Tuesday, December 18, 2007

FED Mortgage Guidelines - Stop Laughing!

Do you have all your holiday shopping done? I just received the last 2 things I had ordered today. Only a few days left! Help the economy! Be patriotic! BUY BUY BUY! Just kidding.

Too Many Once in History Occurrences
The financial landscape right now is extremely ugly. The global political scene is not much better. If you go through various news sources and read the headlines there are many leads that start off "first time ever", "largest ever", "never before", and the like. The world is surely very interesting right now, but with so many once in a lifetime occurrences I think things are going to get much worse before they get better. Here are some eye catchers:
  • Home prices first dip since GREAT DEPRESSION
  • Home starts and completions lowest since 1991 RECESSION
  • Home sales showing record DECLINES
  • ECB injects 500 BILLION into banking system
  • IRAN may have second nuclear plant
  • Turkey Bombs Iraq, forgets to warn USA
  • US congress at lowest approval level ever recorded
  • US president at lowest approval level ever recorded
  • Bond and Debt ratings downgraded at record pace
  • technical Bear market for banks, lenders, and home builders
  • US has negative savings rate, first time since GREAT DEPRESSION
  • Foreclosures and home inventory near ALL TIME HIGHS

That is a mere compilation. When the government, the media, or your friends tell you that everything is just pure GOLDILOCKS, try to keep all this in mind. You hearing me Larry Kudlow?

FED Mortgage Guidelines - Stop Laughing!

The FED had a meeting and allowed the press to attend, a rare occurrence itself. The meeting was to approve and present a new set of lending rules aimed at the mortgage industry. The FED is trying to appear on top of things, and the press was invited to try and "get the word out", sort of speak. The FED has been trying lots of things lately to build some kind of confidence in the banking system. Here is what they came up with:

AP Fed Endorses Home Mortgage Plan Tuesday December 18, 4:02 pm ET By Jeannine Aversa, AP Economics Writer
Fed Endorses Plan to Curb Shady Home Lending Practices

WASHINGTON (AP) -- The Federal Reserve moved Tuesday to protect home buyers from dubious lending practices, its most sweeping response to a mortgage meltdown that has forced record numbers of people from their homes. The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roof over their head. The situation raised the odds the country will fall into recession, unhinged Wall Street, racked up multibillion losses for financial companies and resulted in political finger-pointing over who was to blame.
The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that has burned many of the nation's riskiest "subprime" borrowers -- those with spotty credit or low incomes -- who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers. "Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole. They have no place in our mortgage system," Fed Chairman Ben Bernanke said. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," he said. The proposal would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

As a recap, the FED got together and this is what they came up with:

  • No more prepayment penalties
  • Consider whether borrowers can pay taxes and insurance when calculating loan
  • Income verification mandatory
  • Consider ability of borrower to repay loan on basis of income, not home value

Can you spot the "shady", "predatory", and "deceptive" tactics that are now abolished? I can, but the problem is not the banks being shady, it is the borrowers! No income verification and calculating mortgage payments without taxes and insurance factored in was the only way to loan money to folks that had no business buying a home. The only thing deceptive here is the cries of injustice from the screwed borrowers and the banks that lent to them. There was nothing secret or predatory here, just collusion between borrowers and banks to play "Don't ask, Don't tell" with regards to home loan qualification.

The FED has made another attempt to restore some market confidence, but I think this release makes things worse. If you are a money manager for a pension fund that bought any of the mortgage related paper, I would imagine you are not overly relieved that now lenders will have to VERIFY INCOMES and LOAN REPAYABLE AMOUNTS. I would think you thought that was being done all along. What a shocker! The FED rules are laughable. With every rate cut, with every special cash injection, and with every retarded set of lending rules the FED only wakes the markets up to the reality of the problems. Between the ECB mega cash party in Europe and the FED having almost daily activities the desperation factor has been multiplied. If the market hates two things it is 1) uncertainty and 2.) certain doom. Again, 2008 promises to be a time of financial reckoning.

Feedback Wanted

I try my absolute best to try and bring entertaining material to this site. Please use the comments section to propose post ideas, ask questions, or start a discussion. I enjoy this blog very much, and I want to make sure anyone that stops by is getting something of value here. So please vote in the polls and leave comments so I know what is working and what is not. Thanks in advance.

Have a good night.


Anonymous said...

I view what the FED did on these loans as a non-event dog and pony show, those types of loans and lending practices are gone and they ain't comming back as no one would fund them now anyway.


IIO said...

I work for a major retailer, and just to add to your list, I would say December Retail Sales are looking (extremely) ugly. Those categories which had been hanging on, high-end handbags/accessories, jewelry, luxery type items have peaked and are clearly now in a downtrend. Electronics is still up strong over last year, but has slowed dramatically since November.

The liquidity problems must be filtering down to the consumer.

Anonymous said...

This is the biggest bunch of garbage I've seen since Bush, Alphonso Jackson, and Paulsen presented the FHA secure plan. That was a joke and so is this,BTW 266 FHA secure loans done since it's inception, I guess that's why Alphonso makes the big bucks. I've been in the mortgage biz for over 25 years and nothing like making changes to sub-prime when there is no more sub-prime. Where were they 6 years ago!!!!!

Anonymous said...

I must add I visit your site everyday and find it very well thought out and well done.

Anonymous said...

Great work as usual.

Paulson was here in town the other day. Guess where I am located?

His little sit down with local builder/investors/banks/"THE SCREWED" was a joke.

This blog rocks!


getyourselfconnected said...

Thanks to all for stopping by and especially for leaving a comment. I do appreciate it very much. Thanks for the heads up about the retailers iio, should be interesting to see the sales numbers in January.

brokenotbroken said...

Hey Get. . .
Just wanted to let you know that I too visit your blog frequently. As far as topics of discussion, in my opinion the 401(k) hardship withdrawals will be one bellwether for J6P and our consumer led economy. I think that the scenario plays out something like this. Struggling J6P gets a HELOC to make ends meet, but now his house doesn't increase in value and he can't get a new HELOC so he taps out the CC. Once these are maxed, deposits into his 401(k) plan stop so that he can make his payments. But then, something else comes up and he decides to tap some of his 401(k) balance. Once this is gone, its BK time for J6P. Here is an interesting article that I am sure you saw on CR, http://calculatedrisk.blogspot.com/2007/12/consumers-use-401k-atm.html

I haven't looked around but 401(k) inflows/outflows should be available somewhere.

Also, here is another interesting article from Northern Trust that I think is worth a read,

brokenotbroken said...

I should figure out Tinyurl, but I don't have the time right now. Sorry the link above isn't correct, try this:


watchtower said...

One of my favorite sites, wish I had enough knowledge to contribute something other than "we're all gonna die" (OK, maybe not die, but a decrease in living standards is probably in the works).

energyecon said...

FRB TAF bailout: $20 billion

ECB liquidity infusion: $500 billion

A 'Skilling' moment: PRICELESS!