With nearly 40 percent fewer Bay Area homes selling last month than in December 2006 - reaching a record low - the reality of the Bay Area housing market shifted subtly.
In San Francisco and San Mateo counties, where housing values have been relatively resilient compared with outlying areas, median prices dropped last month. Santa Clara County's median house price rose slightly, but only because cheaper homes are still selling much more rarely than the expensive ones.
December is often a slow month, but what's to blame for the super-freeze last year? Consumer confidence has been hammered by crisis in the credit markets and stock market volatility. Many loans are harder to get. So buyers are waiting.
Just 5,065 new and resale houses and condos changed hands in the nine-county area in December, about 40 percent fewer than a year earlier, according to DataQuick Information Systems. It was a new low for the month in the company's records, which go back to 1988. The previous trough was in December 1990, when 5,458 homes sold.
Prices of single-family homes fell last month in every Bay Area county except in Santa Clara, where the median price rose 4.6 percent from December 2006 to $739,000. The county's recent peak for house prices was in July, at $805,500.
But for most of 2007, median prices in Santa Clara County were inflated by the fact that home sales in the county's least expensive
neighborhoods have been depressed by the subprime mortgage market collapse.
In San Mateo County, the median house price declined 2.7 percent last month from a year earlier, to $765,000, and Alameda County house prices dropped 10.9 percent, to $552,500.
"What this shows is continued weakness throughout the Bay Area," said Ken Rosen, chair of the Fisher Center for Real Estate at University of California-Berkeley. He noted the exception of the median house price in Santa Clara County, but said that figure masked "pockets of real strength and pockets of real weakness" in the county.
Santa Clara County's high-end housing market has remained relatively healthy "partly because of the technology and venture capital businesses that have been so strong," Rosen said. "The recent declines in Nasdaq, and other announcements, indicate that maybe even Santa Clara will go into a house price decline."
DataQuick's newest figures are based on sales that became final in December, meaning most deals began in October or November - just when more effects of the unraveling credit markets were coming to light. In early October, the Dow Jones industrial average was soaring beyond 14,000; by the day after Thanksgiving, it had dropped to just under 13,000.
Many consumers lack confidence in the economy, including Cambrian homeowners Jill Simpson and her husband.
"We'd love to upgrade to a bigger house," she said. "With the recession looming, we're thinking maybe we shouldn't risk it." Maybe in a few more months, she said, if prices come down a bit in Almaden Valley, where she hopes to move. And if they don't fall too much in Cambrian, which would erode her buying power. And if she could find a house that wasn't a major fixer-upper or on a busy street. And if the semiconductor industry, where her husband works, seems stable.
Even for those eager to buy, obtaining a Bay Area-size mortgage can be tougher than it was just six months ago, when the credit markets began to stumble after a few years of don't-ask-don't-tell lending standards.
Now, not only must applicants verify their incomes and have sizable down payments at the ready, but rates for loans of more than $417,000 - so-called "jumbo loans" - can run to 7 percent or more. Lenders change their guidelines and rates constantly, loan brokers say.
Meanwhile, rates for "conforming" loans up to $417,000 - which are typically backed by mortgage financing companies Fannie Mae and Freddie Mac - have been falling. The national average rate for a conforming 30-year mortgage this week was 5.69 percent, according to Freddie Mac, compared with 6.23 percent a year ago.
Monday, January 21, 2008
Global house prices
US and British house prices are falling. Australian house prices are still rising. Housing here is protected in the short term by strong Australian growth, but that will not last forever.
The US housing market is in turmoil. US sub-prime lending allowed many poor households to purchase a home. Booming demand saw US house prices double in 10 years. In the last year US house prices fell 5 per cent as demand fell and repossessions forced sales. Britain is following. A recent Financial Times poll of British economists showed many expected British house prices to fall 10 per cent to 30 per cent from the peak. British house prices tripled in 10 years and have only fallen recently. The catalyst was the collapse of Northern Rock, a deposit-taking home-loan lender. The global house price boom has ended. The freezing of the interbank money market has hobbled credit markets. The pain is spreading from housing to commercial property and equity prices are now falling.
The IMF has warned that house prices could fall in Europe. The European central bank is resisting rate cuts and the euro locks nations into a monetary straightjacket.
Professor William Buiter of the London School of Economics has welcomed the end of the asset bubble and sees a US recession as desirable given the distortions created by financial excesses.
The US might cut rates aggressively to try to keep the party going, but that might be difficult with credit markets imploding.
Do Australian house prices necessarily follow? Australian house prices rose 160 per cent in 10 years and are still rising at the upper end.
Australian share prices will follow global share prices, but our housing seems unlikely to falter unless the economy slows rapidly.
The US sub-prime market sector is much larger than here and non-recourse borrowing in the US means borrowers often walk out when house prices fall below the value of the loan. This creates more volatile house prices.
Australia has had limited use of low interest rate introductory loans and mortgage insurance protects lenders. While RAMS failed we have not had a run on a deposit-taking institution as in the UK.
Even so, the OECD suggested in 2005 that Australian house prices were the most overvalued of any developed country relative to income or rents. Our household debt and servicing costs relative to income are high. Households are exposed if rates rise sharply.
In the US and Britain financial problems mean housing might cause recessions. Barring tax changes, or a financial collapse, that seems unlikely in Australia.
It needs rising interest rates and a world slowdown with rising unemployment to prick Australia's housing bubble. Some say that's unlikely, but overpriced assets do fall. Do not assume Australian house prices will rise forever.
The US housing market is in turmoil. US sub-prime lending allowed many poor households to purchase a home. Booming demand saw US house prices double in 10 years. In the last year US house prices fell 5 per cent as demand fell and repossessions forced sales. Britain is following. A recent Financial Times poll of British economists showed many expected British house prices to fall 10 per cent to 30 per cent from the peak. British house prices tripled in 10 years and have only fallen recently. The catalyst was the collapse of Northern Rock, a deposit-taking home-loan lender. The global house price boom has ended. The freezing of the interbank money market has hobbled credit markets. The pain is spreading from housing to commercial property and equity prices are now falling.
The IMF has warned that house prices could fall in Europe. The European central bank is resisting rate cuts and the euro locks nations into a monetary straightjacket.
Professor William Buiter of the London School of Economics has welcomed the end of the asset bubble and sees a US recession as desirable given the distortions created by financial excesses.
The US might cut rates aggressively to try to keep the party going, but that might be difficult with credit markets imploding.
Do Australian house prices necessarily follow? Australian house prices rose 160 per cent in 10 years and are still rising at the upper end.
Australian share prices will follow global share prices, but our housing seems unlikely to falter unless the economy slows rapidly.
The US sub-prime market sector is much larger than here and non-recourse borrowing in the US means borrowers often walk out when house prices fall below the value of the loan. This creates more volatile house prices.
Australia has had limited use of low interest rate introductory loans and mortgage insurance protects lenders. While RAMS failed we have not had a run on a deposit-taking institution as in the UK.
Even so, the OECD suggested in 2005 that Australian house prices were the most overvalued of any developed country relative to income or rents. Our household debt and servicing costs relative to income are high. Households are exposed if rates rise sharply.
In the US and Britain financial problems mean housing might cause recessions. Barring tax changes, or a financial collapse, that seems unlikely in Australia.
It needs rising interest rates and a world slowdown with rising unemployment to prick Australia's housing bubble. Some say that's unlikely, but overpriced assets do fall. Do not assume Australian house prices will rise forever.
House price growth
MADRID, Jan 18 (Reuters) - Spanish house price growth hit its lowest rate in nearly a decade in the fourth quarter, the Housing Ministry said on Friday, deepening a slowdown in what has been one of Europe's hottest housing markets.
Growth nearly halved from the same period a year ago to 4.8 percent year-on-year in the fourth quarter. That was down from a rise of 9.1 percent in Q4 2006 and 5.3 percent in the third quarter last year.
While many economists fear a housing and property slowdown will spill over into the rest of the economy, the government said Friday's data showed a much-needed cooling of the market, making it easier for people to buy homes.
"The government has met its targets for house price growth to be in line with inflation," Housing Ministry Policy Director Rafael Pacheco told a news conference.
He denied there was a crisis in the housing sector and said prices and construction activity were undergoing a gradual adjustment.
A weakening economy could endanger the governing Socialists' opinion poll lead before general elections on March 9, analysts say.
Spanish house prices have nearly tripled in the past decade but the market has succumbed to overbuilding of over a million homes in the last four years and a paralysis in demand amid expectations prices may soon fall.
Spanish house demand is "dormant" due to uncertainty over how big a correction Spain's market is facing, said Santiago Baena, Chairman of Spain's API real estate agents network.
Prices are expected not to grow at all over this year, fall 1.8 percent in 2009, then return to zero growth in 2010 before a possible recovery, according to a Reuters poll published on Jan. 10.
"This is a year of uncertainty. With everything that has happened, and national elections on top of that, the country has been paralysed," said Baena. "There is going to be a tough correction this year, but it's going to leave the real estate sector with fundamentals to allow it to take off again."
Xavier Segura, head of research at Caixa de Catalunya agreed the figure could be read positively. "It's good for house price (growth) to approximate inflation, so from that perspective the figure is good news," he said. Spanish inflation rose to a 12-year high of 4.2 percent in December.
Mortgage lending by Spanish banks has fallen from 28 percent growth in June 2006 to 20 percent in June 2007, according to the Bank of Spain, as higher interest rates coincide with tighter lending conditions after the global credit crunch.
Non-performing loan rates among Spanish banks are rising towards the higher levels seen in other European countries as households face 8-year high mortgage interest rates, according to the Bank of Spain.
More than half of families that took out mortgages between 2005 and 2007 may have difficulties repaying them in 2008, according to Spain's Financial Intermediaries Association or Asifin.
Growth nearly halved from the same period a year ago to 4.8 percent year-on-year in the fourth quarter. That was down from a rise of 9.1 percent in Q4 2006 and 5.3 percent in the third quarter last year.
While many economists fear a housing and property slowdown will spill over into the rest of the economy, the government said Friday's data showed a much-needed cooling of the market, making it easier for people to buy homes.
"The government has met its targets for house price growth to be in line with inflation," Housing Ministry Policy Director Rafael Pacheco told a news conference.
He denied there was a crisis in the housing sector and said prices and construction activity were undergoing a gradual adjustment.
A weakening economy could endanger the governing Socialists' opinion poll lead before general elections on March 9, analysts say.
Spanish house prices have nearly tripled in the past decade but the market has succumbed to overbuilding of over a million homes in the last four years and a paralysis in demand amid expectations prices may soon fall.
Spanish house demand is "dormant" due to uncertainty over how big a correction Spain's market is facing, said Santiago Baena, Chairman of Spain's API real estate agents network.
Prices are expected not to grow at all over this year, fall 1.8 percent in 2009, then return to zero growth in 2010 before a possible recovery, according to a Reuters poll published on Jan. 10.
"This is a year of uncertainty. With everything that has happened, and national elections on top of that, the country has been paralysed," said Baena. "There is going to be a tough correction this year, but it's going to leave the real estate sector with fundamentals to allow it to take off again."
Xavier Segura, head of research at Caixa de Catalunya agreed the figure could be read positively. "It's good for house price (growth) to approximate inflation, so from that perspective the figure is good news," he said. Spanish inflation rose to a 12-year high of 4.2 percent in December.
Mortgage lending by Spanish banks has fallen from 28 percent growth in June 2006 to 20 percent in June 2007, according to the Bank of Spain, as higher interest rates coincide with tighter lending conditions after the global credit crunch.
Non-performing loan rates among Spanish banks are rising towards the higher levels seen in other European countries as households face 8-year high mortgage interest rates, according to the Bank of Spain.
More than half of families that took out mortgages between 2005 and 2007 may have difficulties repaying them in 2008, according to Spain's Financial Intermediaries Association or Asifin.
Friday, January 18, 2008
Homebuilder faces lending deadline
TAMPA, Fla. (AP) - Upscale homebuilder WCI Communities Inc. (NYSE:WCI) could learn Wednesday whether it will receive new terms on credit and loans that it needs to avoid bankruptcy.WCI has received at least three loan extensions from two banks and seeks new terms giving it more flexibility to pay interest on its debt.If the two banks, Bank of America Corp. (NYSE:BAC) and KeyCorp's (NYSE:KEY PRA) (NYSE:KEY PRB) (NYSE:KEY) KeyBank, cannot agree to new terms, WCI may lose its ability to draw more money from its loans and force it to declare bankruptcy.The banks had extended a temporary agreement that expires Wednesday, when WCI's stock rose 32 cents, or 15.1 percent, to $2.44. The stock has plunged from a 52-week high of $24.20 last February.Bonita Springs-based WCI and Bank of America representatives did not return calls seeking comment. A KeyBank spokeswoman declined comment, citing privacy regulations.Representatives for billionaire investor Carl Icahn, one of WCI's largest shareholders, also declined to comment Wednesday morning. In September, WCI named Icahn chairman after he attempted to take over the board and force the sale of the company.WCI is the nation's 33rd largest homebuilder, according to 2006 sales. The company builds tower residences and traditional homes in upscale communities in the mid-Atlantic, Northeast U.S., and in Florida.Even with new terms for its loans, WCI is not guaranteeing that it will survive.'This amendment will be expensive and there can be no assurance that we will be able to comply with the amended covenants and other requirements,' WCI said in a statement issued Jan. 7.For months, WCI has watched buyers back away from contracts to buy condos, part of the larger problem of home loan defaults and falling house prices. As a result, the number of unsold homes has increased, forcing homebuilders to cut prices and lose money.Florida -- where the company focuses on second homes -- is among the regions hardest hit by the decline.If WCI files for bankruptcy, it would join two other builders who have gone into Chapter 11 protection in the past few months.The first, Neumann Homes Inc., a large privately-held homebuilder in the Midwest and Colorado, filed in October. The second, Levitt and Sons, a unit of Florida-based Levitt Corp. (NYSE:LEV) , filed in November, citing 'unprecedented conditions,' particularly in Florida and the Southeast U.S.
'Myth of unbeaten land'
In Shenzhen, the decline in volume of new residences, combined with sharp decreases of house purchases for investment and consequent property auction failures, have proved that the “turning point” inside the real estate market in Shenzhen, a special economic zone in south China’s Guangdong Province, has already come, much earlier than market expectations.
The property market in 2007 can be described as “rare”, it was extremely hot during the first half of last year, then it experienced depression during the second half,” said Liang Wenhua, General Manger of Shenzhen-based Shihua Real Estate, during an interview with the China Business News.
In the spring of last year, hosing prices in Shenzhen rose sharply. The monthly average price increase for newly built commercial houses reached 13.5 percent in the first ten months, making it the fastest among China’s 70 large and medium-sized cities, according to statistics from the National Development and Reform Commission (NDRC).
The average price of residential buildings was 10,872 yuan (US$ 1,495) per square meter in January 2007 but the same year saw a record high of 16,777 yuan (US$ 2,307), a rise of almost 60 percent. The second-hand house market enjoyed more of a boom, with prices increasing from 8,984 yuan (US$ 1,235) in December 2006 to 14,572 yuan (US$2,004) in June 2007, up 62 percent in six months. Prices of some high-class apartments even posted more than a 90 percent rise in this city.
The housing market in Shenzhen experienced a sharp decline in October last year, with property sales of only 82 units during the seven-day National Day holidays. The floor space of commercial housing dropped by 37.5 percent in 2007 as compared to the same period in 2006, with residential building down 40.5 percent and sales of commercial houses decreasing by 13.2 percent, based on an analysis from the Shenzhen Statistics Bureau.
Significantly, this “turning point” arrived earlier than market forecasts had predicted. More and more people were taking a wait-and-see attitude towards buying houses in the latter half of 2007. Sales in October, November and December hit a record low of the year, while the 2006 market was the most prosperous during those very same months.
Prices for new residential buildings hit a record high in September of last year and then it began to fall. They experienced a continuous decrease in the following months of the year.
The price of second-hand houses stopped rising as of last August. Only 1,139,900 square meters were sold in the third quarter of 2007, down more than 60 percent from the second quarter, based on the statistics from the Zhongyuan Property Agent.
The sharp fall took place during the fourth quarter and was due to low sales volume. The volume of second hand residential buildings hit 661,800 square meters, with the price falling by 10 percent as compared with the same period in 2006.
The average price of second hand properties hit 12,729 yuan (US$1,750) in 2007, or a year-on-year increase of 51 percent, still a large number due to the sharp rise in the first six months.
“There were really great ups and downs in the market, that’s very rare,” commented Liang Wenhua.
The land is unbeaten?
Rising property prices are attributed to a limited land supply; this is commonly understood among real estate industry insiders in Shenzhen. “In the long term, land supplies in Shenzhen will be very limited,” said Feng Yongheng, a research fellow with Midland Realty (Holdings) Limited. He believed that land cost is the key factor toward deciding housing prices in Shenzhen. Land prices will rise as the land supply for housing decreases, and then the house prices will continue to go up.
In 2006, the Shenzhen municipal government leased land consisting of 906,000 square meters for commercial and residential buildings. But in 2007 the government has leased only 409,000 square meters, according to the latest statistics.
The government has tightened up land supplies and held land sales via public auction, causing a shortage in land supplies. Property prices rose. According to an official document issued in 2006, the land supply for residential houses construction would decrease year by year after 2007.
Unexpectedly, many managers of house agencies did not agree with such a statement. “Many land auctions have failed recently and one reason for this is due to government controlled housing policies that keep purchasing costs artificially low. At the same time real estate developers still need to turn a profit on the market,” said Liang, holding the view that the overheated property market had led to increasing land prices.
“Demand dictates price,” said Zou Jianmin, a real estate investor. He did not agree that land supply was a key factor in deciding housing prices.
In Shenzhen, six land auctions failed last December and an unsuccessful auction also took place in 2006.
“Developers have their bottom lines; building houses does not always make money,” said Wang Shuquan, General Manger of the Midland Realty (Holdings) Limited. He stressed economic laws, and he maintained that housing prices would decline.
The property market in 2007 can be described as “rare”, it was extremely hot during the first half of last year, then it experienced depression during the second half,” said Liang Wenhua, General Manger of Shenzhen-based Shihua Real Estate, during an interview with the China Business News.
In the spring of last year, hosing prices in Shenzhen rose sharply. The monthly average price increase for newly built commercial houses reached 13.5 percent in the first ten months, making it the fastest among China’s 70 large and medium-sized cities, according to statistics from the National Development and Reform Commission (NDRC).
The average price of residential buildings was 10,872 yuan (US$ 1,495) per square meter in January 2007 but the same year saw a record high of 16,777 yuan (US$ 2,307), a rise of almost 60 percent. The second-hand house market enjoyed more of a boom, with prices increasing from 8,984 yuan (US$ 1,235) in December 2006 to 14,572 yuan (US$2,004) in June 2007, up 62 percent in six months. Prices of some high-class apartments even posted more than a 90 percent rise in this city.
The housing market in Shenzhen experienced a sharp decline in October last year, with property sales of only 82 units during the seven-day National Day holidays. The floor space of commercial housing dropped by 37.5 percent in 2007 as compared to the same period in 2006, with residential building down 40.5 percent and sales of commercial houses decreasing by 13.2 percent, based on an analysis from the Shenzhen Statistics Bureau.
Significantly, this “turning point” arrived earlier than market forecasts had predicted. More and more people were taking a wait-and-see attitude towards buying houses in the latter half of 2007. Sales in October, November and December hit a record low of the year, while the 2006 market was the most prosperous during those very same months.
Prices for new residential buildings hit a record high in September of last year and then it began to fall. They experienced a continuous decrease in the following months of the year.
The price of second-hand houses stopped rising as of last August. Only 1,139,900 square meters were sold in the third quarter of 2007, down more than 60 percent from the second quarter, based on the statistics from the Zhongyuan Property Agent.
The sharp fall took place during the fourth quarter and was due to low sales volume. The volume of second hand residential buildings hit 661,800 square meters, with the price falling by 10 percent as compared with the same period in 2006.
The average price of second hand properties hit 12,729 yuan (US$1,750) in 2007, or a year-on-year increase of 51 percent, still a large number due to the sharp rise in the first six months.
“There were really great ups and downs in the market, that’s very rare,” commented Liang Wenhua.
The land is unbeaten?
Rising property prices are attributed to a limited land supply; this is commonly understood among real estate industry insiders in Shenzhen. “In the long term, land supplies in Shenzhen will be very limited,” said Feng Yongheng, a research fellow with Midland Realty (Holdings) Limited. He believed that land cost is the key factor toward deciding housing prices in Shenzhen. Land prices will rise as the land supply for housing decreases, and then the house prices will continue to go up.
In 2006, the Shenzhen municipal government leased land consisting of 906,000 square meters for commercial and residential buildings. But in 2007 the government has leased only 409,000 square meters, according to the latest statistics.
The government has tightened up land supplies and held land sales via public auction, causing a shortage in land supplies. Property prices rose. According to an official document issued in 2006, the land supply for residential houses construction would decrease year by year after 2007.
Unexpectedly, many managers of house agencies did not agree with such a statement. “Many land auctions have failed recently and one reason for this is due to government controlled housing policies that keep purchasing costs artificially low. At the same time real estate developers still need to turn a profit on the market,” said Liang, holding the view that the overheated property market had led to increasing land prices.
“Demand dictates price,” said Zou Jianmin, a real estate investor. He did not agree that land supply was a key factor in deciding housing prices.
In Shenzhen, six land auctions failed last December and an unsuccessful auction also took place in 2006.
“Developers have their bottom lines; building houses does not always make money,” said Wang Shuquan, General Manger of the Midland Realty (Holdings) Limited. He stressed economic laws, and he maintained that housing prices would decline.
JPMorgan and Wells Fargo hit
Further evidence of the deteriorating state of the US economy emerged yesterday as both JPMorgan Chase and Wells Fargo reported that fourth-quarter earnings had been hit by higher provisions for loan losses in consumer-related businesses.
The results from the two big banks followed the disclosure by Citigroup on Tuesday that credit costs in its US consumer business had risen by $4.1bn as more borrowers, hit by falling house prices, struggled to keep up with payments on credit card, auto and home equity loans.
JPMorgan once again avoided the huge writedowns on subprime mortgage-related securities that have plagued its rivals.
However, provisions in its retail financial services division rose to $1.1bn from $262m last year. In the credit card unit, JPMorgan set aside $1.8bn, up $507m, or 40 per cent, from last year.
Overall, the bank said it had earned $3bn, or 86 cents per share, in the quarter, down 34 per cent from $4.53bn, or $1.26 per share, last year. Last year's fourth quarter included a $622m gain from the sale of corporate trust businesses.
JPMorgan said it had a $1.3bn writedown, net of hedges, on subprime mortgage-related holdings. That figure compared with an $18.1bn writedown ann-ounced by Citigroup on Tuesday and a writedown of $15bn or more expected from Merrill Lynch today.
Unlike Citi and Merrill, JPMorgan was never a significant creator of collateralised debt obligations backed by residential mortgages - a decision that is now paying off for the bank.
Shares in JPMorgan rose 5.8 per cent to $41.43 yesterday as investors cheered the relatively light subprime hit. They may also have been reacting to fresh comments from Jamie Dimon, chief executive, suggesting he would like to use the weakness in financial shares to make acquisitions at bargain prices.
"In terms of either buying assets or buying companies, we're very open-minded," Mr Dimon said. "This environment doesn't change that at all." JPMorgan is considered a potential buyer of several big regional banks.
Meanwhile, Wells Fargo reported its lowest quarterly profit in six years as earnings fell 38 per cent to $1.36bn, or 41 cents per share, from $2.18bn, or 64 cents per share, last year.
Wells set aside $1.4bn to cover anticipated loan losses. Loans more than 90 days past due had risen to $6.39bn at the end of the year.
The results from the two big banks followed the disclosure by Citigroup on Tuesday that credit costs in its US consumer business had risen by $4.1bn as more borrowers, hit by falling house prices, struggled to keep up with payments on credit card, auto and home equity loans.
JPMorgan once again avoided the huge writedowns on subprime mortgage-related securities that have plagued its rivals.
However, provisions in its retail financial services division rose to $1.1bn from $262m last year. In the credit card unit, JPMorgan set aside $1.8bn, up $507m, or 40 per cent, from last year.
Overall, the bank said it had earned $3bn, or 86 cents per share, in the quarter, down 34 per cent from $4.53bn, or $1.26 per share, last year. Last year's fourth quarter included a $622m gain from the sale of corporate trust businesses.
JPMorgan said it had a $1.3bn writedown, net of hedges, on subprime mortgage-related holdings. That figure compared with an $18.1bn writedown ann-ounced by Citigroup on Tuesday and a writedown of $15bn or more expected from Merrill Lynch today.
Unlike Citi and Merrill, JPMorgan was never a significant creator of collateralised debt obligations backed by residential mortgages - a decision that is now paying off for the bank.
Shares in JPMorgan rose 5.8 per cent to $41.43 yesterday as investors cheered the relatively light subprime hit. They may also have been reacting to fresh comments from Jamie Dimon, chief executive, suggesting he would like to use the weakness in financial shares to make acquisitions at bargain prices.
"In terms of either buying assets or buying companies, we're very open-minded," Mr Dimon said. "This environment doesn't change that at all." JPMorgan is considered a potential buyer of several big regional banks.
Meanwhile, Wells Fargo reported its lowest quarterly profit in six years as earnings fell 38 per cent to $1.36bn, or 41 cents per share, from $2.18bn, or 64 cents per share, last year.
Wells set aside $1.4bn to cover anticipated loan losses. Loans more than 90 days past due had risen to $6.39bn at the end of the year.
Housing Boom's Excess
NEW YORK (AP) — The bill for America's excessive borrowing during the housing boom has arrived, and more people are having trouble paying it.
JPMorgan Chase & Co. and Wells Fargo & Co., two of the nation's largest banks, on Wednesday joined a growing chorus warning that the subprime mortgage mess is just the start of a sweeping lending crisis. And some fear that consumers falling behind on all kinds of loan payments could tip the economy's scale toward recession.
Strapped consumers are having a tough time making payments on credit cards, home-equity loans, and even for their cars. This has caused three of the top five U.S. commercial banks that have already reported damaging fourth-quarter results to set aside some $12.5 billion to cover future loan losses — and that number will likely grow as the year wears on.
Problems in the subprime mortgage market are rapidly spilling over into other areas of the economy. No matter what the experts call it — a recession, slowdown or even the makings of a depression — it's clear banks are under mounting pressure to be more cautious about lending.
"If consumption growth stagnates, the odds of a recession are incredibly high," said Andrew Bernard, director of the Center for International Business at the Tuck School of Business at Dartmouth. "All the pieces of household financial health are starting to be shakier, especially at the low end."
He and others are paying close attention to what top U.S. banks say about their customers' payment habits. Many view this as an early indicator about where the overall economy is headed, but there are other signs that are troublesome.
The stock market has had its worst start to the year in three decades, with investors rattled by signs from the Labor Department that unemployment is on the rise and retail sales are on the decline. Further, the Commerce Department reported Wednesday that higher costs for energy and food in 2007 pushed inflation for the year up by the largest amount in 17 years.
There was no sign of a turnaround in the last few months of the year. The Federal Reserve reported that the economy grew at a slower pace in late November and December as credit problems intensified and consumers tightened their spending.
To some, it appears that the Fed came to its rate-cutting decision in August a bit too late. Others point to the falling dollar and surging oil prices, factors that usually prevent the central bank from easing its monetary policy.
While debate persists about the Fed's timing and the extent of the slowdown, bank executives — who have scrambled to prepare for another tumble in home prices and higher unemployment in 2008, feel academic definitions are beside the point.
"We're not predicting a recession — it's not our job — but we're prepared," JPMorgan Chase CEO Jamie Dimon told analysts after the nation's third-largest bank wrote down $1.3 billion and said profit dropped 34 percent.
His financial institution didn't do all that bad. Rival Citigroup Inc. fared the worst during the fourth quarter, losing $9.83 billion after writing down the value of its portfolio of mortgage and mortgage-backed products by $18.1 billion.
Wells Fargo, a more traditional bank that avoided last year's trading woes, saw its profit fall 38 percent due to troubles with home equity loan and mortgage defaults.
JPMorgan is girding for home prices to decline further in 2008 by 5 percent to 10 percent; Citigroup's estimate of 7 percent falls within that range, too.
"The banks are the infrastructure for everything, the heartbeat of the market," said Chris Johnson, president of Johnson Research Group. "They need to be fixed before the market, and economy, can move forward with confidence. They need to get all their dirty laundry out there."
Banks and card companies like American Express Co. — which warned last week that it would add $440 million to loan loss provisions — said in the regions where home prices are declining, card default rates are rising faster. The same goes for auto loans, subprime mortgages and home equity loans in these areas, which include Florida, Michigan and California.
A big reason for the rise in credit card default rates is that they are returning to more usual levels following a change in bankruptcy law that sent rates lower for a time. But the fact that more losses are being seen in the weaker parts of the country shows the increase is economically driven as well.
Analysts believe this means one thing: Consumers will be the ones paying for years of lax lending standards by U.S. financial institutions. Many will become more restrictive about who gets credit in a bid to stem future losses — and that could curb consumer spending, which accounts for more than two-thirds of the economy.
"We've pushed the envelope," Johnson said. "Along with the joy of a market that goes as high as ours is the agony of when it starts to correct itself."
JPMorgan Chase & Co. and Wells Fargo & Co., two of the nation's largest banks, on Wednesday joined a growing chorus warning that the subprime mortgage mess is just the start of a sweeping lending crisis. And some fear that consumers falling behind on all kinds of loan payments could tip the economy's scale toward recession.
Strapped consumers are having a tough time making payments on credit cards, home-equity loans, and even for their cars. This has caused three of the top five U.S. commercial banks that have already reported damaging fourth-quarter results to set aside some $12.5 billion to cover future loan losses — and that number will likely grow as the year wears on.
Problems in the subprime mortgage market are rapidly spilling over into other areas of the economy. No matter what the experts call it — a recession, slowdown or even the makings of a depression — it's clear banks are under mounting pressure to be more cautious about lending.
"If consumption growth stagnates, the odds of a recession are incredibly high," said Andrew Bernard, director of the Center for International Business at the Tuck School of Business at Dartmouth. "All the pieces of household financial health are starting to be shakier, especially at the low end."
He and others are paying close attention to what top U.S. banks say about their customers' payment habits. Many view this as an early indicator about where the overall economy is headed, but there are other signs that are troublesome.
The stock market has had its worst start to the year in three decades, with investors rattled by signs from the Labor Department that unemployment is on the rise and retail sales are on the decline. Further, the Commerce Department reported Wednesday that higher costs for energy and food in 2007 pushed inflation for the year up by the largest amount in 17 years.
There was no sign of a turnaround in the last few months of the year. The Federal Reserve reported that the economy grew at a slower pace in late November and December as credit problems intensified and consumers tightened their spending.
To some, it appears that the Fed came to its rate-cutting decision in August a bit too late. Others point to the falling dollar and surging oil prices, factors that usually prevent the central bank from easing its monetary policy.
While debate persists about the Fed's timing and the extent of the slowdown, bank executives — who have scrambled to prepare for another tumble in home prices and higher unemployment in 2008, feel academic definitions are beside the point.
"We're not predicting a recession — it's not our job — but we're prepared," JPMorgan Chase CEO Jamie Dimon told analysts after the nation's third-largest bank wrote down $1.3 billion and said profit dropped 34 percent.
His financial institution didn't do all that bad. Rival Citigroup Inc. fared the worst during the fourth quarter, losing $9.83 billion after writing down the value of its portfolio of mortgage and mortgage-backed products by $18.1 billion.
Wells Fargo, a more traditional bank that avoided last year's trading woes, saw its profit fall 38 percent due to troubles with home equity loan and mortgage defaults.
JPMorgan is girding for home prices to decline further in 2008 by 5 percent to 10 percent; Citigroup's estimate of 7 percent falls within that range, too.
"The banks are the infrastructure for everything, the heartbeat of the market," said Chris Johnson, president of Johnson Research Group. "They need to be fixed before the market, and economy, can move forward with confidence. They need to get all their dirty laundry out there."
Banks and card companies like American Express Co. — which warned last week that it would add $440 million to loan loss provisions — said in the regions where home prices are declining, card default rates are rising faster. The same goes for auto loans, subprime mortgages and home equity loans in these areas, which include Florida, Michigan and California.
A big reason for the rise in credit card default rates is that they are returning to more usual levels following a change in bankruptcy law that sent rates lower for a time. But the fact that more losses are being seen in the weaker parts of the country shows the increase is economically driven as well.
Analysts believe this means one thing: Consumers will be the ones paying for years of lax lending standards by U.S. financial institutions. Many will become more restrictive about who gets credit in a bid to stem future losses — and that could curb consumer spending, which accounts for more than two-thirds of the economy.
"We've pushed the envelope," Johnson said. "Along with the joy of a market that goes as high as ours is the agony of when it starts to correct itself."
Cap on Payday Loans
CONCORD, N.H. -
New Hampshire's House has approved a 36 percent cap on payday loans, which will likely force payday loan companies out of the state if the Senate and governor agree.
New Hampshire and Rhode Island are the only New England states whose laws make payday loans profitable.
New Hampshire has no limit on payday interest rates. Rhode Island caps the finance charge at $15 per $100 two-week loan. That works out to a 391 percent annual interest rate.
New Hampshire's banking commissioner and payday lenders had told lawmakers that the companies would close if interest rates were capped. The plan approved on Wednesday caps the annual rate at 36 percent on payday advances and vehicle title loans.
Ken Compton, chief executive officer of Advance America, said the company would continue to work with lawmakers to craft reasonable regulations, but if a 36 percent interest cap is enacted, the company will close in New Hampshire.
The cap would translate into $2.96 in interest per $100 borrowed on a 30 day title loan and $1.38 per $100 - about 10 cents a day - on a $100 payday loan for 14 days.
Compton said $1.38 per $100 borrowed wouldn't be enough to cover staffing, rent, electricity and other basic business expenses.
Advance America charges consumers $20 per $100 in cash advanced, up to a maximum $500 loan in New Hampshire.
Critics complain that a $100, two-week loan plus the $20 charge works out to a 521 percent annual interest rate.
Cap supporters - including New Hampshire Legal Assistance and the state's welfare administrators - said consumers get caught in a "debt trap" when they can't repay the loans and must roll them over. They said consumers could instead turn to banks, credit unions, churches, friends and town welfare officers for help.
"It's not our responsibility what (payday loan companies) do," Greenland Democrat Michael Marsh said of their inability to make ends meet under a cap. Marsh said the companies' "real business is trapping the borrower."
Payday lenders offer quick cash advances for a fee, often secured by a postdated personal check from the borrower. Title lenders offer cash loans based on the value of the borrower's car. Customers are drawn to the lenders because, unlike banks, they don't run credit checks.
"Things happen," said Thomas Loll, D-Marlborough. "If you need a new battery, instead of groveling by going to mommy and daddy to ask for 100 bucks, these loans are out there."
Bow Democrat Stephen DeStefano said 92 percent of the loans are paid back. He said of the 160,000 loans issued by the lenders in New Hampshire last year, only six borrowers filed complaints.
Borrowers who don't repay title lenders lose their cars. Payday lenders may work out a longer payment plan to attempt to get their money back. Critics say some borrow increasing amounts, winding up deeper in debt.
"It's too easy for people to borrow and too hard for them to get out from under," said David Kidder, R-New London, who supported the cap.
The House voted 207-124 to send the bill to the Senate, which also is considering legislation to cap the rate. Sen. David Gottesman, who is sponsoring a similar bill, said he's very optimistic the Senate will approve the rate cap.
Gov. John Lynch said rates of 500-600 percent are unacceptable, but the state has to be sure people who need short-term loans have access to the cash.
The House voted down a compromise that caps fees paid by consumers at $15 per $100 borrowed. It also would have required a next day cooling off period between loans and a two-day cooling off after the fifth consecutive loan. Payday lenders would have had to offer an extended payment plan without additional fees if a customer couldn't repay the loan on time.
Compromise supporters won a small victory by preventing the House from killing the bill. Instead, the House postponed further action on that bill and a companion bill that had proposed imposing similar restrictions on title loans.
The title loan bill would have capped fees on the loans at $22 per $100 for 30 days. It also required a signed affidavit that the consumer could repay the loan. The lender would have had to include information on how the car would be repossessed for nonpayment. The bill also limited loan renewals and bans automatic renewals.
New Hampshire repealed an interest cap on small loans in 1999 after lenders complained to lawmakers that the credit card industry had moved into the market. Sen. Lou D'Allesandro, the repeal bill's sponsor, said the law was changed to ensure people who had problems getting credit could get a loan.
New Hampshire's House has approved a 36 percent cap on payday loans, which will likely force payday loan companies out of the state if the Senate and governor agree.
New Hampshire and Rhode Island are the only New England states whose laws make payday loans profitable.
New Hampshire has no limit on payday interest rates. Rhode Island caps the finance charge at $15 per $100 two-week loan. That works out to a 391 percent annual interest rate.
New Hampshire's banking commissioner and payday lenders had told lawmakers that the companies would close if interest rates were capped. The plan approved on Wednesday caps the annual rate at 36 percent on payday advances and vehicle title loans.
Ken Compton, chief executive officer of Advance America, said the company would continue to work with lawmakers to craft reasonable regulations, but if a 36 percent interest cap is enacted, the company will close in New Hampshire.
The cap would translate into $2.96 in interest per $100 borrowed on a 30 day title loan and $1.38 per $100 - about 10 cents a day - on a $100 payday loan for 14 days.
Compton said $1.38 per $100 borrowed wouldn't be enough to cover staffing, rent, electricity and other basic business expenses.
Advance America charges consumers $20 per $100 in cash advanced, up to a maximum $500 loan in New Hampshire.
Critics complain that a $100, two-week loan plus the $20 charge works out to a 521 percent annual interest rate.
Cap supporters - including New Hampshire Legal Assistance and the state's welfare administrators - said consumers get caught in a "debt trap" when they can't repay the loans and must roll them over. They said consumers could instead turn to banks, credit unions, churches, friends and town welfare officers for help.
"It's not our responsibility what (payday loan companies) do," Greenland Democrat Michael Marsh said of their inability to make ends meet under a cap. Marsh said the companies' "real business is trapping the borrower."
Payday lenders offer quick cash advances for a fee, often secured by a postdated personal check from the borrower. Title lenders offer cash loans based on the value of the borrower's car. Customers are drawn to the lenders because, unlike banks, they don't run credit checks.
"Things happen," said Thomas Loll, D-Marlborough. "If you need a new battery, instead of groveling by going to mommy and daddy to ask for 100 bucks, these loans are out there."
Bow Democrat Stephen DeStefano said 92 percent of the loans are paid back. He said of the 160,000 loans issued by the lenders in New Hampshire last year, only six borrowers filed complaints.
Borrowers who don't repay title lenders lose their cars. Payday lenders may work out a longer payment plan to attempt to get their money back. Critics say some borrow increasing amounts, winding up deeper in debt.
"It's too easy for people to borrow and too hard for them to get out from under," said David Kidder, R-New London, who supported the cap.
The House voted 207-124 to send the bill to the Senate, which also is considering legislation to cap the rate. Sen. David Gottesman, who is sponsoring a similar bill, said he's very optimistic the Senate will approve the rate cap.
Gov. John Lynch said rates of 500-600 percent are unacceptable, but the state has to be sure people who need short-term loans have access to the cash.
The House voted down a compromise that caps fees paid by consumers at $15 per $100 borrowed. It also would have required a next day cooling off period between loans and a two-day cooling off after the fifth consecutive loan. Payday lenders would have had to offer an extended payment plan without additional fees if a customer couldn't repay the loan on time.
Compromise supporters won a small victory by preventing the House from killing the bill. Instead, the House postponed further action on that bill and a companion bill that had proposed imposing similar restrictions on title loans.
The title loan bill would have capped fees on the loans at $22 per $100 for 30 days. It also required a signed affidavit that the consumer could repay the loan. The lender would have had to include information on how the car would be repossessed for nonpayment. The bill also limited loan renewals and bans automatic renewals.
New Hampshire repealed an interest cap on small loans in 1999 after lenders complained to lawmakers that the credit card industry had moved into the market. Sen. Lou D'Allesandro, the repeal bill's sponsor, said the law was changed to ensure people who had problems getting credit could get a loan.
New Hampshire House
Payday and title lenders would face a sharp crackdown under a bill passed by the New Hampshire House yesterday. Annual interest rates on the loans, which now can top 500 percent, would be capped at 36 percent under the proposed law. Payday lenders say the 36 percent rate would push the burgeoning industry out of the state and called it an "effective ban."
A similar bill has wide support in the Senate, with 14 out of 24 senators signed on as co-sponsors. Gov. John Lynch said yesterday that he thinks 500 percent annual interest rates "are unacceptable" but that he hoped to strike a balance that doesn't "ignore the need that's out there."
"I think we have to help people and protect people from going through a cycle of poverty where they're continuing to get more debt . . . because of refinancing these payday loans, which is what's been happening," Lynch said. "On the other hand, there is also a need."
Title lenders offer cash with the borrower's car used as collateral. Payday loans are small cash advances secured by showing a pay stub and sometimes relying on a postdated check as security. People ineligible for traditional loans are drawn to the lenders because they don't rely on credit checks.
Arguments about the bill, which cleared the House 207-124, pitted consumer choice against consumer protection. Advocates for preserving the loans argued that they are one option consumers should have and that, in some cases, the interest and penalties are less expensive than alternatives such as bouncing a check or racking up credit-card debt.
"New Hampshire consumers have the right to make their own credit choices," said Rep. Steve DeStefano, a Bow Democrat who advocated an amended version of the bill.
While payday loans are billed as short-term, small cash transactions that help tide people over to the next paycheck, critics say that the average borrower gets sucked into a cycle and takes out eight loans a year, according to industry statistics. "They pay the loan at 12:05 and at 12:08, they take out another one," said Banking Commissioner Peter Hildreth, who supported the bill.
New Hampshire and Rhode Island are the only states in New England where payday lending is not restricted. The industry has been on the rise in New Hampshire since 1999, when the Legislature removed a 24 percent cap on interest rates. There are about 50 payday loan storefronts across the state, and they made 149,000 loans in 2006.
Majority Leader Mary Jane Wallner, a Concord Democrat, said that the bill "eliminate triple-digit usury interest rates" and noted that the bill's backers include the attorney general's office.
"It's too easy for people to borrow and too hard for them to get out from under," said Rep. David Kidder, a New London Republican. He said that "easy borrowing" is what led to the nation's mortgage crisis and violates what he called "Republican ideals of thriftiness."
Not everyone agreed with him. Rep. Marshall Quandt said that on the 160,000 payday loans last year, only 12 complaints were filed. He said that constituents have a right to the payday loan option and are smart enough to know whom to call if they have a problem.
A similar bill has wide support in the Senate, with 14 out of 24 senators signed on as co-sponsors. Gov. John Lynch said yesterday that he thinks 500 percent annual interest rates "are unacceptable" but that he hoped to strike a balance that doesn't "ignore the need that's out there."
"I think we have to help people and protect people from going through a cycle of poverty where they're continuing to get more debt . . . because of refinancing these payday loans, which is what's been happening," Lynch said. "On the other hand, there is also a need."
Title lenders offer cash with the borrower's car used as collateral. Payday loans are small cash advances secured by showing a pay stub and sometimes relying on a postdated check as security. People ineligible for traditional loans are drawn to the lenders because they don't rely on credit checks.
Arguments about the bill, which cleared the House 207-124, pitted consumer choice against consumer protection. Advocates for preserving the loans argued that they are one option consumers should have and that, in some cases, the interest and penalties are less expensive than alternatives such as bouncing a check or racking up credit-card debt.
"New Hampshire consumers have the right to make their own credit choices," said Rep. Steve DeStefano, a Bow Democrat who advocated an amended version of the bill.
While payday loans are billed as short-term, small cash transactions that help tide people over to the next paycheck, critics say that the average borrower gets sucked into a cycle and takes out eight loans a year, according to industry statistics. "They pay the loan at 12:05 and at 12:08, they take out another one," said Banking Commissioner Peter Hildreth, who supported the bill.
New Hampshire and Rhode Island are the only states in New England where payday lending is not restricted. The industry has been on the rise in New Hampshire since 1999, when the Legislature removed a 24 percent cap on interest rates. There are about 50 payday loan storefronts across the state, and they made 149,000 loans in 2006.
Majority Leader Mary Jane Wallner, a Concord Democrat, said that the bill "eliminate triple-digit usury interest rates" and noted that the bill's backers include the attorney general's office.
"It's too easy for people to borrow and too hard for them to get out from under," said Rep. David Kidder, a New London Republican. He said that "easy borrowing" is what led to the nation's mortgage crisis and violates what he called "Republican ideals of thriftiness."
Not everyone agreed with him. Rep. Marshall Quandt said that on the 160,000 payday loans last year, only 12 complaints were filed. He said that constituents have a right to the payday loan option and are smart enough to know whom to call if they have a problem.
Thursday, January 17, 2008
Fixed-rate home loans
NEARLY one in four borrowers are choosing a fixed-interest home loan in the face of rates rising to their highest in almost a decade - but experts warn they may not be getting the best deal.
Official lending figures for November show borrowers defied the Reserve Bank's latest official interest rate rise to take out 65,831 home loans, a 4 per cent increase on the previous month. Of these, 24 per cent were fixed for a period of two years or longer, nearly double the average level of the past decade and a half.
But experts say a significant rise in the fixed rates charged by the big banks since the end of last year means borrowers should think twice before fixing their loan.
A senior financial analyst at the research house Cannex, Harry Senlitonga, said the big five banks now charged an average premium of 0.4 percentage points above their average discounted variable rate for a three-year fixed loan. This meant interest rates would have to rise twice before borrowers saved money.
"The risk is when interest rates go down, you end up paying more," he said.
Mr Senlitonga said fixed loans had other drawbacks. They were less likely to have unlimited redraw facilities, allowing extra payments to be made, or offset accounts, which allow borrowers to use their savings to reduce the size of their loan.
Borrowers on fixed loans also faced an "interest adjustment" penalty if they chose to quit the loan before the fixed period expired.
However, Mr Senlitonga predicted a continued swing towards fixed loans after the big banks decided recently to raise their standard variable rates independently of the Reserve Bank.
"It is an extra cost for borrowers, but they're willing to pay for life insurance and car insurance. This is insurance on their mortgage."
A survey by Westpac shows consumer confidence has been shaken by the banks' unofficial rate rises. Confidence, exacerbated by rising petrol prices and continued turbulence on the sharemarket, fell 8.3 per cent this month to below its long-run average.
The general manager of the consumer group Infochoice, Denis Orrock, said some people would choose a fixed-rate loan, even though they could end up paying more.
"A lot of people are very nervous. They just want to know what their repayments are over the next three years regardless," he said.
The ideal time to lock in would have been before November. "Unfortunately we saw the fixed rates all move up significantly just after the Christmas and new year period," he said.
The average interest rate on a three-year fixed loan from the five big banks is 8.42 per cent.
By contrast, the average variable rate of the main banks is 8.69 per cent, although most borrowers should be able to get a discounted rate of about 8 per cent.
Of the big banks, NAB and Westpac offer the cheapest three-year fixed rate, 8.29 per cent, while the Commonwealth Bank has the highest rate at 8.64 per cent.
Official lending figures for November show borrowers defied the Reserve Bank's latest official interest rate rise to take out 65,831 home loans, a 4 per cent increase on the previous month. Of these, 24 per cent were fixed for a period of two years or longer, nearly double the average level of the past decade and a half.
But experts say a significant rise in the fixed rates charged by the big banks since the end of last year means borrowers should think twice before fixing their loan.
A senior financial analyst at the research house Cannex, Harry Senlitonga, said the big five banks now charged an average premium of 0.4 percentage points above their average discounted variable rate for a three-year fixed loan. This meant interest rates would have to rise twice before borrowers saved money.
"The risk is when interest rates go down, you end up paying more," he said.
Mr Senlitonga said fixed loans had other drawbacks. They were less likely to have unlimited redraw facilities, allowing extra payments to be made, or offset accounts, which allow borrowers to use their savings to reduce the size of their loan.
Borrowers on fixed loans also faced an "interest adjustment" penalty if they chose to quit the loan before the fixed period expired.
However, Mr Senlitonga predicted a continued swing towards fixed loans after the big banks decided recently to raise their standard variable rates independently of the Reserve Bank.
"It is an extra cost for borrowers, but they're willing to pay for life insurance and car insurance. This is insurance on their mortgage."
A survey by Westpac shows consumer confidence has been shaken by the banks' unofficial rate rises. Confidence, exacerbated by rising petrol prices and continued turbulence on the sharemarket, fell 8.3 per cent this month to below its long-run average.
The general manager of the consumer group Infochoice, Denis Orrock, said some people would choose a fixed-rate loan, even though they could end up paying more.
"A lot of people are very nervous. They just want to know what their repayments are over the next three years regardless," he said.
The ideal time to lock in would have been before November. "Unfortunately we saw the fixed rates all move up significantly just after the Christmas and new year period," he said.
The average interest rate on a three-year fixed loan from the five big banks is 8.42 per cent.
By contrast, the average variable rate of the main banks is 8.69 per cent, although most borrowers should be able to get a discounted rate of about 8 per cent.
Of the big banks, NAB and Westpac offer the cheapest three-year fixed rate, 8.29 per cent, while the Commonwealth Bank has the highest rate at 8.64 per cent.
N.H. House adopts 36% interest
CONCORD, N.H. (AP) - New Hampshire's House has approved a 36% cap on payday loans which will force payday loan companies out of the state if the Senate and governor agree.
New Hampshire and Rhode Island are the only New England states whose laws make payday loans profitable.
New Hampshire's banking commissioner and payday lenders had told lawmakers that the companies would close if interest rates were capped. The plan approved on Wednesday caps the annual rate at 36% on payday advances and vehicle title loans.
Critics said a cap would leave consumers few other choices to get cash to tide them over.
But cap supporters - including New Hampshire Legal Assistance and the state's welfare administrators - said consumers get caught in a "debt trap" when they can't repay the loans and must roll them over. They said consumers could instead turn to banks, credit unions, churches, friends and town welfare officers for help.
Payday lenders offer quick cash advances for a fee, often secured by a postdated personal check from the borrower. Title lenders offer cash loans based on the value of the borrower's car.
New Hampshire and Rhode Island are the only New England states whose laws make payday loans profitable.
New Hampshire's banking commissioner and payday lenders had told lawmakers that the companies would close if interest rates were capped. The plan approved on Wednesday caps the annual rate at 36% on payday advances and vehicle title loans.
Critics said a cap would leave consumers few other choices to get cash to tide them over.
But cap supporters - including New Hampshire Legal Assistance and the state's welfare administrators - said consumers get caught in a "debt trap" when they can't repay the loans and must roll them over. They said consumers could instead turn to banks, credit unions, churches, friends and town welfare officers for help.
Payday lenders offer quick cash advances for a fee, often secured by a postdated personal check from the borrower. Title lenders offer cash loans based on the value of the borrower's car.
House prices dropping
THE number of chartered surveyors reporting house price falls in Wales has reached levels last seen during the early 1990s house price crash, figures show today.
According to new figures, 71% said prices had fallen during December, while just 1% said prices had risen.
The alarming sign led to demands for a cut in interest rates to avoid a yet more damaging slump.
House prices dropped in all regions of Wales during the month, according to figures from the Royal Institution of Chartered Surveyors.
Andrew Davies, of Morgan and Davies estate agents in Lampeter, said the statistics showed “a very disappointing last quarter result which we hope will improve in the new year.
“We do need a further interest rate reduction to convince the market that we are not heading for a major correction in valuations.”
However, borrowers who waited until after the recent interest rate cuts before securing a fixed rate mortgage are still worse off as the average cost of a mortgage continues to rise, further research shows today.
The average interest rate charged on a fixed rate mortgage across the whole market was 7.30% in early December before the Bank of England reduced interest rates by 0.25% to 5.5%.
But since the cut, the average fixed rate has increased to 7.31%, leaving the majority of people taking out a fixed rate loan forced to pay more, according to moneysupermarket.com
Meanwhile, market analysts claim today that mortgage lenders would continue to rely on wholesale funding and securitisation to raise money despite the recent credit crunch, and despite such funding models being questioned after the collapse of Northern Rock.
Fixed-rate mortgages, unlike standard variable rates and tracker deals, are not based on the Bank of England base rate but on swap rates.
It would still be expected, however, that fixed-rate deals would come down to reflect a fall in the official cost of borrowing but this has not been the case, though there are some good deals around for borrowers with very good credit histories.
Louise Cuming, head of mortgages at moneysupermarket.com, said, “Our data shows, on average, unless you are a low-risk borrower, a new fixed-rate mortgage will cost you more.
“I shudder to think what would have happened to the average fixed-rate mortgage if the Bank of England hadn’t cut rates.
“Many homeowners who waited until after the interest rate cut to get a fixed-rate deal will be worse off, much to their annoyance.”
But there is better news for people thinking of taking out a loan, with evidence that the rates charged on these are beginning to fall after rising during most of 2007.
Financial information group Moneyfacts.co.uk said that during the first half of January five lenders, including Barclays, Alliance & Leicester and Britannia Building Society, had reduced their loan rates by up to 3%.
Esther James, personal finance analyst at the group, said, “For most of 2007 we reported rising loan rates, with the demise of sub 6% personal loans and the market finally settling at the end of the year with the best deals around 6.5% to 7%. But as 2008 starts, there is good news for borrowers as rates begin to fall.
“It’s the season of debt consolidation, so perhaps these lenders are looking to maximise their opportunities within this limited window.
“The drop could be a seasonal fluctuation or a limited marketing drive rather than the start of a more widespread trend, but only time will tell.”
There is also evidence today that retired homeowners increasingly sought to cash in on rising house prices to supplement their income during 2007 with figures showing that demand for equity release continued to grow.
Around £1.4bn was released during the year, 24% more than in 2006, according to independent adviser Key Retirement Solutions.
According to new figures, 71% said prices had fallen during December, while just 1% said prices had risen.
The alarming sign led to demands for a cut in interest rates to avoid a yet more damaging slump.
House prices dropped in all regions of Wales during the month, according to figures from the Royal Institution of Chartered Surveyors.
Andrew Davies, of Morgan and Davies estate agents in Lampeter, said the statistics showed “a very disappointing last quarter result which we hope will improve in the new year.
“We do need a further interest rate reduction to convince the market that we are not heading for a major correction in valuations.”
However, borrowers who waited until after the recent interest rate cuts before securing a fixed rate mortgage are still worse off as the average cost of a mortgage continues to rise, further research shows today.
The average interest rate charged on a fixed rate mortgage across the whole market was 7.30% in early December before the Bank of England reduced interest rates by 0.25% to 5.5%.
But since the cut, the average fixed rate has increased to 7.31%, leaving the majority of people taking out a fixed rate loan forced to pay more, according to moneysupermarket.com
Meanwhile, market analysts claim today that mortgage lenders would continue to rely on wholesale funding and securitisation to raise money despite the recent credit crunch, and despite such funding models being questioned after the collapse of Northern Rock.
Fixed-rate mortgages, unlike standard variable rates and tracker deals, are not based on the Bank of England base rate but on swap rates.
It would still be expected, however, that fixed-rate deals would come down to reflect a fall in the official cost of borrowing but this has not been the case, though there are some good deals around for borrowers with very good credit histories.
Louise Cuming, head of mortgages at moneysupermarket.com, said, “Our data shows, on average, unless you are a low-risk borrower, a new fixed-rate mortgage will cost you more.
“I shudder to think what would have happened to the average fixed-rate mortgage if the Bank of England hadn’t cut rates.
“Many homeowners who waited until after the interest rate cut to get a fixed-rate deal will be worse off, much to their annoyance.”
But there is better news for people thinking of taking out a loan, with evidence that the rates charged on these are beginning to fall after rising during most of 2007.
Financial information group Moneyfacts.co.uk said that during the first half of January five lenders, including Barclays, Alliance & Leicester and Britannia Building Society, had reduced their loan rates by up to 3%.
Esther James, personal finance analyst at the group, said, “For most of 2007 we reported rising loan rates, with the demise of sub 6% personal loans and the market finally settling at the end of the year with the best deals around 6.5% to 7%. But as 2008 starts, there is good news for borrowers as rates begin to fall.
“It’s the season of debt consolidation, so perhaps these lenders are looking to maximise their opportunities within this limited window.
“The drop could be a seasonal fluctuation or a limited marketing drive rather than the start of a more widespread trend, but only time will tell.”
There is also evidence today that retired homeowners increasingly sought to cash in on rising house prices to supplement their income during 2007 with figures showing that demand for equity release continued to grow.
Around £1.4bn was released during the year, 24% more than in 2006, according to independent adviser Key Retirement Solutions.
New Zealand House Sales Fall 32%
New Zealand house sales slumped to a seven-year low in December, adding to signs record-high interest rates are slowing the property market and economic growth.
House sales dropped 32 percent to 5,597 homes from 8,245 a year earlier, according to a report today from the Real Estate Institute of New Zealand Inc. e-mailed to Bloomberg News. Sales in December, which is traditionally a slower month for property, were the lowest since January 2001.
Reserve Bank Governor of New Zealand Alan Bollard, who raised the benchmark interest rate four times between March and July last year to a record 8.25 percent, welcomes a slowing property market because housing is the leading driver of consumer spending. As economic growth slows, Bollard may cut interest rates later this year, said economist Shamubeel Eaqub.
``We expect the property market downswing to broaden to a general economic slowdown,'' said Eaqub, economist at Goldman Sachs JBWere Ltd. in Auckland. ``As growth deteriorates and inflation concerns abate we expect interest-rate cuts from mid 2008.''
New Zealand's dollar bought 78.00 U.S. cents at 5:10 p.m. in Wellington from 77.80 cents immediately before the report was released.
Eaqub forecasts the economy will grow just 1.1 percent this year, less than half the 2.6 percent pace forecast by the central bank. He expects rate cuts beginning in June. Only one of 15 other economists surveyed by Bloomberg News agrees.
`Reached a Peak'
``A number of factors are impacting on the housing market, including the increased cost of home finance following rising interest rates,'' Murray Cleland, national president of the Real Estate Institute, said in a statement. ``The market may have reached a peak.''
A two-year fixed-rate home loan had an interest rate of 9.3 percent in November compared with 8.1 percent a year earlier, according to central bank figures.
Still, ``while successive interest-rate increases have impacted on the number of properties sold, prices remain steady,'' said Cleland.
The median house price rose 4.5 percent to NZ$345,000 ($268,000) from a year earlier, the institute said. The annual increase in prices was the weakest since June 2002. Prices fell from a record NZ$352,000 in November.
The median time it took to sell a house stood at 36 days from 29 days a year earlier, and 36 days in November, the institute said.
House sales dropped 32 percent to 5,597 homes from 8,245 a year earlier, according to a report today from the Real Estate Institute of New Zealand Inc. e-mailed to Bloomberg News. Sales in December, which is traditionally a slower month for property, were the lowest since January 2001.
Reserve Bank Governor of New Zealand Alan Bollard, who raised the benchmark interest rate four times between March and July last year to a record 8.25 percent, welcomes a slowing property market because housing is the leading driver of consumer spending. As economic growth slows, Bollard may cut interest rates later this year, said economist Shamubeel Eaqub.
``We expect the property market downswing to broaden to a general economic slowdown,'' said Eaqub, economist at Goldman Sachs JBWere Ltd. in Auckland. ``As growth deteriorates and inflation concerns abate we expect interest-rate cuts from mid 2008.''
New Zealand's dollar bought 78.00 U.S. cents at 5:10 p.m. in Wellington from 77.80 cents immediately before the report was released.
Eaqub forecasts the economy will grow just 1.1 percent this year, less than half the 2.6 percent pace forecast by the central bank. He expects rate cuts beginning in June. Only one of 15 other economists surveyed by Bloomberg News agrees.
`Reached a Peak'
``A number of factors are impacting on the housing market, including the increased cost of home finance following rising interest rates,'' Murray Cleland, national president of the Real Estate Institute, said in a statement. ``The market may have reached a peak.''
A two-year fixed-rate home loan had an interest rate of 9.3 percent in November compared with 8.1 percent a year earlier, according to central bank figures.
Still, ``while successive interest-rate increases have impacted on the number of properties sold, prices remain steady,'' said Cleland.
The median house price rose 4.5 percent to NZ$345,000 ($268,000) from a year earlier, the institute said. The annual increase in prices was the weakest since June 2002. Prices fell from a record NZ$352,000 in November.
The median time it took to sell a house stood at 36 days from 29 days a year earlier, and 36 days in November, the institute said.
Stem foreclosures
The appeal of the O'Malley administration's latest response to the foreclosure crunch in Maryland is also its strength: The plan attacks a variety of problems while offering some relief to homeowners and driving industry participants toward greater accountability. The proposal recognizes that government alone can't stem the tide of foreclosures and that the private sector must take a leading role.
Since the subprime mortgage industry imploded nationally, foreclosure filings in Maryland have steadily increased. A total of 11,017 loans in Maryland were in foreclosure in November, up 8.5 percent from the previous month, according to a report prepared for the state. Prime loan foreclosures grew by 9 percent to 5,574, while foreclosures among subprime loans increased by 8 percent to 5,443.
Gov. Martin O'Malley's package, announced this week, looks ahead, and could most likely benefit tens of thousands of Marylanders whose risky subprime mortgages will reset in two years, leaving them vulnerable to foreclosure. It would establish a $400,000 loan pool to help homeowners pay their mortgages as they try to avert foreclosure, toughen licensing requirements for mortgage brokers and, most novel, require loan servicing companies to document the number of loans in default and efforts to help borrowers.Consumer advocates have charged that lenders aren't modifying loans, despite pledges to help homeowners resolve their problems. A study by Freddie Mac, the corporation founded by Congress to help provide affordable home loans, shows that 60 percent of borrowers who enter foreclosure never talk with their bankers, but 80 percent who do talk to their lenders get relief.
First-time homebuyers would be well advised to enroll in loan counseling programs so they understand the extent of their financial commitments.
The state's proposals offer some legislative remedies, including a bill that would extend the minimum period from 15 to 45 days for notification of foreclosure. The Maryland Bankers Association supports this bill, and it should be approved. A second bill that deserves support would require lenders to verify a borrower's ability to repay an adjustable-rate mortgage.
The governor's package may help Marylanders at risk of foreclosure, but not those who are losing their homes now. The impact in neighborhoods will be significant and should compel state and city officials to begin planning for ways to shore up hard-hit communities. That's the next conversation to have.
Since the subprime mortgage industry imploded nationally, foreclosure filings in Maryland have steadily increased. A total of 11,017 loans in Maryland were in foreclosure in November, up 8.5 percent from the previous month, according to a report prepared for the state. Prime loan foreclosures grew by 9 percent to 5,574, while foreclosures among subprime loans increased by 8 percent to 5,443.
Gov. Martin O'Malley's package, announced this week, looks ahead, and could most likely benefit tens of thousands of Marylanders whose risky subprime mortgages will reset in two years, leaving them vulnerable to foreclosure. It would establish a $400,000 loan pool to help homeowners pay their mortgages as they try to avert foreclosure, toughen licensing requirements for mortgage brokers and, most novel, require loan servicing companies to document the number of loans in default and efforts to help borrowers.Consumer advocates have charged that lenders aren't modifying loans, despite pledges to help homeowners resolve their problems. A study by Freddie Mac, the corporation founded by Congress to help provide affordable home loans, shows that 60 percent of borrowers who enter foreclosure never talk with their bankers, but 80 percent who do talk to their lenders get relief.
First-time homebuyers would be well advised to enroll in loan counseling programs so they understand the extent of their financial commitments.
The state's proposals offer some legislative remedies, including a bill that would extend the minimum period from 15 to 45 days for notification of foreclosure. The Maryland Bankers Association supports this bill, and it should be approved. A second bill that deserves support would require lenders to verify a borrower's ability to repay an adjustable-rate mortgage.
The governor's package may help Marylanders at risk of foreclosure, but not those who are losing their homes now. The impact in neighborhoods will be significant and should compel state and city officials to begin planning for ways to shore up hard-hit communities. That's the next conversation to have.
Home finance rebounds
Two interest rate rises in the second half of last year failed to deter potential home buyers from seeking finance but have discouraged investors from joining the fray, new figures show.
Figures released on Wednesday by the Australian Bureau of Statistics (ABS) showed a solid rebound in housing finance approvals in November, despite interest rates rises earlier that month and August.
Housing finance commitments for owner-occupied housing rose a seasonally adjusted four per cent in November, exceeding market expectations of a one per cent improvement.
By value, housing finance rose half a per cent in the month to $22.295 billion, the ABS said.
But the value of loans to investors fell by 2.8 per cent to $6.739 billion.
"Housing finance approval growth rebounded strongly in November, even with the ... rate hike early in the month fresh in the minds of potential home buyers," ANZ economist Alex Joiner said.
"However, the figures suggest that the recent interest rate hikes have been enough to deter the investor side of the market," Dr Joiner said.
He said the figures also indicated an increasing disparity between the approvals for new and established housing, and showed first home buyers were continuing to struggle to gain a foothold in the housing market.
"It would seem (hikes in) interest rates have hit hardest those that can least afford (them), with the purchase new homes, usually purchased by those entering the market for the first time, falling 7.3 per cent."
And with a raft of recent data, including strong retail sales growth in November and unofficial forecasts pointing to further inflationary pressures, adding to the case for a hike in official cash rates in February, it seems housing sector volatility is set to continue.
" ... we do expect conditions to worsen with affordability continuing to deteriorate throughout 2008 as house prices and interest rates march ever higher," Dr Joiner said.
"Further interest rate rises in the first half of 2008 will see a continuation of what has been a softening trend in approvals."
The current interest rate environment has already seen borrowers shift in droves to fixed interest home loan products, an indication of the level of uncertainty among Australian households.
The proportion of people taking out fixed-term home loans hit an eight-year high of 24 per cent in November, up from 21 per cent in October.
"Home loan borrowers clearly have had enough of rising interest rates, with one in four opting in November for fixed-term rather than variable-rate loans," CommSec chief equities economist Craig James said.
"And the most recent rate hike prompted more borrowers to either shift loans to another lender or seek better terms," he said.
"The upsurge in refinancing activity is a very positive development, indicating that people are keen to get their financial houses in order so that their lifestyles are not adversely affected by rising interest rates."
Figures released on Wednesday by the Australian Bureau of Statistics (ABS) showed a solid rebound in housing finance approvals in November, despite interest rates rises earlier that month and August.
Housing finance commitments for owner-occupied housing rose a seasonally adjusted four per cent in November, exceeding market expectations of a one per cent improvement.
By value, housing finance rose half a per cent in the month to $22.295 billion, the ABS said.
But the value of loans to investors fell by 2.8 per cent to $6.739 billion.
"Housing finance approval growth rebounded strongly in November, even with the ... rate hike early in the month fresh in the minds of potential home buyers," ANZ economist Alex Joiner said.
"However, the figures suggest that the recent interest rate hikes have been enough to deter the investor side of the market," Dr Joiner said.
He said the figures also indicated an increasing disparity between the approvals for new and established housing, and showed first home buyers were continuing to struggle to gain a foothold in the housing market.
"It would seem (hikes in) interest rates have hit hardest those that can least afford (them), with the purchase new homes, usually purchased by those entering the market for the first time, falling 7.3 per cent."
And with a raft of recent data, including strong retail sales growth in November and unofficial forecasts pointing to further inflationary pressures, adding to the case for a hike in official cash rates in February, it seems housing sector volatility is set to continue.
" ... we do expect conditions to worsen with affordability continuing to deteriorate throughout 2008 as house prices and interest rates march ever higher," Dr Joiner said.
"Further interest rate rises in the first half of 2008 will see a continuation of what has been a softening trend in approvals."
The current interest rate environment has already seen borrowers shift in droves to fixed interest home loan products, an indication of the level of uncertainty among Australian households.
The proportion of people taking out fixed-term home loans hit an eight-year high of 24 per cent in November, up from 21 per cent in October.
"Home loan borrowers clearly have had enough of rising interest rates, with one in four opting in November for fixed-term rather than variable-rate loans," CommSec chief equities economist Craig James said.
"And the most recent rate hike prompted more borrowers to either shift loans to another lender or seek better terms," he said.
"The upsurge in refinancing activity is a very positive development, indicating that people are keen to get their financial houses in order so that their lifestyles are not adversely affected by rising interest rates."
"Bridge to HOPE" program
Foreclosures have risen alarmingly across the nation since the housing boom deflated and many borrowers began contending with higher monthly payments as interest rates on adjustable-rate mortgages increased. Many of the troubled borrowers took out subprime loans, which are designed for those with spotty credit histories and come with higher interest rates to offset the risk to lenders."These are really, really tough times," O'Malley said. "We are seeing a national economic downturn, and we are also seeing a real unprecedented crisis when it comes to foreclosures."The administration also announced yesterday the "Bridge to HOPE" program to provide interest-free loans of up to $15,000 so that homeowners can catch up on their mortgage payments and avoid foreclosure. Raymond A. Skinner, secretary of the Department of Housing and Community Development, said his agency has moved $400,000 from its existing budgets to be able to make the loans with state dollars.The HOPE loan program, announced last summer by O'Malley, didn't meet expectations. It would have directed $100 million to assist hundreds of homeowners refinance, but only 14 homeowners have qualified. That program was funded through the bond market, so participants had to meet minimum creditworthiness requirements. The standards for the new, state-funded program will be less restrictive.Many of the governor's legislative and regulatory proposals came from a task force that included industry representatives as well as housing advocates. Administration officials hope that collaborative approach will lead to broad support for the proposals.One legislative initiative would extend the time between the start of foreclosure proceedings and the point at which the house can be auctioned, which is now 15 days. Under O'Malley's plan, lenders would have to wait 90 days from the borrower's default to file a foreclosure action, and another 45 days until the foreclosure sale. Lenders also would be required to send a notice to homeowners of intent to foreclose.Kathleen Murphy, president of the Maryland Bankers Association, said that the foreclosure reforms codify what most "responsible lenders" already do. She said the new notices would prompt borrowers who are late on their payments to call lenders to work out a solution. She said that lenders lose on average $68,000 per foreclosure and that it's in their interest to help borrowers.Another bill would require that lenders screen borrowers for their ability to repay an adjustable loan once the rate resets and verify sources of income. So-called "no doc" loans, which became known as "liar loans," call for very little or no documentation of income, such as tax returns or pay stubs. Many of those loans have gone bad.O'Malley also wants a criminal statute on mortgage fraud and a ban on prepayment penalties for subprime loans, both of which would enhance current laws on the books.Regulatory changes include holding brokers, lenders and servicers to a "duty of good faith and fair dealing," a standard of care. Thomas E. Perez, Maryland's secretary of labor, licensing and regulation, has frequently said that it's harder to get licensed as a barber than as a mortgage broker in Maryland, and one regulatory change would increase the amount of experience needed to obtain a license."You can be assured that person is qualified to give you a loan," Perez said. "That person would be required to look after the public interest rather than just lining his own pockets."
O'Malley unveils home aid
LANDOVER - Gov. Martin O'Malley announced a wide-ranging plan yesterday to confront an unprecedented rise in home foreclosures and combat predatory mortgage schemes, including legislation to slow the minimum time for foreclosure from 15 days to more than four months.The Democratic governor proposed new requirements for brokers and lenders to ensure that borrowers can afford the mortgages, changes to the state's foreclosure process to make it more consumer-friendly and a ban on the conveyance of property in so-called foreclosure rescue schemes.O'Malley's administration also wants Maryland to become the second state in the nation, after California, to require that loan servicing companies file monthly reports about how many loans are in default and to document their efforts to help borrowers by refinancing or modifying the loan terms. State officials said there is a gulf between what servicers say they are doing and the actual assistance they are providing."We have heard time and time again that no one wins in a foreclosure," O'Malley said. "Well, if that is the truth, then we need the information so that we can tell which loan servicers are actually working with homeowners to actually stave off foreclosure."O'Malley outlined his plan at a news conference on the front lawn of Velma Floyd, a Landover resident who almost lost her first home recently in a foreclosure rescue scheme, in which troubled homeowners refinance and are instructed to temporarily sign over the title of their homes. Floyd's broker is under investigation by state regulators and therefore wasn't named."We just want to keep our home, and we want to help others keep their homes," Floyd said.Tens of thousands of subprime mortgages are expected to go into foreclosure in Maryland over the next two years at a cost of $2.7 billion in lost property value and $19 million in property taxes, according to the Joint Economic Committee in Congress. About one-fifth of homeowners with subprime mortgages in the state were late on their payments or in the foreclosure process during the three months through October, according to the Mortgage Bankers Association.
Lenders raise deposits
Two of Britain's biggest mortgage lenders, Alliance & Leicester and Britannia building society, have doubled the minimum deposit demanded from first-time buyers in the latest sign that banks are anticipating a downturn in house prices.
Borrowers will have to pay a minimum deposit of 10% on the price of a property compared with 5% before. Since the typical first-time buyer pays £147,834 for a home, it raises the cost of the deposit from £7,392 to £14,783.
According to the financial data provider Moneyfacts, 11 mortgage lenders have reduced the maximum loan-to-value ratios on some or all of their mortgage range since the beginning of December. This marked an about-turn from the position before the onset of the credit crunch, when lenders pushed loan-to-value ratios to highs of 130%, with 95% the norm.
Trying to find the cash for a deposit is regularly cited as the toughest hurdle for first-time buyers, so the increase in deposits is likely to deter buyers in a property market that is already slowing markedly.
A spokeswoman for Britannia said: "At the end of December, Britannia took the decision to impose a maximum loan-to-value limit on all products of 90%. This is due to the current external environment, with house prices falling over the last few months and the Council of Mortgage Lenders forecast that house prices will continue to fall in 2008."
The credit crunch is blamed for making banks more hesitant about lending. Northern Rock was widely regarded as the most aggressive lender in the 100%-plus loan market, with its Together product a favourite with first-time buyers unable to afford a deposit. Scottish Widows Bank, which specialises in mortgages for graduates, cut its maximum loan-to-value this month from 102% to 95%. Other lenders that have cut maximum loans include Yorkshire building society, Manchester building society and Egg.
David Knight, a mortgage analyst at Moneyfacts.co.uk, said: "With mounting evidence that housing prices are cooling, combined with the increasing number of borrowers facing debt problems, it is not welcome news for those consumers with only a small amount of equity."
He said borrowers who come to the end of a deal but found themselves still borrowing at a high loan-to-value ratio could also find the choice of deals limited, or may be forced to pay a much higher price.
Ray Boulger, of the mortgage broker John Charcol, said he expected big lenders such as Halifax, Abbey and Nationwide to continue to offer 95% loans, though he warned that the interest rates charged may move higher as competition diminishes
Borrowers will have to pay a minimum deposit of 10% on the price of a property compared with 5% before. Since the typical first-time buyer pays £147,834 for a home, it raises the cost of the deposit from £7,392 to £14,783.
According to the financial data provider Moneyfacts, 11 mortgage lenders have reduced the maximum loan-to-value ratios on some or all of their mortgage range since the beginning of December. This marked an about-turn from the position before the onset of the credit crunch, when lenders pushed loan-to-value ratios to highs of 130%, with 95% the norm.
Trying to find the cash for a deposit is regularly cited as the toughest hurdle for first-time buyers, so the increase in deposits is likely to deter buyers in a property market that is already slowing markedly.
A spokeswoman for Britannia said: "At the end of December, Britannia took the decision to impose a maximum loan-to-value limit on all products of 90%. This is due to the current external environment, with house prices falling over the last few months and the Council of Mortgage Lenders forecast that house prices will continue to fall in 2008."
The credit crunch is blamed for making banks more hesitant about lending. Northern Rock was widely regarded as the most aggressive lender in the 100%-plus loan market, with its Together product a favourite with first-time buyers unable to afford a deposit. Scottish Widows Bank, which specialises in mortgages for graduates, cut its maximum loan-to-value this month from 102% to 95%. Other lenders that have cut maximum loans include Yorkshire building society, Manchester building society and Egg.
David Knight, a mortgage analyst at Moneyfacts.co.uk, said: "With mounting evidence that housing prices are cooling, combined with the increasing number of borrowers facing debt problems, it is not welcome news for those consumers with only a small amount of equity."
He said borrowers who come to the end of a deal but found themselves still borrowing at a high loan-to-value ratio could also find the choice of deals limited, or may be forced to pay a much higher price.
Ray Boulger, of the mortgage broker John Charcol, said he expected big lenders such as Halifax, Abbey and Nationwide to continue to offer 95% loans, though he warned that the interest rates charged may move higher as competition diminishes
Mortgage Policy Overhaul
The House passed a broad overhaul of the nation’s mortgage laws in November. Similar legislation has been introduced in the Senate, but lawmakers have a difficult job ahead of them. They will need to hash out differences — and deal with strong industry opposition — before any measure becomes law.
Synopsis: As the housing crisis worsened this year, lawmakers scrambled to come up with an effective response. The collapse in the sub‑prime mortgage market emerged as a major culprit in the real estate slowdown. Millions of borrowers, many with spotty credit histories, have struggled to make higher monthly payments after low introductory rates on adjustable-rate mortgages reset upward.
Industry critics say lenders, including mortgage brokers, helped stoke the crisis by pushing borrowers into subprime loans they were never going to be able to afford.
To curb those tactics, Financial Services Chairman Barney Frank , D-Mass., shepherded a major mortgage regulation measure through the House. The bill would bring mortgage brokers — now regulated state by state — under a nationwide licensing registry, establish minimum standards for home loans and expand some limits on high-cost mortgages. It also would prohibit brokers from steering consumers into mortgages they are unlikely to be able to repay.
The measure also would subject mortgage securitizers — companies that package home loans into securities to be sold on the secondary markets — to greater liability if they buy and sell mortgages that fail to meet the bill’s standards. Frank tailored the bill to win support from GOP members and mollify critics, who said the measure could further constrain home buying in the United States.
Ultimately, the bill won 64 GOP votes, including a majority of Republicans from Ohio and Michigan, states hit by mortgage troubles.
In the Senate, Christopher J. Dodd , D-Conn., chairman of the Banking, Housing and Urban Affairs Committee, introduced a bill (S 2452) in December generally similar to the House measure. It would establish a series of minimum standards for sub‑prime mortgages, including a requirement that lenders demonstrate that prospective borrowers have the ability to repay the loans. In some ways, Dodd’s bill is tougher than the House measure. It would establish liability for the investors who buy mortgage-backed securities, while the House bill would place liability on the companies that package the securities. The House bill would pre-empt potentially tougher state measures on securitizer liability; the Senate measure would not.
In recent years, investors such as hedge funds and pension funds have become the primary holders of residential mortgages, including sub‑prime loans. The boom in securitization — in which a lender packages loans into securities and sells them in the secondary market — means many loans are no longer owned by banks or mortgage brokers. Dodd’s bill would provide a “safe harbor” for loan holders if the underlying mortgage meets the bill’s standards.
Synopsis: As the housing crisis worsened this year, lawmakers scrambled to come up with an effective response. The collapse in the sub‑prime mortgage market emerged as a major culprit in the real estate slowdown. Millions of borrowers, many with spotty credit histories, have struggled to make higher monthly payments after low introductory rates on adjustable-rate mortgages reset upward.
Industry critics say lenders, including mortgage brokers, helped stoke the crisis by pushing borrowers into subprime loans they were never going to be able to afford.
To curb those tactics, Financial Services Chairman Barney Frank , D-Mass., shepherded a major mortgage regulation measure through the House. The bill would bring mortgage brokers — now regulated state by state — under a nationwide licensing registry, establish minimum standards for home loans and expand some limits on high-cost mortgages. It also would prohibit brokers from steering consumers into mortgages they are unlikely to be able to repay.
The measure also would subject mortgage securitizers — companies that package home loans into securities to be sold on the secondary markets — to greater liability if they buy and sell mortgages that fail to meet the bill’s standards. Frank tailored the bill to win support from GOP members and mollify critics, who said the measure could further constrain home buying in the United States.
Ultimately, the bill won 64 GOP votes, including a majority of Republicans from Ohio and Michigan, states hit by mortgage troubles.
In the Senate, Christopher J. Dodd , D-Conn., chairman of the Banking, Housing and Urban Affairs Committee, introduced a bill (S 2452) in December generally similar to the House measure. It would establish a series of minimum standards for sub‑prime mortgages, including a requirement that lenders demonstrate that prospective borrowers have the ability to repay the loans. In some ways, Dodd’s bill is tougher than the House measure. It would establish liability for the investors who buy mortgage-backed securities, while the House bill would place liability on the companies that package the securities. The House bill would pre-empt potentially tougher state measures on securitizer liability; the Senate measure would not.
In recent years, investors such as hedge funds and pension funds have become the primary holders of residential mortgages, including sub‑prime loans. The boom in securitization — in which a lender packages loans into securities and sells them in the secondary market — means many loans are no longer owned by banks or mortgage brokers. Dodd’s bill would provide a “safe harbor” for loan holders if the underlying mortgage meets the bill’s standards.
Mortgage Reform Proposal
In August, President George Bush proposed a series of programs, called "FHA Secure," to help homeowners who are overburdened by their mortgages. Since then, the program has been modified to include additional provisions.
And now, Congress is increasingly under pressure to better regulate the mortgage industry and, perhaps, bail out homeowners with untenable loans. The changing and evolving plans to assist homeowners holding variable-rate mortgage loans that will be reset to a higher interest rate this year can be confusing - at best.
Bush's FHASecure plan enhanced the Federal Housing Administration (FHA) refinancing program. It extended refinancing options to families who were in default on their mortgages, but only if they previously had good credit and had been up to date on mortgage payments.
Under the program, homeowners can refinance their mortgages into fixed-rate FHA (government-insured) mortgages if they have missed loan payments because of a recent spike in adjustable-rate mortgage (ARM) interest rates that caused their total payments to jump. While better than nothing, the FHASecure proposal's measures help only a very small percentage of troubled mortgages.
Many argue that in addition to this help, there needs to be a correction in the market - and the government will not be able to help every person who is over-extended. Unfortunately, some homeowners have ignored the process of evaluating the right type of loan for their budget too long.
To address some of those concerns, homeowners may find it helpful to understand some of the key modifications to the President's plan:
A rate freeze for borrowers who will not be able to afford their adjustable mortgages. This will help some borrowers on the margin, but will not help the majority of subprime borrowers facing foreclosure. Several requirements will exclude most subprime borrowers. For instance, the borrower cannot be more than 30 days past due on the account at the timethe loan is changed, cannot have been more than 60 days late at any time in the past 12 months, must hold a loan whose interest rate will reset in 2008, and must demonstrate he/she is not capable of paying the new higher payment. Just about 100,000 to 250,000 loans will qualify for this program - fewer than 10 percent of loans whose rates will reset between now and the end of 2009.
Tax relief for forgiven debt (cancellation of debt income). If the lender forgives a portion of the loan balance as part of the foreclosure process, the forgiven debt has been considered taxable income. For example, if a home is worth $400,000, but the owner has a $500,000 mortgage, and the lender lets the owner walk away without paying the difference, the IRS considers the homeowner as having received $100,000 in value. That $100,000 would be taxable. Now, Bush and Congress have provided tax relief to individuals in this situation. This will simply lessen the pain for some consumers already in the dire financial situation of foreclosure.
And now, Congress is increasingly under pressure to better regulate the mortgage industry and, perhaps, bail out homeowners with untenable loans. The changing and evolving plans to assist homeowners holding variable-rate mortgage loans that will be reset to a higher interest rate this year can be confusing - at best.
Bush's FHASecure plan enhanced the Federal Housing Administration (FHA) refinancing program. It extended refinancing options to families who were in default on their mortgages, but only if they previously had good credit and had been up to date on mortgage payments.
Under the program, homeowners can refinance their mortgages into fixed-rate FHA (government-insured) mortgages if they have missed loan payments because of a recent spike in adjustable-rate mortgage (ARM) interest rates that caused their total payments to jump. While better than nothing, the FHASecure proposal's measures help only a very small percentage of troubled mortgages.
Many argue that in addition to this help, there needs to be a correction in the market - and the government will not be able to help every person who is over-extended. Unfortunately, some homeowners have ignored the process of evaluating the right type of loan for their budget too long.
To address some of those concerns, homeowners may find it helpful to understand some of the key modifications to the President's plan:
A rate freeze for borrowers who will not be able to afford their adjustable mortgages. This will help some borrowers on the margin, but will not help the majority of subprime borrowers facing foreclosure. Several requirements will exclude most subprime borrowers. For instance, the borrower cannot be more than 30 days past due on the account at the timethe loan is changed, cannot have been more than 60 days late at any time in the past 12 months, must hold a loan whose interest rate will reset in 2008, and must demonstrate he/she is not capable of paying the new higher payment. Just about 100,000 to 250,000 loans will qualify for this program - fewer than 10 percent of loans whose rates will reset between now and the end of 2009.
Tax relief for forgiven debt (cancellation of debt income). If the lender forgives a portion of the loan balance as part of the foreclosure process, the forgiven debt has been considered taxable income. For example, if a home is worth $400,000, but the owner has a $500,000 mortgage, and the lender lets the owner walk away without paying the difference, the IRS considers the homeowner as having received $100,000 in value. That $100,000 would be taxable. Now, Bush and Congress have provided tax relief to individuals in this situation. This will simply lessen the pain for some consumers already in the dire financial situation of foreclosure.
Economic downturn, deficit are temporary
The state should not cut short spending on health care, education, transportation and public safety due to recent economic downturn, Gov. Janet Napolitano said in her sixth State of the State address Monday.
In her annual speech to legislators, the governor asked lawmakers to consider several spending proposals, despite a projected budget deficit of $1 billion, which she said was temporary.
"It is not permanent. It is not a sign that Arizona's growth will stall," she said. "It is not an excuse to stop working toward what we all believe in."
Many of her proposals, which focused on education, economic growth, public safety, transportation and health care, she said would be cost-neutral, paid through state savings.
Republican leadership in the Legislature, however, was skeptical as to how her proposed tuition freeze at state universities and expanded health care for young adults, could be cost-neutral.
"The governor has made something that sounds great utopia-wise," said Speaker of the House Jim Weiers. "But the devil's in the details."
Napolitano proposed a tuition freeze for all three public Arizona universities, in which tuition rates are fixed, and not increased annually, for the four years a student is in college.
Under her direction, the Department of Administration will search for ways under the state health insurance plan to expand coverage to young adults, up to age 25, under their parent's insurance.
She further proposed the state double the number of bachelor's degrees awarded by 2020, boost the average high school dropout age from 16 to 18 and award all high school students earning a "B" average free tuition at any community college or state university.
The governor also put forward a three-step plan to protect Arizonans from subprime-lending scams. The plan includes licensing loan officers and investors buying homes, as well as a home buyer's "Bill of Rights," an informative booklet online and in print that can be used as a tool for making financial decisions.
Napolitano also suggested the state require that by 2025 all electric utilities provide 15 percent of their electricity from renewable sources.
In regard to the employers sanctions law that Napolitano signed last year, she encouraged the Legislature to better define what constitutes a complaint, so that law enforcement officials do not waste time chasing down anonymous calls from "malicious competitors or disgruntled employees." She also asked the Legislature to redirect money from successful racketeering prosecutions to fund enforcement.
Republican leaders in the House and Senate criticized the Democratic governor for not addressing the state's budget deficit in greater detail, but said the Legislature looks forward to working more closely with her on the proposals.
In her annual speech to legislators, the governor asked lawmakers to consider several spending proposals, despite a projected budget deficit of $1 billion, which she said was temporary.
"It is not permanent. It is not a sign that Arizona's growth will stall," she said. "It is not an excuse to stop working toward what we all believe in."
Many of her proposals, which focused on education, economic growth, public safety, transportation and health care, she said would be cost-neutral, paid through state savings.
Republican leadership in the Legislature, however, was skeptical as to how her proposed tuition freeze at state universities and expanded health care for young adults, could be cost-neutral.
"The governor has made something that sounds great utopia-wise," said Speaker of the House Jim Weiers. "But the devil's in the details."
Napolitano proposed a tuition freeze for all three public Arizona universities, in which tuition rates are fixed, and not increased annually, for the four years a student is in college.
Under her direction, the Department of Administration will search for ways under the state health insurance plan to expand coverage to young adults, up to age 25, under their parent's insurance.
She further proposed the state double the number of bachelor's degrees awarded by 2020, boost the average high school dropout age from 16 to 18 and award all high school students earning a "B" average free tuition at any community college or state university.
The governor also put forward a three-step plan to protect Arizonans from subprime-lending scams. The plan includes licensing loan officers and investors buying homes, as well as a home buyer's "Bill of Rights," an informative booklet online and in print that can be used as a tool for making financial decisions.
Napolitano also suggested the state require that by 2025 all electric utilities provide 15 percent of their electricity from renewable sources.
In regard to the employers sanctions law that Napolitano signed last year, she encouraged the Legislature to better define what constitutes a complaint, so that law enforcement officials do not waste time chasing down anonymous calls from "malicious competitors or disgruntled employees." She also asked the Legislature to redirect money from successful racketeering prosecutions to fund enforcement.
Republican leaders in the House and Senate criticized the Democratic governor for not addressing the state's budget deficit in greater detail, but said the Legislature looks forward to working more closely with her on the proposals.
Federal Home Loan
San Francisco, Jan.14 /PRNewswire-USNewswire/ -- The Federal Home Loan Bank of San Francisco (FHLBank San Francisco) announced today that, with the assistance of Speaker of the House Nancy Pelosi, more than $4.4 million in Affordable Housing Program (AHP) grants have been awarded to housing projects throughout San Francisco, funding seven projects expected to generate 591 new affordable housing units.
"The Federal Home Loan Bank of San Francisco has been a strong partner in our efforts to create more affordable housing throughout California," said Speaker Pelosi. "By expanding affordable housing, and opportunities for homeownership, they are helping to build better neighborhoods and communities. The public-private AHP projects have proven to be effective partnerships, and I look forward to continuing them in the future."
Since 2000, the 8th Congressional District has received a total of almost $24 million dollars in affordable housing projects that have helped finance 45 projects to create 4,441 new rental units and 15 owner-occupied units.
Unique projects awarded grants in 2007 include the 275 10th Street Supportive Housing facility and Octavia Court in San Francisco. The 275 10th Street Supportive Housing facility will provide housing for 134 very low-income homeless individuals. The facility will include seven fully ADA-accessible units, as well as units for visually and hearing-impaired residents. The Octavia Court project promotes independent living for people with developmental disabilities. The facility will feature space for a vocational arts program, complete with a gallery and studios.
Projects funded this year in Speaker Pelosi's district include: -- 275 10th Street Supportive Housing (San Francisco County) -- Octavia Court (San Francisco County) -- 53 Columbus Avenue (San Francisco County) -- Civic Center Residence (San Francisco County) -- Mason Street Housing (San Francisco County) -- Polk and Geary Senior Housing (San Francisco County) -- Zygmundt Arendt House (San Francisco County)
"The AHP helps to provide moderate and low-income families with access to broader housing options," said Lawrence H. Parks, Senior Vice President, Legislative and External Affairs, FHLBank San Francisco. "With the help of Speaker Pelosi and our member institutions, we are helping to ensure that families and individuals of all income levels have access to affordable housing in San Francisco."
Parks said the support provided by the AHP was particularly important during the current downturn in the housing markets.
"The Federal Home Loan Bank system is doing what it was designed to do -- providing stability and support to the housing markets, particularly in tough economic times," Parks said.
Designed as a flexible, competitive funding source, the AHP provides grants and below-market loans to develop and rehabilitate single-family and multifamily projects targeting very low- to moderate-income households. Member financial institutions, in partnership with community-based housing sponsors, submit applications for specific projects and programs twice a year. Since the program's inception in 1990, the Federal Home Loan Bank of San Francisco has awarded approximately $460 million, which has assisted in the development of more than 80,000 units of quality affordable housing in Arizona, California, Nevada, and other areas served by its member institutions.
"The AHP is committed to providing affordable housing options for working families," said Parks. "The AHP has a history of forging public-private partnerships that help families and individuals find affordable housing," Parks said.
About The Federal Home Loan Bank of San Francisco
The Federal Home Loan Bank of San Francisco delivers low-cost funding and other services that help member financial institutions make home mortgage loans to people of all income levels and provide credit that supports neighborhoods and communities. The Bank also funds community investment programs that help members create affordable housing and promote community economic development. The Bank's members -- its shareholders and customers -- are commercial banks, credit unions, savings institutions, thrift and loans, and insurance companies headquartered in Arizona, California, and Nevada.
"The Federal Home Loan Bank of San Francisco has been a strong partner in our efforts to create more affordable housing throughout California," said Speaker Pelosi. "By expanding affordable housing, and opportunities for homeownership, they are helping to build better neighborhoods and communities. The public-private AHP projects have proven to be effective partnerships, and I look forward to continuing them in the future."
Since 2000, the 8th Congressional District has received a total of almost $24 million dollars in affordable housing projects that have helped finance 45 projects to create 4,441 new rental units and 15 owner-occupied units.
Unique projects awarded grants in 2007 include the 275 10th Street Supportive Housing facility and Octavia Court in San Francisco. The 275 10th Street Supportive Housing facility will provide housing for 134 very low-income homeless individuals. The facility will include seven fully ADA-accessible units, as well as units for visually and hearing-impaired residents. The Octavia Court project promotes independent living for people with developmental disabilities. The facility will feature space for a vocational arts program, complete with a gallery and studios.
Projects funded this year in Speaker Pelosi's district include: -- 275 10th Street Supportive Housing (San Francisco County) -- Octavia Court (San Francisco County) -- 53 Columbus Avenue (San Francisco County) -- Civic Center Residence (San Francisco County) -- Mason Street Housing (San Francisco County) -- Polk and Geary Senior Housing (San Francisco County) -- Zygmundt Arendt House (San Francisco County)
"The AHP helps to provide moderate and low-income families with access to broader housing options," said Lawrence H. Parks, Senior Vice President, Legislative and External Affairs, FHLBank San Francisco. "With the help of Speaker Pelosi and our member institutions, we are helping to ensure that families and individuals of all income levels have access to affordable housing in San Francisco."
Parks said the support provided by the AHP was particularly important during the current downturn in the housing markets.
"The Federal Home Loan Bank system is doing what it was designed to do -- providing stability and support to the housing markets, particularly in tough economic times," Parks said.
Designed as a flexible, competitive funding source, the AHP provides grants and below-market loans to develop and rehabilitate single-family and multifamily projects targeting very low- to moderate-income households. Member financial institutions, in partnership with community-based housing sponsors, submit applications for specific projects and programs twice a year. Since the program's inception in 1990, the Federal Home Loan Bank of San Francisco has awarded approximately $460 million, which has assisted in the development of more than 80,000 units of quality affordable housing in Arizona, California, Nevada, and other areas served by its member institutions.
"The AHP is committed to providing affordable housing options for working families," said Parks. "The AHP has a history of forging public-private partnerships that help families and individuals find affordable housing," Parks said.
About The Federal Home Loan Bank of San Francisco
The Federal Home Loan Bank of San Francisco delivers low-cost funding and other services that help member financial institutions make home mortgage loans to people of all income levels and provide credit that supports neighborhoods and communities. The Bank also funds community investment programs that help members create affordable housing and promote community economic development. The Bank's members -- its shareholders and customers -- are commercial banks, credit unions, savings institutions, thrift and loans, and insurance companies headquartered in Arizona, California, and Nevada.
Treasurer plan
THE Rudd Government is considering outlawing exit fees onmortgages so that banks canno longer punish home owners who choose to switch to a better deal.
Wayne Swan, who last week attacked banks for lifting interest rates by up to 0.2 of a percentage point, has asked Treasury for a report on how to increase competition between the financial institutions.
Suncorp yesterday became the fifth bank to ignore the Treasurer's warning that rates should not be raised by more than 0.12 of a point because of the global sub-prime crisis.
The Queensland-based bank from today will add 15 basis points to its variable rate, taking it to 8.72 per cent and effectively adding $20 a month to repayments on an average loan.
Exit fees have become a standard clause in home loan contracts, with penalties applying when borrowers switch from variable to fixed-rate loans, refinance with other lenders or pay their loans out early.
Australian Bankers Association chief executive David Bell said refinancing loans was easy under the present system.
But Mr Swan said through aspokesman yesterday that this was not the experience of borrowers.
"We believe it's a serious issue that Australian families confront and that's why we are committed to doing everything we can to remove barriers that stop families voting with their feet to switch banks if they are unhappy," he said.
The decision to switch banks can cost customers between $700 and $2000, which consumer experts said was too expensive. A schedule of fees compiled by InfoChoice shows customers are slugged, especially if they have held their loan for less than four years.
Most of the banks have designed an exit fee and then an early termination fee, for which ANZ, CBA and Westpac charge $700. Breaking the loan early for customers of NAB costs about $900, while St George's fees are steeper, at $1000.
The exit fee component ranges from $160 at ANZ to $250 at Westpac and $350 at StGeorge.
The fees charged by non-bank lenders, which have raised rates by more than their banking rivals, are more expensive, with RAMS charging $295 to switch and Mortgage House slugging departing borrowers up to $2495.
A number of competitors in the bank and non-bank sector charge customers a percentage of their outstanding loans, with some as high as 2 per cent.
InfoChoice general manager Denis Orrock said the costs meant it could take home owners two years before they got the benefit of switching.
Mr Orrock said Mr Swan's proposal to force banks to scrap exit fees was a shift back to regulation.
"If the Treasurer wants to do something, he is going to have to re-regulate across the board," Mr Orrock said.
"It is not just the banks but the non-bank lenders, as well. There are two fees which hit people the most - the exit fees and the early termination."
The ABA's Mr Bell said he did not think the present fee structure was excessive and that customers were warned before signing up.
"There are costs associated with home loans for a very good reason: when a mortgage is established to a new customer, the banks have to make sure the people can pay it back," Mr Bell said. "The fees are disclosed to customers; it is made very clear."
Opposition Treasury spokesman Malcolm Turnbull said the Government should increase the pressure on the major banks to justify the recent run of rate hikes. "Wayne Swan has been treated like a mug by the banks," he said.
Wayne Swan, who last week attacked banks for lifting interest rates by up to 0.2 of a percentage point, has asked Treasury for a report on how to increase competition between the financial institutions.
Suncorp yesterday became the fifth bank to ignore the Treasurer's warning that rates should not be raised by more than 0.12 of a point because of the global sub-prime crisis.
The Queensland-based bank from today will add 15 basis points to its variable rate, taking it to 8.72 per cent and effectively adding $20 a month to repayments on an average loan.
Exit fees have become a standard clause in home loan contracts, with penalties applying when borrowers switch from variable to fixed-rate loans, refinance with other lenders or pay their loans out early.
Australian Bankers Association chief executive David Bell said refinancing loans was easy under the present system.
But Mr Swan said through aspokesman yesterday that this was not the experience of borrowers.
"We believe it's a serious issue that Australian families confront and that's why we are committed to doing everything we can to remove barriers that stop families voting with their feet to switch banks if they are unhappy," he said.
The decision to switch banks can cost customers between $700 and $2000, which consumer experts said was too expensive. A schedule of fees compiled by InfoChoice shows customers are slugged, especially if they have held their loan for less than four years.
Most of the banks have designed an exit fee and then an early termination fee, for which ANZ, CBA and Westpac charge $700. Breaking the loan early for customers of NAB costs about $900, while St George's fees are steeper, at $1000.
The exit fee component ranges from $160 at ANZ to $250 at Westpac and $350 at StGeorge.
The fees charged by non-bank lenders, which have raised rates by more than their banking rivals, are more expensive, with RAMS charging $295 to switch and Mortgage House slugging departing borrowers up to $2495.
A number of competitors in the bank and non-bank sector charge customers a percentage of their outstanding loans, with some as high as 2 per cent.
InfoChoice general manager Denis Orrock said the costs meant it could take home owners two years before they got the benefit of switching.
Mr Orrock said Mr Swan's proposal to force banks to scrap exit fees was a shift back to regulation.
"If the Treasurer wants to do something, he is going to have to re-regulate across the board," Mr Orrock said.
"It is not just the banks but the non-bank lenders, as well. There are two fees which hit people the most - the exit fees and the early termination."
The ABA's Mr Bell said he did not think the present fee structure was excessive and that customers were warned before signing up.
"There are costs associated with home loans for a very good reason: when a mortgage is established to a new customer, the banks have to make sure the people can pay it back," Mr Bell said. "The fees are disclosed to customers; it is made very clear."
Opposition Treasury spokesman Malcolm Turnbull said the Government should increase the pressure on the major banks to justify the recent run of rate hikes. "Wayne Swan has been treated like a mug by the banks," he said.
Outlook Signals Rates
TOKYO -- Bank of Japan Gov. Toshihiko Fukui said the nation's economy will continue to expand but that growth will keep slowing due to weak housing investment.
Mr. Fukui's remarks Friday before a lower-house panel in Parliament strengthen the view that Japan's central bank is unlikely to raise interest rates early this year -- something once considered a strong possibility.
Some analysts even suggest that the central bank's next move may be to cut rates, although the current 0.5% level leaves little margin for easing monetary policy. Mr. Fukui's comments came a day after ...
Mr. Fukui's remarks Friday before a lower-house panel in Parliament strengthen the view that Japan's central bank is unlikely to raise interest rates early this year -- something once considered a strong possibility.
Some analysts even suggest that the central bank's next move may be to cut rates, although the current 0.5% level leaves little margin for easing monetary policy. Mr. Fukui's comments came a day after ...
Financial forces
For about the last 30 years, our nation has been traveling the deregulation highway, a road with no rules or direction. We have let enterprise be free, business go unfettered, the good times roll. And roll they have, but to where? One stopping point: the current mortgage crisis.Recently, however, there has been a slight regulatory bump in the road. After its chairman acknowledged that "market discipline has in some cases broken down," the Federal Reserve released new mortgage lending rules "to protect consumers against fraud [and] deception." Banks making sub-prime loans will be required to actually consider the borrower's ability to pay and confirm a borrower's income before handing over the money. Now there's a radical notion. Disclosure also will be required of those nasty little (actually not so little) "bonuses" that brokers receive for writing loans at rates higher than a poor, unwitting consumer can afford.To some, they may not be much, but the absence of such rules encouraged the predatory lending practices that have left millions of Americans facing foreclosure.
Monday, January 14, 2008
Banks seek clarity on reverse mortgage
Banks propose to seek clarity from the Reserve Bank of India (RBI) on the risk weights that should apply for reverse mortgage loans.
At present, the risk weight for real estate sector apply to reverse mortgage loans, which is calculated at 150 per cent of the value of the loan. A section of the bankers feel that the risk weights are high.
Bankers feel that the risk weights for small size loans should be on a par with that applicable on priority sector loans, which is 75 per cent of the value of the loan. Housing loans up to Rs 20 lakh are classified under the priority sector.
“We asked for a clarification from the RBI on what should be the risk weights on reverse mortgage loans,” said a senior official of Bank of Baroda at a seminar on reverse mortgage organised by National Housing Bank and Tina Ambani’s Harmony for Silvers Foundation.
Reverse mortgage allows senior citizens with inadequate income sources to mortgage their own homes for a monthly stream of income for up to 15 years.
At the end of the reverse mortgage period, in case the senior citizen is alive, then he or the heir, will have the option of retaining the house after paying the principal plus interest to the lender or the lender can sell the house and pay the owner the difference between the amount due and the sale price.
Finance Minister P Chidamabaram, in his 2007-08 Budget, had stated that NHB will introduce a ‘reverse mortgage scheme’ for senior citizens.
After the reverse mortgage guidelines introduced by NHB, several banks besides Deewan Housing Finance have launched the scheme for senior citizens. The banks, which have launched the scheme, are Punjab National Bank, State Bank of India, Bank of Baroda, Allahabad Bank, Indian Bank and Axis Bank.
National Housing Bank (NHB) Chairman S Shridhar said that the reverse mortgage scheme though well structured has taxation, valuation and legal issues.
The housing regulator has written to the Central Board of Direct Taxes to see that the income, which is a loan to the senior citizen, is exempted from Income-Tax.
“There has to be some amendments to the I-T laws. Besides, the issue of how can the banks get their money back if the senior citizen passed away needs to be addressed. The government of New Zealand is drafting a law to ensure unhindered access to reposession of the house after the senior citizen passes away,” said Shridhar.
At present, the risk weight for real estate sector apply to reverse mortgage loans, which is calculated at 150 per cent of the value of the loan. A section of the bankers feel that the risk weights are high.
Bankers feel that the risk weights for small size loans should be on a par with that applicable on priority sector loans, which is 75 per cent of the value of the loan. Housing loans up to Rs 20 lakh are classified under the priority sector.
“We asked for a clarification from the RBI on what should be the risk weights on reverse mortgage loans,” said a senior official of Bank of Baroda at a seminar on reverse mortgage organised by National Housing Bank and Tina Ambani’s Harmony for Silvers Foundation.
Reverse mortgage allows senior citizens with inadequate income sources to mortgage their own homes for a monthly stream of income for up to 15 years.
At the end of the reverse mortgage period, in case the senior citizen is alive, then he or the heir, will have the option of retaining the house after paying the principal plus interest to the lender or the lender can sell the house and pay the owner the difference between the amount due and the sale price.
Finance Minister P Chidamabaram, in his 2007-08 Budget, had stated that NHB will introduce a ‘reverse mortgage scheme’ for senior citizens.
After the reverse mortgage guidelines introduced by NHB, several banks besides Deewan Housing Finance have launched the scheme for senior citizens. The banks, which have launched the scheme, are Punjab National Bank, State Bank of India, Bank of Baroda, Allahabad Bank, Indian Bank and Axis Bank.
National Housing Bank (NHB) Chairman S Shridhar said that the reverse mortgage scheme though well structured has taxation, valuation and legal issues.
The housing regulator has written to the Central Board of Direct Taxes to see that the income, which is a loan to the senior citizen, is exempted from Income-Tax.
“There has to be some amendments to the I-T laws. Besides, the issue of how can the banks get their money back if the senior citizen passed away needs to be addressed. The government of New Zealand is drafting a law to ensure unhindered access to reposession of the house after the senior citizen passes away,” said Shridhar.
Reverse Mortgage
It's the exact opposite of a traditional mortgage. Rather than the borrower making monthly mortgage payments, the lender pays the borrower. Income and credit history are irrelevant.
Instead, the mortgage is based on the equity -- the home's value minus debt -- the homeowner has in the home.
The amount borrowed must be repaid, plus interest, when you die, sell your home or move out. If the home is worth less than the loan amount, the Federal Housing Administration makes up the difference. That's one reason why mortgage insurance is required.
With a traditional mortgage, the amount you owe decreases over time, and your equity increases. With a reverse mortgage, your debt rises over time, and your equity can diminish.
CAN ANYONE GET A REVERSE MORTGAGE?
Almost all lenders require borrowers to be 62 or older. You also must own your home outright or be able to pay off your existing mortgage with the money received from a reverse loan.
HOW DO I GET MY MONEY?
You can opt for a lump sum, monthly payments, a line of credit or any combination of the three. In the case of a line of credit, you aren't charged interest until you actually borrow the money.
HOW MUCH CAN I BORROW?
It depends on your age, the current interest rate and the appraised value of your home. In general, the older you are and the more valuable your home is, the more you can borrow.
Borrowers typically can borrow 45 percent to 75 percent of the equity in their home, said Peter Bell, president of the National Reverse Mortgage Lenders Association.
A number of Web sites offer calculators that provide estimates of how much you might be able to borrow with a reverse mortgage. One is available from AARP at www.rmaarp.com/.
Loan amounts are capped on loans insured by the Federal Housing Administration, which accounts for about 90 percent of reverse mortgages. The limits range from $200,160 to $362,790, depending on the housing market.
In Wake and Johnston counties, the limit is $224,200; in in Durham and Orange counties, $237,500. Other counties' limits can be found at https://entp.hud. gov/idapp/html/hicost1.cfm.
Legislation pending in Congress calls for raising the reverse mortgage limits to a single, national standard: $417,00.
WHAT FEES ARE INVOLVED?
The up-front costs of a reverse mortgage are higher than in traditional mortgages.
In the Triangle, up-front costs on loans typically are $5,000 to $10,000, said Christena Schafale, director of information services for Resources for Seniors, a Raleigh nonprofit group that is a government-approved counselor for seniors interested in obtaining reverse loans.
But you don't need that amount of cash to get a reverse loan. The costs can be rolled into the mortgage.
Among the costs of FHA-insured loans is an origination fee that amounts to 2 percent of the loan limit or the home's appraised value, whichever is less.
A mortgage insurance premium fee tacks on 2 percent of the loan limit or the home's appraised value, whichever is less. Half of a percent is added to the annual interest rate charged on the loan balance.
Other closing costs commonly charged include fees for document preparation, title search, title insurance and surveying.
Instead, the mortgage is based on the equity -- the home's value minus debt -- the homeowner has in the home.
The amount borrowed must be repaid, plus interest, when you die, sell your home or move out. If the home is worth less than the loan amount, the Federal Housing Administration makes up the difference. That's one reason why mortgage insurance is required.
With a traditional mortgage, the amount you owe decreases over time, and your equity increases. With a reverse mortgage, your debt rises over time, and your equity can diminish.
CAN ANYONE GET A REVERSE MORTGAGE?
Almost all lenders require borrowers to be 62 or older. You also must own your home outright or be able to pay off your existing mortgage with the money received from a reverse loan.
HOW DO I GET MY MONEY?
You can opt for a lump sum, monthly payments, a line of credit or any combination of the three. In the case of a line of credit, you aren't charged interest until you actually borrow the money.
HOW MUCH CAN I BORROW?
It depends on your age, the current interest rate and the appraised value of your home. In general, the older you are and the more valuable your home is, the more you can borrow.
Borrowers typically can borrow 45 percent to 75 percent of the equity in their home, said Peter Bell, president of the National Reverse Mortgage Lenders Association.
A number of Web sites offer calculators that provide estimates of how much you might be able to borrow with a reverse mortgage. One is available from AARP at www.rmaarp.com/.
Loan amounts are capped on loans insured by the Federal Housing Administration, which accounts for about 90 percent of reverse mortgages. The limits range from $200,160 to $362,790, depending on the housing market.
In Wake and Johnston counties, the limit is $224,200; in in Durham and Orange counties, $237,500. Other counties' limits can be found at https://entp.hud. gov/idapp/html/hicost1.cfm.
Legislation pending in Congress calls for raising the reverse mortgage limits to a single, national standard: $417,00.
WHAT FEES ARE INVOLVED?
The up-front costs of a reverse mortgage are higher than in traditional mortgages.
In the Triangle, up-front costs on loans typically are $5,000 to $10,000, said Christena Schafale, director of information services for Resources for Seniors, a Raleigh nonprofit group that is a government-approved counselor for seniors interested in obtaining reverse loans.
But you don't need that amount of cash to get a reverse loan. The costs can be rolled into the mortgage.
Among the costs of FHA-insured loans is an origination fee that amounts to 2 percent of the loan limit or the home's appraised value, whichever is less.
A mortgage insurance premium fee tacks on 2 percent of the loan limit or the home's appraised value, whichever is less. Half of a percent is added to the annual interest rate charged on the loan balance.
Other closing costs commonly charged include fees for document preparation, title search, title insurance and surveying.
Community Commentary
This summer, the Legislature took the opportunity to debate payday loans. And throughout the debate, we continually confronted the negative stigma associated with the industry. Too many people have failed to fully consider this industry for its consumer benefits, and have been quick to accept the critical assessment that it is a predatory industry; frankly nothing could be further from the truth. It's our hope that in this small space we are able to shed some light on an industry that is providing a critical credit option to people who are working hard to make ends meet and often living paycheck to paycheck. When considering the customer, the most profound argument in support of payday loans lies within the numbers. For example, the average payday loan customer is 39-years-old with an average household income of $41,000; 86 percent of payday lending customers have a high school diploma or better and 52 percent are college graduates. That's pretty impressive. But also take into consideration that 45 percent of payday lending customers are homeowners. It's not hard to think of someone you know who meets this description. If that's not enough, take this into consideration as well: 100 percent of payday loan customers have a steady income and an active checking account, because it's required in order to receive a loan. Payday lending in New Hampshire is a legal business and they operate just like other ones in the state. They rent space, they have employees, they provide benefits, they pay business taxes and they sell their product to consumers. (And those consumers choose payday loans because they have determined that it's the best option for them and for their families.) This sounds like many of the retailers we were busy visiting throughout the holidays. Additionally, payday lenders are regulated by the New Hampshire Banking Commission, and strict guidelines govern their operations. The next time the Legislature meets, they will take up House Bill 267, which deals with the lending rates of payday loans and a compromise bill, House Bill 620, which further regulates the industry. Opponents of the compromise would like to reduce the rate to $1.38 per $100 for a two-week loan. If this happens, the payday lending industry in New Hampshire will cease to exist and the customers it serves will be without an alternative. Essentially, we will drive an industry out of New Hampshire – through overregulation — that had zero customer complaints in 2006. This is not the way we believe that business is done in New Hampshire, nor does it send a favorable message about the business climate in the Granite State. Our purpose as elected officials is to protect consumers — eliminating the payday loan industry is not the answer. This month, staff members of the Federal Reserve Bank of New York issued preliminary findings that show consumers suffer when payday loans are banned. Both Georgia and North Carolina have banned payday lending practices in recent years, and as a result there's been an increase in bounced checks, Chapter 7 "no asset" bankruptcy filings and complaints about lenders and debt collectors. If New Hampshire proceeds to ban payday lending, we will face the same realities. (In fact, the Oregon legislature recently passed legislation with a similar rate cap as the one being considered here, and virtually all payday lenders have shut down.) Whether you like it or not, payday advance loans can be a valuable option for some who find themselves in need of cash-flow assistance between paychecks. For those who believe that eliminating the industry will solve the ills of America's spending problems, it's clear that this is not the magic bullet. To the contrary, the evidence is quite overwhelming that the opposite will occur and more Granite Staters would likely experience financial hardship. The compromise legislation, House Bill 620, is a fair way to regulate the industry to further protect consumers, without ending payday lending as a reasonable lending option in our state.It is interesting to note that testimony before the Commerce Committee was that last year there were 160,000 pay day loans and 10,000 title loans taken out in New Hampshire. Whether we like these loans or not, there is a demonstrated need for them.
If house is threatened
Perhaps the first thing new homebuyers should know when they sign a mortgage is that their annual expenses, including taxes and insurance, should not exceed 36% of their household income, according to several lending institutions.
Lester Wilkins, a loan officer at Flagstar Bank in Fort Gratiot, said in the current housing market people should consider a total housing expense closer to 25%, and people should have cash reserves of about two or three month's waIf borrowers find themselves suddenly struggling to make their mortgage payments, he said, they should contact their lender's loss mitigation department. "Banks do not want to default on a mortgage as much if not more than the borrowers. It is estimated a bank starts off with a 40% loss in the individual investment as soon as they reclaim the property," he said. "Banks are often willing to modify a borrower's loan ... this is becoming almost commonplace in light of the foreclosure epidemic."
Over the next two years, the Department of Housing and Urban Development estimates 2.3 million adjustable-rate mortgages will reset, and nearly a quarter of these homeowners will be at risk of foreclosure as interest rates rise.
Last year, the department implemented the FHASecure plan that allows borrowers with a history of timely mortgage payments to refinance their sub-prime loans.
The department also offers these tips for avoiding foreclosure, beginning with responding to lender's letters:
Do not ignore communications from your lender: Be prepared to provide them with financial information, such as your monthly income and expenses.
Stay in your home for now: You may not qualify for assistance if you abandon your property.
Beware of scams: Do not sign anything you don't understand, and remember that signing over the deed to someone else (who promises to repair bad credit or manage mounting debts) does not necessarily relieve you of your loan obligation.
Contact a HUD-approved housing counseling agency at (800) 569-4287: These agencies frequently have information on services and programs offered by government agencies as well as private and community organizations that can help.
John Niebieszczanski, a field operations chief with HUD and an Algonac resident, said the best defense against loan defaults is a good offense.
"It's important that people are proactive," he said. "The thing is getting people to make that step and not the day before the house goes into foreclosure."ges for security.
Lester Wilkins, a loan officer at Flagstar Bank in Fort Gratiot, said in the current housing market people should consider a total housing expense closer to 25%, and people should have cash reserves of about two or three month's waIf borrowers find themselves suddenly struggling to make their mortgage payments, he said, they should contact their lender's loss mitigation department. "Banks do not want to default on a mortgage as much if not more than the borrowers. It is estimated a bank starts off with a 40% loss in the individual investment as soon as they reclaim the property," he said. "Banks are often willing to modify a borrower's loan ... this is becoming almost commonplace in light of the foreclosure epidemic."
Over the next two years, the Department of Housing and Urban Development estimates 2.3 million adjustable-rate mortgages will reset, and nearly a quarter of these homeowners will be at risk of foreclosure as interest rates rise.
Last year, the department implemented the FHASecure plan that allows borrowers with a history of timely mortgage payments to refinance their sub-prime loans.
The department also offers these tips for avoiding foreclosure, beginning with responding to lender's letters:
Do not ignore communications from your lender: Be prepared to provide them with financial information, such as your monthly income and expenses.
Stay in your home for now: You may not qualify for assistance if you abandon your property.
Beware of scams: Do not sign anything you don't understand, and remember that signing over the deed to someone else (who promises to repair bad credit or manage mounting debts) does not necessarily relieve you of your loan obligation.
Contact a HUD-approved housing counseling agency at (800) 569-4287: These agencies frequently have information on services and programs offered by government agencies as well as private and community organizations that can help.
John Niebieszczanski, a field operations chief with HUD and an Algonac resident, said the best defense against loan defaults is a good offense.
"It's important that people are proactive," he said. "The thing is getting people to make that step and not the day before the house goes into foreclosure."ges for security.
Sunday, January 13, 2008
Betting on the house
The boom in housing prices has Canadians feeling richer. It also has many of them leveraging themselves to their eyeballs, using the value of their houses and condos to borrow on lines of credit and second mortgages.
"Some people are using the money to diversify their investments and buy securities, which is tax deductible. But others are using it to renovate their houses, take trips or finance private school fees," says a banker who deals with richer clients.
The size of loans is growing faster than the value of the houses, according to Statistics Canada. "The growth in outstanding line-of-credit debt… surged 2.3 times," reported Statscan's The Wealth of Canadians survey, which covered the period from 1999 to 2005. At the same time, the average value of the principal residence rose 32.6%.
"The number of family units with line-of-credit debt increased almost 77% to 3.3 million," said Statscan. A quarter of all families now have line-of-credit debt.
The way the line of credit works is simple: Say your house is worth $750,000 and you have a mortgage of $250,000. After the bank sends out an appraiser, it will give you a line of credit for 80% of the difference. It's easy to tap into the cash once the line of credit is open.
"I have a lot of clients in their 50s and 60s who still have mortgage-based
Many financial planners will advise borrowing against the house, if the money is invested debt. The previous generation paid off their mortgage and never borrowed against it."
Many financial planners will advise borrowing against the house, a non-performing asset, if the money is used to invest. "I'm a big fan of prudent investment leverage, especially when you consider the tax deduction and the long-term growth of a balanced portfolio of global stocks," says Moshe Milevsky, of the Schulich School of Business at York University.
There are other ways of leveraging. If you're among the sliver of the population in the super-rich category, you can get cash from another dead asset -- the art on your walls.
"We are in the process of setting up an art-lending program, so that people can borrow against what is a passive asset," says Sam Sivarajan of UBS Canada. Mr. Sivarajan is in charge of what bankers call ultra-high net-worth families, with assets of $50-million or more. UBS estimates there are 2,700 families in Canada in that category.
One of the problems with lending against art is that banks like collateral and art collectors like their art on the wall, not in a vault. UBS has worked that out. It has a group of art experts at their head office in Switzerland who assess how much a work of art is worth. "For now we're doing it on a case-by-case basis," says Mr. Sivarajan.
The art loan is the same as the line of credit on your house, except in some cases the art is worth more than the house. - Fred Langan is host of CBC News Business.
"Some people are using the money to diversify their investments and buy securities, which is tax deductible. But others are using it to renovate their houses, take trips or finance private school fees," says a banker who deals with richer clients.
The size of loans is growing faster than the value of the houses, according to Statistics Canada. "The growth in outstanding line-of-credit debt… surged 2.3 times," reported Statscan's The Wealth of Canadians survey, which covered the period from 1999 to 2005. At the same time, the average value of the principal residence rose 32.6%.
"The number of family units with line-of-credit debt increased almost 77% to 3.3 million," said Statscan. A quarter of all families now have line-of-credit debt.
The way the line of credit works is simple: Say your house is worth $750,000 and you have a mortgage of $250,000. After the bank sends out an appraiser, it will give you a line of credit for 80% of the difference. It's easy to tap into the cash once the line of credit is open.
"I have a lot of clients in their 50s and 60s who still have mortgage-based
Many financial planners will advise borrowing against the house, if the money is invested debt. The previous generation paid off their mortgage and never borrowed against it."
Many financial planners will advise borrowing against the house, a non-performing asset, if the money is used to invest. "I'm a big fan of prudent investment leverage, especially when you consider the tax deduction and the long-term growth of a balanced portfolio of global stocks," says Moshe Milevsky, of the Schulich School of Business at York University.
There are other ways of leveraging. If you're among the sliver of the population in the super-rich category, you can get cash from another dead asset -- the art on your walls.
"We are in the process of setting up an art-lending program, so that people can borrow against what is a passive asset," says Sam Sivarajan of UBS Canada. Mr. Sivarajan is in charge of what bankers call ultra-high net-worth families, with assets of $50-million or more. UBS estimates there are 2,700 families in Canada in that category.
One of the problems with lending against art is that banks like collateral and art collectors like their art on the wall, not in a vault. UBS has worked that out. It has a group of art experts at their head office in Switzerland who assess how much a work of art is worth. "For now we're doing it on a case-by-case basis," says Mr. Sivarajan.
The art loan is the same as the line of credit on your house, except in some cases the art is worth more than the house. - Fred Langan is host of CBC News Business.
Mortgage Bankers Association
The Mortgage Bankers Association has projected home mortgage originations of about $1.86 trillion this year, down from a peak of $3.95 trillion in 2003.
With much less business, big lenders are much less inclined to accept loans generated by brokers, especially as those loans in the past often have been more prone to default. The number of mortgage-brokerage firms -- mostly tiny operations with a handful of employees -- has dropped to 40,000 from 53,000 a year ago, estimates Mr. LaMalfa of Wholesale Access. He thinks the number is likely to fall to 30,000 by the end of this year.
Mr. LaMalfa thinks brokers will remain a significant part of the mortgage business because they tend to have low costs, a willingness to work in the evenings or on weekends and an ability to reach borrowers in neighborhoods with few or no bank branches.
For now, lenders are being forced to concentrate on loans that either can be sold to Fannie or Freddie or those considered safe enough to retain as long-term investments.
For Bank of America, buying Countrywide will gain it a commanding position in mortgages. Bank of America and Countrywide had a combined market share of about 25% in the first nine months of 2007, according to Inside Mortgage Finance, a trade publication. That puts them far ahead of the No. 2 mortgage lender, Wells Fargo & Co., with a market share of about 11%. The other top contenders in terms of loan volume are Citigroup Inc. and J.P. Morgan Chase, which both had about 8% of the market in last year's first nine months.
With much less business, big lenders are much less inclined to accept loans generated by brokers, especially as those loans in the past often have been more prone to default. The number of mortgage-brokerage firms -- mostly tiny operations with a handful of employees -- has dropped to 40,000 from 53,000 a year ago, estimates Mr. LaMalfa of Wholesale Access. He thinks the number is likely to fall to 30,000 by the end of this year.
Mr. LaMalfa thinks brokers will remain a significant part of the mortgage business because they tend to have low costs, a willingness to work in the evenings or on weekends and an ability to reach borrowers in neighborhoods with few or no bank branches.
For now, lenders are being forced to concentrate on loans that either can be sold to Fannie or Freddie or those considered safe enough to retain as long-term investments.
For Bank of America, buying Countrywide will gain it a commanding position in mortgages. Bank of America and Countrywide had a combined market share of about 25% in the first nine months of 2007, according to Inside Mortgage Finance, a trade publication. That puts them far ahead of the No. 2 mortgage lender, Wells Fargo & Co., with a market share of about 11%. The other top contenders in terms of loan volume are Citigroup Inc. and J.P. Morgan Chase, which both had about 8% of the market in last year's first nine months.
Mortgage Markets Get a Hand
The giants are taking control of the home-mortgage market.
Friday's agreement for Bank of America Corp. to buy Countrywide Financial Corp. for $4 billion shows how size and financial solidity are trumping everything else in mortgage lending. With the heft to withstand rising defaults and falling home prices, these big companies are helping prevent a total shutdown of mortgage lending.
"Bank of America stepping in right now is a very good thing for the market" because it signals confidence in an eventual revival of the housing and mortgage markets from what appears to be the worst slump since the Great Depression, said Susan M. Wachter, a finance and real-estate professor at the University of Pennsylvania's Wharton School.
There is a price to pay: Their greater role means less competition and higher costs for consumers, at least in the short run.
But giant banks like Bank of America have the ability to finance their lending relatively cheaply through deposits and to keep on their books loans that are hard to sell to investors. That insulates them from the market fears that, in the past year, have knocked thousands of small and midsized lenders and brokers out of business because they could no longer find takers for loans they generate or borrow money at reasonable rates.
Those fears may drive other big mortgage lenders into deals. Washington Mutual Inc., which had 5.9% of the mortgage market in the first nine months of 2007, has been struggling with heavy loan losses and is considered a potential takeover candidate, as is IndyMac Bancorp Inc., whose share was 3.3%. Both Washington Mutual and IndyMac operate thrifts and are heavily focused on home mortgages.
One potential buyer for Washington Mutual is J.P. Morgan Chase & Co., which has expressed interest in expanding its retail-banking franchise in places like California and the Southeast. Executives at J.P. Morgan also have expressed interest in other regional banks.
The Bank of America purchase is "the first step on a new way of life" for the mortgage industry, said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey & Co. To survive, major lenders will have to hold more capital and charge higher interest rates, in relation to their cost of funds, to compensate for the risks of home loans. Those risks have increased because house prices are falling, lowering the value of collateral, and it is no longer easy to sell loans other than those that match the criteria for sale to government-sponsored mortgage investors Freddie Mac and Fannie Mae.
Having a well-known name like Bank of America or J.P. Morgan Chase also is important in this period of turmoil because home buyers, and the real-estate agents who advise them, don't want to risk finding out at the closing table that their lender has just shut down. "Right now people are afraid, and they're looking for certainty," said Tom LaMalfa, a managing director of Wholesale Access, a mortgage-research firm in Columbia, Md. He said many are willing to pay a bit more in fees or interest rate to get a loan from a lender they view as solid.
The shakeout follows an unprecedented boom. During the first half of the decade, when falling interest rates encouraged millions of Americans to refinance, big lenders couldn't keep up with demand. That left plenty of room for small lenders and mortgage brokers, which originate loans for sale to bigger lenders.
Friday's agreement for Bank of America Corp. to buy Countrywide Financial Corp. for $4 billion shows how size and financial solidity are trumping everything else in mortgage lending. With the heft to withstand rising defaults and falling home prices, these big companies are helping prevent a total shutdown of mortgage lending.
"Bank of America stepping in right now is a very good thing for the market" because it signals confidence in an eventual revival of the housing and mortgage markets from what appears to be the worst slump since the Great Depression, said Susan M. Wachter, a finance and real-estate professor at the University of Pennsylvania's Wharton School.
There is a price to pay: Their greater role means less competition and higher costs for consumers, at least in the short run.
But giant banks like Bank of America have the ability to finance their lending relatively cheaply through deposits and to keep on their books loans that are hard to sell to investors. That insulates them from the market fears that, in the past year, have knocked thousands of small and midsized lenders and brokers out of business because they could no longer find takers for loans they generate or borrow money at reasonable rates.
Those fears may drive other big mortgage lenders into deals. Washington Mutual Inc., which had 5.9% of the mortgage market in the first nine months of 2007, has been struggling with heavy loan losses and is considered a potential takeover candidate, as is IndyMac Bancorp Inc., whose share was 3.3%. Both Washington Mutual and IndyMac operate thrifts and are heavily focused on home mortgages.
One potential buyer for Washington Mutual is J.P. Morgan Chase & Co., which has expressed interest in expanding its retail-banking franchise in places like California and the Southeast. Executives at J.P. Morgan also have expressed interest in other regional banks.
The Bank of America purchase is "the first step on a new way of life" for the mortgage industry, said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey & Co. To survive, major lenders will have to hold more capital and charge higher interest rates, in relation to their cost of funds, to compensate for the risks of home loans. Those risks have increased because house prices are falling, lowering the value of collateral, and it is no longer easy to sell loans other than those that match the criteria for sale to government-sponsored mortgage investors Freddie Mac and Fannie Mae.
Having a well-known name like Bank of America or J.P. Morgan Chase also is important in this period of turmoil because home buyers, and the real-estate agents who advise them, don't want to risk finding out at the closing table that their lender has just shut down. "Right now people are afraid, and they're looking for certainty," said Tom LaMalfa, a managing director of Wholesale Access, a mortgage-research firm in Columbia, Md. He said many are willing to pay a bit more in fees or interest rate to get a loan from a lender they view as solid.
The shakeout follows an unprecedented boom. During the first half of the decade, when falling interest rates encouraged millions of Americans to refinance, big lenders couldn't keep up with demand. That left plenty of room for small lenders and mortgage brokers, which originate loans for sale to bigger lenders.
Veto budget
MANILA, Philippines -- Mincing no words, Malacañang on Saturday branded the proposed P13.5 billion additional “pork barrel” of the House of Representatives as “unconstitutional” which, if allowed, would imperil the Arroyo administration's goal of a balanced budget this year.
Budget Secretary Rolando Andaya Jr. told the Inquirer that President Gloria Macapagal-Arroyo could use her veto power if the House panel failed to stick to the budget proposal she had submitted to Congress, which amounted to P1.227 trillion.
"Malacañang has nothing to do with it," said Andaya. "Without engaging the members of Congress in an argument, (the President) has the veto power. This is something we can do after, but it's best for the two chambers to talk things out."
He urged the House leadership to adhere to the constitutional provision which bars Congress from increasing the amount of the President's proposed budget yearly.
"From the standpoint of the Department of Budget and Management, we recognize the power of Congress to realign, reallocate budget,” said Andaya, adding: "But of course we, in the end, also have the duty to follow the Constitution and adhere to the President's major policy of a balanced budget for 2008."
Andaya pointed out that the national government could easily incur a budgetary deficit of P8.3 billion for 2008 if Malacanang went along with the proposal of Albay Representative Edcel Lagman, chair of the House committee on appropriations.
Senate President Franklin Drilon claimed the other day that the House had "inserted" an extra P13.5 billion "pork barrel" in its version of the national budget for 2008 which, in effect, amended the President's budget.
Drilon said the House added the P13.5 billion pork barrel -- which funds the pet projects of legislators and is a known source of kickbacks -- to the Department of Public Works and Highways budget of P86.7 billion.
This is on top of the P12.4-billion pork barrel allocated to the 24 senators and more than 200 congressmen for their priority projects each year, Drilon said.
Lagman countered that the increase in the DPWH budget consisted of realigned funds from other items within the department's budget and other departments' budgets.
For instance, some P8.3 billion was realigned from the slow-moving foreign-assisted projects (FAPs) to locally funded projects within the DPWH to avoid "immobilizing such fund," he said.
In addition, some P756 million allotted for the Rural Road Network Development and the Laoag River Basin Flood Control was realigned from loan proceeds to personal counterparts and vice versa, according to Lagman.
And so was some P515 million, from the Quirino Highway project to the Tarlac-Nueva Ecija-Aurora-Dingalan Road, he added.
Andaya, however, noted that the House panel in effect increased Arroyo's proposed budget by P8.3 billion.
How? Andaya explained that there were two types of funding -- programmed and unprogrammed items.
The programmed items are listed in the National Expenditures Program submitted to Congress along with the proposed national budget. As regards the 2008 budget, programmed items are worth a total of P1.227 trillion.
He said the unprogrammed items are “off-budget” since they “can only be spent depending on certain conditionalities but is mainly the availability of revenues.”
“What they (Lagman panel) did was to put the programmed items (worth P8.3 billion) with loan counterparts to unprogrammed items,” he said.
(A foreign-assisted project has two components -- local counterpart and loan counterpart or proceeds from official development assistance.)
But this increased the P1.227-trillion budget by P8.3 billion since the House in effect “doubled” the budgetary allocation for these items.
“Since the loan proceeds are sure to come in this year, what the House did was to place the counterpart loan proceeds (of the P8.3 billion) into unprogrammed items,” he said.
Citing an example, he said if DPWH was given P10 in the programmed items, the House put an extra P10 in the unprogrammed items, for a total of P20.
“They actually doubled the budget (for the items). The danger there is it's unconstitutional -- you can't increase the President's budget proposal. Second, it's fiscally unsound because it's tantamount to double expenditures,” said Andaya.
This will result in deficit since the P1.227 trillion proposed budget is backed by expected revenues for the year, eventually putting at risk the target of a balanced budget for 2008.
“The (P8.3 billion) translates into additional spending,” said Andaya, explaining that Congress' authority actually only covered the P770.73 billion representing programmed appropriations.
“They can't touch the P295.75 billion in interest payment and P210.73 billion in internal revenue allotment because they are mandated by law,” said the budget chief, who had held the chairmanship of the House appropriations committee several times before assuming his current post.
Budget Secretary Rolando Andaya Jr. told the Inquirer that President Gloria Macapagal-Arroyo could use her veto power if the House panel failed to stick to the budget proposal she had submitted to Congress, which amounted to P1.227 trillion.
"Malacañang has nothing to do with it," said Andaya. "Without engaging the members of Congress in an argument, (the President) has the veto power. This is something we can do after, but it's best for the two chambers to talk things out."
He urged the House leadership to adhere to the constitutional provision which bars Congress from increasing the amount of the President's proposed budget yearly.
"From the standpoint of the Department of Budget and Management, we recognize the power of Congress to realign, reallocate budget,” said Andaya, adding: "But of course we, in the end, also have the duty to follow the Constitution and adhere to the President's major policy of a balanced budget for 2008."
Andaya pointed out that the national government could easily incur a budgetary deficit of P8.3 billion for 2008 if Malacanang went along with the proposal of Albay Representative Edcel Lagman, chair of the House committee on appropriations.
Senate President Franklin Drilon claimed the other day that the House had "inserted" an extra P13.5 billion "pork barrel" in its version of the national budget for 2008 which, in effect, amended the President's budget.
Drilon said the House added the P13.5 billion pork barrel -- which funds the pet projects of legislators and is a known source of kickbacks -- to the Department of Public Works and Highways budget of P86.7 billion.
This is on top of the P12.4-billion pork barrel allocated to the 24 senators and more than 200 congressmen for their priority projects each year, Drilon said.
Lagman countered that the increase in the DPWH budget consisted of realigned funds from other items within the department's budget and other departments' budgets.
For instance, some P8.3 billion was realigned from the slow-moving foreign-assisted projects (FAPs) to locally funded projects within the DPWH to avoid "immobilizing such fund," he said.
In addition, some P756 million allotted for the Rural Road Network Development and the Laoag River Basin Flood Control was realigned from loan proceeds to personal counterparts and vice versa, according to Lagman.
And so was some P515 million, from the Quirino Highway project to the Tarlac-Nueva Ecija-Aurora-Dingalan Road, he added.
Andaya, however, noted that the House panel in effect increased Arroyo's proposed budget by P8.3 billion.
How? Andaya explained that there were two types of funding -- programmed and unprogrammed items.
The programmed items are listed in the National Expenditures Program submitted to Congress along with the proposed national budget. As regards the 2008 budget, programmed items are worth a total of P1.227 trillion.
He said the unprogrammed items are “off-budget” since they “can only be spent depending on certain conditionalities but is mainly the availability of revenues.”
“What they (Lagman panel) did was to put the programmed items (worth P8.3 billion) with loan counterparts to unprogrammed items,” he said.
(A foreign-assisted project has two components -- local counterpart and loan counterpart or proceeds from official development assistance.)
But this increased the P1.227-trillion budget by P8.3 billion since the House in effect “doubled” the budgetary allocation for these items.
“Since the loan proceeds are sure to come in this year, what the House did was to place the counterpart loan proceeds (of the P8.3 billion) into unprogrammed items,” he said.
Citing an example, he said if DPWH was given P10 in the programmed items, the House put an extra P10 in the unprogrammed items, for a total of P20.
“They actually doubled the budget (for the items). The danger there is it's unconstitutional -- you can't increase the President's budget proposal. Second, it's fiscally unsound because it's tantamount to double expenditures,” said Andaya.
This will result in deficit since the P1.227 trillion proposed budget is backed by expected revenues for the year, eventually putting at risk the target of a balanced budget for 2008.
“The (P8.3 billion) translates into additional spending,” said Andaya, explaining that Congress' authority actually only covered the P770.73 billion representing programmed appropriations.
“They can't touch the P295.75 billion in interest payment and P210.73 billion in internal revenue allotment because they are mandated by law,” said the budget chief, who had held the chairmanship of the House appropriations committee several times before assuming his current post.
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