FDIC Details Plan To Alter Mortgages
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Agency officials estimated the cost to the government at $22.4 billion.
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The mortgage industry is concerned that any new modification plan will persuade some people to stop making mortgage payments in addition to helping people who already have stopped making payments. The industry argues this will translate into higher interest rates because investors will demand compensation for the increased risk of loan defaults. That, in turn, would limit the number of people who can afford mortgage loans.
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FDIC estimates that 1.4 million borrowers with such loans are at least two months late on their payments, and another 3 million borrowers will miss at least two payments by the end of next year. The agency estimates that half those borrowers, or about 2.2 million people, would receive a loan modification under the program, and that about 1.5 million will successfully avoid foreclosure.
Under the terms of the proposed FDIC program, lenders would reduce monthly payments primarily by cutting the borrower’s interest rate to a minimum rate of 3 percent. If necessary, the company could also extend the repayment period on the loan beyond 30 years, reducing each monthly payment. Finally, in some cases, companies could defer repayment of some principal. The borrower still would be on the hook for the full value of the loan.
Officials said their experience at IndyMac showed that principal reductions were not necessary. So far, FDIC has modified about 20,000 IndyMac loans. In 70 percent of the cases, FDIC was able to create an affordable payment solely by reducing the interest rate. In 21 percent of the cases, the agency also extended the life of the loan. In 9 percent of the cases, it delayed repayment of some principal.
An interesting proposal I would support. Ideally this type of action would not be necessary but since banks were allowed to degrade their standards so far and allowed to grow so large their failures threaten the economy some radical actions are being taken. Compared to many others this is sensible.
Related: How Much Worse Can the Mortgage Crisis Get? - JPMorgan Chase Freezes Mortgage Foreclosures - Fed Plans To Curb Mortgage Excesses (Dec 2007)
More dramatic evidence that changing in the federal funds rate do not lead to similar changes in 30 year fixed mortgage rates. It is true the last few months are very unusual times for the credit market. However, the current lack of correlation is not the exception, the graph clearly shows there is very little correlation between changes in the two interest rates.
Related: historical comparison of 30 year fixed mortgage rates and the federal funds rate - Affect of Fed Funds Rates Changes on Mortgage Rates - posts on financial literacy - Jumbo v. Regular Fixed Mortgage Rates: by Credit Score
For more data, see graphs of the federal funds rate versus mortgage rates for 1980-1999. Source data: federal funds rates - 30 year mortgage rates
JPMorgan Chase Freezes Foreclosures
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According to the most recent data compiled by the Hope Now Alliance of lenders, counselers, and other industry players, lenders started the foreclosure process on 565,000 homeowners in this year’s third quarter. Some 265,000 homes were actually foreclosed on, nearly twice the number from the third quarter of 2007. Moreover, more than 2.2 million homeowners are more than 60 days delinquent in their mortgage payments, also a near doubling from last year.
FDIC Chairman, Sheila Bair, has been encouraging banks to take such action and instituted such action on the mortgages the FDIC acquired when they took over Indymac - Loan Modification Program for Distressed Indymac Mortgage Loans
Related: Ignorance of Many Mortgage Holders (July 2007) - Foreclosure Filings Continue to Rise - Historical 30 Year Fixed Mortgage Rates - Homes Entering Foreclosure at Record (Sep 2007) - 2nd Largest Bank Failure in USA History
Wholesale Prices Rising at Fastest Pace Since 1981
New federal government data showed that the cost of materials used by businesses increased 1.2 percent in July and have risen 9.8 percent during the past 12 months. It was the largest yearly increase since 1981, as businesses absorbed sharp increases in energy and other commodity costs.
Today’s report follows recent news that consumer prices are also rising faster than expected — and faster than the Federal Reserve’s generally accepted target rate of around 2 percent.
Inflation can cause serious damage to your personal finances. As prices increase if you don’t get a raise (or your investments don’t raise) to match the increased costs you must pay your financial situation deteriorates. One benefit, to those with 30 year fixed rate mortgages, is that you get to pay back your loan with inflated dollars. This can be a huge advantage for some, and a huge loss for whoever holds the mortgage.
Related: inflation risk for investments - Inflation is a Real Threat - Food Price Inflation is Quite High - posts on inflation
Fannie Mae (the quasi government mortgage giant) is raising fees for mortgages it buys. Banks and mortgage lenders often sell the mortgage to Fannie Mae shortly after completing the loan. Mortgages get more expensive - again
And Fannie doubled its “adverse market delivery charge” to 0.5%. That is an across-the-board fee assessed against every loan Fannie buys, according to a Fannie spokeswoman. Fannie first instituted the charge this spring.
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The added fees will be passed on to borrowers and could mean quarter-point increases in interest rates.
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Fannie will also eliminate buying Alt-A loans by the end of 2008. Alt-A loans, a category between prime and subprime, accounted for about 11% of the company’s loans during the last years of the boom. They have been used mostly by people who couldn’t or wouldn’t document their incomes, their assets or both. These buyers will find it harder to obtain financing once Fannie stops buying the loans.
According to Yun, however, the cutback in Alt-A will hurt people buying second homes to rent out or resell, rather than first time homeowners. “These are people who often rely on their good credit to buy investment properties putting little or no money down,” he said.
Related: Mortgage Rates Rising - Fed Funds Rate Changes Don’t Indicate Mortgage Rate Changes - Jumbo and Regular Mortgage Rates By Credit Score - Homes Entering Foreclosure at Record
Example 30 year mortgage rates (from myfico.com - see site for current rate estimates). Previous posts on this topic: Feb 2008 - August 2007 - May 2007. Since the last post both jumbo and conforming mortgages rates are up (and are up most for high credit scores).
| FICO score | APR Aug 2008 | APR Aug 2008 - jumbo | APR Feb 2008 | APR Feb 2008 - jumbo | APR Aug 2007 | APR May 2007 |
|---|---|---|---|---|---|---|
| 760-850 | 6.12% | 7.00% | 5.53% | 6.61% | 6.27% | 5.86% |
| 700-759 | 6.34% | 7.22% | 5.75% | 6.83% | 6.49% | 6.08% |
| 660-699 | 6.62% | 7.50% | 6.04% | 7.12% | 6.77% | 6.37% |
| 620-659 | 7.43% | 8.31% | 6.85% | 7.93% | 7.58% | 7.18% |
| 580-619 | 9.45% | 9.63% | 9.22% | 9.40% | 9.32% | 8.82% |
| 500-579 | 10.31% | 10.49% | 10.20% | 10.37% | 10.31% | 9.68% |
For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.
Since February the premium for jumbo loans has decreased to 88 basis points (from 108) for all credit scores above 620 (the combination of higher down payment and higher regular interest rates below 620 result in very little premium from Jumbo loans, under 20 basis points.
Related: 30 Year Fixed Rate Mortgage Rate Data - Learning About Mortgages - How Much Worse Can the Mortgage Crisis Get? - Real Free Credit Report (in USA)
I commented on, WaMu Free Checking: The High 3.3% APY May Be Worth A Look, yesterday:
I agree it is worth considering. It has FDIC insurance. But the bank is not very stable. The stock price, for example, was above 40 in the last year. It is below 5 now. But as long as your entire deposit is covered by FDIC you are in safe (though if a bank goes under - not that likely - there can be a delay in getting your money). Normally a bank’s assets would be bought out by another bank.
And today I read of the second largest bank failure in the history of the USA, IndyMac Bank seized by federal regulators:
Regulators said depositors would have no access to banking services online and by telephone this weekend, but could continue to use ATMs, debit cards and checks. Online banking and phone banking services are to resume operations Monday.
Federal authorities said based on a preliminary analysis, the takeover of IndyMac would cost the FDIC between $4 billion and $8 billion.
It is important to make sure your deposits are FDIC insured (in the USA), and to know the limits of the coverage.
FDIC Failed Bank Information Information for IndyMac Bank, F.S.B., Pasadena, CA
IndyMac was a huge mortgage focused bank. Their stock price had fallen from a high of nearly $30 in the last year to below $5 in April, $2 in May and $1 in June. It is a very good thing we have the FDIC.
Related: Credit Crisis (August 2007) - Credit Crisis Continues - Homes Entering Foreclosure at Record
Foreclosure Filings Continue to Rise
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last week the Mortgage Bankers Association reported that about 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, almost double the 1.28 percent rate of a year earlier, and the highest point since the group began compiling such figures in 1979. A Credit Suisse report this spring predicted that 6.5 million loans will fall into foreclosure over the next five years, reaching more than 8 percent of all U.S. homes.
There numbers really are astounding. How lame were the decisions of banks and mortgagees that nearly 1 in 40 mortgages are in default (and that number likely increasing in the next year to much more?
Related: Homes Entering Foreclosure at Record (Sep 2007) - Homes Entering Foreclosure at Record - Ignorance of Many Mortgage Holders
This year, the average discount rate has fallen every month while the average 30 year mortgage rate has climbed all but 1 month (a 5 basis point drop). In January, 2008 the discount rate averaged 3.94% and 30 year conventional fixed rate mortgages averaged 5.76%. In May, 2008 the discount rate had fallen to 1.98% (for a 196 basis point drop) and 30 year conventional fixed rates had risen to 6.04% (for a 28 basis point increase).
The chart shows the federal funds rate and the 30 year conventional fixed rate mortgage rate from January 2000 through May 2008 (for more details see: historical comparison of 30 year fixed mortgage rates and the federal funds rate).
Related: Affect of Fed Funds Rates Changes on Mortgage Rates - real estate articles - Bond Yields 2005-2008 - Jumbo and Regular Mortgage Rates By Credit Score
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The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.
I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).
There is not a significant correlation between moves in federal funds rate and 30 year mortgage rates that can be used for those looking to determine short term (over a few days, weeks or months) moves in the 30 year fixed mortgage rates. For example if 30 year rates are at 6% and the federal reserve drops the federal funds rate 50 basis points that tells you little about what the 30 year rate will do. No matter how often those that should know better repeat the belief that there is such a correlation you can look at the actual data in the graph above to see that it is not the case.
Related: real estate articles - Affect of Fed Funds Rates Changes on Mortgage Rates - How Not to Convert Equity - more posts on financial literacy
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