Freddie & Fannie can buy more loans!

Good afternoon,
Federal Regulators Fannie Mae and Freddie Mac, the biggest buyers of home mortgages, are going to remove limits on the amount of loans and securities that they can own. This could help the housing market. (Source: The New York Times) This could help relieve the credit crunch in the long term though it is a risky move for the two mortgage giants.
According to the agencies that control these mortgage companies, they are making the change because the organizations began filing financial reports again after lapsing years ago. This is questionable and may be more related to the mortgage “crisis”. One still remaining limitation of course is that Fannie and Freddie still have to hold 30% more capital than they are required to by law, due to tumultuous times in the mortgage market.
Fannie Mae reported a 2 billion dollar loss for 2007, and is noting that home prices will further decline in 08. This is following a 4 billion dollar profit in 06.
In many ways, this means that large mortgage buyers will hold many loans – including potentially fatal loans. While this might help the home market, it isn’t the best financial investment the government could make. Democrats in Congress are of course calling for more. The fact is, few investors are buying mortgage backed securities these days - so without Freddie and Fannie, there are very few investors to buy them. Without investors, banks won’t create loans. Without loans, the credit crunch continues.
Bottom line: it may help home prices, and it may help lenders – but it will surely be a bad deal for these two agencies. I wonder who will ultimately pay for the deals gone bad.
Dani

How to Recession Proof Your Life!

In today’s turbulent economic times, we can lose 2% of our 401k value in a day; 5% in 6 months in our homes; the instability requires a solid plan of action to recession proof your life!

About 40% of economists surveyed today believe a recession is likely in 2008. So what can you do to be prepared:

1) Secure any income. If you have income streams, document them and be sure they’re safe for the next few years.

2) Start getting your financial house in a database, literally. Use a money tool like Quicken or even Excel to help you keep track of things like mortgage balances and credit card debt. Sometimes seeing how much you are in debt can help curb spending, too.

3) Prioritize your debts. You get an $8000 tax return right? You owe $7500 on your car; so it would be nice to remove that payment! But what if you’re paying 6% on your car and 15% on your credit card? Even if the $8000 won’t make much of a difference in your balance, it will make a difference in how much of your money goes to interest each month. Pay the debt that has the highest interest rate first!

4) Transfer balances. Lots of us get the balance transfer offers from credit card companies and ignore them. This is easy to do. But, simply shifting money from one card to another, even if it buys you 6 months with no interest, can save thousands in a year.

5) Begin saving if you haven’t already. It’s very easy to feel insecure right now with fluctuating markets.

6) Take stock in your stocks. Figure out what is in your 401k. Don’t just put it in and forget about it. Look at the balances, re-balance your portfolio, and make sure you are invested wisely for the future. Most investment planners will have you invest based on when you intend to retire or when you need the money.

7) Look for all the tax incentives you can find! There are lots of ways to save money on taxes; 401ks, IRAs, and some not-so-common savings plans such as college funds and donations. Talk with a tax planner and save your money instead of giving it to Uncle Sam.

8) Have 6 months savings. In otherwords, if your bills cost you $3000 per month, you need a minimum of $18000 in liquid capital. This should be something secure, like a six or twelve month CD.

9) Finally, get spending under control. Throughout the early 2000s, many were using their homes as ATMs, feeling the market would continue to increase. We know how detrimental that can be! Figure out where your money goes by keeping track of it for 2-3 months. You will know what you can cut out, and where to save some extra money.

Is this a good time to buy a house? The answer is a resounding absolutely definitely YES!

Is this a good time to buy a house? The answer is a resounding absolutely definitely YES!

Here are the reasons – speaking as a consumer advocate/investor (I am looking for deals like crazy)

1. We always want to buy low/sell high in any investment, whether it is stocks or real estate. This is low! In some areas it’s a 20 year low.
2. Rates are dropping (finally). As rates continue to drop, those who qualify (tighter lending standards are a good thing... it means there’s a very good chance you will be able to afford the house you are approved for) will find it even less expensive to buy the house of their dreams.
3. Foreclosures, while bad for home values, are a great investment. Buying homes in pre foreclosure, saving the homeowner from a foreclosure on their credit record and getting a good deal.
4. The baby boomers that will be moving to Sun Belt states in the next 2 to 15 years will help the markets bounce back in these areas that were pummeled by low housing prices.
5. This is a good time to buy a short sale or REO property. The prices are low; the banks are really trying to keep foreclosures off of their books.
6. This can be a good alternative to stocks, particularly if you get positive cash flow.
7. Home builders are giving away upgrades; and in some areas nearly giving away the farm, too.

Now.. it is absolutely critical that people evaluate several areas before buying. Do your homework!

1. The overall trend in the area they’re buying in. Is it still going drastically downward? Is the national average a 4% loss and the loss in the area they want to buy 30%? A red flag.
2. Are there a lot of people in foreclosure in the area? Is the area in the top 50 metro areas? If so it’s a sign prices may drop further, and you should wait a bit longer before buying.
3. Is there high crime or low crime? Lower obviously is better. Higher crime leads to people moving away, and well.. criminals moving in.
4. Decent schools? This is always a good selling point if you need to get out quickly.
5. Can you afford it??? Don’t overbuy!
6. Finally.. are jobs moving TO or FROM the area? Moving from is a bad sign (e.g. the rust belt states.. Michigan, Ohio etc..) moving to? Round Rock/Austin Texas, Las Vegas.. good deals. Jobs will ultimately support the market!

With good decisions and proper research, it’s a FANTASTIC time to buy.

Dani Babb, PhD, MBA

The Obama Plan.. not so bad afterall.

So here are the basics of the Obama Home Ownership Plan: (Source Obama's web site)

1. Stiff penalties for mortgage fraud – it’s estimated up to 15% of people who purchased homes during the boom lied about various pieces of relevant information, thereby creating a ripple effect. This is good for everything and everyone. Some mortgage brokers in particular knew what they were doing when they signed people up for ‘liar loans’. This has created a big problem for everyone.

2. A fund to help people refi their mortgages or sell them if they cannot afford them – while this has the remnants of a bailout which in general I am not a fan of, it certainly may help consumer confidence. If we keep this to people that TRULY got duped and not investors who made a bad call, it could help stabilize the housing market.

3. Creating new affordable housing – individuals that are being punished because of the things others did that created an unstable market and impossible lending standards may be able to buy a home.

4. 10% universal mortgage credit is tax relief! He’s sounding more like a Republican here.. I'm all for less taxes. Please, do, lessen all of our tax burdens. That will help fuel the economy. ALSO, it will help incentivize people to stay in their homes. The more people go into foreclosure, the bigger of a problem we will have. Yeah it will affect those earning 50k or less, but I want tax cuts for EVERYONE.. so this is great!

5. Mandating loan disclosure: many people complain that the mortgage documents are too difficult to read. If making it easier to read helps everyone be aware of what they’re signing up for, go for it.

6. A fund to help homeowners avoid foreclosure – This helps with refi costs for homeowners truly caught in the mess- not investors. The details of this aren’t clear yet… we will see how this one pans out.

All of this seems to be paid for by his fines on mortgage companies that commit fraud… not by tax payers.. at least thus far.
I don’t really see this as a bailout. It is transparency and tax cuts. He’s starting to sound like a Republican. ;)

Dani

Foreclosure Freeze - Who Does It Help, How Does It Work, What To Know

There is a lot of misconception out there about the foreclosure freeze and who it really helps, what it takes to qualify, and how it works. My goal is to demystify it a bit. I have listed some bullet points to help:

The freeze is temporary. It freezes legal efforts to remove delinquent borrowers for 30 days while lenders and borrowers work together on a payment plan.
This is a joint effort by 6 of the nation's largest lenders
One big difference between this and other options discussed in the past is that it is available to people regardless of their loan types. Even if you do NOT have an ARM, it may help. (Some people have Pay Option ARMs or fixed rates that are high, too). (ARMS have the highest rate of delinquency though)
The borrower does not need to be subprime to qualify as with other programs like the Bush plan. Any kind of mortgage is okay.

When does the homeowner qualify?

Once they are 90 days or more behind in their payments, lenders will send letters asking the owner to call.
Borrowers will be asked if they ewant to stay in their home. If they do, they will be offered financial counseling.

Important things to note:

Loan modifications are not automatic! Homeowners have to provide proof of wages and debt.
Lenders then decide whether to pause the foreclosure process.
During the freeze, foreclosure prevention specialists decide if a loan modification program will work. Will the borrower have a chance to be successful? Is he/she making enough money?
Potential options are: Lowernig rates, balance on loans, or both. Anything that does happen though requires that the homeowner pay on time for three months at which time the changes become permanent.

As homeowners, remember it costs the bank generally $50,000 per home to process a foreclosure. Most would rather have homeowners stay in homes - so call your bank!

Dani

Let the Spin Begin - the Media and the R Word

As late as mid January of 2008, economists surveyed by leading financial publications resulted in a prediction that the US had less than a 50% chance of going into a recession in 2008.

If you listened to the media, you'd think the world was ending. Who are the worst offenders?

I did a search to see how many hits I got on web sites noted below, with hit rates indicated:

Fox News 1530
CNN: 1692
ABC (approximately) 3760
and MSNBC an astounding 23,200!

I wanted to take this into the newspaper arena, and found the following:

The far left leaning San Francisco Chronicle in 2008 alone mentioned a recession 464 times according to their web search - already more than the entire 2007 year! (which came in at 329)

The New York Times.. also left leaning.. 420 in 2007, and already 311 since January 1, 2008.

Compare this to the Washington Times (considered more conservative) which mentions it 149 times in 2007 and 77 times in 2008.

One could speculate on the motivations behind using the R word. Perhaps it's pure drama that drives viewers.

But the media has a responsibility here, and it seems very few are holding them accountable. The more they mention the word recession (whether we are in one or not), the more people assume we are.

ABC, CBS and NBC reported in the first two weeks of 2008 negative stories about a pending or looming recession 32 times. The positive? Mentioned in 8 stories. (Source: Business & Media Institute)

What are the facts? Well a study conducted by Bloomberg of 62 economists released January 9th showed economists predicitng a 1.5% GROWTH in the first half of 2008. This is most definitely weak expansion, but it is far from a recession! The Wall Street Journal reported similar findings, predicting growth of 2% or less, and a 42% chance of recession. The same type of issue holds true for unemployment, also exaggerated by the media. Take the Today Show reporting on January 5th that unemployment moved up to 5% last month, the highest rate in two years. Really? In September of 05, unemployment was also at 5.1%. The 5% rate is the highest in SIXTEEN months, not two years. It's also below the 5.4% 10 year average and the 6% 30 year average. (Source: Business and Media Institute)

I can only speculate on why the media would choose to report the news as they do in an election year or when circulation at some aforementioned newspapers are down (you can guess which ones), but the media owes it to the public to talk about the facts and not use scare tactics, selectively choosing the data it wishes to represent.

Dani

McCain Event, Economics, Mannequins and Illigitimate Middle Class Warfare

I went to a McCain fundraiser in Los Angeles, CA on Thursday the 31st. Among lots of Hollywood celebs, former Congressmen, Senators and our California Governor, McCain spoke about the war in Iraq. He made a comment that was quite interesting to me.

Many critics have said that he must begin discussing the "economic situation", so he's thrown a few comments in here and there to let people know he's in tune with the American concerns. He said, loosely quoted as I didn't write it down verbatim, "yes I know I know, we need to talk about the economy..." and then proceeded to talk about the war again.

In my view, many people on the left and right are using the fundamental misunderstanding of the general population with regard to how economics works to their political advantage. I see Romney doing it to the nth degree, Obama and Clinton of course - not unexpected. They talk about the middle class families; even create a 'war between the classes' that is highly misleading and divisive all while talking hypocritically about unity. Speaking of hypocrits. We need a "CEO to run the country?" Last time I checked, weren't the CEOs being jailed, blamed for scandals and ripping off their shareholders and employees?

Some countries try to avoid having a middle class altogether. American clearly has one; one that has unprecedented homeownership (thanks to the creative lending practices that are now being trampled upon by so-called economic experts saying they "predicted this long ago", and the Bush tax cuts).

What people don't realize is this:

1. What the Dems and some Republicans are calling a debacle with regard to the mortgage "crisis" is that, still, less than 2% of people in this nation are late on their mortgages.

2. The economy not be growing as fast as it did three year ago, but we are hardly in a recession. No one cares to look up what the term actually means.

3. The middle class has the highest home ownership in the history of this nation. Why? Because mortgage companies wanted to make money. Hedge fund managers wanted to money. Mortgage companies got creative, provided funding to people who wanted to buy homes, investors bought the mortgages - and the middle class benefitted this entire thing. And, not commonly heard in the media? Most are actually paying those obligations - so who is losing exactly?

4. As the middle class gains in equity, and they will (markets never go down over a long period), they will become even wealthier. Lower-middle income individuals who bought homes will move into the middle class.

What I found refreshing about McCain is that he knows he has to talk about the economy if he wants to score points. He does.. to a small degree, to avoid losing to a talking mannequin known as the former Governor of Massachusetts.

But what about this? Will losing 70000 jobs after gaining hundreds of thousands matter when another Islamic radicalist boards a plane and takes a Delta jet into the Empire State Building? Probably not. A Dow down day of 300 could be a blessing.

Maybe we need to stop all the whining, cowtowing to Wall Street, and let the Fed do the hard work it needs to do.. and stop using bogus hypocritical claims to try to win the office of President. Maybe for once, people will see through the BS and think of the big picture rather than the $50 their mortgage payment went up in two years on that McMansion they bought on their $50,000/year salary.

Dani