Our friends in Washington are taking the “kitchen sink” approach to the Great American Mortgage Crisis: Throw everything at the problem, including the kitchen sink, and see if it somehow improves.
Last week, Federal Reserve Chairman Ben Bernanke asked lenders to cut the principal on troubled mortgages to make payments cheaper for borrowers. Fed officials signaled they will probably cut interest rates again next week. Fannie Mae, Freddie Mac and the Federal Housing Administration eased the lending limits on their loans. And legislators kicked around the idea of reviving a New Deal program to help people buy their homes out of foreclosure.
Unfortunately, some of the ideas that are getting the most attention will do little to fix the crisis. In fact, a cut in interest rates could make things worse. The best idea – re-creating a New Deal housing program – has not yet made it to the drawing board.
“Everything that's being done is on the periphery, but nothing done so far will really stabilize the market,” said David McDonald, president of the San Diego chapter of the California Association of Mortgage Brokers.
Here's a look at the proposed changes, from the worst to the best:
Interest rate cut. In the past two weeks, several Fed officials, including Bernanke, Vice Chairman Donald Kohn and Sandra Pianalto, head of the Fed branch in Cleveland, dropped hints that they will cut the federal funds rate when they meet March 18. That has raised hopes that mortgage rates will soften, easing the pain for borrowers with adjustable rates.
But to make the cut, the Fed will pump more money into the economy, which devalues the dollar and boosts inflation. That can drive down the long-term bond market, raising the rate on 30-year mortgages.
“The last two times the Fed dramatically reduced the fed funds rate, (long-term) mortgage rates went in opposite directions. It's been terrible,” said Mark Goldman, mortgage consultant with Windsor Capital Mortgage Corp.
Cutting the principal. Bernanke said last week that before foreclosing on a home, banks should try to make the mortgage more affordable by lowering the principal to reflect its current market value.
That's a nice ivory-tower idea, but would it work in real life?
Bernanke is asking lenders to rewrite their loans even though most loans are out of their hands. Instead, they have been packaged and resold to investors around the globe.
“The lenders are under contractual obligations to their investors,” said Norm Miller, real estate economist at the University of San Diego. “Any proposal that changes the terms of the contracts would just not fly unless it clearly maximizes the net present value or minimizes losses.”
Consider the implications. More than 10 percent of homeowners have mortgages that exceed their home's value. Some analysts say that number could top 30 percent this year. Does Bernanke expect lenders to rewrite all those loans? If so, what will happen a year from now if property values decline further?
“When you goof around with a contract, you get away from the stability that investors count upon,” said T.J. Knowles, a mortgage broker at CalBrokers in San Diego. “Who in the world would invest in mortgages if they know the bank might rewrite the terms? And then banks will get more restrictive in their lending because they won't know which investors will buy them.”
Cutting government loan limits. Last week, government-sponsored lenders lifted the caps on “conforming” loans to let more people take advantage of their relatively low rates. The upper limits on loans from Fannie Mae, Freddie Mac and the FHA were once $417,000. Now those limits are being boosted nationwide. In San Diego's case, the new cap amounts to $697,500.
But when Fannie Mae and Freddie Mac lifted the cap, they raised their fees and tightened lending restrictions, meaning fewer borrowers will qualify.
“This does absolutely nothing for anybody who isn't a perfect borrower. And for a perfect borrower, it does not do much,” Knowles said. “Fannie Mae and Freddie Mac have always required full documentation and very high credit scores for loans. Now that they've lifted the cap, those restrictions are going to get tighter because there's more risk.”
Raising the limit on FHA loans could help the market more, since the FHA has fewer restrictions and aims at downscale borrowers. But even then, “it's not as if there's going to be an earthquake of activity,” Goldman said.
Back to the future. So far, the best ideas are proposals to revive two programs created by Franklin Roosevelt in the heart of the Great Depression.
Congress is working to bolster the FHA, which Roosevelt created in 1934 to stabilize the weak housing market. In the past few years, the FHA has insured as few as 3 percent of U.S. loans, undercut by lenders who were offering no-documentation, no-equity, adjustable-rate mortgages. Now that those lenders have gone belly up, the FHA could help stabilize the market.
Rep. Barney Frank, D-Mass., is pushing to help the FHA refinance 1 million troubled homeowners, as long as lenders agree to reduce their principal. Although cuts in principal could be problematic, Frank's bill is only one indication of the renewed interest in the FHA.
In the meantime, Sen. Christopher Dodd, D-Conn., is pushing to re-create the Home Owners' Loan Corp., or HOLC, a New Deal agency that helped defaulted borrowers buy their homes out of foreclosure with low-interest, long-term loans. Dodd proposes putting $20 billion into a similar program that would be embedded within an existing government agency, such as the FHA.
If the past is any indicator, this money would not be wasted. Ninety percent of the HOLC's loans were repaid, making it one of those rare government agencies that turns a profit. The concept has drawn support from both the conservative American Enterprise Institute and the liberal Center for American Progress.
“It's not like I'm creating something altogether new,” Dodd told reporters last week. “In fact, it goes back a long time.”
But sometimes, judging from the current crop of proposals, old ideas are the best.
http://www.signonsandiego.com/
Sunday, March 9, 2008
Darling to introduce 25-year fixed mortgages
Home owners will be able to take out mortgages at interest rates fixed for as long as 25 years under Budget plans to restore stability to a housing market plunged into crisis by the recent global credit crunch.
Alistiar Darling, the Chancellor of the Exchequer, is due to unveil his first Budget
The most reliable customers will also get access to "gold standard" loans at much cheaper rates than poorer, high-risk borrowers.
In a tacit admission that Labour has overseen a high-risk boom in house prices, Alistair Darling, the Chancellor, will encourage mortgage lenders and consumers to use long-term loans to make the UK market less volatile.
From this week, mortgage lenders will be able to use new rules to offer more long-term fixed-rate mortgage deals, with interest rates set to be fixed for as long as 25 years.
Ministers are concerned that the "boom-and-bust" nature of British house prices risks wider economic stability and makes many households vulnerable to even relatively small fluctuations in interest rates.
Long-term mortgages are commonplace in many European economies, but relatively rare in the UK.
Only a handful of lenders currently offer fixed-term loan rates longer than five years, and those deals available are typically more expensive than short-term offers.
Mr Darling's long-term mortgage plans are based on giving mortgage lenders greater freedom to raise money using covered bonds - a loan secured against a pool of assets that "covers" the loan if the issuer collapses.
But Treasury officials accept that any plan for lenders to make more use of such financing will face obstacles in the current banking climate.
Since last summer, many banks have suffered huge losses as they had bought bonds and other debt instruments that were ultimately secured on "sub-prime" mortgage customers whose low incomes and limited assets made them more likely to default on their repayments.
That has left many banks extremely wary of investing in mortgage-backed securities, where banks package their debt and sell it on to investors.
As a result, wholesale money markets are almost entirely frozen, making it very hard for mortgage firms to raise the funds to lend out in long-term mortgages.
Mr Darling's answer is a new system of "kite-marking" that will effectively give every mortgage deal a quality rating.
That would allow mortgage firms to raise money on wholesale markets by offering bonds secured against the home and repayments of their most reliable customers.
In a speech last month, Mr Darling promised a new "gold standard" for covered bonds and mortgage-backed securities. He said the move would help "not just the housing market but wider economic growth in these uncertain times".
However, there are concerns that grading mortgages according to customers' reliability could create a two-tier system for would-be house buyers.
The richest and most secure customers would be able to access cheap loans raised on international markets, which would not be available to poorer customers.
The Council of Mortgage Lenders has warned that a quality-mark system risks "driving a wedge" between different groups of mortgage customers.
The European Securitisation Forum has also expressed concerns, suggesting that a grading system might make it prohibitively expensive for riskier customers to borrow.
Bankers are also sceptical about the plans, because the Treasury itself would not be involved in grading loans to avoid any appearance that the Government was backing particular investments.
Long-term interest rates are typically around six per cent. The best deal available for a long-term rate is 5.5 per cent, compared with a market-best rate of 5.2 per cent for a two-year fixed-rate mortgage.
Many fixed-rate mortgages are rising in cost, as lenders fail to pass on cuts in base rates to customers. The Bank of England has cut rates twice since December, to 5.25 per cent.
Data published by the Bank of England last week showed that, in January, the average mortgage fixed rate, paid by new and existing customers, rose from 5.36 per cent to 5.39 per cent.
# Transport
Motorists who want to buy cars with the largest engines will bear the brunt of Mr Darling's efforts to present a "green Budget " on Wednesday.
"Gas-guzzlers", including large 4x4s and estate cars, will face a new "showroom tax" that could add as much as £2,000 to the sale price.
The Chancellor is also expected to penalise existing vehicles with the highest emissions for the second year running with a further increase in top-level Vehicle Excise Duty (VED). And tax discs will be colour-coded to indicate how much carbon dioxide a vehicle emits.
Mr Darling has come under intense pressure over a planned 2p increase in fuel duty after record global oil prices sent UK pump prices soaring. Economists say higher prices mean Mr Darling can afford to at least delay the duty increase.
# Tax
Wealthy "non-domiciled" UK residents will get new concessions in the Budget as Mr Darling refines his package of new tax rules.
The Chancellor will stick to plans to levy a £30,000 annual charge on long-standing "non-doms" - people with foreign links who live in Britain but pay no UK tax on overseas income - but he is expected to allay fears that Americans, in particular, would be taxed twice on their money by announcing a deal with US authorities.
The Treasury's plans for a tax crackdown on non-doms had triggered a backlash, with warnings that many of the wealthiest people in the UK would chose to leave the country.
The Chancellor is set to press ahead with plans to increase the rate of corporation tax paid by small companies from 20 per cent to 22 per cent.
# Energy firms
Mr Darling is putting intense pressure on energy companies to give financial help to customers who are struggling with rising fuel bills.
Soaring wholesale prices for oil and gas have helped many suppliers record high profits, but there is more strain on many households.
Officials say there are more than 4.5 million people in "fuel poverty," and up to £200 million could be distributed by cutting the fuel bills of selected customers, with those over 70 given particular priority.
The Treasury is locked in talks with the industry over the plan, and the outcome is likely to be announced in the Budget.
Mr Darling is understood to want the scheme be voluntary, but is prepared to impose a windfall tax on energy companies if an agreement cannot be reached.
# Alcohol
Tax on beer, wines and spirits will all increase in the Budget as the Government responds to growing concerns about Britain's binge-drinking culture.
Duty on most alcoholic drinks has risen more slowly than inflation in recent years, as ministers avoided tax rises that might have angered voters.
But a chorus of warnings from doctors and police chiefs about rising numbers of problem drinkers has helped persuade Mr Darling that public opinion will now accept some price rises.
He is expected to announce an immediate above-inflation duty rise on Wednesday.
In the long term, the Chancellor is said to be considering an alcohol "accelerator" much like that applied to fuel duty, which would mean that taxation on drinks would automatically rise in real terms every year.
http://www.telegraph.co.uk/
Alistiar Darling, the Chancellor of the Exchequer, is due to unveil his first Budget
The most reliable customers will also get access to "gold standard" loans at much cheaper rates than poorer, high-risk borrowers.
In a tacit admission that Labour has overseen a high-risk boom in house prices, Alistair Darling, the Chancellor, will encourage mortgage lenders and consumers to use long-term loans to make the UK market less volatile.
From this week, mortgage lenders will be able to use new rules to offer more long-term fixed-rate mortgage deals, with interest rates set to be fixed for as long as 25 years.
Ministers are concerned that the "boom-and-bust" nature of British house prices risks wider economic stability and makes many households vulnerable to even relatively small fluctuations in interest rates.
Long-term mortgages are commonplace in many European economies, but relatively rare in the UK.
Only a handful of lenders currently offer fixed-term loan rates longer than five years, and those deals available are typically more expensive than short-term offers.
Mr Darling's long-term mortgage plans are based on giving mortgage lenders greater freedom to raise money using covered bonds - a loan secured against a pool of assets that "covers" the loan if the issuer collapses.
But Treasury officials accept that any plan for lenders to make more use of such financing will face obstacles in the current banking climate.
Since last summer, many banks have suffered huge losses as they had bought bonds and other debt instruments that were ultimately secured on "sub-prime" mortgage customers whose low incomes and limited assets made them more likely to default on their repayments.
That has left many banks extremely wary of investing in mortgage-backed securities, where banks package their debt and sell it on to investors.
As a result, wholesale money markets are almost entirely frozen, making it very hard for mortgage firms to raise the funds to lend out in long-term mortgages.
Mr Darling's answer is a new system of "kite-marking" that will effectively give every mortgage deal a quality rating.
That would allow mortgage firms to raise money on wholesale markets by offering bonds secured against the home and repayments of their most reliable customers.
In a speech last month, Mr Darling promised a new "gold standard" for covered bonds and mortgage-backed securities. He said the move would help "not just the housing market but wider economic growth in these uncertain times".
However, there are concerns that grading mortgages according to customers' reliability could create a two-tier system for would-be house buyers.
The richest and most secure customers would be able to access cheap loans raised on international markets, which would not be available to poorer customers.
The Council of Mortgage Lenders has warned that a quality-mark system risks "driving a wedge" between different groups of mortgage customers.
The European Securitisation Forum has also expressed concerns, suggesting that a grading system might make it prohibitively expensive for riskier customers to borrow.
Bankers are also sceptical about the plans, because the Treasury itself would not be involved in grading loans to avoid any appearance that the Government was backing particular investments.
Long-term interest rates are typically around six per cent. The best deal available for a long-term rate is 5.5 per cent, compared with a market-best rate of 5.2 per cent for a two-year fixed-rate mortgage.
Many fixed-rate mortgages are rising in cost, as lenders fail to pass on cuts in base rates to customers. The Bank of England has cut rates twice since December, to 5.25 per cent.
Data published by the Bank of England last week showed that, in January, the average mortgage fixed rate, paid by new and existing customers, rose from 5.36 per cent to 5.39 per cent.
# Transport
Motorists who want to buy cars with the largest engines will bear the brunt of Mr Darling's efforts to present a "green Budget " on Wednesday.
"Gas-guzzlers", including large 4x4s and estate cars, will face a new "showroom tax" that could add as much as £2,000 to the sale price.
The Chancellor is also expected to penalise existing vehicles with the highest emissions for the second year running with a further increase in top-level Vehicle Excise Duty (VED). And tax discs will be colour-coded to indicate how much carbon dioxide a vehicle emits.
Mr Darling has come under intense pressure over a planned 2p increase in fuel duty after record global oil prices sent UK pump prices soaring. Economists say higher prices mean Mr Darling can afford to at least delay the duty increase.
# Tax
Wealthy "non-domiciled" UK residents will get new concessions in the Budget as Mr Darling refines his package of new tax rules.
The Chancellor will stick to plans to levy a £30,000 annual charge on long-standing "non-doms" - people with foreign links who live in Britain but pay no UK tax on overseas income - but he is expected to allay fears that Americans, in particular, would be taxed twice on their money by announcing a deal with US authorities.
The Treasury's plans for a tax crackdown on non-doms had triggered a backlash, with warnings that many of the wealthiest people in the UK would chose to leave the country.
The Chancellor is set to press ahead with plans to increase the rate of corporation tax paid by small companies from 20 per cent to 22 per cent.
# Energy firms
Mr Darling is putting intense pressure on energy companies to give financial help to customers who are struggling with rising fuel bills.
Soaring wholesale prices for oil and gas have helped many suppliers record high profits, but there is more strain on many households.
Officials say there are more than 4.5 million people in "fuel poverty," and up to £200 million could be distributed by cutting the fuel bills of selected customers, with those over 70 given particular priority.
The Treasury is locked in talks with the industry over the plan, and the outcome is likely to be announced in the Budget.
Mr Darling is understood to want the scheme be voluntary, but is prepared to impose a windfall tax on energy companies if an agreement cannot be reached.
# Alcohol
Tax on beer, wines and spirits will all increase in the Budget as the Government responds to growing concerns about Britain's binge-drinking culture.
Duty on most alcoholic drinks has risen more slowly than inflation in recent years, as ministers avoided tax rises that might have angered voters.
But a chorus of warnings from doctors and police chiefs about rising numbers of problem drinkers has helped persuade Mr Darling that public opinion will now accept some price rises.
He is expected to announce an immediate above-inflation duty rise on Wednesday.
In the long term, the Chancellor is said to be considering an alcohol "accelerator" much like that applied to fuel duty, which would mean that taxation on drinks would automatically rise in real terms every year.
http://www.telegraph.co.uk/
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