The Times, They Are a Changin

I would like to take this opportunity to thank all of our blog readers who comment and send me feedback, whether it is in the comments section of the blog or via email. As always, I invite a discussion/debate and I am grateful to have an engaged audience not shy about giving their 2 cents. I have been in touch with one reader via email who has some great insight regarding the mess plaguing our financial landscape, and has sent me some wonderful articles that I would like to share with you.

This first article details the FDIC’s civil suit against former executives of IndyMac.

      “The FDIC has sent letters warning hundreds of top managers and directors at failed banks — and the insurers who provided them with liability coverage — of possible civil lawsuits, Osterman said. The letters go out early in investigations of failed banks, he added, to ensure that the insurers will later provide coverage even if the policy expires.
The four defendants in the FDIC lending negligence case, who operated the Homebuilder Division at IndyMac, collectively approved 64 loans that are described in the 309-page lawsuit.”

  http://www.latimes.com/business/la-fi-indymac-fdic-20100714,0,4893259.story

The second is a Times article about lobbyists in Washington. I find it interesting that there is a good discussion centered on the practice and ethics of lobbying, especially given its long history in American politics. This morning I was listening to NPR and the host of the program was speaking with a lobbyist. The guy brought up some interesting points and helped to dispel some preconceived stereotypes I had about the bunch. One thing he said resonated very much with me; he discussed how everyone in this country has a right to freedom of speech, and those in power always have had others trying to influence the decisions they make.

      Here is an excerpt from the Times article I found intriguing:

      “Lobbyists [are] the best bargain in Washington. Capitol Tax Partners, for example, is one of 1,900 firms that house more than 11,000 lobbyists registered to operate in Washington. Last year, according to the Center for Responsive Politics (CRP), firms like Capitol Tax were paid a total of $3.49 billion for unraveling the mysteries of the tax code for a variety of businesses.”

http://www.ritholtz.com/blog/2010/07/2009-lobbying-expenses-3-49-billion-      dollars/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A      +TheBigPicture+%28The+Big+Picture%29

 The third article is in regards to Countrywide being sued by the State of Oregon. The suit against Countrywide is a result of pension losses stemming from the risky mortgage-baked securities originated by Countrywide. Among other things, the suit alleges that Countrywide deceived investors by claiming all the mortgages that comprised the investment vehicle sold to Oregon met underwriting standards and guidelines, things like borrower’s income and ability to meet mortgage obligations. This suit adds to the total number of lawsuits now in court that seek to hold accountable these companies that contributed to the financial crisis. I think many more are either in the works or will be soon.

 http://www.thetruthaboutmortgage.com/countrywide-sued-by-state-of-oregon/

This fourth article discusses the follies of TARP. It’s a pretty short article and it breaks down the debt rather well.

http://www.ritholtz.com/blog/2010/07/lies-divide-truth-            unites/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+            TheBigPicture+%28The+Big+Picture%29

This fifth article was perhaps my favorite. Its goal is to explain the oversupply of houses and the reasons why the market cannot absorb such overabundant inventory. One thing I found highly interesting was the explanation given for why housing prices cannot appreciate right now and likely will not for an extended period of time. Loan to Values are 1.5 times too high, there is $4 trillion of excess mortgages on the market, and 24% of US mortgages have negative equity. The article also goes on to discuss why interest rates are so low and why the Fed MUST keep them so low in order to prevent a cascading wave of defaults. This article is a real eye opener and puts aside rhetoric in favor of cold hard statistics. I highly encourage all homeowners and anyone generally interested in the economics of mortgages to read this article!

 http://www.ritholtz.com/blog/2010/07/the-4-trillion-dollar-question-            2/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+The            BigPicture+%28The+Big+Picture%29

Its slim pickings to find some upbeat news these days; however I think ignorance is by no means a solution. Please remain informed and educate yourself as best as possible about what is going on so you don’t fall victim to the economy!

As always, I invite a discussion in the comments section below as to your comments and questions.

Got questions? Send me an e-mail: Matt@desertedgelegal.com

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY OR FINANCIAL ADVISOR. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL OR FINANCIAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY/FINANCIAL ADVISOR BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****

Oh the Banks, they just can’t keep their hands out of the cookie jar

I think we are all pretty sick of hearing news about the major banks in this country receiving bailouts, ripping the carpet out under homeowners, making immense profits, etc… If that doesn’t induce a migraine requiring an ibuprofen the size of a hockey puck, I don’t know what does. So let’s start with the annoying and work our way down to some irony regarding this week’s bank profit earnings reports.

JP Morgan Chase reported a net income of $4.8 billion for the second quarter of 2010. This was an increase of 77% and supposedly was the result of a wind down in losses from defaulted loans.

Did these loans somehow start performing again? I am a little confused as to how or why failed loan losses decreased when foreclosures are on the rise. I read today that 2010 is on track to see 1 million foreclosures, an 11.11% increase over last year’s record of 900,000 foreclosures.

My only conclusion is that they banks are finally receiving the payouts from the swaps they bought to cover possible mortgage delinquencies and/or they are selling ridiculous amounts of foreclosed homes to cover the loan losses. A chief executive was even quoted as saying loan losses overall, “remain at extremely high levels.”

Something just doesn’t make sense, I hope I’m not the only one scratching my head wondering what happened that turned an admittedly losing situation into one that was so profitable, it even made up the slack of loss experienced in JP Morgan Chase’s trading and investment bank divisions.

A JP exec gave a cautionary outlook, stating that the looming financial regulatory bill just passed by Congress and headed to the president will affect profits. The biggest concern for the bank is strict regulations on risky but profitable derivatives trading. If you recall, out of hand risky derivatives trading was a major catalyst that propelled our economy into the red.

JP was the first bank to report profits; many analysts expect less stellar earnings from the other banks.

Now onto the irony

In what may be a possible proactive response to the financial regulation passed by Congress today, Goldman Sachs acquiesced to paying $550 million to settle civil fraud charges. The complaint alleged Goldman mislead buyers of mortgage related securities.

The breakdown of the settlement has $300 million being paid in fines to the SEC with the rest going to compensate those unfortunate enough to experience losses as a result of Goldman’s misdirection.

Apparently Goldman designed a security with input from a client that had bet on that same securities failure. This ended up costing buyers of the security almost $1 billion while the client that inspired the security raked in profits.

Federal judges in New York’s Southern District must still approve this settlement before Goldman pays. Although this is the largest fine ever levied against a financial institution in SEC history, it is a literal drop in the bucket for Goldman. In the first quarter of 2010 alone, the bank earned $3.3 billion, while earning $13.4 billion in 2009. Do the math; $550 million in fines is less than 17% of what Goldman earned in the first three months of 2010. Moreover, the $250 million left over after paying the SEC will cover about a fourth of the losses seen by the unlikely bunch who invested in the doomed security.  

Hopefully, as the investigations into the financial crisis continue and the plots thicken, more fines will be levied and some slivers of justice will be seen. This fine against Goldman and the financial regulations passed today are a start, lets hope the ball keeps rolling.

As always, I invite a discussion in the comments section below as to your comments and questions.

Got questions? Send me an e-mail: Matt@desertedgelegal.com

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY OR FINANCIAL ADVISOR. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL OR FINANCIAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****

Bank Profits, two ugly words

As I mentioned in my post last week, many companies report their earnings for the second quarter of 2010 this week. The three largest banks will be reporting their earnings and analysts expect the banks to post solid earnings data. Although analysts anticipate the earnings to be “good” they do not anticipate them to be “amazing.”

Several catalysts have been identified as game changers, helping the banks boost profits over the same earnings period last year. The biggest one is likely to be an improvement in client credit, contributing to a slashed credit card delinquencies. This means the banks had to spend less money paying off bad debt. The banks do face a double edged sword in consumer credit cards because of the new Credit Card Accountability, Responsibility, and Disclosure Act, which has resulted in some lost revenue. The three major banks have also experienced a serious decline in consumer loan demand, given the strict guidelines prevalent in the credit market these days.

There has also been high volatility in the currency markets, seen notably in the fluctuations of the Euro given the economic woes of several EU member nations (read: Spain, Portugal, and most notably Greece). As of today, one Euro costs about $1.2737 (dollars). Back in 2009, between October-December, the Euro was at its yearly high, costing more than $1.5000 (dollars).

At first glance, an increasing dollar may sound like a good thing. Though it does boost our domestic purchasing power parity, it has negative ramifications in a globalized market. For example, with a more expensive dollar, exported American goods are more expensive to buy abroad. One benefit of the weak dollar of the past few years was a reduction in trade deficit given that our exports were cheaper on global market.

The Federal Reserve also disclosed the minutes of their Federal Open Market Committee Meeting  (“FOMC”). The FOMC is the Fed committee that that makes key decisions about interest rates and the growth of the United States money supply. The FOMC slashed outlook for domestic growth and indicated they would continue to bolster the recovery should the economy dip. Key reasons cited for this less than positive outlook include the obvious like high unemployment and the stalled housing market; other reasons include the recent economic faltering of Europe’s debt crisis and volatility in our own Wall Street.

Earlier this year, the FOMC was shifting from the Keynesian approach it had taken the past few years of injecting funds into the economy to stimulate recovery to a wind down of reliance on the Fed to spur growth. However, at the most recent meeting (June 22-23), the FOMC indicated that it needs to explore new options to spark a sustained recovery. The FOMC decided to hold steady the key interest rate at its record low of near zero to help sustain the recovery.

My biggest concern with the low rates available to the banks is simple. They can borrow from the Fed at near zero interest and turn around and invest in Risk Free 10 year Treasury Bonds yielding 3.05%. The spread between the rate the bank borrows at and the rate of the T-Bill is risk free, so why would the bank lend the money out to risky consumers? So my concern is that the recovery the Fed is trying to bolster is only benefiting the bottom line of the banks. The idea of the key rate set by the Fed is that lending institutions base their rate off it, so a lower Fed rate should result in lower rates for consumer borrowers. However, the banks are derailing this line  of lending by borrowing money from the Feds at a low rate and reinvesting it at the higher rate of return offered by the Feds on our sovereign debt. I think this is a huge problem, the money the banks are borrowing is tax payer money, the money they are receiving from T-Bill returns is tax payer money.

Solutions to this problem are highly complicated: Should we allow all consumers to borrow directly from the Fed? Should we require banks to relend the money they borrow from the Fed? Should we not allow banks to profit from the spread between the rate they borrow at and the rate they receive from T-Bills?

As always, I invite a discussion in the comments section below as to what your comments, questions, and possible solutiosn are regarding this mess.

Got questions? Send me an e-mail: Matt@desertedgelegal.com

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****

Government Spending vs. Austerity

Currently, there is a big debate on whether the government needs to tighten its belt and cut the deficit or whether government stimulus is needed in order to jump start the economy and keep things moving. I had a great discussion with a reader of the blog via email regarding my post last week titled One Step Forward, Two Steps Backward.

I think most people would agree that the government cannot spend our way out of recession into perpetuity and that it is in everyone’s best interest to cut the deficit. One of the proposals for the government to cut back has been to end the subsidization of the housing market. This could manifest in several different ways. This was my reply to the blog reader in regards to ending mortgage interest tax deductions and reducing the home loan amortization down from the standard 30 years:

“I read Professor Shiller’s proposal for curtailing the mortgage period down from thirty years and removing the government subsidies that go with it. I don’t think that is necessarily a bad idea, I just am hesitant to say it is the right fix right now.

ONE STEP FORWARD, TWO STEPS BACKWARD

This week, the S&P 500 is on track to have one of its best weeks in a year. The market closed last Friday, July 2, 2010 at about 1022.58. At time of this writing, the S&P stood at 1077.62; this yields a gain of more than 5% in a short (4 day) week of trading. Many big corporations, including some big banks like Bank of America, report earnings next week and investors continue to wonder whether we are on the edge of a double dip recession or a sustained rally.

Although the market has shown good signs of life this week, I think the best indicator of stability in the economy right now is going to be a stabilization and possible increase (albeit a very modest increase) in home values. Here in Arizona, the idea that home values will trend upward is optimistic but with all the foreclosures and bank owned properties, I am hesitant in thinking there will be a sustained bull housing market.

Politics aside, the current legal battle between Arizona and the Federal Government will likely have some implications for the housing market here. Time will tell whether the hot button immigration issues here will lead to an influx of homeowners or an outflow of people leaving, but personally I don’t think too many people will make the most important purchase of their life based on court battles.

Right now, so many homes are for sale, with many more owned by the banks, that it is truly difficult for stabilization to occur. Simple supply and demand dictates that too much supply and not enough demand will drive down prices because of a flooded market.

What scares me the most is the idea that even if there is stabilization, the banks could easily derail a recovery. Right now, the banks own massive amounts of homes, and a lot of banks are not putting them on the market because of the weak demand for housing. What this means is that as soon as the market starts to pick up, we will start to see more bank owned houses that are currently vacant put up for sale. This will again flood the market with supply without lockstep increases in demand, driving down prices yet again.

The obvious message of this is clear, people needing to sell their homes will face a saturated market; homeowners will be forced to compete for buyers with the banks that have the time and resources to wait out a sale and the means to finance a potential buyer.

With so many foreclosures happening the banks continue to stockpile their inventory of homes. Obviously the housing market is not a prime seller’s market right now, so these banks will likely sit on these repossessed houses, keeping them vacant, until property values show signs of appreciating. That’s when the market will be flooded yet again with these bank owned homes, killing off any increases in home values. One step forward, two steps backward.

The effect of supply without demand will also negatively impact the refinance market as well. When prices go up, the supply will be again flooded, bringing down values. What this means for homeowners needing to refinance is high volatility in appraisals. Imagine that in 2011, your neighborhood sees an increase in home prices and you successfully refinance given the newfound equity in your home; the bank suddenly puts two or three homes they own, that have sat vacant, for sale in your neighborhood to profit from the appreciation; this flood of supply will inherently drag down all the home values of the neighborhood; your home value will go down with the neighborhood, quite possibly putting the newly refinanced into a position of being underwater. This could lead to an increase in strategic defaults. One step forward, two steps backward.

Got questions? Send me an e-mail: Matt@desertedgelegal.com

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****

Principal Reduction Coming to AZ?

Wall Street got their bailout, that’s bitter, yet old news; however the outspoken thought on the minds of the rest of America remains, where’s the bailout for Main Street? Under a new plan called Save My Home AZ, expected to launch in September of 2010, some Arizona homeowners may finally get some much needed help in reducing the balance of their mortgages by $100,000 or more. The program is a trial run, paving the way for a broader reaching program to keep homeowners in their homes.

Back in February, the Arizona Department of Housing received $125 million in federal funds to help stabilize Arizona’s declining home market. Recently, Washington, D.C. gave its blessing to allow Arizona to use the money to reduce mortgage balances for up to 1,850 households. Here are the details:

• Borrowers can receive up to $50,000 in state-issued funds to use towards what they owe on their mortgage
• 75% of the funds will be issued in Maricopa County
• These “loans” will in all probability not have to be repaid in full
• Households that have seen their incomes slashed can receive up to $12,000, to be applied to up to 1,000 households
• Incentivize lenders to work with homeowners to settle second mortgages by offering the lender up to $5,000 if they settle with the homeowner

Though this plan will certainly not neutralize the foreclosure situation across Arizona, it is a start. The pilot-program promises to show what outcomes can be expected by directly helping distressed homeowners instead of the trickle down bailouts we have seen over the past year that seem to only benefit the banks.

However, like any bit of good news that sounds too good to be true, the devil is in the details. The biggest red flag is that participation by the lenders is optional. Additionally, the program relies on a matching system where the lender matches the dollar amount of federal funds received by homeowners. With so many big lenders out there refusing to negotiate mortgage modifications, there is definitely cause for skepticism as to whether the big lenders will capitulate and participate. Moreover, eligibility guidelines are quite narrow (see “Guidelines” below), meaning the majority of the 50,000 expected foreclosures in AZ this year will not be stopped by this program.

On its face, this plan does offer a bit of pragmatism, which has been noticeably absent throughout this entire housing crisis. For example, homeowners who receive these home-saving funds would be obligated to repay portions of the “loans” if they sell the home within ten years or if the home appreciates in value.

I remain skeptical for several reasons. First, why now? Where was this program last year or the year before? It almost seems as though it is too little too late. Like previous modification programs, this plan seems plagued by strict and narrow guidelines, disqualifying most homeowners. When I worked as a mortgage banker, supposedly modification programs were available to homeowners with Freddie or Fannie backed loans; however never once did I connect with a client who qualified, regardless of whether their loan was Fannie or Freddie.

Second, is $125 million in funds enough to spur any sort of a noticeable correction in the Arizona housing market? With an expected 50,000 foreclosures in AZ this year alone, $125 million sounds like a drop in the bucket. Just for a simple comparison, figure the mortgage balance of each foreclosure averaged over the 50,000 expected foreclosures is $50,000 (completely hypothetical, just a round figure to use as an example). That yields $2.5 billion, so the $125 million in federal funds covers a mere 5%, hardly enough to correct the housing crisis here in AZ.

My biggest skepticism lies with the lenders; with participation optional, it seems unlikely that most big lenders will voluntarily take part in this plan. If they will, why wouldn’t they just negotiate with homeowners to settle a modification from the get go?

Guidelines:

Foreclosures must be imminent. Households must have exhausted all options for remaining current on payments.

Modest primary residences. Assistance may only be used for borrowers’ primary residences, and may only help households with incomes at or below 120 percent of the area’s median income.

Personal responsibility. Money may not go to borrowers who face foreclosure for “self-inflicted” reasons, such as refinancing to take out equity or basing mortgages on undocumented income.

Hardships. Applicants must demonstrate hardship, such as reduced income due to underemployment, medical condition, divorce or death.

Source: “Proposal for use of HFA Hardest-Hit Fund (Third Revision),” Arizona Department of Housing

If you have any questions, please feel free to email me at matt@desertedgelegal.com.

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****

Hello!

My name is Matt Azari and I am happy to be contributing to the Foreclosure Industry Blog. I recently attended Christine’s Auditing class and I was overwhelmed with all of the undisclosed charges and inconsistencies with chain of title that go into a typical mortgage.

A little about myself: my background is in Finance; I hold a Bachelor’s of Science in Business Administration/Finance from the University of Arizona’s Eller College of Management in Tucson, AZ. During my time in Tucson, I began my legal experience by working at a medium sized insurance-defense law firm. I then went to work for a business valuation and transaction advisory firm, where I learned auditing skills. I moved to Phoenix to take a job with Quicken Loans as a Web Mortgage Banker. This was an eye opening experience and I quickly learned the ins and outs of mortgage origination. After months of working at Quicken, I decided I no longer wanted to “sell” mortgages and decided to pursue my dreams of practicing law. I had already applied to law school prior to my time at Quicken and decided attending would certainly advance my career goals and get me where I want to be. I am proud to have just completed my first year of law school and I welcome the challenges ahead in my quest to succeed in the legal profession.

My time at Quicken afforded me a unique opportunity to connect with potential refinance and purchase clients, looking for hassle-free home loans. By this time, the housing market had been hit with waves of foreclosures, and the government was offering a first-time home buyer tax credit. Needless to say, with rates at all-time lows and government incentives in place to help homebuyers, a refinance boom was underway. We were offering any kind of mortgage one could think of; from conventional 30 year fixed loans to 3, 5, and 7 year ARM programs with rates as low as 3.99%. These ARMSs appeared quite attractive, despite the fact that with falling home prices and no end in sight for the housing mess, the ARMs made no sense for the vast majority of my clients.

I was always skeptical of any sort of an ARM program, especially during the trough of the credit crunch; what tragedy would befall unsuspecting homeowners when they attempt to refinance their ARM into a fixed rate loan, but their home value had remained stagnant or depreciated? Three years did not leave much time for home values to stabilize, especially considering that the majority of my clients were in the hardest hits states, like Arizona and California!

I look forward to getting into more detail about my experience in the mortgage lending industry, telling my story from an insider’s perspective, stay tuned!

If you have any questions, please feel free to email me at matt@desertedgelegal.com.

DISCLAIMER:

****MATT AZARI IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****