Sunday, September 23, 2007

The Calm

It's Sunday evening and we are calmly writing this post. The Fed's action last week brought many negative opinions for the 50 bps cut but the Fed in its infinite wisdom has given Wall Street a chance to rally. We were a little surprised by the negative tone over the weekend. The local paper had a front page article entitled "Mortgage troubles are here to stay". Didn't the author read that the Fed lowered rates by 50 bps and there shouldn't be any more worries? Yes, sarcasm is alive and well here at the Update.

The article was gloomy and gave stats on subprime mortgages in the area. From a 7% proportion of subprime mortgages in 2004 for one of the wealthiest areas here, the percentage jumped to 17% in 2006. Other areas in the counties that contain Minneapolis and St. Paul, the percentatges are 26% for Hennepin (Mpls) and 30% for Ramsey (St. Paul). One of the metro areas had a 36% subprime percentage in 2006. These percentages represent the number of mortgages that were subprime. (We're not sure if the number or the dollar amount would be more representative but the percentages are high.) All told, in the 11 county metro area the number is 26%. That's 26% of all mortgages written in 2006 were subprime.

The state has passed a new predatory lending law that took effect last month but it won't be able to help the folks that are already in these loans. But, maybe going forward, there will be less trouble for borrowers...meaning they won't get loans and won't be buying houses. The new rules say that subprime loans can not have pre-payment penalties (apparently 70% of subprime loans used to have pre-payment penalties). Plus, closing costs can't be more than 5% of the loan amount (apparently many subprime mortgages carried much higher fees than that, no wonder the mortgage market was booming).

And, last, in order to qualify for a loan, you have to be able to pay for the highest rate the mortgage will be able to charge. So, for an ARM that can reset to 11% even though it starts out at 5%, you have to be able to qualify for a payment based on 11%. You may recall that some ARM's had options that allowed the borrower to pay Less than the amount due on the mortgage, in a practice that is called "neg-am" or negative amortization. This practice allows the mortgage amount to go up since the loan payments are not enough to cover the interest.

Another article in the paper told the story of a 66 year old man who was facing foreclosure on a loan he had just taken out last December. He had bought the house back in 1975 for $24,900 and raised four children there. He entered an agreement to borrow $186,500 on an ARM starting at 1.75% interest which is now 8.625% about 9 months later. Plus, it was an Option ARM and he didn't actually have to pay the full amount of the mortgage. The full payment for the loan was $1,421 but he only had to pay $540 on his minimum payment option. So, he found out his balance had increased in that short period of time to $191,066.

This gentleman is trying to find a way to renegotiate his loan with Countrywide Financial, where have we heard that name before? They are downsizing by 20% of staff and are not in the business of renegotiating loans in order to make less money. We'll see how this all plays out. We wonder what the man did with $186K, although we know some of it was spent on medical costs.

Meanwhile, the stock market marches to a different drummer or is it the Piep Piper in a beard. We keep wondering what the market is trying to do in the face of almost certain recession. They truly believe the Fed can save them.

Please take a look at the True Contrarian at the link on the left. He tries to defend the dollar bouncing strongly and we have thought so too for a while but it has kept on going down. If the dollar would turn around that would give pause to most of the other markets (with the possible exception of the bond market).

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