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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Monday, October 27, 2008

HOPE NOW: A New Organization To Help with Your Mortgage

Today's economy presents so much to talk about! How do we pick a topic? Very arbitrarily. We just dive into the middle and see what comes up. Whatever it is, there's no shortage of commentary and data to feed on. And it's all worth our attention: U.S. Treasury capital investments in banks, Federal Reserve purchases of "commercial paper" debt notes directly from the borrowing companies, and the extraordinary intra-day volatility of stock prices, just to name a few.

A news story catches our eye about a Dallas, Texas, woman attending the foreclosure auction for her house. Her visible grief over losing it moved the successful bidder to sympathy, and that person actually returned it to the woman. The "foreclosure sale" is an unfortunate sign of the times, but the generosity of a total stranger takes away some of the sting. Some conventional wisdom seems to suggest that once a borrower gets into trouble, foreclosure is the only possible outcome, that efforts by lenders to help the borrower in preventing it are nonexistent or trivial in the overall scheme of things.

In fact, though, since the beginning of 2007, loan workout plans that keep people in their homes have been far more numerous than foreclosure sales. There were almost three times as many workouts as there were foreclosure sales last year, 1.535 million to 514,000. Brand new data published just this morning show that such efforts in the first nine months of 2008 already numbered 1.598 million, even more than the total for all of last year. At the same time, the number of foreclosure sales also rose, reaching 713,000.

Handling delinquent mortgages is -- as nearly every aspect of the current economic calamity -- highly complex. We've touted subprime loans here for the benefits they bring to neighborhoods. But we also have to face the fact that many people got loans who had no business taking on such commitments. More recently, as well, the delinquency rates on prime mortgages have escalated, reaching nearly 4% in the second quarter, compared to a long-run average of about 2.5%. So rapidly increasing numbers of homeowners are starting down the road toward dispossession.

The monthly bookkeeping and payment processing on a mortgage loan are called "servicing". In the old days, when banks and thrift institutions made nearly all of the mortgages and kept them to maturity, the servicing and the loan relationship were local and much more personal. If there was a problem in the borrower's family, for instance, the friendly local banker might be available to figure out some way to work around the payment obligations until the situation cleared up.

Now, with the dominance of mortgage-backed securities (MBS) that are sold to disinterested third party investors, there is much less personal attention. "Servicing" is an industry to itself. Sometimes, borrowers have been unable to contact servicers, they have told Federal Reserve and other survey-takers. It's also the case that some borrowers have been unresponsive to calls from servicers, and by some measurements, as many as half of mortgage foreclosures have occurred without any contact between servicer and borrower.

So let us introduce you to "HOPE NOW", a federally encouraged alliance of servicers, lenders, community organizations and industry associations, which was formed in July 2007. The membership list is quite extensive, and the federal government's Department of Housing and Urban Development, HUD, along with the Fed and the FDIC, stand behind their efforts. It is HOPE NOW data we cite above about the number of loan workouts and foreclosure sales. They provide a hotline: 1-888-995-HOPE. If you are in trouble on your mortgage and can't get a response from the phone number on your monthly payment bill, call these people. They'll help. If the problem is much more involved and you really need to cobble together a whole plan, call these people. Their services are absolutely free to the borrower. See their website:

The data on workouts do show that of the types of workouts, so-called repayment plans are more widespread than "loan modifications". A repayment arrangement is a schedule of enlarged payments that intend to bring the borrower up to date; this approach is clearly more burdensome for the borrower and can be unrealistic, given that the borrower was having trouble keeping up with the original payments in the first place. The loan modification approach is one advocated in particular by community groups and legislators; it makes a permanent change in the basic terms of the mortgage: the amount of the principal, the final maturity data and/or the determination of the interest rate. This kind of fundamental change to the loan is clearly intended to make it more manageable for the borrower.

Today's new data from HOPE NOW highlight a dramatic increase in "loan mods": in the third quarter of 2007, there were just 75,000 of these around the country. This year's third quarter saw more than three times that many: 257,000.

So does the lender or servicer engage in a workout solution or do they foreclose? This is determined by a "net present value" calculation on the mortgage. The total value today of the entire modified payment schedule (with reduced payments and/or longer term) is compared with the amount that is likely to be recovered in a foreclosure sale. The costs of foreclosing are actually quite high. FDIC and Federal Reserve studies indicate that they can eat up as much as half of the principal amount of the mortgage, taking account of harm that comes to the property value due to its foreclosed status. Very often, then, workouts do indeed pay, relative to foreclosure. To say nothing of the social value of keeping the original homeowner in their own home.

This issue has many more facets: the often deleterious effect of investor-owners who don't live in the house, the impact of new legislation further emphasizing the loan workout environment, the relationship of delinquencies and home prices in general, and so on. One glimmer of hope might be seen in the September data on home sales. The U.S. Census Bureau today reported a small uptick in sales of new houses, from 452,000 in August to 464,000 last month. Sales of existing homes, compiled by the National Association of Realtors, gained 5.5% to 5.18 million in September, the largest volume since August 2007. These increases were both accompanied by lower prices, so we can't conclude there's a genuine advance in demand, just some "bargain-hunting". Still, getting those inventories of unsold homes off the market and into buyers' hands is a necessary first step to any renewal of growth.

Finally, if you yourself are struggling with your own mortgage or you know someone who is, where do you call? That's right: HOPE NOW: 1-888-995-HOPE. Begin to get it worked out. The sooner that gets started, the better off everyone will be – especially you!

Saturday, October 11, 2008

Encouragement Can Come from the Church

What can the Church say in the midst of this tumultuous time? Surely religious faith is important right now. As I have attended church these last couple of Sundays in particular, it has been so affirming to hear the Promises of love and healing from God in Christ.

In this regard, here is a very constructive statement from the Bishop of Chicago, Jeffrey Lee, the text of a Pastoral Letter he issued just this past Tuesday. At the conclusion, he quotes the Collect from two weeks ago, a prayer that spoke very strongly to me as I stood in the pew that morning.

The news from both New York and Washington, D.C., about the present financial situation in the United States is troubling to me and many others. There is widespread confusion about the status of our country's financial markets. People are angry and anxious about the economy in general. There is concern about the immediate and long-term consequences of intervention in the finance sector by the United States Congress, the Department of the Treasury, and the Federal Reserve. For most of us, issues of this nature and scale are unprecedented, and the accompanying uncertainty contributes to our apprehension.

These problems, like so many we face today, are compounded by the speed at which information is distributed. We are confronted by immediate and virtually incessant comment and analysis by the media and others. There is a general election at which we, as a nation, will decide the leadership that will guide us over the next several years. And, this is taking place while our service personnel are engaged in military action in Iraq and Afghanistan. It is not surprising that people are worried.

But it is essential to remember now, as at other times of transition and turmoil, that most of the challenges in life are ones we cannot control and that our trust, as always, is best placed in the Lord. As the Psalmist reminds us, "Cast your burden on the LORD, and he will sustain you." (Psalm 55:22). None of us can know precisely how this or any future predicament will be resolved, but we can take comfort in the certain knowledge that God is still God and that Christ is always with us.

I am aware that the consequences of this economic crisis are reaching into the lives of our faith community with the threat to jobs, homes and savings. Along with prayer and pastoral support, we can also offer our members and communities information and connections that can restore confidence and aid with charting a more secure future. Several of our congregations have ongoing ministries for assisting those searching for jobs or making a career change. Career counseling, legal service and credit counseling help is also available through local, state and federal sources. . . .

The collect for Proper 20 seems appropriate during this time, and I encourage you to join me in praying for the health and well being of all people, but especially those most affected by current financial events.

"Grant us, Lord, not to be anxious about earthly things, but to love things heavenly; and even now, while we are placed among things that are passing away, to hold fast to those that shall endure; through Jesus Christ our Lord, who lives and reigns with you and the Holy Spirit, one God, for ever and ever. Amen."


Bishop Lee provided a list of resources for counseling and career assistance. His list, of course, was specific to his Diocese. But he also mentions this nationwide Department of Justice approved list of credit counseling agencies. We cannot emphasize too much the importance of keeping your own finances under control and getting help with credit before it controls you!

Thank you, Bishop Lee!

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Saturday, October 04, 2008

Very Tricky

We're writing on Saturday morning. This weekend might be the first one since Labor Day when there doesn't have to be a major financial market rescue in the works or when Washington officials had to pull all-nighters to put together some patch before Asian markets open Sunday evening, East Coast time. Whew! Does this "weekend off" mean the worst is past?

Well . . . .

We've known for a long time that our debt society posed a danger, but we've still been amazed these last weeks at the speeds and magnitudes of the losses in these recent events. In just the four extra days it took Congress to pass the bailout legislation, from the House defeat Monday to the House passage Friday, the following developments occurred:

1. The Federal Reserve loaned $368 billion through its discount window to banks, money funds and bond dealers during the Fed's statement week ended Wednesday. The previous week was half as much, $188 billion, and before these credit problems really broke out in March, the largest amount ever had been $12 billion in the aftermath of 9/11.

2. Rates for overnight lending in the international money markets leaped to 6.8% on Tuesday, compared to the Federal Reserve's target 2% rate in the U.S. The day was the quarter-end, September 30, often a time when such lending is tight, but in recent years, borrowers have learned to smooth their daily cash needs to limit this spurt. Not so now. That rate came down somewhat later in the week, but very short-term interest rates for private sector borrowers remain generally elevated; cash investors continue to favor "risk-free" U.S. Treasury bills, which Friday were earning a mere 0.47%.

3. Two short-term investment funds widely used by college endowment managers suspended or limited withdrawals. The Wall Street Journal reported that no school's operations were immediately impacted but it's still a very precarious position.

4. The State of California announced that it may soon need to get a federal loan of $7 billion to meet its short-term cash needs.

Some of these situations might have emerged anyway during the week, but certainly there was added risk with Monday's failure of the main plan that was on the table, and all these developments reflect that.

By yesterday, in addition to the final passage of the bill, there was also talk that the Federal Reserve would lower its target for the base "federal funds rate". That has remained at 2% since April even as the Fed has added enormous amounts of short-term funds to the credit markets. Now, we're getting more concrete evidence that the credit tribulations are affecting the economy itself. Most notably, the Labor Department reported that the number of jobs in September fell by 159,000, spread across a wide range of industries. Consumer spending, already hurt by high gas prices, was also weak in its latest report, covering August, with declines in several widely diverse segments. Industrial output and manufacturers' orders have also weakened. So what began in the housing markets has spread now across the economy. These events in the U.S. are also mirrored in other countries, especially in Europe.

The right things are happening, though. The legislation did pass. The Fed may well lower its base rate, which will hopefully lead to reductions in other interest rates. The weakest banks and securities firms are being absorbed into stronger ones. It will take some weeks for Treasury officials to begin the newly authorized purchase program for mortgage securities, but they are one group probably not taking off this weekend as they get that effort organized. All this will help.

And you? Along the lines of what Mother Crafton wrote in yesterday's eMo, seize responsibility for your own financial condition. Make sure your bill-paying is up-to-date. Invest money cautiously. We've said it before, but we'll repeat: don't invest in anything you don't understand. This is one time when it isn't a joke to put some money under the mattress. The new law greatly increases FDIC insurance for bank deposits. Take advantage of that, possibly at your own local neighborhood bank. Be careful. It's still very tricky out there.

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