Proof the Fed Does Not Protect Consumer Rights

      I was dumb founded as I read this editorial in The New York Times of November 29th and so I am quoting the basic points below.

     You may remember when the movement to create a separate Consumer Protection Agency gathered force last spring.  Mr Bernanke was one of its fiercest opponents. I remember one droning disposition before the Congressional Banking Committee when he explained actions the Fed took in protecting the credit card consumer.  He talked about the size of the font and the length of the sentences and the clarity of the prose in bank disclosures.  Not a word about limits on fees, timely notice of raises in interest rates, collusion with other creditors in setting interest rates. Mr Bernanke was mostly worried about educating the consumer! Nothing about reforming banking practices.

      Congress did mandate more comprehensive changes to credit card regulations, in great part due to the efforts of Elizabeth Warren, and the Banking Reform Act did create a separate Consumer Protection Agency within Treasury, outside the purview of the Fed. This new proposal should remove any lingering doubts anyone ever had about the wisdom of taking consumer protections away from the FED.  Read and weep.

      "There are two sides to every delinquent loan - a lender who made a bad lending decision and a borrower who cannot repay. Yet, banks have never acted as if they bear responsibility for the mortgage mess.

They have . . .. resisted reducing principal balances for troubled borrowers, for instance, because that could force them to take losses they would rather delay.

Now, despite mounting evidence of borrower mistreatment, the Federal Reserve has proposed a rule that would disable the most effective legal tool that borrowers have to fight foreclosures.

First, some background: The Truth in Lending Act from 1968 gives borrowers the "right of rescission," the ability to undo a home refinancing or home equity loan within three years of the closing if the lender did not make proper disclosures - generally of the loan amount, interest rate and repayment terms. The law makes allowances for mere mistakes by the lender, but otherwise requires strict compliance, as well it should: disclosure is the main - often the only - consumer protection in the mortgage market. ... .  when a loan is rescinded, the lender must give up its security interest in the home - and without a security interest, the lender cannot foreclose. The borrower must still repay the loan principal, minus payments already made. Essentially, a lender that has not complied with required disclosures can get its money back, but not interest and other fees.

      In practice, one of the ways that rescissions have worked is that lenders faced with rescission have instead modified the loans, by reducing principal and setting new repayment terms. The Fed. . .  would require a borrower to pay off the remaining principal before the lender gives up its security interest. That would be clearly impossible for troubled borrowers. So the Fed's proposal would benefit the creditor who violated the law rather than the borrower, paving the way for foreclosures that otherwise could be avoided."

      Banks have already influenced our bankruptcy laws such that the one type of debt that cannot be extinguished or altered by a bankruptcy judge - you guessed it - is a mortgage! Now they want relief from responsibility for false representations!  Go talk to your senator about this. I have.

QE2 MADE SIMPLE

As unbelievable as it seems, there are some brilliant cartoonists who have managed to craft a charming explanation of the QE2.

If you prefer a more detailed explanation from an economist of the dismal science, you can find a very satisfactory explanation here.
He doesn't get to his explanation until 12 minutes into the talk, but it is well worth the wait. Make some tea or coffee while you're waiting.  Just be forewarned that the birthing of a new dollar is no immaculate conception; it is a messy affair.

Bonds go Down, Rates go Up and the Dollar plays Havoc with all Sorts of Stuff

Is QE2 going to lower mortgage interest rates? Is it large enough to counteract all the other negatives for the housing market?

As the year began the 10 year treasury bond yield were expected to reach 4.5% this year by experts from private investment banks and government think boxes. It is what one would expect during the recovery.

Come spring 2010 rates barely kissed 4% and then sank back down. They actually rose to a high of 2.96% after the Fed November 3rd announcement that it would be buying $600 billion in the bond market. Bondholders sold as the Federal Reserve bought! Whoops. Rates were supposed to go down in order to discourage investors from buying low risk bonds. Mr Bernanke wants them to put their money into riskier assets like the mortgage market and business loans. We are two weeks into the QE2 bond buying program, so it is early to make judgement. Now Treasury rates have settled down , while interest rates on standard 30-year fixed mortgage rates have gone up to 4.62%! Whoops! This wasn’t supposed to happen. We can't be sure which way rates will go at this point. It seems there is a lot more room for interest rates to rise than there is for them to fall.  Would a quarter point or even a half point be enough to effect someone's decision to buy or not to buy?

Mortgage Applications fall by a third from April of this year -  the last month to apply for the home buyers tax credit.  Successful purchase transactions will fall in the months ahead as FICO credit scores are being raised across the board.

FHA and all the major lending banks are tightening qualification standards on the loans they originate  or purchase from smaller banks. The three largest  largest mortgage originators, Wells Fargo,  Bank of America,  and JP Morgan Chase, no longer buy loans with FICO scores below 640 from other lenders. Many independent mortgage banks will follow suite. Only about 3.7 percent of U.S. consumers with credit information available, for a total of 6.3 million folks,  score between 620 and 640, according to FICO.  The Minneapolis-based company  Fair Isaac Corp generates these  nationally accepted credit ratings.

Nationwide about a third of sellers whose homes are still on the market have dropped their asking price at least one time.  In Seattle 50% of sellers have done the deed. You can see the chart for all major cities here.

Nationally home prices are down 2.8 %.  Seattle prices down 5.8 from a year ago.

Inflation is not what the Federal Reserve thinks will encourage growth.  It registers an underwhelming  .6% annual rise if you exclude food and energy prices, and 1.2% if you include them.  So if investors expect inflation to lift prices, that is where they will put their money. Watch the prices of raw assets, basically anything you can take out of the ground, soak up all those Federal dollars.  Eventually they will creep into manufactured products.  But will they lift home prices in the face of all the pressures on the housing market now?

Bernanke said the Fed’s first large-scale bond-buying plan, from December 2008 through March 2010, was “quite successful in helping to stabilize the economy

and support the recovery during that period.” 

The Federal Reserve will be adding to a trillion dollar reserve account by buying $600 billion more, plus money redemptions from those pesky mortgage securities the Fed took off the hands of our big banks last year.   It is a lot to ask – but I for one will be holding my breath until the QE2 experiment ends this spring. 

In the meantime, feel free to contact me with real estate questions.

Housing Bubble to Interest Rate Puddle

As the financial news was celebrating a turn-around in the economy I thought I might be seeing some positive changes in the real estate world.
Supply and demand improved: the number of residential offices in King Country fell by almost half since the top of the market in 2006. Great news for those of us still in business.
The incidence of falling-asleep-on-Open House-sofas declined drastically. People spent some of their precious week-ends to look at homes again and not just to sniff out their neighbors inferior interiors. The interest in maybe buying was palpable.
Interest rates were a huge lure. I mean, 4 1/2 % on the way to 4%! No points!! Folks who would not normally consider a second home or rental house were crunching the numbers. What with rental rates beginning to rise and vacation home prices to fall, not to mention the fuzzy noises coming from the Fed, how could you lose.

In July Ben Bernanke was painting a picture of an economy expanding at a moderate rate, consumer spending rising 2% , jobs $ housing still a bit worrisome. The Fed was going to prevent inflation by getting ready tools to drain the excesses from the system, including asset sales and reverse purchases.
Those green shoots were coming up roses. The turnaround was right around the corner.
And what a turn around it was. In August Mr Bernanke talks about another stimulus program. All of a sudden the economy was bad enough to need another shot of strong meds. What had happened for the Fed to change its mind?? Who knows? The foreclosure mess finally breaking?
Who cares? The stock market goes up. Speculation about how much money will fly out of the magical Fed Bubble Machine goes on for two months. Maybe one, maybe two trillion, maybe the beginning of more rounds of Fed stimulus.
The market goes wild. Everything is up, commodities from coffee to cotton, gold, emerging and emerged markets. Even bond prices go up. If the Fed is going to buy Treasuries, bond prices will rise, so investors get in there first.
November 4th the program is announced: $600 billion in short to mid term Treasuries plus the reinvestment of the earnings from Mortgage Bonds. Everyone is off to the races. And then a funny thing happens.
Bond prices start to fall. When the price paid for the bond goes down, the interest rate the bonds yield goes up. At the long end, the 30 year Treasury yield on Nov 4 was 4.06 % ; on Nov 12 – 4.29%. Doesn’t sound like much, $35 a month on a $250,000 loan. But if this is a new trend, and if interest rates rise on the 10 year Treasuries, we can expect mortgage rates to go up.
This will be very bad for housing prices, bad for owners with ARM mortgages, and bad for first time buyers qualifying for their first mortgages. It will be good for the banks, however, as there will be a larger spread between what they can borrow and what they can lend out at.
The Big Question remains - WHY would prices of bonds go down when the Fed has been advertising far and wide for months that they are going to buy on the order of $100 billion a month?
Maybe because foreign buyers aren’t coming to the Treasury auctions. Maybe the bond holders are selling more than the Fed is buying. Maybe they're wondering who will be buying when the Fed is done. Who would be buying unless interest rates go up enough to justify the risk of bond prices falling further?
And just when I though I had lots of good news to bring to my blog, the landscape shifts.
Interest rates may return to their 4-41/2 % range. Most often buyers sitting on the fence will jump off if they fear interest rates will rise. We will see if this time it is going to be different.