Mortgage Shopper

US Federal Reserve Bank to keep interest rates on hold

The Federal Reserve has announced in a widely expected decision that it is keeping US interest rates unchanged at 5.25 per cent.

The central bank has held its short-term fed funds rate at 5.25 per cent since June of 2006 in a bid to ward off inflationary threats.

The Fed's policy makers opted to hold mortgage interest rates steady despite mounting concerns about the distressed housing and mortgage markets caused by the unravelling sub-prime home loan market and a related credit squeeze.

- AFP

US Housing market and bank profit losses forces the US dollar to record low against the Euro

The US dollar touched a new record low against the euro in Asian trade today, hit by jitters about the US housing market troubles caused by subprime lending problems for banks, and recent falls in global share prices, dealers said.

The euro rose to as high as 1.3845 US dollars in early Tokyo trading, just beating its previous all-time best of 1.3843 seen on Friday.

By late morning in Asia, the euro stood at 1.3830 US dollars, up from 1.3820 on Friday in New York.

The dollar was at 120.93 yen, close to a six-week low, after 121.26 in New York. The euro eased to 167.21 yen from 167.70.

"The dollar remains weak because of concerns about the US housing market and worse-than-expected corporate earning reports which weighed on stocks," said Kikuko Takeda, currency research manager at the Bank of Tokyo-Mitsubishi UFJ.

Disappointment over company results and worries about problems in the US sub-prime mortgage sector – loans to homeowners with patchy credit histories – caused sharp falls on global equity markets on Friday.

Dealers said the falls were affecting carry trade as investors grow more risk averse.

Carry trade is a risky but popular practice of borrowing money in countries with low interest rates such as Japan and investing in countries with high interest rates such as Australia or Britain.

Many Japanese have also been sending their savings overseas in search of higher returns than at home where interest rates remain very low.

Some analysts expect this trend to continue and see the recent rise of the yen against the dollar as a temporary correction, while others believe the outlook for the greenback is worsening due to the sub-prime woes.

Japan's financial markets are keeping a close watch on political events this week ahead of Sunday's upper house election, with polls showing Prime Minister Shinzo Abe's ruling party heading for heavy losses.

A bad result would not automatically cost Abe his job as the ruling coalition enjoys a majority in the more powerful lower house, but it would likely bring pressure on the premier to step down.
Source: Agence France Presse

The subprime mortgage home loan machine

Edward N. Jones, a former NASA engineer for the Apollo and Skylab missions, looked at low-income home buyers nearly a decade ago and saw an unexplored frontier.
Michael E. Jones, chief technology officer of Arc Systems, pointed out the router that connects all the company’s servers and technology.

Through his private software company in Austin, Tex., Mr. Jones and his son, Michael, designed a program that used the Internet to screen mortgage borrowers with weak credit histories in seconds. The software was among the first of its kind. By early 1999, his company, Arc Systems, had its first big customer: First Franklin Financial, one of the biggest lenders to home buyers with weak, or subprime, credit.

The old way of processing mortgages involved a loan officer or broker collecting reams of income statements and ordering credit histories, typically over several weeks. But by retrieving real-time credit reports online, then using algorithms to gauge the risks of default, Mr. Jones’s software allowed subprime lenders like First Franklin to grow at warp speed.

By 2005, at the height of the housing boom, First Franklin had increased the number of subprime loan applications it processed sevenfold, to 50,000 every month. Since 1999, Mr. Jones’s software has been used to produce $450 billion in subprime loans.

The rise and fall of the subprime market has been told as a story of a flood of Wall Street money and the desire of Americans desperate to be part of a housing boom. But it was the little-noticed tool of automated underwriting software that made that boom possible.

Automated underwriting software spawned an array of subprime mortgages, like those that required no down payment or interest-only payments. The software effectively helped move what was a niche product only a decade ago into the mainstream.

Automated underwriting “replaced the ways we used to extend credit,” said Prof. Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard.

Automated underwriting is now used to generate as much as 40 percent of all subprime loans, according to Pat McCoy, a law professor at the University of Connecticut who has written on real estate lending.

The software itself, of course, cannot be blamed for lowered lending standards or lax controls. But critics say the push for speed influenced some lenders to take shortcuts, ignore warning signs or focus entirely on credit scores.

“Used properly, automated underwriting is a wonderful thing,” Professor McCoy said. The problem, she said, comes when lenders customize it to approve the wrong borrowers.

During the housing boom, speed became something of an arms race, as software makers and subprime lenders boasted of how fast they could process and generate a loan. New Century Financial, second to HSBC in subprime lending last year and now on the brink of bankruptcy, promised mortgage brokers on its Web site that with its FastQual automated underwriting system, “We’ll give you loan answers in just 12 seconds!”

Dozens of little-known software companies compete with Arc Systems. They include MindBox of Greenbrae, Calif.; Metavante, in Milwaukee; Mortgage Cadence of Greenwood Village, Colo.; and Overture Technologies in Bethesda, Md.

With small staffs, the companies typically sell their software to home lenders with vast networks of call centers employing hundreds of thousands of loan officers. Some big Wall Street banks and housing lenders bought the software, then developed their own systems. First Franklin, which has been acquired by Merrill Lynch, said that it stopped using Arc Systems’ software last year to create its own proprietary system.

Subprime lenders like automated underwriting because it is cheap and fast. A 2001 Fannie Mae survey found that automated underwriting reduced the average cost to lenders of closing a loan by $916. The software quickly weeds out the very riskiest of applicants and automatically approves the rest.

“You don’t have to chase every lead — just greenlight ’em,” Mr. Jones of Arc Systems said in an interview.

And greenlight them they did.

By mid-2004, Countrywide Financial, a major subprime lender, had used MindBox’s automated underwriting system to double the number of loans it made, to 150,000 monthly.

“Without the technology, there is no way we would have been able to do the amount of business that we did and continue to do,” Scott Berry, executive vice president for artificial intelligence at Countrywide Financial, told a trade publication, Bank Systems & Technology, in the summer of 2004. Countrywide now uses a proprietary system.

Early forms of automated underwriting were first developed and used in the 1970s to process car loans and credit card applications.

By the mid-1990s, software for home buyers with good credit had gone mainstream at Fannie Mae and Freddie Mac, the large government-sponsored mortgage finance companies, and big traditional lenders. But none had been developed for subprime lending, then a niche market.

There are no estimates of the sales volumes for this software niche, but companies like Arc Systems often have annual revenues in the tens of millions of dollars. Arc Systems, whose name is something of a pun — Mr. Jones’s middle name is Noah — earns $10 to $30 each time a borrower submits a loan application.

Proponents say the software makes things fairer and more objective for risky borrowers.

“It takes the subjectivity out of the good ol’ boy system in which Martha knows Joe, who approves the loan — then you end up with a bad decision,” Mr. Jones said.

Samir Rohatgi, a vice president at MindBox, said that old system of manual underwriting actually encouraged loan officers working on commission to grant bad loans.

“Those people were feeling pressure because of the way their company’s performing, so the decisions are sometimes biased,” he said.

Mr. Jones said that because his program, LendTech, could parse credit reports for more than 3,000 risk variables, “we had better analytics than the trading desks” on Wall Street.

But some question whether such analysis gave comfort where it was not deserved.

“Automated underwriting put the credit score on such a pedestal that it obscured the other important things, like is the income actually there,” said Professor Retsinas of Harvard. “Before there was A.U., down payment mattered a lot. Where we’ve crossed the line in recent years is to say, we don’t need down payment.”

Michael Perna, Arc Systems’ marketing director, said that income “is supposed to be verified by a person.”

Mr. Jones founded Arc Systems in 1984 to produce software for Suwannee County, Fla., which used it to track when policemen issued parking tickets and when jail wardens fed inmates. Then in 1992, a local subprime lender called Home Inc. asked Mr. Jones to develop a program to screen risky borrowers. In 1997, amid the adoption of the Internet, “we ditched that software and went Web-based,” Mr. Jones said.

Since 1999, his software has been used by major subprime lenders including HSBC and its former Household subsidiary, Deutsche Bank and the Virginia Housing Development Authority. Lehman Brothers and the Ellington Management Group, a big seller of mortgage-backed securities, have used LendTech to analyze pools of billions of dollars of subprime loans that they sold to big institutional investors.

“We’ve had clients all along the food chain,” Mr. Jones, who is 66, said.

An electrical engineer by training who worked at NASA in the 1960s and then Unisys, Mr. Jones keeps his NASA patches on a wall in his office. He likes to clear cedar and juniper brush on his 100-acre property near Austin. His wife, Gayle, a nurse by training, is the company’s executive vice president. Arc Systems has 52 employees and at one point employed seven married couples.

“We like to have picnics and play softball,” Mr. Jones said.

Since the subprime housing market began falling apart late last year, Arc Systems’ sales have dropped 30 percent. Still, Mr. Jones sees a sparkling future for automated underwriting. “The smart money on Wall Street is now looking for the gems — and they’ll use A.U. to find them.”

Then he added, “You know that old symbol of the snake eating its own tail? Well, we’ve always thought the industry was that. And that’s kind of where we’re at right now.”
Source: The New York Times

Mortgage losses knocks Block off

Shares of H&R Block Inc. lost 8.7 percent of their value Friday on news the company suffered unexpected losses from its Option One Mortgage operations.

The Kansas City-based company late Thursday said it would set aside $102.1 million to cover potential losses on loans it could be required to buy back from investors who had purchased them from Option One. The buybacks can be triggered if a borrower misses the first payment owed on the loan.
Block said the losses reflected not only higher numbers of borrowers missing first payments but also quicker decisions by investors to sell the loans back.
“In the past, investors haven’t sold them back right away; they’ve waited to see whether the loan would cure” the delinquency, spokesman Nick Iammartino said.
Block’s buyback agreement is a fairly standard guarantee on the first payment and does not require Block to buy back older loans that run into problems. Some months may pass, however, before the investor’s right to sell back the loan has ended.
Option One makes loans to borrowers who have lower credit scores or otherwise pose greater risks.
Block can resell the loans it has to buy back but won’t be able to sell them for as much money because of the missed payments. The $102.1 million is how much Block expects to lose on all of the loans it had sold, not just those already returned by buyers.
In all of last year, Block set aside about $73 million to cover such losses on loans it had sold.
Not all stock analysts were sure the $102.1 million set aside would be enough. Kelly Flynn, with UBS AG, downgraded the stock in part because of possible additional problems.
“This assumes even if (Block) has already tightened standards to address prepayment risks, defaults on loans originated in the last four to six months will worsen, but we also worry that worse-than-expected experience on new loans provides further downside risks,” Flynn’s report said.
Another analyst said Block’s mortgage loss hadn’t been anticipated but wasn’t entirely surprising given the weakening housing market. Block had said increased loan repurchases have “been noted industry-wide.”
Alexander Paris Jr., director of research at Barrington Research in Chicago, said the new information is that loan buyers have been asking to sell back the loans more quickly than in the past. He called it a “skittishness” that hadn’t been in the mortgage market previously.
Friday morning was the first time investors could react to the news, and Block’s shares quickly fell to as low as $20.20. They finished the day at $20.81, down $1.98.
Friday’s loss was the largest one-day decline for Block owners since a $2.18-per-share fall in late February.
H&R Block had surprised markets then by announcing that software problems had cut into its tax season and forced management to reduce estimates of the company’s earnings.

Source: The Kansas City Star

No money to retire on? Experts say that Americans' spending habits don't match their future needs.

The US national savings rate has gone negative for the first time since the Great Depression. Not only are Americans not saving any of the money they earn, they're spending more than they earn, driving themselves deeper into debt.

The savings rate has been steadily declining for a generation now. Twenty five years ago Americans saved an average of 10 percent of what they earned. Last year they spent $42 billion more than they earned.
Retirement Crisis

The Center for Retirement Research estimates — conservatively — that 43 percent of American households won't have enough money to maintain their standard of living in retirement.

For low-income Americans, that means not being able to cover the cost of such basic necessities as food and shelter. Some will fall into poverty.

For middle-income people, it means they really will notice a decline in how well they are living. They will have to make sacrifices and really be worried once they stop working."

And that's if they are even able to stop working. Experts said it's hard to imagine how baby boomers will be able to stop working at the current retirement age of 62 for women, and 63 for men when so few have the financial resources to pay for a long retirement.
Just 20 percent of Americans are still eligible for company pensions; 25 percent have never enrolled in their employers' 401k retirement plans; and 45 percent cash out their 401ks whenever they change jobs, despite big tax penalties.

"There's a real irony here that people are saving less and living longer, and that's a real problem," said Robert Bixby, the executive director of the Concord Coalition.

US new home builders lose ground

Shares of U.S. home builders slid on Friday after market leader D.R. Horton Inc., The USA’s largest home builder, slashed its forecast and a report showed consumer confidence was eroding.
The Dow Jones U.S. Home Construction Index, a barometer for home-building stocks, was 4.9 percent down at 570.02. It hit a two-year low and has lost half its value since peaking a year ago.
Yet, the drop came as no surprise to investors, who had for the past few years resisted awarding home-builder stocks higher valuations, despite pleas from the companies themselves.
"This means that investors have anticipated that earnings for the companies would come down," said Victory Capital Management analyst Michael Koskuba.
For about the past three years, as they repeatedly turned in double-digit profit growth, U.S. home builders complained the stock market did not value them fairly, with their average price-to-earnings ratio hitting only as high as about 9.6.
And over the past two years, the average P/E of large U.S. home builders was 7.34, about half the S&P 500's P/E of 15.95.
"Essentially investors thought that earnings would come down for these companies," Koskuba said.
The large, publicly traded home builders argued they were no longer cyclical stocks. They said they had grown so big that when the market soured, they could increase their earnings by taking market share away from the smaller private builders.
But investors didn't buy the theory.
"Although they were posting extremely high growth for that five-year period, they were not afforded market multiples because in the back of investors' minds was always the fact that home building was cyclical," Koskuba said.
Because investors never pumped up the P/Es, the fall hasn't been as dramatic, and the average for the top home builders is now about 4.85.
Horton shares fell as much as 11 percent to a two-year low, and were down 7.2 percent at $21.21 in late Friday trading. It was among the top losers on a down day for New York stocks.
Following Horton's announcement late on Thursday, on Friday morning the University of Michigan's preliminary July reading on consumer sentiment was 83.0, down from June's 84.9. It was lower than the median forecast of Wall Street economists polled by Reuters for a reading of 85.5.
Among U.S. builders, Meritage Homes Corp. (MTH.N: Quote, Profile, Research) shed 7.7 percent to $38.85, and Centex Corp. (CTX.N: Quote, Profile, Research) fell 4.6 percent to $45.20. Pulte Homes Inc. (PHM.N: Quote, Profile, Research) dropped 3.9 percent to $26.95 and Beazer Homes USA Inc. (BZH.N: Quote, Profile, Research) lost 5.5 percent to $38.57.
In the options market, defensive trading is being seen throughout the housing sector, with increasing put volume in Toll Brothers Inc.(TOL.N: Quote, Profile, Research), Beazer, The Ryland Group Inc.(RYL.N: Quote, Profile, Research) and Pulte, said Frederic Ruffy, analyst at Optionetics, a California-based options education firm.
Investors often turn to equity puts, which give the right to sell the stock at a preset price and time, to protect existing stock holdings or bet on further weakness in a stock.
"At some point they will be attractive again," Koskuba said. "But as long as the numbers keep going down, investors are still scared of going back in."

Source: Reuters

How to avoid losing your home through foreclosure when your mortgage loan falls into default

9 tips to avoid foreclosure when your mortgage falls into default.
As any real estate agent knows, home sales heat up with rising temperatures every summer. Now, with mortgage interest rates more than a full point higher than at this time last year, fuel costs riding high, higher minimum credit card payments and consumer debt still raging, many U.S. homeowners risk foreclosure on their homes but they don’t have to lose their slice of the American dream.

Last year, 31 percent of home loans issued were adjustable-rate mortgages [ARMs, which could spell big trouble as fixed mortgage rates hover around 6.83 percent and ARMs are poised to go much higher, Holders of ARMs will be paying an additional $14 billion annually for every 1 percent increase in mortgage rates. People who bought homes at the edge of their spending ability with an ARM could face dire consequences as their mortgage payments increase -- but they can take steps to keep their financial situations in check.

According to the Mortgage Bankers Association of America, 4.7 percent of U.S. mortgages were delinquent at the end of 2005. With $9 trillion in outstanding U.S. mortgage debt, that places $423 billion at risk of foreclosure. Homeowners who are at risk (as well as prospective homeowners) can use the tips below to avoid mortgage trouble.

How to prevent problems:
1. Create a budget and don’t stretch yourself too far. The unexpected can and does happen to millions of Americans each year. For people who live at the far edge of their means, one life event can hijack their lives and lead to defaults on bills and/or mortgage payments. The key is to build a detailed budget of income and expenses, making sure to allow some breathing room to weather an unexpected downturn.
2. Be very careful with ARMs or interest-only loans. These types of loans let borrowers qualify for more expensive homes , but beware as rates (and payments) climb. If you can barely afford the payment on your ARM or interest-only mortgage, you are asking for trouble in a few years when the teaser period expires and your loan re-sets to a fixed rate. Be sure you have extra cushion in your budget with these loans.
3.    Don’t jump to refinance your home to pay off credit card debt. Many people faced with large credit card debt or other unsecured debts consider refinancing their homes. But this strategy only moves the debt, securing it with your home. That puts your home is at risk of foreclosure if you are unable to pay. If you are not confident that you can keep up with your home loan payments, consider debt resolution or another debt relief option.
We can’t emphasize enough that people must educate themselves about what they're getting into with a mortgage. Overall debt problems will continue to escalate unless people rein in their spending to live within their means. Unfortunately, for some people, that may mean losing their home to resolve their financial situation.
How to avoid foreclosure, if it’s already on its way:
1.    Enter into a forbearance agreement. For a temporary hardship, lenders might grant a forbearance agreement to lower - or eliminate payments for a limited time.
2.    Consider loan modification. A loan modification seeks a permanent change to the loan, such as lowering the payment and extending the loan term, or incorporating any delinquencies into future payments.
3.    Obtain a deed in lieu of foreclosure. A deed in lieu essentially allows the borrower to return the title or deed of the property giving the home to the mortgage holder to avoid foreclosure.
4.    Sell the home. Selling your home may not be ideal, but it is a way to avoid foreclosure proceedings on your house and pay back your lender.
5.    Refinance the loan. It may be possible to refinance your mortgage for a lower interest rate and/or lower monthly payment (this is much different than refinancing to take cash out to pay off credit cards). However, if you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment. Educate yourself on current rates by checking online rate comparison sites and using online calculators to determine the real costs of refinancing. These tools are available on a number of Web sites, including http://www.bills.com/calculators/.
6.    Be cautious. Be wary of so-called equity skimmers. If your house is facing foreclosure, you will probably receive numerous solicitations from companies looking help you prevent foreclosure by offering to sell your home for you or by taking ownership of your home. In most cases, these solicitations are scams trying to take advantage of people in difficult situations. The perpetrators aim to snatch the equity you have built up in your home.

In many states, foreclosure rates have already started to increase, especially impacting the segment of the population that carries adjustable-rate mortgage loans, whose payments climb upward with every interest-rate increase. However, homeowners can make choices, ideally, before they purchase a home, but even after problems arise, that will help them keep a home, or at least minimize the damage a foreclosure could have on their futures.

US mortgage applications fall for summer

U.S. mortgage applications are falling, reflecting a decline in home refinancing loans as interest rates climbed, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended May 26 decreased 1.9 percent to 541.9 from the previous week's 552.6.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.66 percent, up 0.05 percentage point from the previous week, and matching a four-year high touched a month ago.

The MBA's seasonally adjusted purchase mortgage index fell 0.2 percent to 395.5. The index was also below its year-ago level of 462.7.

The purchase index is considered a timely gauge of U.S. home sales.

The group's seasonally adjusted index of refinancing applications decreased 4.8 percent to 1,409.0.

Source: Reuters

Mortgage Rates down slightly

Low Job Growth In May Helped Reduce Upward Pressure On Rates.
McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market SurveySM (PMMSSM) in which the 30-year fixed-rate mortgage (FRM) averaged 6.62 percent, with an average 0.5 point, for the week ending June 8, 2006, down from last week’s average of 6.67 percent.  Last year at this time, the 30-year FRM averaged 5.56 percent.

The average for the 15-year FRM this week is 6.23 percent, with an average 0.5 point, down from last week’s average of 6.26 percent.  A year ago, the 15-year FRM averaged 5.14 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.20 percent this week, with an average 0.5 point, down from last week when it averaged 6.26 percent.  A year ago, the five-year ARM averaged 5.01 percent.

One-year Treasury-indexed ARMs averaged 5.63 percent this week, with an average 0.8 point, down from last week when it averaged 5.68 percent.  At this time last year, the one-year ARM averaged 4.21 percent.

Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

“Mortgage rates are down a little this week on news of disappointing job growth in May coupled with downward revisions for the previous two months,” said Frank Nothaft, Freddie Mac vice president and chief economist.  “The slight drop in long-term rates reflects a cautiously optimistic outlook in the market that core inflation remains contained.  The soon-to-be released Producer Price Index (PPI), followed by the Consumer Price Index (CPI) will give a better indication which way inflation is headed.

“Currently, the Fed is monitoring each of these economic reports and will take their impacts into consideration at its next meeting towards the end of June, leaving open the question of what action, if any, the Fed will take.”

Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing. Freddie Mac fulfills its mission by purchasing residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than four million renters in America.