The details of the plan call for a reduction of interest rates aimed at borrowers of sub prime and adjustable rate mortgages (ARM’s). Interest rates could be cut to as low as 2.5% for some borrowers, although the cuts would be temporary. The idea is to decrease mortgage payments so that the total payment does not exceed 34% of a borrowers income, which is the approximate percentage that reputable lenders use to determine a persons eligibility for a home loan. Had Countrywide and other sleazy lenders used this formula to begin with, the mortgage crisis would have never happened.

In addition to cutting interest rates for distressed home buyers, Countrywide will freeze foreclosures until borrowers mortgages can be evaluated and readjusted. All legal proceedings against Countrywide will be suspended until March 1, 2009 provided they meet the goal of adjusting 50,000 mortgages. The final objective is to reduce 395,000 loans in states hardest hit by the sub prime crisis including California, Illinois, and Florida.

This will be the most aggressive and possibly the most effective plan to address the mortgage crisis to date. Key lawmakers are putting the pressure on other lenders to adopt the program since recent efforts by the Bush administration have done little but reward the irresponsible behavior that created the problems in the first place.

Samuelson states that economic downturns hardly ever evolve into national tragedies. In fact, the US has been through 10 recessions since the late 40’s. While they did have a very real effect on the economy and of the people living through them, they actually only lasted for an average of 10 months. The two worst were from 73 to 75 and in 81 to 82. Both lasted 16 months and unemployment rates peaked at nearly 11%, well above the average for the other recessions of 7.5% and of the current rate of 6%.

Coinciding with the number of recessions over the last 60 years are the number of bear markets. Since WWII the number of bear markets has also been 10. A bear market is one in which the S&P Index declines at least 20% from the most recent peak. The average of all post war bears was just over 31% . The .com crash of the nineties witnessed a fall of over 50% and last week the market was down 30% from one year ago.

Compare all of this to the Great Depression, where the market lost a whopping 90% of its value resulting in nearly a decade of hard times. Most economist agree that this is not likely in today’s environment where the Federal Reserve is actively injecting funds into the finance sector, unlike the Federal Reserve of 1929 that did relatively nothing to prevent the collapse of the US economy.

Residential construction fell by 2.1%, up slightly from June’s 1.3% decrease, while non-residential construction gained 0.2%, down slightly after rising 1.1% in the previous month. Overall, this is not surprising news. As home purchases continue to decrease in the tightening credit market making it unwise for contractors to take on large residential projects. More worrying is the notable decline in private construction.

There was a 1.4% decline in private construction and a 1.4% increase in public building, which came in at 0.2% and 0.4% in the month of June.

The site breaks down the large mortgage companies into 3 categories.

• Imploded Lenders: Lender may be operating in some capacity but has possibly filed for bankruptcy or halted major operations. Can include prime, subprime, retail, or wholesale lenders.
• Ailing Lenders: Lender is scaling back operations or have recently been in manifest financial, legal, or operational distress. Most of the industry currently falls into this cateogory so Aaron reserves this list for the most glaring cases.
• Non-Imploded Lenders: Unfortunately, this area seems to include only sponsored listings so you may want to check another independent source before taking this portion at face value.

Although it is a community centric forum, the editorial staff requires that 2 out of 3 of the following criteria be met before a company makes it to the “implosion” or “ailing” list:

• At least $20 million/month in origination volume (any stage of origination)
• At least 3 states of origination
• At least 50 employees

Over all the site has some great information and is organized in a consistent manner. I highly reccomend giving it a look or even subscribing to the feed if you want to stay up to speed on the latest mortgage implosions.

The FHA, or Federal Housing Authority, is a federal government agency that was created in the 1930’s. The US was just beginning to rebound from the Great Depression and the FHA was developed to help add stability to the mortgage market and improve housing conditions. In 1965 the FHA was joined with the Department of Housing and Urban Development (HUD) and together they have insured of 34 million mortgages.

Typically an FHA does not rely on a persons credit score as much as a traditional loan and they also do not require as much of a down payment, currently only 3%. Since the interest rate is not dependent on a credit score, the rate is the same for everyone. This is advantageous to someone with a lower credit score, but does not reward someone with a high credit score.

In order to qualify for an FHA loan there are several requirements you must meet. You must been employed by the same company for at least two years and maintained the same or more income throughout your employment with the company. If you have ever had a Bankruptcy, it must be at least two years old and you must have had at least two years of good credit since the bankruptcy. If you have had a Foreclosure, it must be at least three years old. You must also be in good standing with any of your lenders and not had more than two 30 day late payments in the past two years. Your mortgage payment will usually be based off of 30% of your total monthly income.

FHA loans were extremely popular in the late 30’s and early 40’s, but today it is estimated that they only account for 3% of all current home loans. If you have less than perfect credit, they may however be a great way for you to get a loan.

Fixed Rate Mortgage

With a fixed rate mortgage you are guaranteed by the lender to maintain the same interest rate during the entire length of your loan. The major advantage to this type of loan is that if the federal interest rates go up, you are locked in at a lower rate that can not be changed by the bank. There is a flip side to this though, because if the federal interest rate goes down, your interest rate will not.

Most people that finance their home with a fixed rate mortgage, do so over the course of 30 years. The advantage to this is that you get a larger tax advantage and because it is spread out over 30 years a lower monthly payment.

Others opt for a shorter mortgage of 15 or 20 years. Generally the shorter the loan, the lower the interest rate. This means you pay less interest, but because you are paying over a shorter time the monthly payments will be higher.

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage, as the name implies, is a mortgage that does not have a fixed interest rate. The interest rate is set to be re-evaluated at a predetermined period. The interest rate can go up or down and a cap is placed on the percent it can change each time.

The frequency that the interest rate adjusts is set by the bank, as is the amount the interest rate can change each time. For example say you are offered a 4.9% 3/1 ARM. This means that the first 3 years, the interest rate will stay at 4.9%. After that your interest rate will adjust every 1 year. The percent that the interest rate can go up or down is set at the time of the loan, but it is often 1%. So in 4 years when the interest rate change, you would probably be paying 5.9%. The next year it would be re-evaluated and would either raise or lower 1%.

The advantage to this type of loan is that your initial interest rate will be generally less expensive than a fixed rate mortgage. If you keep the loan without refinancing though, you will likely end up with a much higher interest rate because except in times of recession, your interest rate will not typically go down. An adjustable rate mortgage is perfect if you intend to refinance or sell your home within a few years before the interest rate changes.

The Obama plan is a three prong approach.

1. Modernize the Financial Regulatory System

This includes giving the Fed supervisory authority over any institution where the Fed is a lender of last resort; i.e. Bear Sterns. Obama also wishes to increase disclosure requirements for investment institutions and streamline the entire process of regulation. Currently, many institutions are regulated by multiple agencies with overlapping areas of authority. This makes it difficult to identify who is responsible for enforcing compliance.

2. Help Homeowners Facing Foreclosure

Obama proposes the start of a new Housing Security Program to give lenders an incentive to refinance existing mortgages into fixed 30 year mortgages backed by the federal government. He also proposes closing the Chapter 13 bankruptcy loophole for mortgage companies and defining mortgage fraud and predatory lending at the federal level.

3. $30 billion Economic Stimulus Package Specific to the Mortgage Crisis

The stimulus package would set aside $10 billion in foreclosure prevention for home owners in danger of losing their home. Another $10 billion would go to state and local governments that are facing revenue shortfalls due to the housing market. The rest of the package would be used to extend the length of unemployment benefits for full time workers and offer compensation to many part time workers not currently included in the system.

Although no firm details have been announced, the primary target of the Bush plan will be to tackle the problem of “underwater” loans or loans that are larger than the actual value of the property. This will mean that cooperation with lenders will be essential as any strategy will require  the lenders to forgive part of the loan and refinance the remaining principle with backing from the government. The plan will likely require that homeowners remain in their homes, are able to afford the new payments, and that their lender is willing to sign off on the changes.

Experts say that Thornburg mortgages are not defaulting in large numbers but the current credit crisis has lessened their value as an asset and in turn, Thornburg’s overall equity.

The changes, if enacted, will reform the 30-year old
Real Estate Settlement Procedures Act (RESPA).

One feature of The Good Faith Estimate is not going to make lenders
and brokers happy. Changes to YSP disclosure….

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