With the housing market collapse have come all sorts of new words such as Alt-A loans, ninja loans, subprime, that leave many of us confused. This article by Jack Rosenthal from the New York Times take a stab at explaining some of the most commonly heard terms.
By the way an alternate Alt-A loan is one in which borrowers have excellent credit scores but can’t document their income and assets. Lenders are becoming increasingly concerned that these may be the next set of loans to default.
For those of you hoping that the housing market had bottomed out, the news released yesterday indicates otherwise. Fannie Mae reported losses amounting to $2.3 billion, while its country cousin, Freddie Mac’s last quarter losses amounted to $821 million - far more than had been anticipated.
While some experts believe prices have fallen enough to get a bargain, I believe that the news from the country cousins indicate house prices still have a way to go before they reach the bottom. This means if you are contemplating buying a new home, it might be a good idea to wait. For those of us who had counted on our homes to provide additional retirement income, this is not good news.
The online version of the New York Times has a series on the impact the current economic downturn is having on ordinary Americans. Interviewed for the series are a young couple, a middle age woman, and an elderly woman, all of whom are at risk of losing their homes because of debt.The villains in the piece are the banks and other financial institutions, which make obscene profits off the misery of ordinary people.
According to the article, unlike in the past, banks don’t hold loans on their books. They package the loans and sell them to investors generating large fees. In the past it was critical to lenders to be repaid. Now getting paid is less important than the fees the loans produce.
Home buyers are charged 50 percent more in junk fees. To buy a home, mortgage lenders charge junk fees such as $75 for emails and $100 for document preparation, and $70 for courier services, inflating the cost to homebuyers an average of $700.
Fees also play an especially strong role in the credit card market. Although interest rates may have fallen to the single digits, credit card companies charge even those with good credit around 19 percent in interest. Average late fees have almost tripled since 1994 and charges for exceeding credit limits has more than doubled.
These changes net the financial institutions billions. This unchecked greed on the part of the financial institutions coupled with weak job growth is causing untold misery for millions of Americans.
Fannie Mae and Freddie Mac stand behind most of the United States’ mortgage debt. In recent days their stocks have taken a nosedive. With the housing meltdown, these two entities have become more important to the housing market. This is because the pullback over the last year of banks and others who backed mortgages has forced them to pick up the slack.
Reasons given for the falling value of their stock is fear that they won’t be able to raise enough money from investors to cover growing losses from bank defaults. Freddie Mac’s stock has fallen 50% in the past week. Experts see their troubles as further evidence that the housing downturn may last well into next year.
Fannie Mae and Freddie Mac are privately owned companies whose stock is publicly traded. They were charted by the federal government to buy or guarantee loans and mortgage securities. They are owned and operated by stockholders. They are protected financially by the federal government. This means that taxpayers are on the hook for any losses. Among government support they receive is access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. They do not lend directly to homebuyers, but buy up loans from lenders then bundle the loans together and sell them to investors.
With the cost of fuel increasing, many Americans may find it in their financial interest to move from the suburbs to the metropolitans. If they make the move, they will reverse the trend of moving to the suburbs that began in the 1940s with the creation of the Levittown, NY suburbs.
Moving to the suburbs was originally motivated by a desire for space, quiet, safety, better schools and to get away from Jews, Hispanics, and Blacks. Of course later, those groups would challenge the laws that made it legal to exclude them, and move to the suburbs themselves. The resources put into making the suburbs desirable could have easily been invested into cities, increasing their desirability. When gas was cheap suburban life made sense, but with gas prices skyrocketing and no end in sight, many suburbanites are beginning to reconsider suburban living. Empty nesters who no longer have to factor in schools will find this an easier decision to make.
I made the decision to move to the city almost 8 years ago, long before gas prices reached the more than $4 /gallon level. I was living in the Los Angeles area and was exhausted by the commuting I had to do in order to make my life work. Even then I felt that the cost of maintaining a car was too costly. I was also concerned about the environmental cost associated with owning and operating a car. My decision was made easier with the death of my Alzheimer’s mother, and with my youngest child’s completion of the public high school. Although there are some things that are pleasanter in the suburbs, I like the grittiness of city life, and the fact that amenities such as museums, concerts, theaters are easily accessible.
Yes, according to the New York Times. The Times reported a few days ago that spurred on by more bad news in the housing sector, the Senate is near to approving a bill to help homeowners. The latest housing index showed prices had declined in April by more than 15 percent from a year ago. This is especially bad news for soon to be retirees who expected their homes to provide some of their retirement income. While this group cannot expect the housing bill to help much, there are others who can benefit.
The Senate is considering a rescue-refinancing plan that is intended to stem the more than 8000 foreclosures a day. The plan would allow qualified owners to refinance into more affordable, 30 year fixed rate loans with a federal guarantee. The legislation benefits first time buyers, who would receive a refundable tax credit up to $8000 or 10 percent of the value of a home. The limit on loans that Fannie Mae and Freddie Mac could purchase would be increased from $417,000 to $625,000 in the expensive housing markets.
Latest reports by the S&P/Case-Shiller Index is that compared to a year ago, home sales in February were down by almost 13%. That’s the largest decline since 2001, the year records were first kept. Sagging inventories and a lack of qualified buyers are reported reasons for the decline. It doesn’t help matters that mortgages on many homes are worth more than the value of the homes, and that wages are failing to keep pace with inflation, or that many of us are also worried about finding or holding on to existing jobs.
The sharpest declines were in Las Vegas, Miami and Phoenix. According to experts, the housing slump is more severe than it was during the worst point of the 1990s recession.
Despite the fact that three of the five major Wall Street investment firms posted quarterly losses as the result of the subprime mortgage fiasco, they paid their sales forces and middle managers over $65.5 billion in compensation and benefits. This was up about 8 percent from last year.
It goes to show you that although Wall Street played an active role in creating the mess, it was able to shift the costs to investors, many of whom were retirees and nonprofits. Retirement funds and other nonprofit investors expected their investments to be in relatively safe products, but were duped into buying securities that were backed by risky subprime mortgages that are now practically worthless. In the meantime the sales people who sold them this junk are laughing their way to the bank.
It seems Congress, the president and the federal reserve chairman all believe a tax rebate should be one of the measures used to help head off the recession that some economists believe we are already in. The rebate should be between $300 and $600, and should come quickly. The rebate is expected to be temporary, that is it should be a one time deal. Otherwise, it can create greater economic problems like adding to government deficits and other financial burdens.
The litany of reasons for the expected recession have to do with the easy credit that caused housing prices to rise to unsustainable levels. As a result of the bursting of the bubble, new home sales are down 24.8 percent, and home foreclosures are up. Credit has tightened, and the financial markets have been hit by a wave of debt it has been forced to write down.
The large number of subprime adjustable-rate loans that are set to adjust this summer is not the only bad news that is facing the American economy. More troubling are the defaults that are expected to occur when the pay option adjustable rate loans reset, according to the New York Times. Pay option adjustable rate loans are loans that allowed borrowers to make payments on only a fraction of the interest owed.
When these two types of loan options reset, a wave of foreclosures are expected to occur, promising more bad news for home owners and the economy.
My advice to both buyers and sellers remain the same – wait out this mess. It’s hardly a good time for sellers to put their houses on the market since the economic times favor buyers. For buyers, even though there are bargains out there, prices are expected to continue falling well into 2008 and possibly into 2009.
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