You have probably heard of the Fannie/Freddie takeover in some form or the other more than once already over the last couple of days. Anyway, here is my version and take on the events. On Sunday, the US Treasury announced measures to provide funding to the two government sponsored entities - Fannie Mae and Freddie Mac. These entities which together guarantee nearly $5 trillion in home loan securities that have been purchased by central banks around the world, were unable to raise enough capital to satisfy regulators. Under the announced plan, the Treasury will provide funding to these entities in return for senior preferred shares of the companies which will take precedence over the current existing preferred and common stocks outstanding.

Talking about the worst of times, we hope that you did not have a very big stake in the common shares of Fannie and Freddie. The average share prices of these companies closed in the $6 range on Friday but they are trading currently at less than a dollar - a drop in price of around 80 percent. This is due to the fact that common shareholders of the companies face a massive dilution in the stock values and have a secondary claim to the assets of the companies behind the newly issued senior preferred shares and the already existing preferred shares.

However, markets around the world reacted exuberantly to the decision by the US Treasury and as of this writing, the US markets are reacting positively too. It remains to be seen how the markets will take this news in the coming days and weeks.

This news has made everybody’s attention turn to the Credit Default Swap markets. This market trades in instruments which allow people to speculate on the possibility of default by companies on the debt they issue. As was to be expected, big Wall Street firms, pension funds and foreign central banks took large positions in this market for Fannie and Freddie issued debt to which they faced exposure. Now that the Treasury has agreed to provide funding to Fannie and Freddie, these firms would possibly unwind their position which will lead to active trading in this market.

Talking about the best of times, it’s probably the best time to go value hunting by picking up stocks of blue chip companies that are trading at historical lows. It is also a challenging, interesting and if properly handled, very good time for the mortgage banking industry. One hopes that the US Treasury’s move will pay off by exerting a downward pressure on mortgage rates and improving home-ownership in times to come. So, it is probably the best time to start some serious hunting for a home if you have been thinking about it for a while. One just gets the feeling that the Treasury, Fed and the US Government have revealed and dealt their trump card and this is as much tonic that the markets are likely to get for a long, long time to come.

If the events of the past few days leave you dreaming of boarding a plane to a remote Caribbean island without 24 hour news channels, you may have to put that dream on hold. Jet fuel prices, and therefore airfare prices, are likely to go up in the near future as hurricane Ike has assumed a more menacing look as it threatens to make landfall along the Gulf Coast line between Houston and New Orleans. This is likely to cause increased volatility in oil prices. The Boeing Airline Company is also dealing with striking workers at their plants. As a result, the “Dreamliner” aircraft, which was in high demand by airlines around the world due to its improved jet fuel efficiency, is going to be delayed another year.

Important economic news awaiting release in the coming week includes the weekly unemployment claim which will be keenly watched by all market participants as well as the jousting presidential nominees. Friday sees the release of the Producer Price Index and the Consumer Confidence report.

All in all, a very interesting week is ahead of us.

Who’s eligible?

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program.

They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.

Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it’s to pay for necessary upkeep on the home.

To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.

How can I apply?

Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.

How does the refinancing process work?

This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home’s current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender.

But lenders won’t sign off on a workout unless they think that they’ll lose less money on that than they would by allowing a home to go through the costly foreclosure process.

Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home’s current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.

Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home’s market value.

If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.

As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.

What does it cost?

There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.

However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.

Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they’ll pay a “3% exit fee” of the mortgage principal to the FHA when they resell or refinance.

Plus, they’ll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.

After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

What will I save?

Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even after factoring in the FHA fees.

In areas that have sustained huge price drops, such as Sacramento, Calif., where prices have fallen by about 30% over the past year, some loans might be reduced by more than 40%.

Additionally, the FHA loans carry reasonable interest rates, which are fixed for the life of the loan, as opposed to a subprime adjustable-rate mortgage that can jump higher every six months

 First, it was the tumbling housing market, followed by a credit crisis, slowing economy, high oil and food prices, and now, to top it all, rising global inflation. Add to that - while consumers do seem to be spending their stimulus checks - the unemployment rate also jumped from 5% to 5.5%. Yet, there is a silver lining amidst all of this doom and gloom, with encouraging May retail sales reports and April business inventories pointing to stronger second-quarter U.S. economic growth.

Further adding to these vacillating economic scenarios, the Fed has taken a dramatic u-turn. Only three months ago, the Fed was busy saving the economy from a possible meltdown of the financial system. Now, Bernanke is saying the risk of a serious economic downturn has diminished, and the Fed stands ready to “strongly resist” any rise in long-term inflation expectations. On June 11, the futures market was betting heavily on at least one increase in the Fed’s target rate in the second half of the year. The entire global economy is facing serious inflation concerns and the Fed may not have many choices at this point.

The past few weeks have borne witness to historic price moves in the markets with stocks and bonds falling sharply in response to global inflation fears. In short, the balance of the risk equation between inflation and growth continues to somewhat shift away from downside growth concerns and more towards the rising menace of inflation. The rate curve also flattened over the past week with the spread between the two-year versus 10-year treasury now at 122 bps. The flatter curve will most likely have a negative affect on ARM originations, which are already less than 10% of originations. Last week’s sell-off pushed conforming 30-year rates up to a range of 6.50% - 6.75% and as expected, origination activity last week was off due to higher rates. 

If we believe the latest statistical reports, the U.S. economy is showing lots of resilience. Retail sales rose a stronger-than-expected 1.0% in May, suggesting consumers are allocating part of their stimulus checks to consumption. If we believe these figures, real retail sales in the U.S. are up over a year earlier, while real retail sales in Europe are down substantially over the same period. So far, consumer spending has been strong despite the squeeze of falling wealth and rising gasoline prices, and despite the data showing that consumer confidence has dropped to its lowest level since the 1991 recession. Americans are so far clinging to their material ways and not letting fear keep them from the shopping mall.

The commodities bubble continues to inflate, and oil prices recently topped $139 a barrel. It’s hard to believe figures that energy isn’t as important a chunk in the household budget as it was in the early 1980s. Figures show that this year, at above $4 per gallon oil prices, the average household will spend only 6.7% of its income on energy, down from 7.9% in 1981, but still up sharply from 4.2% in 2002. So far, the market has largely shrugged off the mounting evidence of falling demand and chosen to focus instead on potential shortages caused by everything from strikes in Nigeria, to Israeli threats to bomb Iran, to the hurricane season on the U.S. Gulf coast. As of now, the oil prices seems to know only one way and its “up.” Of course, this upward trend in oil prices is surely not welcome, and worries about a potential political backlash from soaring oil prices has resulted in the oil power axis in the Middle East ratcheting up their efforts to cool things down some. The desert kingdoms called for a meeting on June 22 to help stabilize prices. Prices are being influenced by a wide range of factors, though, that extend well beyond fundamentals. For instance, the weak dollar and increasing concerns about inflation are creating upward pressures on oil. When the European Central Bank President suggested on June 5 that they might raise interest rates, his comments ignited the surge of oil prices to just under $140 per barrel on June 6.

This week’s economic calendar is very busy. Given the Fed’s new attention to inflation, the market will be scrutinizing the May producer price index for signs of rising inflation pressures. On Tuesday, we have the release of Housing starts and Producer price index. On Thursday, we will receive Jobless claims and Leading indicators. All this data will be closely analyzed by the market. Meanwhile, take a break from the market swings and enjoy the summer.

Use your Math. If your math is poor, have somebody prove to you, mathematically that is, as to why you should or not. Another words, If it does make mathematical sense, and (more…)

On a standard principal & interest payment loan, if you send any amount over your standard payment to the bank, your payment is not affected, it does not Recast. (more…)

Interest Only Loans have been around for many decades now, except in the old days they were only available to the wealthy. The rich always knew that paying down a loan (more…)