Required Downpayments Skyrocket
Standard and Poor has published some scary statistics for those with adjustable mortgages, or just looking to purchase a home. Down payment minimums are more than doubling, and higher than usual interest rates are going to give homeowners a reason to try mortgage acceleration:
Homeowners with patchy credit histories are set to face a 26 per cent jump in their monthly mortgage payments due to the global credit squeeze, according to a new report.
Standard and Poor’s, the ratings agency, said that 80,000 UK borrowers who are due to come to the end of existing mortgage deals now face a huge “payment shock” because subprime mortgage lenders have been pushing up interest rates and tightening lending criteria in recent weeks.
Many subprime mortgage lenders such as GMAC and Kensington are now asking borrowers to put down a larger deposit of 25 per cent - rather than the 10 per cent which was required just a few weeks ago.
Last year it was possible to find home loans for 0% down, and loans for 3% to 5% down were plentiful. Now a buyer must have at least 20% saved in order to have a chance at purchasing a home for a decent interest rate.
This will prevent a large number of potential home owners from being able to afford a home. A 20% down payment is a hefty amount for a home in California.
Alan Greenspan Points Fingers
Some interesting allegations from Greenspan today:
The former chairman of the US Federal Reserve warned today that the danger of a US recession had risen following the turmoil in the global credit market and he denied that regulators were caught unawares by the problems which caused the global credit crunch.
Veteran economist Alan Greenspan said the chance of a downturn was still less that 50%, but conceded he was ‘less optimistic than one would like’.
In an interview with BBC Radio 4’s Today programme, Mr Greenspan said it was inevitable the house price bubble would burst and said central banks such as the Bank of England had no control over ‘real’ interest rates
While Greenspan is still holding some hope for the future, he may be better off calling this downturn what it truly is. A disaster. Banksm consumers, and homeowners worldwide continue to struggle in order to manage debt consolidation, interest rates are rising, and home prices are falling.
If there is any hope for the future it would be kind of Mr. Greenspan to share the methods by which such a bright future could be obtained rather than sharing his bleak forecasts in the form of odds and speculation.
Lonestar buys Accredited
Interesting developments as further consolidation takes place in the lending market. Lonestart has made a bid to purchase Accredited.
Bloomberg has the latest:
Lone Star Funds agreed to buy out Accredited Home Lenders Holding Co. for $296 million, ending a two-month dispute with the mortgage lender over terms of an acquisition soured by the worst U.S. housing slump in 16 years.
Lone Star agreed to pay $11.75 a share for San Diego-based Accredited, said a statement released today by both companies. That’s less than its initial offer price of $15.10 a share on June 4 and higher than the $8.50-a-share offer made in August after Accredited sued Lone Star for trying to withdraw. Accredited said today it agreed to halt its lawsuit.
More than 110 companies have halted some mortgage operations or left the business entirely since the start of 2006. Foreclosures set a record in the second quarter and overdue payments on U.S. subprime mortgages rose to the highest level in five years, according to the Mortgage Bankers Association. That’s made investors who buy mortgages reluctant to bid, and bankers have cut off credit lines to home lenders.
It’s interesting that Lonestar managed to successfully renegotiate a purchase price after agreeing to a $15 per share purchase price some time ago. Certainly worth the trouble as far as Lonestar was concerned.
Creatively approaching finances is one of the best ways to successfully operate in personal and business finance. Bi Weekly Mortgage payments are one example of successful application of said principle.
Plenty of Trouble Ahead for US Housing
Following announcements by Saudi Arabia and other nations that they would stop pegging their currency to the US dollar, there continues to be more bad signs indicating trouble ahead.
David Crane lists some of them:
One troubling sign – the risk of a recession in the United States. In an appearance before the Joint Economic Committee of the U.S. Congress a few days ago, Yale economist and housing expert Robert Shiller warned that “the collapse of home prices might turn out to be the most severe since the Great Depression.” Shiller was the economist who predicted the bursting of the dot-com bubble earlier this decade.
Such a decline would have a spillover effect across the economy through what economists call the wealth effect. It has been estimated that $4 trillion (U.S.) in household wealth would be lost if U.S. house prices fell 20 per cent.
Americans would feel much poorer and this would affect a broader range of consumer spending, from autos and appliances to travel and electronics. Shiller has warned that “we could see much more than the 15 per cent real drop in national home price indices that we saw the last time.” That was between 1989 and 1996.
Another troubling sign – continued weakness of the U.S. dollar. Indeed, it may be that the recent cut in interest rates by the U.S. Federal Reserve is designed to lower the value of the U.S. dollar and boost U.S. exports while lowering imports. This would protect some American jobs at the expense of other countries, including Canada.
Those working in the financial industry already realize that job security is a luxury no longer offered to their professions. This can be a genuine concern, as a lost job can quickly cause unpaid debt to double or triple in only a month’s time. Often debt consolidation can be difficult without some form of savings or income to help pay down the debt.
Liquidity Crisis a Reality?
Many trying to pay down their home loans with bi weekly mortgage payments do so with the desire to avoid debt to creditors. Such an attitude will pay off in the near future as easy credit drys up.
Thorsten Polleit has written an interesting editorial regarding what’s happening to credit for consumers in the world markets.
The repercussions of the turmoil in the US subprime mortgage market are increasingly being felt around the world. What was initially thought to be a problem confined to a US credit market segment has increasingly transformed itself into an erosion of investor confidence in credit quality in general and, in some countries, concerns about the reliability of the banking sector.
The most obvious symptom of eroding confidence is the alleged “liquidity crisis.” The term “liquidity” usually denotes the possibility to buy or sell a financial asset at any one time without causing noticeable changes in the price of the product being bought or sold. Market participants speak of “illiquidity” when it is no longer possible to sell financial products, or if selling is possible only at greatly diminished prices.
Disaster may strike in the near future. Being prepared is best accomplished by reducing debt and living within one’s means.
Canada Gets Hit by Credit Crunch
The banking disasters being felt world wide have evidently headed north. Canada.com reports:
Canadian banks are struggling to contain a credit crisis that could spiral out of control here more than it has elsewhere because of a lax regulatory regime, sources have told the National Post.
The crisis relates to the market for a complex type of short-term funding known as asset backed commercial paper (ABCP), which had grown out of proportion in this country partly thanks to Canadian rules that were not as tough as in other nations.
“It’s a made-in-Canada problem,” said Claude Lamoureux, head of Ontario Teachers’ Pension Plan. Many people in the market “didn’t know or didn’t ask questions” because they were making more profits than elsewhere, he added.
Once again, it seems that national banks are learning that loosely governed and often ignored lending regulations are a recipe for disaster.
Often consumers fall into the same financial problems as a loose budget and frequent refinancing can lead to a home taking forever to pay off. Mortgage acceleration can be useful in avoiding such trouble.
Winds Of Change
While perhaps bad news for the many brokers and lenders that acted illegally in the past housing craze, there may be hope for future laws to perhaps further restrict illegal lending practices.
The Atlanta Journal has the latest on the government crackdown:
Real estate wasn’t booming in metro Atlanta in the early 2000s the way it was in cities such as Miami. But the market, with low interest rates and eager buyers, was still perfect for Phillip E. Hill’s mortgage fraud scheme to milk millions from inflated home values.
On Friday, a federal judge in Atlanta sentenced Hill to 28 years in prison and ordered him to pay more than $41 million in restitution for running a conspiracy that involved loan officers and real estate appraisers and racked up $112 million in fraudulent loans, of which Hill himself pocketed a cool $14 million, said prosecutors.
The sentencing came six months after a jury found Hill and nine others guilty of the scam. They used “straw purchasers” to obtain loans on properties where corrupt appraisers had inflated their values, a fraudulent transaction known as a “flip.” The “straw purchasers” were then paid in kickbacks out of proceeds from the excess loans.
Such practices are obviously illegal, but have been largely ignored for some time. It’s good to see the government finally enforcing laws against illegal lending practices.
Inflated appraisals are one of the main reasons borrowers end up with homes they can’t afford. Cashback schemes rather than bi weekly mortgage payments make it easy to rack up mortgage debt quickly, debt which takes thirty long years to pay off.
Predatory Borrowing?
A wonderful editorial ran in the Boston Globe earlier this week covering the darker end of the current housing crisis. Here’s a snippet:
“Like inebriated bar patrons who blame the bartender for serving them too much, a segment of today’s borrowers willfully chose to borrow beyond their means and are now blaming the lender.” — We have no pity for such borrowers… this is nothing like the unsophisticated young couple or fixed-income grandmother who were simply put into an ARM instead of a fixed!
A good analogy for describing those who were ‘criminally stupid’ in their decisions. While responsible borrowers work hard to pay off their loans via mortgage acceleration, other borrowers who opted for bad loans simply because it ‘looked cheaper’ are now loudly demanding the government help them out.
This is not only wrong, it should be condemned by society as immoral behavior. Society should not have to foot the bill for irresponsible borrowers.
Fed Rate Cuts Take Effect
Rate cuts are finally taking affect on the economy, though not in a way that really benefits homeowners. Bloomberg has the latest:
The U.S. commercial paper market shrank for a sixth week, extending the biggest slump in at least seven years and signaling Federal Reserve interest-rate cuts haven’t yet drawn investors back to short-term debt.
Short-term debt maturing in 270 days or less fell $48.1 billion in the week ended yesterday to a seasonally adjusted $1.87 trillion, including a $32.1 billion decline in financial firms’ commercial paper. Asset-backed debt dropped $15.6 billion, according to the Fed in Washington.
Commercial paper investments have declined $354.5 billion, or almost 16 percent, since the week ended Aug. 8, according to the Fed. The slump began in asset-backed paper and spilled into financial companies’ short-term debt. Banks and other financial institutions have sold almost $14 billion of bonds and notes since Aug. 24, allowing them to pay off commercial paper…..
The prospect of a slowing economy, which prompted the Fed to act this week, may have caused firms to reduce sales, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.
“The economy is not very strong,” Crescenzi said. That reduces the need for banks and brokerage firms to sell new debt to fund their day-to-day activities, he said. “The demand for money weakens when the economy weakens.”
While lower short term interest rates make paying off credit cards and debt consolidation a bit easier, they do little to ease the long term interest charged on home loans.
Other Lenders to Follow E-Trade in Leaving Lending?
An interesting editorial from the NYTimes today. Here’s a clip:
DENIAL is a powerful thing, and nowhere is that more evident than among companies holding mortgage securities that are on the skids. Nine months into the meltdown of the home loan market, investors are still waiting for banks, brokerage firms and other companies to come clean on losses incurred on those securities.
Consider the announcement last week from the E*Trade Financial Corporation about problems in its mortgage operations. That E*Trade actually is in the mortgage business surprised those who thought it was a discount brokerage firm.
Late Monday, E*Trade disclosed that it was cutting its earnings forecast for 2007 by 30 percent because of higher provisions for loan losses and potential securities impairments related to mortgages.
The author makes a good point. It’s clear from the E*Trade announcement that lenders have avoided full disclosure regarding their financial situations. Eventually other lenders in financial trouble will have to come clean as well. With the economy already in hot water, what does the future hold in store?
Those worrying about their ARM loans skyrocketing as a result of E*Trade and other lenders closing may wish to consider a bi weekly mortgage as a means to pay down their loans early.