Fed Mortgage Help Plan Outline

Fortunately, the US government and Federal Reserve or Fed is burning all night’s oil to not only find a solution to avoid the US economy from going into a recession, but at the same time, they are also up in arms to help the debt ridden mortgage borrowers who are facing the dangers of foreclosures and ultimately leading to the write-offs for the mortgage lenders. The Hope Now alliance, which was an initiative by Fed was aimed at helping the debt ridden mortgage borrowers. Very recently, the Bear Stearns Bank was sold out to JP Morgan due to subprime mortgage crisis.

The Fed chief, Bernanke, has come out with an outline including 4 key points that the Fed is proposing to avoid the mortgage crisis. All these 4 points are targeted more towards the lenders, as they are the ones who tend to get carried away for want of generating more and more business and end up offering risky credits to the much ignorant mortgage borrowers, who are unable to pay back.

The 4 points that Bernanke proposed are as follows:
Prohibit mortgage lenders from offering mortgage loans which borrowers cannot repay. The major part of crisis in the mortgage sector was the result of the way mortgage operators were offering loans. They offered complex loans to ignorant borrowers which initially had a low interest rate of repayment, and later went on to a much higher interest rate making it unaffordable to the loan borrowers to repay the loan amount and ultimately, their loans resulted in foreclosure.

Make lenders verify the income and assets of the borrower. All one required to borrow loans was a declaration that he has this much income and this many assets. No verification was done by the mortgage lender to ensure that whether the loan borrower really had that many assets and income. Hence, the Fed will tighten the verification process for lending to see whether the borrower with poor credit or insufficient income really have the ability to to repay a loan.

Require escrow accounts for higher-priced loans. For borrowers who do not understand the scope of repaying loans, the Fed suggests higher-priced loans have a separate account for real estate taxes and hazard insurance, which is standard in prime lending.

Ban repayment penalties including "loan-flipping. The Fed proposes to ban schemes in which lenders force borrowers to refinance at a higher rate that they cannot afford.

Hopefully, this will brng some respite to the industry in the long run. The less regulation a market has, the more prone it is for fallout. Lacking of asset checking and credibility checks and greedy mortgage lending practices were the main reasons for subprime mortgage crisis.

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How Bear Stearns failed

What went wrong with Bear Stearns?
Why was Bear Stearns sold out just for $2 a share when just sometime back its share price was as high as $150 per share?

I’ll keep it short and simple. It was the subprime mortgage crisis that led to the fall of Bear Stearns.

Related: My view of Subprime Mortgage Crisis

How the 85 year bank Bear Stearns fell prey to subprime mortgage crisis? The real culprits are various investment banks – including Bear Stearns itself. These banks have to do business – with customers, high net worth individuals, with governments and with each other. They keep coming out with new and “innovative(?)” financial securities and instruments, which they trade with each other. In case of Subprime mortgage crisis, the same investment banks came out with a nice piece of mortgage backed financial securities.

What has happened is as follows: Subprime mortgages (basically loans to credit less individuals) were offered by the various real estate mortgage lenders (including different arms of big investment banks). Since they were offering loans, they required money to back them up. Hence these banks came out with “mortgage backed securities” and sold them to each other. These were the financial instruments, which had the guarantee of the real estate or houses that were sold through subprime mortgages.

However, when the subprime mortgage loan borrowers defaulted, these mortgage backed securities also went for a tailspin. The culprits were these investment banks who failed to realize the risks involved in these subprime mortgage backed securities and sold them aggressively. Bear Stearns is just one example of how one bank with 85 year old reputed history has fallen prey to market conditions.

Let’s also not forget what has happened with Northern Rock bank of UK.

Hopefully, this will be a new lesson to people who blindly keep on buying shares believing that banks are safe and have proper risk management systems.

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Mortgage Approvals Slump: Strict standards for Mortgage Approvals

The mortgage lenders are tightening their standards and guidelines to offer loans to the mortgage borrowers in the ailing mortgage industry.
Since January, the number of loans has fallen by 34 percent, all due to strict lending criteria.

So if you are a mortgage borrower and your mortgage loan application has been disqualified, don’t blame your mortgage lending company. Because, the entire mortgage market is collapsing and hence it is becoming difficult for the mortgage lending companies to offer any easy loans or mortgages.
The data from the Council for Mortgage Lenders reveals that 50,300 loans were made for house purchases in January, which is a clear 20 per cent fall from December 2007. The total loan or mortgage value of £7.8bn stands at 31 per cent less.

Banks are also not taking any chances. They are asking for more and big deposits and offering only smaller loans which are in multiples of the salary received by the individuals.
First-time buyers took out average loans for 88 per cent of a property's value in January, down from 90 per cent in December. They typically borrowed 3.32 times their income.

Fortunately, these are good times for some. If you have that extra money with which you can invest in a falling real estate market, then you must go for it and forget your investments for 3 to 5 years.

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Mortgage Delinquency Report: 6% of the US mortgages are delinquent

The Mortgage Bankers Association has come out with its latest mortgage report and according to the report, a whopping 6% of the US mortgages are delinquent.

Mortgages are considered to be delinquent when there are problems with the mortgage property in terms of finance or there are no authentic procedures under which the mortgage was possessed.

Going by the state-wise data, Michigan keeps up the first rank which is high for delinquencies and the number of homes in foreclosure. The state ranked second nationwide with 8.97% of its home loans more than 30 days delinquent during the three months ended Dec. 31. Mississippi was first with 11% of loans delinquent and Georgia was third with 8.37%.

The total national delinquency rate of 5.82% is the highest in the mortgage bankers survey since it reached 6.07% in 1985, said Doug Duncan, chief economist for the mortgage bankers.
As per the reports, the housing market bubble bust could have far devastating impact and it may culminate being even more dramatic than the long run house price boom that we have seen running from 1998 to 2005. This was the boom that has driven the house prices to astronomical levels in states like California and Florida. Those states are now suffering with a disproportionate share of foreclosure starts.

No doubt, US is witnessing the worst of the times recently. Whatever goes on in the mortgage markets in the US, the ripples and effects of that are felt in far away countries like India, China and UK. Hope to see some respite by the government actions of Hope Now, Mortgage Rescue Plan along with the Six Bank Consortium for mortgage repayment relief.

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Merrill Lynch job cut: fires 650 employees, quits subprime mortgage business

Another big bank, another job cut, another victim of subprime mortgage crisis.
Merrill Lynch, the major investment bank of Wall Street, decalred on Wednesday, that it will cut 650 jobs and it will stop the business of subprime mortgage lending, a business that it was conducting through the financial arm of First Franklin Financial Corp.

Merrill Lynch delared that it is quitting the subprime lending business citing the reasons of worsening market for home loans, which go for home loans to people with poor credit.

Related: BMW Job Cuts , Siemens Job Cut & Morgan Stanley Job Cut

It said it will try to sell Home Loan Services, a unit of First Franklin that handles billing and collections.

Unfortunately, 650 employees of Merrill Lynch will be fired, due to the job cuts in the subprime mortgage crisis.

It is the latest wall street investment bank to join the list of firing the employees in the subprime mortgage based business. Others that have already done so include the biggies like Lehman Brothers and Morgan Stanley, apart from the so many victims of BNP Paribas funds, Macquerie Bank Socgen and so on.

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Mortgage Rescue plans: Massive relief program for US mortgage payers

In the recent past, the US administration, the US government and the Fed have attempted to offer tremendous amount of help to the debt ridden mortgage borrowers of US.
They had come up with highly rewarding programs under the name Hope Now and even launched a consortium of six different banks to come to the rescue of the mortgage borrowers.

Now, the Fed as well as the Bush administration is willing to offer further help and working toward a government rescue of distressed homeowners and mortgage lenders. Bernanke is trying hard to push the banking industry into forgiving major chunks of many mortgages and have given clear indications that only market forces would not be sufficient to prevent a broader economic calamity

He is also of the view that the Federal Housing Administration must further expand its insurance program to let more people switch from expensive subprime mortgages to federally insured loans.

The government based mortgage companies, Fannie Mae and Freddie Mac, are expected to raise a huge money so they could buy more mortgages. The companies already guarantee or hold as investments about $1.5 trillion in mortgages. It was in the last week that the limits were removed on these 2 companies about the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy up billions of dollars in mortgages that other investors have been too frightened to touch.
In theory, the change should not cost taxpayers. But because the companies are chartered by Congress, investors have assumed that Congress would bail them out if needed. Fannie Mae and Freddie Mac can borrow money more cheaply than private banks largely because of the assumed government backing. The move, which administration officials had previously opposed, increases the limits on F.H.A., Freddie Mac and Fannie Mae mortgages from $417,000 to as much as $729,750.

So overall, atleast the US government, the Fed and the administration is not sleeping. They are taking preventive steps to avoid what could end up in a major economical calamity for the citizens of US, especially those ridden by the heavy and costly mortgage loans.

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Mortgage Repayment: Default Rate 1 in 5 expected on fear

Yesterday, the US dollar went to a record low against Japanese Yen, which triggered a mayhem in the global stock markets. Today, the UK has come out with another interesting but dangerous observation. One out of five UK mortgage holders is concerned and worried about meeting their obligations to repay their mortgage loans in the next 1 year. This report was disclosed as per the FSA or the Financial Services Authority.
And interestingly, almost a quarter of those do not have any plans for dealing with the issue, the poll for the financial regulator found.

Already, the repossession of UK homes for mortgage defaults is at its highest since 1999.

However, the survey conducted by FSA was small, only around 570 people took part in that survey.

But it does give worrying indications about the citizens of the country, their concerns and fears about the mortgage markers. The consumer confidence is at the record bottom. The FSA is sufficiently concerned about the situation that it is launching a £2m advertising campaign and an advice guide for homeowners.

The FSA is concentrating its campaign on householders whose fixed-rate deals are coming to an end this year.
The FSA has published a new guide to help people manage their mortgage in preparation for some difficult times. The checklist provided in the guide suggests that people should check their budgets and consider seriously about how they would cope if their mortgage payments increased significantly. It also advises that homeowners start looking at their options well in advance of their current deal coming to a close.

For those already seriously struggling, it says that they should not panic but should talk to their lender and seek free, confidential advice from an independent debt advice agency.

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Morgan Stanley job cut: lays off 1000 mortgage employees

In a first ever open move, the big financial institution, a Wall Street biggie, Morgan Stanley has declared that it is firing 1000 people from it mortgage jobs business segment. The move is done to cut down its US home lending business and will also fire some employees from a British Mortgage unit, an arm of Morgan Stanley.

The management has defended its decision by claiming that the job cut by Morgan Stanley was an effect of the deteriorated situation of the mortgage markets.

Who will be affected?
The Morgan Stanley Home loan or mortgage business employees who generate mortgage or home loan business from brokers or other parties as intermediaries, will be shown the door. Then there are some other bankers who would be involved in a kind of “securitization” or packaging these loans into bonds, will also face job cuts by Morgan Stanley. Including this one, Morgan Stanley has laid off a total of around 2,900 people in mortgages, wealth management, investment banking and capital markets since October 2007. This constitutes around 6% of the total Morgan Stanley employee strength.

After the job cuts, Morgan Stanley has now joined well over 100 mortgage lenders that have slashed jobs or gone out of business in the last year as the housing crisis deepened and credit conditions worsened. Last year, it was Lehman Brothers who had cut 1300 jobs in the mortgage division.

This is a clear sign that the major investment banks and financial institutions are not seeing a sooner end to the mortgage crisis in US and the other developed countries. Obviously the ripples will be felt by other emerging countries as well, on a global basis.

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Fed to Unveil Mortgage Help Plan with Six US Mortgage Lenders

The mortgage markets in US are on the verge of a complete collapse. Due to the subprime mortgage crisis, the home prices are falling, so even some people with good credit ratings are having tough times as they have been left behind on their mortgage payments. Similar to many subprime mortgage borrowers, these people with good credit ratings signed up for adjustable-rate mortgages that allowed them to make smaller initial payments for first few years and later a fluctuating interest rate. Unfortunately, the “later part” that has come in now, is having a HIGH and fluctuating interest rates, which are translating into a higher repayment each month for the mortgage.

Some other “smart” borrowers borrowed mortgage loans against their rising share holding - believing that they will be able to keep up with the mortgage repayments with the “ever rising” shares prices before the higher payments began. Even in the worst case, they had assumed that the prices of the house they have bought will be sufficient enough for repaying the mortgage. But as prices have plummeted, many homeowners now owe more than their home is worth, and banks have tightened their lending practices, leaving even people with good credit ratings struggling with higher payments.

This is what happens when we thing that the entire picture is looking very rosy and goody-goody, so let’s dive in. Everyone else is taking a loan, so should I. Everyone else is buying a house, so should I. My salary will continue forever, I work for MNC.

Highly costly assumptions – leading to tremendous debacles.

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Fortunately, the government in US is working on this issue. Just yesterday, it had declared a Tax Rebate or Tax Refund. The Hope Now alliance, which includes lenders, investors and nonprofit groups, has helped around 8 percent of subprime borrowers in the last 2 quarters of 2007 — more than its original estimate. Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo, which form the Hope New Alliance are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms. The same is cited under the name “Project Lifeline”, where the above mentioned six US banks are willing to help possible mortgage defaulters.

I wonder if something similar collapses in India – what will happen?

Will the Left backed Indian government running on the support of so many parties come to the rescue of its citizens?

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Derivatives Business of Banks & Insurance Companies

Thanks to the Subprime mortgage crisis, not only the banks, but also other financial organizations like Insurance companies are facing a real tough time. The shine may not be over completely from the US economy, but the problems don’t seem to have an end.It’s now the turn of insurance companies to be hit by the subprime mortgage crisis. It was AIG- or American International Group AIG whose share price hit a five-year low amid skeptical questions about how the insurance giant values some of its derivatives.

It’s easy to find a reason when things go wrong. It’s much easier to make assumptions and take a deadly position, thinking that our assumptions will work correctly. Problems with AIG are now contributed to an interest rate derivative called Swaps, that too credit-default swaps, which are very commonly used.

Right from the Subprime mortgage crisis making costly assumptions about the second or third tier lending, to the closing of BNP Paribas based Hedge Funds, to the exposure of a scam at SocGen, to the devastating listing of big stars like Reliance Power IPO and cancellation of Wockhardt Hospital IPO and Emaar MGF IPO in the Indian markets, everything was based upon assumptions. Assumptions that things will go well, there will be no problems with money flow, exchange rates will be stable, market conditions will be favourable, investors will remain stupid enough to throw away their money into Funds and IPOs, etc, etc.

As per the news: AIG said in a Monday SEC filing that the value of its credit-default swaps, used to hedge against fixed-income losses, fell by $4.88 billion in October and November, more than four times its prior forecast.
AIG's independent auditor, PricewaterhouseCoopers, said the insurer had a "material weakness" in its internal controls over financial reporting and oversight.
AIG's stock fell 12% to 44.74, the lowest since March 2003. Its shares have lost more than one-third of their value over the past four months.

God knows whom these great financial institutions employ, as Risk managers. What costly assumptions they make and who was supposed to check their workings. At the end, the shareholders are the ones who loose.

Kotak Mahindra Capital, UBS Securities India, ABN AMRO Securities, Deutsche Equities India, Enam Securities, ICICI Securities, JM Financial Consultants and JP Morgan India were the book running lead managers to the Reliance Power issue while Macquarie India and SBI Capital Markets are co-book running lead managers. All of these are great stalwarts in the business of money. Why did they go wrong?

Citigroup Global Markets India and Kotak Mahindra Capital Company (the joint global co-ordinators and book running lead managers), while ICICI Securities and SBI Capital Markets are BRLM. Why were they forced to close the IPO? All of them try to explain their theories and justifications to the markets. What they forget is that markets have their own theories, language and justification – and that all can be summed up in one word – RANDOM.

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Six US banks join hands to avoid mortgage defaults

It’s all happening in the US. The Subprime mortgage bug is not leaving the US easily. Six of the top mortgage lenders, which include big names like Bank of America, Citigroup and other four mortgage lenders have decided to come together and help chalk out certain steps to help the mortgage borrowers who face the bad situation of default on their mortgage repayment.
They are expected to work together on certain points, providing a guideline to mortgage borrowers, so that the borrowers may not have to vacate the house for want of repayments.

The plan is called “Project Lifeline” offering. The companies met with Treasury officials over the past week to discuss ways to encourage homeowners to get in touch with their mortgage servicers. The move is coming due to the mounting pressure from the US treasury. News is that JPMorgan Chase., Wells Fargo, Washington Mutual and Countrywide Financial may also participate in this offering. These all six are the group members of a strategic alliance called “Hope Now”, that was formed last year, to avoid a spring up of foreclosures in the mortgage lending markets of US.

The estimates are that around 2 million mortgage owners face the problems with the mortgage due to higher mortgage rates and inability to repay them. Prevention is better than cure – good to see that the debt ridden banks and lenders are taking proactive steps to curb the problem. Hope that this end up in a helpful way instead of again pushing the mortgage borrowers in trouble!

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Northern Rock Bank Up for Sale: Bid deadline today 4th February

Northern Rock is a famous mortgage bank of UK. However, following the mortgage market meltdown in the past year, it is now to be sold out. It was one of the favourite banks of the UK citizens for taking easy mortgages or loans for buying properties like house, home, business, etc., but today it is up for sale.

Northern Rock landed itself into financial distress because of its incorrect business functions and models which had no room or preparations for what we know as the global credit crunch.

Unlike the other UK based banks, Northern Rock had devised the business model upon borrowing funds from the wholesale money markets to carry on or run its mortgage business, rather than the usual method of using the deposits of the savings account money which people leave to the banks in their savings account. Borrowing such money from wholesale money markets is not only costly, but also risky, as it does not have any backup for repaying the debt that the bank borrows.

Yet after the subprime mortgage crisis in the US which had the global effect, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or was found to be more expensive.

As the first emergency loan from the Bank of England was announced, thousands of Northern Rock savers rushed to withdraw their funds, before the government's pledge to guarantee all savings. This caused mayhem in the banks money, as saving bank account holder had withdrawn their money and bank was left ailing with less cash, despite the help or emergency aid from the Bank of England.

Now, the FSA or the Financial Services Authority (like that of RBI in India and Fed in USA), is being criticized for not keeping a close eye on the way the bank was functioning. As per the news, Northern Rock's senior managers were most at fault, it also blames that the FSA was guilty of a "systematic failure of duty" in not preventing the bank's "reckless" business plan.

It’s up for sale now. Sir Richard of Virgin Atlantic has already confirmed that Virgin aims to meet the deadline, and is said to be the frontrunner. Along with him, 2 more bidders are expected to be interested in the buying the bank. Under the sale to a private buyer, the government intends to turn the £25bn of Bank of England loans - essentially taxpayers' money - into bonds, which will then be sold to investors. It is not yet known when the government will announce which bid for Northern Rock has been successful.

People who believe that banks which are in the business money savings and money lending or are aggressive in the real estate loan markets, should think again. We have already seen the fate of Global Trust Bank. Recent news was about the losses reported by French bank Societe Generale or SocGen, saying that one of its traders did a scam. All those are affected are the shareholders of the bank.

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