemically important banks also is catching heat for going against the American capitalistic grain.

In his own push back against Basel III, Christopher Whalen with Institutional Risk Analytics, punched holes in the  regulatory structure.

"I think we can all agree that the statist, anti-democratic construction of Basel III is out of step with traditional ideas of American democracy and free enterprise," Whalen wrote. "The world of Basel III is all about top down management of the economy, the sort of socialist claptrap that was introduced into the U.S. political mainstream after the two world wars. Banks are, in fact, run like most other businesses, from the branch level up to the head office, but the deterministic world of Basel III is entirely European in outlook."

Whalen seems to see Basel III as a contradictory construct that  will  actually create a system riddled with greater risks.

"Americans need to reject new era concepts such as market efficiency and fair value accounting, two of the key pillars of the Basel III world that encouraged the growth of opaque OTC markets in mortgage securities and derivatives," Whalen said.  "In good times, Basel III was an enabler for bad banking practices and excessive leverage. Now we are seeing the very same global bureaucrats who fomented the financial bubble rush around setting new, incomprehensible rules that we call Basel III.”

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Wall Street's New Watcher

-The Wall Street Journal

Two weeks after moving into a skyscraper near Wall Street to start assembling a muscular new agency overseeing banks and insurers in New York, Benjamin M. Lawsky got a surprise during an introductory meeting with a midlevel manager: His power was even broader than he thought.

The 41-year-old former federal prosecutor, who spent the last four years as Andrew Cuomo's confidant and adviser in the New York attorney general's office, learned that he had greater latitude to pursue criminal fraud cases than he initially knew.

As the head of the New York State Department of Financial Services, which officially opens its doors Monday, he says he plans to use that authority to put the new agency on the map.

Since the June meeting, Mr. Lawsky has been contacting Federal Bureau of Investigation agents, lawyers and other trusted allies from his past as part of his plans to "exponentially" increase the criminal division from the current handful of employees, he says. But he adds that he will use the power of his new office judiciously.

"I'm strategically aggressive," says Mr. Lawsky, who went after a slew of banks, securities firms and top executives while working in the attorney general's office.

Mr. Lawsky, who is paid $127,000 a year, won't say what the criminal-enforcement unit will investigate first, though he is eager to join forces with state and federal prosecutors to bring cases. That seldom happened before New York lawmakers combined the state's banking and insurance regulators in March to create the new agency.

New York's Department of Financial Services will instantly become one of the highest-profile financial regulators in the nation. The 1,700-person agency will oversee 3,900 banks, insurers, mortgage brokers, loan servicers and New York-based outposts of foreign banks. Those companies have about $5.7 trillion in combined assets.

Few people on Wall Street will talk publicly about Mr. Lawsky, except in an optimistic, hopeful tone. "He's approachable," says Thomas Workman, president and chief executive of the Life Insurance Council of New York, a trade group.

However, some executives and lawyers who represent them are worried that Mr. Lawsky will behave more like a prosecutor than a regulator. As an assistant U.S. Attorney, Mr. Lawsky foiled a plot to smuggle rocket-propelled grenade launchers into the U.S., solved cold-case murders committed by Asian mobsters, and took down an insider-trading ring.

Mr. Lawsky is remembered on Wall Street for his relentless scrutiny, while working as Mr. Cuomo's special assistant, of bonuses paid by U.S. financial firms that got bailout money. He played a key role in an ongoing lawsuit against former Bank of America Corp. Chief Executive Kenneth D. Lewis, in which Mr. Lawsky publicly asked tough questions about the role of the Federal Reserve and Treasury Department in the 2008 takeover of Merrill Lynch & Co. He was also a behind-the-scenes force in extracting more than $60 billion in repayments to investors whose cash was frozen in auction-rate securities.

"Ben is a formidable adversary on the other side of the table," says Mary Jo White, a former U.S. Attorney in New York who hired Mr. Lawsky. Ms. White, now a partner at law firm Debevoise & Plimpton LLP, represents Mr. Lewis in the civil-fraud case. He has denied any wrongdoing.

Lobbyists and trade groups resisted when the new agency's authority was being hashed out in Albany earlier this year. One of the biggest fears was that the Department of Financial Services could be as mighty as the New York attorney general's office. In response, some of Mr. Lawsky's powers were slightly tempered.

Still, working as the agency's acting head this summer, Mr. Lawsky snarled Goldman Sachs Group Inc.'s agreement to sell its Litton Loan Servicing subsidiary until he got a promise that Goldman, Litton and the buyer promise not to process foreclosure documents without reviewing case files and adhere to other business practices. The sale was completed in August, but Mr. Lawsky is pressing numerous other mortgage firms to make the same pledges.

"It was a potentially significant problem," says H. Rodgin Cohen, a partner at Sullivan & Cromwell LLP who represented Goldman in the Litton sale. Mr. Lawsky wasn't "a bully," and "he wanted to get it done."

Mr. Lawsky, a Pittsburgh native, is a marathon runner and fan of composers Gustav Mahler and Richard Wagner. His sixth-floor office includes a Pittsburgh Steelers "terrible towel" and a framed photograph with Gov. Cuomo on Wall Street. He said he doesn't mind being seen as tough "if it keeps the people we regulate on their toes."

The financial industry has a huge impact on New York's struggling job market and economy. As a result, Mr. Lawsky's top priority is to "do what it takes to get the (financial) industry thriving again," he says.

In an email, Gov. Cuomo, a Democrat who took office in January, wrote: "Ben is smart and effective, and he brings a balanced and fair approach to the job. He knows we need to keep New York a center of finance but at the same time aggressively protect consumers."

Preet Bharara, the U.S. Attorney for the Southern District of New York, says working with Mr. Lawsky as a federal prosecutor showed that he is "not timid." At the same time, Mr. Lawsky is "not a bomb-throwing guy," adds Mr. Bharara, who is still friends with Mr. Lawsky.

After Tropical Storm Irene hit New York in late August, Mr. Lawsky traveled the state to help residents file insurance claims. After a crowd in the New York City borough of Staten Island shouted that one insurer had warned it would take 10 days for appraisers to arrive, Mr. Lawsky called executives at the company. The appraisers drove up within two hours.

Although Mr. Lawsky said he is solely focused on his new job, political experts, friends and former colleagues believe Mr. Lawsky is poised for a dramatic political climb.

Already, Mr. Lawsky stands in for Gov. Cuomo at some events. On Sept. 8, Mr. Lawsky gave an emotional speech at Stony Brook University to commemorate the tenth anniversary of the Sept. 11 terrorist attacks on the World Trade Center. "Planes no longer scare me, but they inspire me," said Mr. Lawsky, who watched the second plane hit from his apartment-building rooftop in Manhattan. "They remind me I am trying to seek justice for people."

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House Is Gone but Debt Lives On

-The Wall Street Journal

LEHIGH ACRES, Fla.—Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.

In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71.

It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.

The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a "deficiency judgment."

Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today's battered housing market mean that lenders are doing so more and more.

Foreclosed homes seldom fetch enough to cover the outstanding loan amount, both because buyers financed so much of the purchase price—up to 100% of it during the housing boom—and because today's foreclosures take place following a four-year decline in values.

"Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt," says Michael Cramer, president and chief executive of Dyck O'Neal Inc., an Arlington, Texas, firm that invests in debt. "Before, it didn't make sense [for banks] to expend the resources to go after borrowers; now it doesn't make sense not to."

Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.

Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a "strategic defaulter" who chose to stop paying because the property lost so much value.

In Lee County, Fla., where Mr. Reilly's vacation home was, court records show that 172 deficiency judgments were entered in the first seven months of 2011. That was up 34% from a year earlier. The increase was especially striking because total foreclosures were down sharply in the county, as banks continued to wrestle with paperwork problems that slowed the process.

One Florida lawyer who defends troubled homeowners, Matt Englett of Orlando, says his clients have faced 20 deficiency-judgment suits this year, up from seven during all of last year.

Until recently, "there was a false sense of calm" among borrowers who went through foreclosure, Mr. Englett says. "That's changing," he adds, as borrowers learn they may be financially on the hook even after the house is gone.

In Mr. Reilly's case, "there's not a snowball's chance in hell that we can pay" the deficiency judgment, says the 39-year-old man, who remains unemployed. He says he is going to speak to a lawyer about declaring bankruptcy next week, in an effort to escape the debt. The lender that obtained the judgment against him, Great Western Bank Corp. of Sioux Falls, S.D., declined to comment.

Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects "a massive wave of these cases as banks start selling the judgments to debt collectors."

In a paradox of the battered housing industry, trying to squeeze more money out of distressed borrowers contrasts with other initiatives that aim instead to help struggling homeowners, including by reducing what they owe.

The increase in deficiency judgments has sparked a growing secondary market. Sophisticated investors are "ravenous for this debt and ramping up their purchases," says Jeffrey Shachat, a managing director at Arca Capital Partners LLC, a Palo Alto, Calif., firm that finances distressed-debt deals. He says deficiency judgments will eventually be bundled into packages that resemble mortgage-backed securities.

Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.

Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks' soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.

Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.

Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.

Mr. Hannah expects the market to expand as banks "aggressively unload" their distressed mortgages in the next year, driving up the number of deficiency judgments being sought.

They are pretty easy to get. "If the house sold for less than you owe, the lender wins, plain and simple," says Roy Foxall, a real-estate lawyer in Fort Myers on Florida's west coast.

Mr. Foxall says five deficiency suits were filed against his clients this year, and he couldn't poke any holes in any of them. Lenders typically have five years following a foreclosure sale to sue for remaining mortgage debt.

Mr. Englett, the Orlando lawyer who has handled 27 such suits for homeowners in the past 21 months, says he didn't get the bank to waive the deficiency in any of the cases, but did reach six settlements in which the plaintiff accepted less.

Florida is among the biggest deficiency-judgment states. Since the start of 2007, it has had more foreclosures than any other state that allows deficiency judgments—more than 9% of the U.S. total, according to research firm Lender Processing Services Inc.

A loan-deficiency suit can yank borrowers back to a nightmare they thought was over.

Ray Falero, a truck driver whose Orlando home was foreclosed on and sold in August 2010, says he thought he was hallucinating when, months later, he opened the door and saw a sheriff's deputy. The visitor handed him a notice saying he was being sued for $78,500 by the lender on the home purchase, EverBank Financial Corp., of Jacksonville, Fla.

"I thought I was done with this whole mess," he says.

Mr. Falero, 37, says he was about nine months behind on his loan when the bank foreclosed. Before it did, he bought another home in Minneola, Fla., where he now lives and where he says he is up to date on mortgage payments. Like Mr. Reilly, Mr. Falero says he didn't swell the foreclosed-on loan through refinancing or home-equity borrowing.

EverBank won a deficiency judgment on Mr. Falero's Orlando loan. Mr. Falero and his lawyer are fighting to reduce the amount owed. EverBank declined to comment on his case.

Credit unions and smaller banks are the most aggressive pursuers of deficiency judgments, a review of court records in several states shows.

At Suncoast Schools Federal Credit Union in Tampa, Jim Simon, manager of loss and risk mitigation, says the institution has a responsibility to its members, and that means trying to recoup losses by going after loan deficiencies. He calls such legal action the credit union's "last arrow in the quiver."

The biggest banks appear to have stayed largely on the sidelines as they deal with the foreclosure-paperwork mess. One big bank, J.P. Morgan Chase & Co., "may obtain a deficiency" judgment in foreclosure cases but will "often waive" the leftover debt when a homeowner agrees to a so-called short sale of a house for less than is owed on it, a bank spokesman says.

Among the hardest-hit spots in Florida is Lehigh Acres, a 95-square-mile unincorporated sprawl of narrow, cracked-pavement streets about 15 miles inland from Fort Myers.

Lehigh Acres was carved out of scrub land and cattle farms in the 1950s by a Chicago businessman, Lee Ratner, who had made a fortune on d-CON rat poison, says Gary Mormino, a history professor at the University of South Florida in St. Petersburg. Before he died, Mr. Ratner sold prefabricated houses to families hungry for a slice of paradise.

Decades later, Lehigh Acres (population 68,265) attracted people eager to cash in on the housing boom, even though it is distant from the sugary white beaches on the Gulf of Mexico. Speculative investors bought more than half of homes sold in Lehigh Acres in 2005 and 2006, Bob Peterson, a real-estate agent, estimates.

Many of those stucco homes now stand empty, priced at about a third of the value they had at the peak of the housing boom, which was often around $300,000.

In the first seven months of this year, courts entered 42 deficiency judgments in Lehigh Acres, for a total of $7 million, up from 26 judgments for $4.6 million in the same period of 2010, according to a Wall Street Journal analysis of state-court records.

Fifth Third Bancorp, of Cincinnati, filed for the largest share of deficiency judgments in Lehigh Acres last year. The bank declined to comment.

"It's eerily quiet around here," says Jon Divencenzo, who bought a house in Lehigh Acres at a May foreclosure sale for $50,000. Some nights, he says, the only sounds are rustling pine trees and the idling car engines of former homeowners circling the block to glimpse what they lost.

The hard-hit area reveals a sharp contrast in homeowners' attitudes toward deficiency judgments.

Julia Ingham invested in four Lehigh Acres properties in June 2005, hoping to "drum up some real money for retirement."

All have since been foreclosed on by lenders, says the 62-year-old retired programmer for International Business Machines Corp.

A credit union, after selling one of the foreclosed houses for less than the debt on it, obtained a deficiency judgment against Ms. Ingham for $181,059.54. She worries she could face such judgments on the other properties, too.

Ms. Ingham says when she bought them, she misunderstood how much her investments put her on the hook for. Her builder, she says, promised she could invest $10,000 in four properties and then flip them for a profit. Ms. Ingham says deficiency judgments punish borrowers who were taken advantage of by lenders and builders.

Catherine Ortega, who owns a Lehigh Acres home around the corner from one of Ms. Ingham's foreclosed homes, says banks should leave people like her former neighbor alone. "Those people have suffered enough," she says.

In July 2005, Mr. Reilly took out a $223,000 mortgage to build a vacation home here, about 160 miles from his primary home in Odessa, Fla. He was laid off just as construction was being completed.

Mr. Reilly says he is current on the loan on his primary residence but couldn't afford the vacation home's $1,200-a-month loan payment. Great Western Bank, which is owned by National Australia Bank Ltd., foreclosed on his house in Lehigh Acres in July 2010.

Mr. Reilly, who was a mortgage broker before his layoff, says he knew that deficiency judgments were possible after a foreclosure but didn't expect to face one because he doesn't have any financial assets, and you can't get "blood from a stone."

Alfredo Callado, who lives next door to Mr. Reilly's former house, is unsympathetic. Like Ms. Ortega, Mr. Callado is troubled by the crime that a neighborhood full of empty houses attracts. He started watching over Mr. Reilly's former house to ward off thieves who steal air conditioners from vacant properties.

Mr. Callado, sitting on a lawn chair in his driveway, says lenders should use deficiency suits to punish defaulting homeowners for the damage they do to neighborhoods, including driving down property values.

"You have to make them pay for what they do to those of us left behind," he says.

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Senate leaders announce bipartisan agreement to avert government shutdown

-The Washington Post

Senate leaders agreed to a deal Monday evening that is almost certain to avert a federal government shutdown, a prospect that had unexpectedly arisen when congressional leaders deadlocked over disaster relief funding.

After days of brinkmanship reminiscent of the budget battles that have consumed Washington this year, key senators clinched a compromise that would provide less money for disaster relief than Democrats sought but would also strip away spending cuts that Republicans demanded. The pact, which the Senate approved 79 to 12 and the House is expected to ratify next week, is expected to keep federal agencies open until Nov. 18.

“It will be a win for everyone,” said Majority Leader Harry M. Reid (D-Nev.).

Minority Leader Mitch McConnell (R-Ky.) called the plan “a reasonable way to keep the government operational.”

Aides to House Speaker John A. Boehner (R-Ohio) said he will support the compromise.

The spending battle marked the third time this year that congressional acrimony has brought the government to the edge of calamity. In April, Boehner and President Obama reached a deal on funding for 2011 about 90 minutes before a government shutdown was to begin. On Aug. 2, just hours before the deadline, Congress gave final approval to legislation lifting the government’s borrowing authority, averting a partial shutdown and the potential for a default on the federal debt.

Although this week’s fight ended with days, rather than hours, to spare, it drained many in Congress, who thought it was a senseless fight. Reid summed up the feeling of many lawmakers when he quoted Sen. Johnny Isakson (R-Ga.), who said there was too little money in dispute to raise the specter of a shutdown and to halt payments to those affected by natural disasters.

“Let’s fight when there’s something to fight about,” Reid quoted Isakson as saying during a speech on the Senate floor.

At issue was a dispute over how to fund disaster relief, a concern that was heightened in late August after an earthquake struck central Virginia and Hurricane Irene caused flooding in the Northeast.

Although Democrats said the Federal Emergency Management Agency needed more funding, they agreed to accept a Republican plan to spend $3.65 billion in disaster relief money, $1 billion of which would have gone toward the budget for the current fiscal year, which will end Friday. Republicans, concerned about adding to the budget deficit, refused to support the funding without $1.6 billion in accompanying cuts. Their largest target was an auto loan program popular with Democrats, leading to the standoff.

The showdown between the two sides was averted on Monday, when FEMA said it could make ends meet through the end of the week. That led to an agreement that calls for the agency and other government disaster relief programs to forgo the $1 billion in proposed funding for this week. Beginning Saturday and running to Nov. 18, FEMA can begin to tap the remaining $2.65 billion for ongoing efforts.

With the House out of session this week, the Senate approved a resolution that will keep the government open through next Tuesday. The House is expected to approve that extension in a voice vote Thursday, which does not require all members to be present, and then approve the longer-term bill next Tuesday.

Some lawmakers from hard-hit states are unhappy with the compromise, saying that it would result in a slight delay in processing aid to victims, and that the overall total of FEMA funding wouldn’t be enough to account for the damage caused by the disasters.

“They would delay the process by punting back to the House,” said Sen. Roy Blunt (R-Mo.). The deal “also stripped $1 billion in disaster relief and provides less emergency funding for Missourians in the wake of record flooding and tornadoes,” he added.

The debate over the budget bill turned on sharp — and familiar — political lines that scuttled earlier talk that the two parties were going to tone down their attacks.

Republicans, particularly House conservatives, said they were unwilling to add to the federal deficit, even for disaster funding, and accused Democrats of overspending. Democrats used the debate to portray Republicans as “holding hostage” relief checks for those struck by tornadoes, flooding, forest fires and droughts, focusing much of their criticism on House Majority Leader Eric Cantor (R), who represents Mineral, Va., the epicenter of the earthquake.

Although the agreement lifts the imminent specter of a government shutdown, it will not resolve the fight over how much FEMA needs to help disaster victims and whether that money must be offset with spending cuts.

The White House has said FEMA will need $4.6 billion for the next fiscal year — a figure many Democrats say underestimates the agency’s needs.

Democrats will push to fully fund FEMA’s request and perhaps broaden it during negotiations over spending for the rest of the year, but they were split Monday over what the compromise would mean for future funding battles.

“This is a very big and important move. It says we met each other halfway. We saved the jobs,” said Sen. Barbara Boxer (Calif.), referring to the the auto loan program. “We figured out a way to fund FEMA that was acceptable to them. It’s a template. We have to figure out how to meet each other halfway here.”

Sen. Patrick J. Leahy (Vt.), whose state was hit hard by flooding from Hurricane Irene, said the deal would solve the disaster issue — but only temporarily.

“I’m concerned about the fact that we give blank checks to Iraq and [Afghanistan] and we don’t want to take care of America for Americans,” he said. “It’s wrong, it’s foolish and it will come back to haunt us.”

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What New Jumbo Mortgage Rules Mean for Expensive Zip Codes

-Yahoo! Finance

On Oct. 1, the size of mortgages eligible for purchase by Fannie Mae and Freddie Mac will shrink. That isn't necessarily a big deal in most parts of the country; the new lower limit of $625,500 — down from today's $729,750 — still is big enough to cover most homes in almost all markets in the United States.

Furthermore, mortgage bankers are stepping up with new money to cover those bigger loans, reports Mortgage Daily. "Programs here and there are popping up," says publisher Sam Garcia. He reports that some new lenders, including TMS Funding and New Penn Financial LLC, are launching programs that will make mortgages as big as $2 million available to lenders with good credit scores and enough cash to keep up with the payments. And many existing mortgage lenders currently will make those so-called "jumbo" loans and just keep them in their portfolios instead of selling them.

But those loans will cost more. Currently the difference between rates on so-called conforming loans and private-made loans is about 0.64 percent. Over the last two years that spread has been as low as 0.48 percent and higher than one percent, says Garcia.

So in some pricey places, the new limits will really pinch borrowers. Those limits vary from market to market and are determined in part by local housing prices. In expensive housing markets where prices have fallen, the limits will drop the most. Hardest to be hit, according to a new analysis by Move.com, will be San Diego, where loans up until $697,500 qualify for Fannie and Freddie until Sept. 30. On Oct. 1, that limit drops to $546,250, a $151,250 difference.

Folks there who want to borrow a bunch for a home will see their costs rise significantly. A San Diego homebuyer who needs $600,000 would pay $2,937 a month for a 30-year loan at today's rate of 4.18 percent, according to Bankrate.com. Starting next month, if rates stay stable and that borrower goes to a private lender, he would pay $3,155 a month. That's $228 more a month, or $82,080 more over 30 years.

Some buyers (and lenders) may try to get around that by piggy-backing loans; piling a smaller non-conforming loan onto a conforming loan.

Here are some other areas, most often searched on Realtor.com, that could see significant changes in their loan limits, according to the Move analysis.

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FHFA lacks staff to effectively monitor GSEs, report says

-Housingwire

The Federal Housing Finance Agency lacks the staff to properly monitor the mortgage giants it has in conservatorship, according to a report by the Office of the Inspector General.

The report said the agency also failed to provide adequate oversight over default services legal issues.

The Office of the Inspector General for the federal regulator said the FHFA "has far too few examiners" to properly handle its examination system to monitor Fannie Mae,Freddie Mac and the Federal Home Loan Banks

The inspector general report also "identified shortfalls in the agency's examination coverage, particularly in the areas of real estate owned and default-related legal services," which it blames on the staffing shortages.

In another report, the inspector general said the FHFA over the past five years "repeatedly found Fannie Mae had not established an acceptable and effective operational risk management program despite outstanding requirements to do so." The auditor said the regulator hasn't exercised its power as conservator to force the company to do as much, and recommends the FHFA compel Fannie to establish stronger controls.

"Fannie Mae’s lack of an acceptable and effective operational risk management program may have resulted in missed opportunities to strengthen the oversight of law firms it contracts with to process foreclosures," according to the auditor's report.

"Given Fannie Mae’s history of noncompliance, (the Office of the Inspector General) believes that the agency must exercise maximum diligence and take forceful action to ensure that Fannie Mae meets the agency’s expectations in this regard. Otherwise, FHFA’s safety and soundness examination program, as well as its delegated approach to conservatorship management, may be adversely affected."

Fannie Mae declined comment.

Edward DeMarco, acting director of the FHFA, has said the agency is having trouble hiring experienced examiners because many don't want to move to Washington and there's the perception the government-sponsored enterprises will ultimately go away.

The FHFA has 120 examiners and plans to hire another 26, but "has expressed concern that its current hiring initiative will neither enable it to overcome its examination capacity shortfalls nor ensure the effectiveness of its 2011 reorganization," according to the inspector general report.

The agency wanted all the new examiners on board by the end of September, but now expects to have them all working by the end of the year.

The agency wants to assign 20 to 25 examiners to each examination team, yet is only staffing them with 13. The FHFA indicated only 34% of the 120 nonexecutive examiners are accredited federal financial examiners, and there is no accreditation program currently in place.

The federal auditor recommends the FHFA further study its staffing problems, implement an examiner accreditation program and use contractors to mitigate the shortage.

"Moreover, FHFA has not reported upon its examination capacity shortfalls in a systematic manner," according to the report. "Given FHFA's critical responsibilities, it is essential that it keeps Congress, the executive branch and the public fully and currently informed about its examination capacity."

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US Economy Is Basically 'Still In Recession': Fed's Evans

-CNBC

The U.S. economic outlook has "clearly" deteriorated this year, and the continued softness of economic indicators shows that the headwinds facing the country are even stronger than thought, Chicago Federal Reserve President Charles Evans said on Wednesday.

"Conditions still aren't much different from an economy still in recession  ," Evans, speaking at a seminar in London said.

He said the Fed  faced significant challenges in overcoming the obstacles left behind by the financial crisis.

Evans, a voting member on the Federal Open Market Committee  , said he believed central banks should focus on medium- rather than short-term inflation as many short-term effects such as fluctuations in food and energy prices were beyond policy makers' reach.

Given how "truly badly" the U.S. was doing on the jobs front, the Fed should consider more aggressive action, he said.

He did not explicitly call for more quantitative easing  or bond purchases but called for "strong action."

"I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation," he said. "Such further policy accommodation does increase the risk that inflation could rise temporarily about our long-term goal of 2 percent," he said.

The Fed Open Market Committee said in August that it would continue to keep its benchmark interest rate low for at least through mid 2013, acknowledging that the recovery it had hoped for had so far failed to take shape.

The Fed ended a $600 billion Treasury bond-buying program at the end of June.

Temporary inflation above 2 percent is not something we should "regard with horror," he said.

Evans said it was "painfully obvious" that large quantities of unused resources were an enormous loss to the U.S. economy, referring to the 14 million Americans unemployed today.

Some argue there are limits to what further accommodative measures can do, he said, adding: "I'm personally much more optimistic and don't want to subscribe to that pessimistic view."

"Monetary policy should be used more aggressively to try to increase aggregate demand," Evans said.

He added he fully supported the policies implemented by the Fed, but added that more needed to be done.

"We should not be afraid of such temporarily higher inflation results today...These are not usual times," Evans said.

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Why only small business can save America

-USA Today

The bad news is all around us and never seems to end. If it's not Tea Party Republicans who somehow, shockingly seemed willing to allow the country to go into default before they would accept even the most basic of revenue increases, it's a president who seems unable to match his legislative ability to his previous soaring rhetoric, sharp mind and historic promise.

And that's for starters.

Unemployment remains far too high, hovering near 9%. The deficit is all too real and getting bigger. China is emerging as a global power, and taking the lead in creating green energy solutions - the clear, big playing field of this new century.

Here at home, Gen X and Gen Y'ers seem resigned to living in a country that was not as great as the one they were born into, and my generation - Baby Boomers - are only too happy to collect our benefits.

What are we to do?

Entrepreneurship is the answer. Small business to the rescue. Foster startup fever.

In America, small business has always been The Answer. More than 99% of businesses with payrolls in this country are small businesses, according to the Small Business Administration, and those small businesses historically employ more than half of all workers and create 80% of new jobs.

Small business is, and always has been, the engine that moves the country forward. So if the stagnant political class really wants to get this country moving again, and help reassert our rightful place as the most innovative, entrepreneurial, industrious place on the globe, they need to start enacting policies and programs that do one thing - help small businesses and entrepreneurs.

What we need is a comprehensive 21st Century Entrepreneurship Act.

Want to lower the unemployment rate? Cultivate small business startups and you will.

Want more tax revenue? Foster entrepreneurial growth and you will get it.

Want to see America create the Next Big Thing? Help small business and just watch where it leads us.

The last great boom, during the Clinton administration, created more than 20 million jobs, and many of those came from startups that grew. In 1992, hardly anyone had ever heard of the Internet and no one knew what an Amazon.com was. Today that company, started out of Jeff Bezos' garage, employs about 30,000 people. In 1992, Starbucks was a regional business with about 100 stores. Today it is a public company worth more than $27 billion, and it has more than 6,500 stores.

Was there ever a better friend to small business, someone who believed in the power of free enterprise, more than Ronald Reagan? As he said in a May, 1988 speech to students at Moscow University: "The explorers of the modern era are the entrepreneurs, men with vision, with the courage to take risks and faith enough to brave the unknown. These entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States."

The great economic growth during the Reagan administration was similarly fueled by a commitment to, and fostering of, entrepreneurship.

So what does "promoting small business and entrepreneurship" mean? What does it look like?

I am privileged to be a member of the board of the World Entrepreneurship Forum. This global think tank has spent a lot of time considering what governments can and should do to promote entrepreneurship. They include:

"Reform Regulations: To promote a truly entrepreneurship-centered business climate, reform tax and regulatory environments so as to make it easier, faster, and less costly for entrepreneurs to set up enterprises.

"Create Entrepreneur-Friendly Institutions: Introduce entrepreneurship-friendly support institutions that provide technological knowledge, market information, business know-how, certification services, access to capital, and other essential business support.

"Understand Entrepreneurship: Make it known that entrepreneurs are positive agents of social change, wealth creation, transparency, sustainability, and innovation."

A comprehensive 21st Century Entrepreneurship Act would include tax reform, and regulatory ease. It would include, as SBA administrator Karen Mills recently wrote, immigration reform so we can again attract the best and brightest entrepreneurs and engineers to our country. It would increase access to capital. It would help more startups start up. It would foster business incubators and programs like Business Matchmaking.

And it would require something that those in Washington have forgotten about, something that cannot be legislated, but cannot be ignored: It would require pulling together for the common good and the promise that is America.

I, like many Americans, am disappointed in both the president and Congress. But I still hold out hope, because I know what is possible, what we can do together. So to our leader, I say: Mr. President, tear down these walls!

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20 Percent Down For Home Purchase The New Standard, Again?

-The Real Estate Bloggers

The housing market may be getting a little tighter in a couple of months. The bureaucrats working on enacting some of the provisions of the Dodd-Frank reforms have interpreted the loosely written laws to require homes that qualify for the best interest rates to have a minimum of a 20 percent down payment.

That sound you just heard is agents across the country gulping in panic.

The homes that have a 20 percent down payment will get the best interest rates, those buyers that do not have 20 percent to put down will be held to a much higher standard for approval and face higher interest rates.

The fact that the real estate industry is still muddling along with historically low interest rates, high inventories, and significantly lower prices is bad enough news for the millions of agents out there. Now adding the prospective of tougher loan approvals and the reduction of potential buyers the real estate industry has another hurdle to cross.

Some Dodd-Frank reforms are already in place, but Congress left details of others to regulators. The down payment rule is currently in a “public comment” period that’s been extended to Aug. 1.

The proposal would split home loans into two categories. One would be loans to buyers who put 20 percent down, and lenders would face few regulatory hurdles bundling those loans to sell as investment securities. It was the volume of subprime loans in such securities that helped precipitate the financial crisis.

The other loan category would allow smaller down payments but would require lenders to maintain at least 5 percent of the total value of their loans so they shoulder part of the risk. The intent is to ensure lenders thoroughly vet borrowers.

Isakson and others believe the second category would be subject to higher interest rates and could shut lower-income buyers out of the market.

“Loan rates would go up 3 percent because of the scarcity of the loans,” said Isakson, who ran a real estate company in metro Atlanta before his days in Washington. “With the housing market in the shape it is, it’s just ridiculous.”

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Bulldoze: The New Way To Foreclose

-Yahoo!

Banks have a new remedy to America's ailing housing market: Bulldozers.

There are nearly 1.7 million homes in the U.S. in some state of foreclosure. Banks already own some of these homes and will soon have repossessed many more. Many housing economists worry that near constant stream of home sales from banks could keep housing prices down for years to come. But what if some of those homes never hit the market.

Increasingly, it appears banks are turning to demolition teams instead of realtors to rid them of their least valuable repossessed homes. Last month, Bank of America announced plans to demolish 100 foreclosed homes in the Cleveland area. The land is then going to be donated back to the local government authorities. BofA says the recent donations in Cleveland are part of a larger plan to rid itself of its least saleable properties, many of which, according to a company spokesperson, are worth less than $10,000. BofA has already donated 100 homes in Detroit and 150 in Chicago, and may add as many as nine more cities by the end of the year.

And BofA is not alone. A number of banks are ramping up their efforts not just to rid themselves of their unwanted homes, but to fully dispose of them. Fannie Mae has a program to sell houses to local municipalities for around a few hundred dollars. Wells Fargo has donated 800 homes to be demolished since 2009. JPMorgan Chase says it was one of the first banks to begin donating houses it couldn't sell, or didn't think were repairable. Since 2008, the JPMorgan has donated or sold at a discount 1,900 houses to city or county officials.

The banks do the deals because once the properties are donated they no longer have to pay taxes or for upkeep. Tax experts say the banks may also be able to get a write off for the donation. That appears to be a better deal than trying to repair some of these homes, which according to a BofA spokesperson are more economical to demolish than fix up. The local governments like these deals because they get free land to develop or use for open space. Cleveland-based Cuyahoga County Land Reuntilization Corp., which inked the deal with BofA, has been one of the most aggressive local government organizations in striking these deals. Housing economists like these deals because they remove homes from the market that would otherwise sell for a low price or not at all, dragging down home prices in general. An oversupply of homes on the market has been once of the big problems plaguing real estate. At the end of June, it would take nine and a half months for the current number of homes on the market to sell. The housing market is considered healthy when supply equals six months of sales. So taking some of these homes off the market for good could remove some of the inventory drag.

The question is whether the banks will ever put up enough housing for demolition to make a difference. The Obama administration says it is working on its own plan to revamp its loan modification program in order to help keep more people in foreclosure in their homes, reducing the number of foreclosed properties on the market. Some areas of the country are looking at how to speed up foreclosures in an effort to return some normality to the market. It's not clear that any of this will work. Certainly, the idea that we are at the point where banks would be better off knocking down houses that reselling them shows there is still something very wrong with the housing market. But what is clear is that banks and others are at the point where they are ready to try something new to boost the housing market. And that is a good sign for the future.

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Lacker Says More Fed Stimulus Would Increase Inflation Rather Than Growth

-Bloomberg

Federal Reserve Bank of Richmond President Jeffrey Lacker said additional monetary stimulus would likely raise inflation further while not providing a substantial lift to economic growth.

“Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth,” Lacker said in a speech before the Dulles Regional Chamber of Commerce in Chantilly, Virginia.

Federal Reserve policy makers meet Aug. 9 to assess the economy and monetary policy. U.S. central bankers have kept their benchmark lending rate in a range of zero to 0.25 percent since December 2008 and expanded the central bank’s balance sheet to $2.8 trillion in total assets in an effort to support growth.

The Fed’s Beige Book, a survey of regional economies released yesterday, said economic activity slowed in eight of 12 Fed districts. The recovery, which began in June 2009, has failed to pull the unemployment rate below 9 percent in all but two of the past 24 months of expansion. Lacker called the rebound in gross domestic product “disappointing” and said it remains to be seen if the economy rises to previous trend rates of around 3 percent annual growth or settles at a lower trend rate.

“When coming out of a recession, real GDP has typically grown several percentage points faster than the 3 percent long- run trend rate,” Lacker said. “This time, real GDP has risen at a 2.75 percent annual rate since the end of the recession.”      

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Lack of financing may derail growing housing investments

-Housingwire

Investors are a driving force in the housing market, but their enthusiasm is constrained by limited financing options with more investors forced to pay cash for their homes as debt-driven financing remains restricted. And with housing supply only set to increase, the ability of these investors to absorb the overhang may substantially decrease.

Primary activity in the nation's key housing markets is made up of a significant portion of hard cash buyers operating in the distressed property space. Of this number, only 40% or so are estimated to have access to excess capital.

Seventy-five percent of investor transactions last month were financed with cash, according to researchers who compiled the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. While investors are welcomed into the market for keeping sales flowing, an earlier report from HousingPulse warned investor cash levels would eventually be depleted, leaving the market in the hands of first-time homebuyers — many of whom no longer qualify for credit because of tightened underwriting guidelines.

Looking forward, researchers who compiled the report expect home prices to dip further in 2011 due to limited financing options for investors and a growing gap between the supply of distressed properties and sagging demand from first-time buyers. One market source interviewed by the firm expects price declines of at least another 10%.

"The fact that the recent rebound in existing home sales has been predominantly driven by cash buyers and investors places a question mark over the sustainability of that rebound," said Paul Dales, U.S. housing analyst for Capital Economics, back in March. "The concern is that there may be a limited pool of such buyers and that first-time buyers will not be able to fill any void."

The survey showed the proportion of first-time homebuyers in the housing market dropped to 35.4% in June, compared to 37.3% in May. At the same time, the HousingPulse Distressed Property Index dropped to 44.7% in June from 46.7% in May. Even with distressed properties clearing the market,  HousingPulse noted "the gap between first-time homebuyers and distressed property supply was 9.3 percentage points in June," suggesting that housing supply far exceeds demand.

Not to mention, the market remains fearful of the eventual unleashing of the growing shadow inventory of foreclosed and short sale properties.

In the report, Campbell/Inside Mortgage Finance quotes an anonymous California real estate agent as saying "there are tens of thousands of homes that have not even received a notice of default that have not made a mortgage payment in months or years."

The same agent said there will not be a bottom until the "economy turns in earnest and or the default inventory is exhausted."

The study concluded that investors have played a significant role since the end of the homebuyer tax credit by accounting for more than 20% of home purchases on average.

Middle-class Americans seem to believe the dire forecast about home prices and future sales, and remain unlikely to meaningfully get into moving up the property ladder, much less buying second homes.

Sixty-three percent of citizens surveyed for the First Command Financial Behaviors Index believe America is already in a double-dip recession, About 55% of those Americans who see the nation in the grips of a double-dip recession consider the weak housing market to be one of the key causes.

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FHA May Be Next in Line for Huge Bailout: Delisle and Papagianis

-Bloomberg

The nationwide decline in house prices has created a vacuum in the U.S. mortgage market. Private financing for home loans has all but dried up and the U.S. government is now guaranteeing almost every new mortgage. Fannie Mae and Freddie Mac have received most of the media’s attention, but policy makers need to focus on the third leg of the housing- support stool: the Federal Housing Administration.

The FHA has some major accounting problems. Left unaddressed, they could spook the markets, lead the FHA to seek a federal cash infusion and further enrage taxpayers. These outcomes can be avoided -- but only if policy makers are more transparent about the risks involved in guaranteeing mortgages.

The FHA provides private lenders with a 100 percent guarantee against defaults on home mortgages that meet certain underwriting criteria, such as a minimum down payment and credit score. Traditionally, the FHA has served first-time homebuyers and low- to moderate-income families who pay an insurance premium for this loan guarantee.

As private-financing options have disappeared, the role of the FHA has grown. Its market share has increased to about 30 percent today from 3-4 percent in 2007. That’s because the agency is now practically the only game in town, accepting borrowers with down payments of as low as 3.5 percent. As the last few years have made clear, sizable down payments -- or “skin in the game” -- are the key to avoiding defaults in the near term and to achieving a stable housing market in the long term.

FHA’s Bottom Line

So how has the FHA fared financially in serving borrowers with low down payments? As the housing bubble burst in 2007, and the number of mortgage-related defaults started to climb, the FHA’s capital reserves declined to $3.5 billion from $22 billion.

This means that the FHA is on the verge of requiring a bailout to support its outstanding mortgage guarantees, which are projected to exceed $1 trillion in 2011.

The credit quality of FHA lending can be improved with better underwriting standards, such as requiring higher down payments and premiums. Unfortunately, it’s difficult to sound the alarm because flawed accounting measures show that new FHA loans will be profitable for the government. As a general rule, each year the government sets insurance premiums high enough to give the appearance that they will more than cover any losses from homeowners who default.

Budgetary Illusion

But no one should take comfort in the FHA’s projected profit. It’s purely a budgetary illusion.

According to the Federal Credit Reform Act of 1990, federal-budget analysts must strip out any costs that the government incurs when it bears market risk in guaranteeing loans, including mortgages. Market risk is the likelihood that loan defaults will be higher during times of economic stress and that those defaults will be more costly. Excluding costs for market risk is particularly irresponsible at a time when foreclosure rates are elevated and doubts remain over whether home prices will fall further.

If the rate of loss on the FHA’s new guarantees ends up higher than expected, that will probably be because the overall economic recovery has stalled. In such a scenario, any entity guaranteeing mortgages -- be it the taxpayer-backed FHA or a private company -- will suffer bigger-than-expected losses.

Taxpayer Risks

Skeptics might dismiss warnings about the FHA’s ballooning market share. They would defend the government’s current accounting rules and argue that the growth in FHA loans (at the expense of private-sector lending) is a perfectly logical policy goal. In their view, the government is a more efficient provider of mortgages because it can borrow at lower interest rates than any private financial institution.

What’s missing from this analysis is that the government enjoys low borrowing costs only because it can shift market risk onto taxpayers.

Put another way, there is only one reason why investors lend to the government at lower rates than they charge private mortgage insurers, even if they all insure identical mortgages: The government can call on taxpayers to repay bondholders if FHA loans result in higher-than-expected defaults. Few taxpayers would choose to bear that risk free of charge.

Rewriting the Rules

Some lawmakers understand this and are working to change the government’s accounting rules to include market risk. At the request of Representative Paul Ryan, a Republican from Wisconsin, the Congressional Budget Office recently took the official budget estimate for new FHA loans and added in the cost of market risk that taxpayers bear in guaranteeing the mortgages.

Under this more comprehensive methodology, the CBO determined that FHA loans would swing to a loss of $3.5 billion from a projected profit of $4.4 billion next year. In a 10-year budget window, this could mean a difference of $50 billion to $70 billion, depending on market conditions.

Accounting issues often seem arcane or even trivial. But the growth in FHA lending has turned a seemingly small problem into a large taxpayer vulnerability. The current accounting rules will also make it harder politically to shift some of the housing market back to the private sector. Congress should own up to the full costs and risks that taxpayers bear to guarantee mortgages.

The last time Congress delayed action in this area, taxpayers got stuck bailing out Fannie and Freddie -- at a cost of more than $160 billion and rising.

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As housing prices drop, closing costs are rising

-MSNBC

Nationwide, the average origination and title fees on a $200,000 purchase mortgage totaled $4,070, according to Bankrate's annual survey of closing costs. That's an 8.8 percent jump compared to 2010 when the average closing costs totaled $3,741.

For the second year in a row, the states with the highest closing costs are New York, where costs average $6,183; Texas at $4,944; followed by Utah with $4,906. Next was California, where average closing costs in San Francisco totaled $4,832. New York and Texas have dominated the top spots for five years.

The cheapest places to get a mortgage are Arkansas, North Carolina and Indiana. In each of these states, the average closing costs are close to $3,400.

What exactly has gone up?
Most of the jump in closing costs is tied to fees charged directly by lenders.

On average, lenders charged about $1,614 in origination fees this year, up 10.3 percent from last year. Origination fees include lender charges for services such as underwriting and processing.

Fees imposed by third parties, including title, appraisal, postage/courier and survey charges, averaged $2,456, up 7.9 percent from 2010.

While some third-party fees rose, title insurance premiums changed little compared to last year. The survey excludes property taxes, homeowners insurance and recording fees.

Why are fees rising?
Many lenders and mortgage professionals claim that origination fees have increased because of stricter mortgage regulations that the government has implemented in the last two years.

"New regulations require more staffing and cost more money," says Jason Auerbach, division manager of First Choice Loan Services in New York City.

Auerbach says some of the "new" regulations — which vary from having to take extra steps to verify a borrower's income and employment to disclosure forms and licensing-related matters — have been in place for a couple of years already, but the mortgage industry takes them more seriously now. New forms and regulations that are still in discussion are influencing lenders already.

"Banks are self-regulating," Auerbach says. "They want to make sure there is nothing in that loan that is going to make Fannie and Freddie uncomfortable."

Fannie Mae and Freddie Mac buy most mortgages and have almost no tolerance for missing documents or errors in paperwork.

Neil Garfinkel, a New York real estate attorney with AGMB Law, says he has noticed firsthand the increased caution, as he has been retained to help several smaller banks seeking counseling related to mortgage compliance issues.

"It does cost them more, and I'm sure the costs have to be passed on to the consumer," Garfinkel says.

Paying more for fair loans?
The argument that increased regulation makes loans more expensive has long been used by the lending industry against new, more stringent rules.

While new rules may cost the lenders more money, it's difficult to determine how much of the added costs are really a result of regulatory changes, says Barry Zigas, director of housing policy for the Consumer Federation of America.

"It's ironic to hear that the consumer has to pay more to get a fair product," Zigas says. "But if it means the mortgage they are getting is more likely to be tailored to their needs, they should be happy to pay."

Compare and negotiate lender's fees
That doesn't mean you have to pay whatever your mortgage lender feels like charging you.

Some of the fees included in your closing costs, such as appraisals and credit reports, aren't really negotiable. But you can shop around and negotiate lender fees. In some states you can negotiate title insurance costs.

Origination fees vary substantially from lender to lender, says Diane Saatchi, senior vice president of Saunders & Associates, a real estate brokerage in Bridgehampton, N.Y.

Bankrate's survey shows that if you are getting a $200,000 mortgage in New York, for example, you may be charged anywhere from the $700s to more than $4,000 in origination fees depending on which lender you choose.

That's why it's important to compare good faith estimates, or GFEs, from at least three banks and three mortgage brokers, Saatchi says. Borrowers are entitled to get a GFE form, which includes a breakdown of estimated closing costs, within three business days after submitting a mortgage application.

Shopping for title insurance
The GFE form includes an estimate for title insurance, but you can shop around. Will the savings be worth your time? It depends on where you live. Some states set or regulate title insurance premiums. In other states the charges vary.

In Bankrate's survey, the average title insurance premium nationwide is $1,653. North Carolina is one of the cheapest places to buy title insurance with an average cost of $993. In comparison, the average title insurance premium in the New York, for the same home value and mortgage amount, is $2,811.

Joseph Eaton, co-author of the 2007 book "The American Title Insurance Industry: How a Cartel Fleeces the American Consumer," has studied the title industry for more than a decade. He says that if consumers were able to shop for title insurance outside of their states and the rates weren't fixed in some states, borrowers wouldn't have to pay as much.

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Only 49% of homeowners surveyed say home worth more than mortgage

-Housingwire

For the second month in a row, less than half of the nation's homeowners think their home is worth more than the amount they still owe on their mortgage.

While that’s up from June’s all-time low of 45%, it is just the third time this finding has fallen below 50% since late 2008, according to pollster Rasmussen Reports, which conducted a national telephone survey of homeowners.

Upper-income homeowners are more confident in their home value than those who earn less, and investors are much more confident than non-investors about their home’s value.

In December 2008, 61% believed their home was worth more than their mortgage. While the numbers have declined since then, this is the first time that the number believing they had equity in their home stayed below 50% for two months in a row.

The survey of 676 homeowners was conducted July 17-18. The margin of error is 4 percentage points.

One in three homeowners said his or her home is not worth more than the amount left on the mortgage with another 18% unsure.

According to the survey, 7% of homeowners say they’ve missed or been late on a mortgage payment in the last six months, in line with previous months.

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Conflicts in federal programs leave underwater homeowners adrift

-Housingwire

Government programs aimed at refinancing mortgages for homeowners in negative equity are plagued with disappointing results, long-shot legislation and growing conflicts among regulatory agencies.

As of May, 2.1 million mortgages sat somewhere in the foreclosure process, according to Lender Processing Services. Of those delinquent home loans, 80% were in negative equity, meaning the borrower owed more on the mortgage than the property is worth. Of the seriously delinquent loans that were current just six months ago, roughly 6% had loan-to-value ratios of 150% or higher.

U.S. home prices have fallen 32% from their peak in 2006, according to the Standard & Poor's/Case-Shiller index, but prices may not have bottomed. Robert Shiller, who helped develop the index, recently said prices could drop another 10% to 25%.

In response to the growing number of underwater borrowers, the Obama administration established several programs to urge investors toward writing down the principal on these loans. Each has underwhelmed because the two largest mortgage investors in the country, Fannie Mae and Freddie Mac, do not participate or cannot help homeowners with severe negative equity.

The programs

In September, the Department of Housing and Urban Development launched the $8 billion Federal Housing Administration Short Refinance program. Through it, underwater borrowers can refinance into an FHA-insured loan if the lender or investor writes off the unpaid principal balance of the original first-lien by at least 10%.

As of June, only 246 borrowers made it through the program.

One month after FHA Short Refi launched, the Treasury Department started a principal reduction initiative under the Home Affordable Modification Program. Participating servicers evaluate borrowers with a loan-to-value ratio of more than 115% for a reduction.

As of June, servicers included this write-down on 4,911 HAMP modifications.

In February 2010, the Treasury initiated the roughly $7 billion Hardest Hit Fit to provide Troubled Asset Relief Program dollars to state housing finance agencies. Some states including California and Arizona built principal reduction programs, but only Bank of America (BAC: 9.82 +2.61%) and Ally Financial (GJM: 23.5546 +0.32%) agreed to participate and only under investor approval.

The Arizona Department of Housing expects BofA to reach up to 8,000 homeowners with the assistance with no estimate yet for California. Ally Financial has given no estimates.

The Home Affordable Refinance Program is by far the most successful. Since it launched in March 2009, more than 784,000 Fannie Mae and Freddie Mac loans pushed through the program and out of negative equity. But 84% of them held LTVs of less than 105%. Only 5,400 borrowers further underwater received help.

The 'Boxer Rebellion'

Sen. Barbara Boxer (D-Calif.) introduced a bill in January that would eliminate upfront fees and underwater restrictions Fannie and Freddie include when evaluating a homeowner for refinancing out of negative equity.

The bill gained recent support from several trade groups and Moody's Analytics Chief Economist Mark Zandi, who said the cost of the bill would be offset by the savings Fannie and Freddie would recoup by helping these borrowers avoid default.

But the bill has Wall Street jumpy. Analysts at Bank of America Merrill Lynch called the bill the "Boxer Rebellion" in a research note released Friday.

"Due to the existence of HARP and HAMP, programs which have performed well below initial expectations, the practical need for this new, seemingly sensible legislation is hard to rationalize. Why would this program have any more implementation success than its predecessor programs?" BofAML analysts said. "Sen. Boxer's push for legislation to refinance underwater homeowners stands in opposition to perhaps the most pressing need of the U.S. economy and fiscal situation: reliance on, not help for, responsible citizens."

Jaret Seiberg, an analyst at the Washington think tank MF Global said Friday the Boxer bill does not have the legs to wind through Congress. Even if it did, the prepayment risk could overwhelm the system.

With Boxer targeting roughly 2 million Americans with her bill, Seiberg said the paperwork needed could have the same damaging effects as the robo-signing disaster.

"Even if one could get massive refinancings, there is the question of whether the infrastructure could support such a move. We saw with the robo-signing controversy that the system could not handle the crush of record foreclosures. In our view, there would be similar problems if there was a crush of refinancing," Seiberg said. "This would be a massive amount of paper to process at once and each loan would need to be recorded in a county clerk’s office."

Conflicting agencies

It appears two government agencies are sending conflicting signals to Fannie Mae and Freddie Mac on whether principal reduction even fits into their conservatorship roles.

When the FHA Short Refinance program launched in September, HUD said between 500,000 and 1.5 million borrowers who owe more on their mortgage than their home is worth would be able to refinance into a right-side-up FHA loan.

But HUD counted on two-thirds of that estimate on loans owned by Fannie and Freddie. As a result of these two firms missing from the program, only the 246 loans, mentioned above, made it through.

HUD said it is working to get Fannie and Freddie involved and is "getting the ball rolling" on the other one-third of the program's targeted loans.

But the lack of participation from Fannie and Freddie is a directive issued by their regulator, the Federal Housing Finance Agency.

"FHFA understands that some mortgage investors have sought such solutions in order to recover today what principal they can on outstanding mortgages. However, I have determined that these programs as they work today, while they may be in the best interest of certain other mortgage investors, do not meet FHFA's conservatorship goals," said FHFA Acting Director Edward DeMarco in a letter to Rep. Brad Miller (D-N.C.) this year.

Out of options

Treasury Secretary Timothy Geithner admitted on last week's Meet the Press that the Obama administration is running out of options to "engineer artificially a stronger recovery" in the housing market and overall economy.

Obama did say at the town hall hosted by Twitter last week that he would put more pressure on banks to pursue principal reduction as an option. But Seiberg said voluntary programs proved to be unreliable and going further would be an illegal breach of securitization documents.

"To make a real difference, the government would need to refinance all underwater borrowers at once to a lower rate loan," Seiberg said. "Such a move would leave the government on the hook for billions of dollars in damages."

BofAML analysts said Washington should instead be focusing on establishing a public-private partnership to invest in distressed real estate, citing the success Treasury had under such a program through TARP. But the analysts remained doubtful — given the current political gridlock on Capitol Hill — that anything could be done.

"Given the less than heroic nature of the budget debate so far, we are not hopeful that this will change anytime soon," the analysts said.

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Europe's pain is U.S. homeowners' gain

-MSNBC

The threat of a debt default by Greece and other European countries has created financial turmoil for investors, banks and government officials. It’s also provided a boon to U.S. homeowners.

Long-term mortgage rates have been drifting to their lowest levels of the year, sparking a new wave in mortgage refinancing activities, industry experts say.

The reason? Despite the anxiety over debt talk brinksmanship in Washington, investors have been flocking to dollar-based investments including U.S. Treasuries, because euro-based securities seeem riskier. Even as a potential U.S. default looms, the odds seem lower than a default in Europe. It’s like living in the nicest house in a bad neighborhood.

Investor fears about Europe were stoked again Wednesday after the head of the European Commission gave an an unusually somber warning to EU leaders, saying that if they don't find a convincing solution to Greece's debt crisis at Thursday summit, the global economy will pay the price.

The investor "flight to safety" into dollars has forced up prices of Treasuries, which pushes interest rates lower. For homeowners looking to refinance their mortgage, there are fresh bargains available. As of last week, the average rate on a 30-year fixed mortgage had fallen to just 4.54 percent.

"Ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe has brought mortgage rates back to their lowest levels of the year," Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association said in a statement. "Refinance applications have surged in response."

The MBA’s mortgage application index, which tracks both refinancing and home purchases, spiked up 15.5 percent in the week ended July 15. That’s the biggest increase since early March. The index for refinancing applications soared 23.1 percent.

Those refinancings are helping homeowners lower their monthly payments and free up a little more cash to pay bills. Mortgage payments made up just under 10 percent of household debt in the first quarter, down from 11.3 percent when the recession began in 2007. (Some of that drop is the result of homeowners who lost their homes and no longer have a mortgage.)

But unlike the days of "cash-out" refinancings during the housing boom, there's little home equity left to cash out. With home prices down one-third from their peak and still falling, roughly one in four homeowners have no equity at all. At the height of the mortgage mania in 2006, American households scooped nearly $350 billion out of their houses by refinancing and taking out home equity loans. In the year ended in April, that had fallen to less than $60 billion.

The drop in mortgage rates has done little to revive sales of new and existing homes. Bankers are still very choosy about approving loans for home buyers, and consumers have gotten more nervous about buying as the job market and economy have weakened.

Sales of previously-owned homes fell more the forecasters had expected in June hitting a seven-month low and extending a dismal spring selling season. More troubling was a surge in cancellations of pending contracts as home buyers found themselves unwilling or unable to close on their purchase. Some 16 percent of buyers backed out of their contracts in June - up from 4 percnt in May.

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More Americans to exit homeownership

-Housingwire

Political deadlock mixed with terrible housing market conditions will eventually turn America into a society of renters, according to the latest Housing Market Insights report from Morgan Stanley (MS: 21.58 +2.86%).

High rates of mortgage delinquency, foreclosures and liquidations are turning homeowners into renters, analysts at the investment banking giant said, lowering homeownership rates and increasing demand for rentals.

And it appears even federal institutions are giving up on implicitly supporting what used to be the cornerstone of the ideal American life.

In the Treasury Department white paper on reforming the government-sponsored enterprises, a suggested change to housing policy was put forward: "The administration believes that we must continue to take the necessary steps to ensure that Americans have access to an adequate range of affordable housing options. This does not mean our goal is for all Americans to be homeowners."

During the housing bubble, homeownership rates increased from 66% to 69%, an all-time high. Today, that number is just below 65%, according to Morgan Stanley researchers Oliver Chang, James Egan and Vishwanath Tirupattur.

The analysts expect this will decline further to 59.7%, driving multifamily vacancies down and rents up. The researchers derived this estimate by taking the number of delinquent homeowners likely to be foreclosed, and moving them into the rental category.

Nonetheless, American payroll and household formation numbers are actually on the rise (see chart below):

Traditionally, this would mean that these households, with increasing capital, would naturally look to invest in a home, but getting the loan to do so is on a downward trajectory (see chart below):

The above two graphs will come as no surprise to those following the rental markets.

The National Multi Housing Council, a trade group representing the apartment industry, pushed for clearer housing policy in regard to renting at the group's mid-year conference in May.

Developers speaking at the conference said the recession has made it easier to get new apartments approved for financing from Fannie Mae and Freddie Mac. During the housing boom, it was difficult to get approvals from the government-sponsored enterprises for rental housing, but localities are reducing the barriers and restrictions that have hampered rental development to encourage the revenue and jobs new development brings.

The NMHC called the trend "the new normal," and it appears demand will continue to surge.

Furthermore, a lack of credit and falling home prices continue to negatively impact the desire to own a home.

And it's not just these factors pulling down the ability of Americans to get a mortgage.

"GSE reform, Dodd-Frank securitization rules, mortgage interest deduction reform, continued home price declines and a long workout period for distressed homes, will likely make it harder to buy an owner-occupied home," the Morgan Stanley report states.

"As such, we believe that the U.S. will become a Rentership Society, in which the homeownership rate will keep falling, the home rentership rate will conversely rise, and the rental market will dominate the investment landscape in housing for years to come," according to the analysts.

They made clear the interpretation of their results are not necessarily equal to a negative outlook. They point to improvement to the multifamily sector as an example. However, performance of single-family dwellings, often owned by one landlord, are more difficult to project.

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Fed's Massive Stimulus Had Little Impact: Greenspan

-CNBC

The Federal Reserve's massive stimulus program had little impact on the U.S. economy besides weakening the dollar and helping U.S. exports, Federal Reserve Governor Alan Greenspan told CNBC Thursday.

In a blunt critique of his successor, Fed Chairman Ben Bernanke, Greenspan said the $2 trillion in quantitative easing over the past two years had done little to loosen credit and boost the economy.

"There is no evidence that huge inflow of money into the system basically worked," Greenspan said in a live interview.

"It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion," he said. "Aside from that, I am ill-aware of anything that really worked. Not only QE2 but QE1."

Greenspan’s comments came as the Fed ended the second installment of its bond-buying program, known as QE2, after spending $600 billion. There were no hints of any more monetary easing—or QE3—to come.

Greenspan said he "would be surprised if there was a QE3"  because it would "continue erosion of the dollar."

The former Fed chairman himself has been widely criticized for the low-interest rate policy in the early and mid 2000s that many believe led to the 2008 credit crisis.

Bernanke, who took over for Greenspan in 2006, began implementing the quantitative easing program in 2009 in an attempt to unfreeze credit and prevent a collapse of the US financial system. The strategy has gotten mixed reviews so far.

On Greece, Greenspan said a default is likely and will  "affect the whole structure of profitability in the U.S." because of this country's large economic commitments to Europe, which holds Greek debt. Europe is also where "half the foreign [U.S.] affiliate earnings" are generated, he added.

"We can’t afford a significant drop in foreign affiliate earnings," Greenspan said.

Greenspan was also pessimistic about the U.S. deficit talks, saying he didn’t think Congress would reach an agreement on raising the debt ceiling by the Aug 2 deadline.
“We’re going to get up to Aug 2 and I think on that night, we are not going to have the issue solved,” he said.
If that happens, he said, the U.S. would have to continue paying debt holders or risk major damage in global financial markets. As a result, “we will default on everything else.”
He added: “At that point, I think we’ll all come to our senses.”

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Fed's new money policy: 'Wait and see'

-MSNBC

After pumping more than a trillion dollars into the financial system, forcing interest to near zero and buying back hundreds of billions of dollars of bad mortgage bonds, the Federal Reserve has adopted a new monetary policy.

Call it "wait and see."

Fed Chairman Ben Bernanke was on Capitol Hill Wednesday testifying on the central bank's latest strategies for getting the economy back on a stronger footing. The hearing comes a day after minutes of the Fed's latest Open Market Committee meeting in June showed the group divided over what to do next.

Some members want to consider resuming the pump-priming policy of buying up bonds. The majority, including Bernanke, argue that the recent "soft patch" in growth resulted from a temporary surge in oil prices and the supply bottlenecks from the Japanese earthquake.

"Once the temporary shocks that have been holding down economic activity pass, we expect to see again the effects of (recent Fed policy) reflected in stronger economic activity and job creation," Bernanke told the House Financial Services Committee.

After a convincing pickup in growth last year, the economy slowed sharply in the first quarter and has been limping along since. First quarter gross domestic product edged up just 1.9 percent. The latest monthly data, especially the surprising collapse in job growth in May and June, have raised concerns that the recovery may be stalling out.

For now, central bankers don't see that happening. Bernanke said that while they've trimmed their growth forecasts, Fed forecasters believe growth will rise in the second half of the year to between 2.7 percent and 2.9 percent for the full year. The Fed forecast sees the economy gathering more steam next year, expanding at a rate of 3.3 to 3.7 percent.

So until the data from the second half starts rolling in, Bernanke and most of his colleagues think the best course is to do nothing.

"The Fed has thrown the kitchen sink at the markets with massive liquidity," said Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide. "So I expect in the second half they stay on the sidelines, they try get a read for the overall health of the economy and then make their decisions from there."

Though the Fed is on hold for now, Bernanke was quick to note that the central bank stands ready to take action if there are new shocks to the global economy or the financial system. Investors were cheered by just a mention that central bank might consider showering more money on the financial markets. Stocks and bonds rallied shortly after Bernanke's prepared testimony was released.

There are plenty of potential sources for shocks that could throw the economy off kilter. The ongoing political fracas over the federal budget, for one, has the bond market on edge. Congressional dithering over raising the debt ceiling has raised the threat of a default on U.S. Treasury debt.

The spreading debt crisis in Europe, for another, threatens to spark a banking panic that could put pressure on U.S. banks.

Bernanke said the U.S. would continue to pay interest on its debt even if Congress failed to extend the debt ceiling by Aug. 2, when the government is scheduled to exceed its borrowing authority.

"The assumption is that as long as possible, the Treasury would want to try to make payments on the principal and interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy," Bernanke said.

Nevertheless, any of these shocks could produce the Fed's worst nightmare: a surge in market-driven interest rates that would severely test the central bank's ability to keep interest rates low. In his testimony, Bernanke reminded the committee of the importance of holding rates down.

"We know from many decades of experience with monetary policy that when the economy is operating below its potential, easier financial conditions tend to promote more rapid economic growth," he said.

But the Fed doesn't have many tools left to hold down rates if bond investors get spooked and demand higher interest payment to offset the risk of not getting their money back. Bernanke assured the committee that the Fed has "several options," and cited two. One would be to be more explicit about its plans to keep rates low for a very long time. The other would be to scale back the interest payments to banks that store cash in the Fed's accounts.

"A lot of the options he put on the table were effectively worthless," said Drew Matus, a senior economist at UBS Investment Research. "So I think Bernanke really is just hoping for the best."

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