Where are the hosannas for Congress's handiwork on housing? Nobody expected it to solve anything, but it's worth understanding why.
By CNBC's count, the federal government has already made roughly $1.4 trillion available to refinance mortgage debt since the housing meltdown began. That makes this week's bill, which adds another $300 billion to the pot, seem a mite anticlimactic. The key word is refinance. Even if this money helps prevent foreclosures, it's aimed at houses that people want and that would likely resell even if foreclosed. Hardly touched is the real problem of tens of thousands of houses financed during the subprime boom that are unoccupied, unwanted, falling apart, built on spec, mortgaged on spec and abandoned on spec.
Washington has practically monopolized the business of financing and refinancing home sales for willing buyers and sellers, but it does nothing about the homes going rancid on the shelf, souring the value of the nation's entire housing stock and mortgage debt.
Maybe that explains why we're finally getting some takers for a demolition strategy as the least-cost route out of the subprime mortgage aftermath. The Economist, in its July 10 edition, endorsed a "wrecking-ball response." Bill Gross, the Pimco bond king, says in an ideal world Washington would "buy one million new/unoccupied homes, blow them up, and then start all over again." Even Larry Lindsey, the former Reagan economist, concludes that a larger bailout is nearly inevitable -- though his fanciful solution is to recruit 100,000 immigrants who would agree to buy $10 million worth of housing each.
A surplus of homes is the key liability dragging down much of the collateral underlying the financial system. Any Lindsey whimsies aside, have no doubt where many of these losses ultimately will land.
Take Fannie Mae and Freddie Mac, which owned 62,000 homes in the first quarter and were acquiring houses twice as fast as they could sell them. Fannie and Freddie now are statutorily backed by taxpayers, so taxpayers now are the real owners of nearly as many foreclosed houses as the rest of the country's 8,500 banks and thrifts combined.
And that's just the beginning. In seizing IndyMac, a California lender in subprime heartburn country, the FDIC put its fingers in its ears and simply declared a moratorium on new foreclosures. Taxpayers will end up owning a lot of derelict homes through FDIC too.
None of this is reason to disregard glimmers of a bottom in housing. Housing markets are local. Even with an unprecedented 19 million empty single-family homes, apartments and condos hanging overhead, some 500,000 new houses a year continue to be built and sold -- because people want houses where they want them. *If you are building a new home, be sure to get a home warranty. Home warranty coverage is often of great value to a house, whether or not it is being sold.
The problem is the other places.
In California's Central Valley around Stockton, one household in 25 received a foreclosure filing last quarter. In the Inland Empire, one in 32 did. In greater Las Vegas, one in 35 households received a notice. We use household advisedly since nobody lives in many of these homes or collects the mail. Close to the ground, a growing suspicion is that the numbers even understate the troubles because banks see no point in foreclosing on empty, unsellable homes. Local governments complain of not being able to find anyone to dun for upkeep because the owner has absconded and yet no bank has filed foreclosure papers.
To be sure, the disaster is not entirely confined to vast tracts of exurban no-man's lands in the Southwest. The Star Ledger of Newark, where home prices once were rising 50% a year, describes 66 Norwood Street, financed by Countrywide for a speculative buyer who rented it out while never making a payment on her $325,000 mortgage. Fannie now owns the house, which burned twice between a final order evicting the tenant and Fannie's crew arriving to board the place up.
Multiply that by entire neighborhoods of brand new, large homes, built on cheap land far from town or amenities in the subprime ground zero of California, Arizona and Nevada. Failing an improvement on God's damp squib of an earthquake in subprime country yesterday, some sort of strategy is going be priority one for the next president.
So far, Washington has put its political capital into trying to refinance salvageable homes for unsalvageable homeowners, when a relevant policy would consist of judiciously buying unsalvageable houses and demolishing them. Fannie and Freddie's strength is housing market software: They could be put to work devising a least-cost, maximum-bang strategy for demolishing unoccupied homes to preserve as much value as possible for the homeowners and mortgage creditors who remain.
Of course, right now their overriding imperative is to avoid recognizing losses rather than rushing toward them -- which is why Fannie and Freddie should be nationalized (and later privatized). One way or the other, taxpayers will end up owning thousands of unwanted houses. It's not too soon to begin limiting our costs.
By: Holman Jenkins, Jr.
Wall Street Journal; July 30, 2008
Wednesday, August 13, 2008
Monday, August 11, 2008
Fed Extends Lending Programs as Threats Persist
Move Reflects Worry Over 'Fragile' State Of Financial Market
A year after credit markets seized up, the Federal Reserve is still struggling with the crisis and expanding key lending programs that were designed as temporary measures to nurse the financial system back to health.
The central bank announced Wednesday that it is extending programs through January that allow investment banks to borrow from the Fed. The move is an effort to prevent a worsening in what the Fed described as "continued fragile circumstances in financial markets."
Troubles in the financial world continue to take the Fed deeper into new territory in its effort to prevent a larger credit crunch. The financial sector's weakness is a key reason why policy makers are likely to hold interest rates steady at 2% when they meet next week. A handful of officials are pushing for rate boosts in the near future to get ahead of inflation risks, but most policy makers appear to support staying on hold at least until financial markets can return to a more normal state of functioning. Continued weakness in housing and labor markets also is weighing on many officials.
For the past year, Fed officials have sought to separate their policy actions directed toward financial stability -- emergency lending to financial firms, for instance -- with their monetary-policy role of guiding the economy by setting interest rates. That distinction would allow the Fed to continue its aggressive lending role without being constrained on interest-rate policy if, for instance, it needed to respond to inflation risks.
For now, however, top Fed officials remain especially worried that today's market conditions could deepen the credit crunch by preventing banks from making loans to consumers and businesses. Banks' losses on mortgage loans in particular are wearing down their balance sheets, forcing them to raise large amounts of capital that would allow them to extend credit to consumers. A rate boost now could further aggravate markets while firms are trying to recapitalize. Even though credit markets have improved from their worst points over the past year, they remain far more strained than they were before the credit crisis started last August.
"Healthy economic growth depends on well-functioning financial markets," Fed Chairman Ben Bernanke told lawmakers this month. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."
The Fed's extension of its loan program for securities firms, started in March after the collapse of Bear Stearns Cos., allows the investment banks to take overnight loans directly from the Fed's discount window. That program, known as the primary-dealer credit facility, was set to expire in September.
The Fed extended the program through Jan. 30, though it said "the facilities would be withdrawn should the board determine that conditions in financial markets are no longer unusual and exigent." The move extends the length of the Fed's support to investment banks into the next presidential administration and Congress, which is likely to restart the debate then over whether such firms should get direct lending support.
The Fed's timeline indicates officials believe markets could remain weak, needing a backstop into the beginning of the year. How and when to conclude the program remains in doubt.
"When does it end? It ends a little bit when the liquidity needs start to abate," said Ray Stone of Stone & McCarthy Research Associates. "It's certainly not going to happen soon."
The central bank altered or expanded several programs to address apparent needs of financial institutions and prevent further stress on financial markets.
The Fed extended through January a $200 billion program that allows investment banks to receive 28-day loans of Treasury securities through an auction. In addition, the Fed launched a new program to auction options of up to $50 billion under that program -- the term securities lending facility -- "for exercise in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends." That may prevent further market stresses at turning points when firms are closely managing their books, and allows firms to effectively buy insurance instead of carrying the securities over the term. The Fed offered a related program at the turn of the millennium to maintain stability through the Y2K transition.
The Fed carried out a long-sought extension of its auctioned loans for commercial banks. Those will now be available for 84 days in addition to the 28-day loans under the term auction facility. That program was created as an alternative to the Fed's discount window, which is generally used by banks for last-minute funding needs but can carry a stigma because an institution fears being seen as troubled. The $25 billion auctions for 84-day loans will start Aug. 11 and alternate biweekly with $75 billion in 28-day loans. The total credit available under that program will be $150 billion.
The central bank also said it would increase the size of a swap line with the European Central Bank to $55 billion from $50 billion to accommodate a temporary increase in the amount of U.S. dollars the ECB can auction. The ECB and Swiss National Bank are extending 84-day loans in addition to 28-day funds. The Swiss central bank's swap line remains at $12 billion.
Demand for the dollar funding has been rising at each auction since May. In the most recent auction Tuesday, 63 banks bid more than $101 billion for the $25 billion auction. That was the highest number of institutions to bid, and the highest ratio of demand to the amount of funds available, since the ECB opened its swap line with the Fed in December.
Most Fed officials support the efforts to improve market functioning. But their views on the financial situation vary. On one end, officials view the latest market stresses as a source of concern but one that shouldn't stand in the way of raising rates to reverse the aggressive easing -- from 5.25% last September. Officials on the other end believe conditions have worsened dramatically in the past month -- as seen through higher mortgage costs, shrunken bank balance sheets and wider credit spreads -- and add risks to the economy.
While the second quarter delivered strong growth, activity may slow once the effect of economic-stimulus payments fades. High energy prices, a weakening labor market and continued troubles in the housing sector could join tightening credit conditions as restraints to growth into the end of the year.
At the same time, officials are bracing for high inflation readings. Oil this month has pulled off its record high by roughly $20, and gasoline has dropped back under $4 a gallon. Both developments could support a moderating inflation rate in the coming months. But prices remain volatile, and officials are putting little faith in the pullback.
A year after credit markets seized up, the Federal Reserve is still struggling with the crisis and expanding key lending programs that were designed as temporary measures to nurse the financial system back to health.
The central bank announced Wednesday that it is extending programs through January that allow investment banks to borrow from the Fed. The move is an effort to prevent a worsening in what the Fed described as "continued fragile circumstances in financial markets."
Troubles in the financial world continue to take the Fed deeper into new territory in its effort to prevent a larger credit crunch. The financial sector's weakness is a key reason why policy makers are likely to hold interest rates steady at 2% when they meet next week. A handful of officials are pushing for rate boosts in the near future to get ahead of inflation risks, but most policy makers appear to support staying on hold at least until financial markets can return to a more normal state of functioning. Continued weakness in housing and labor markets also is weighing on many officials.
For the past year, Fed officials have sought to separate their policy actions directed toward financial stability -- emergency lending to financial firms, for instance -- with their monetary-policy role of guiding the economy by setting interest rates. That distinction would allow the Fed to continue its aggressive lending role without being constrained on interest-rate policy if, for instance, it needed to respond to inflation risks.
For now, however, top Fed officials remain especially worried that today's market conditions could deepen the credit crunch by preventing banks from making loans to consumers and businesses. Banks' losses on mortgage loans in particular are wearing down their balance sheets, forcing them to raise large amounts of capital that would allow them to extend credit to consumers. A rate boost now could further aggravate markets while firms are trying to recapitalize. Even though credit markets have improved from their worst points over the past year, they remain far more strained than they were before the credit crisis started last August.
"Healthy economic growth depends on well-functioning financial markets," Fed Chairman Ben Bernanke told lawmakers this month. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."
The Fed's extension of its loan program for securities firms, started in March after the collapse of Bear Stearns Cos., allows the investment banks to take overnight loans directly from the Fed's discount window. That program, known as the primary-dealer credit facility, was set to expire in September.
The Fed extended the program through Jan. 30, though it said "the facilities would be withdrawn should the board determine that conditions in financial markets are no longer unusual and exigent." The move extends the length of the Fed's support to investment banks into the next presidential administration and Congress, which is likely to restart the debate then over whether such firms should get direct lending support.
The Fed's timeline indicates officials believe markets could remain weak, needing a backstop into the beginning of the year. How and when to conclude the program remains in doubt.
"When does it end? It ends a little bit when the liquidity needs start to abate," said Ray Stone of Stone & McCarthy Research Associates. "It's certainly not going to happen soon."
The central bank altered or expanded several programs to address apparent needs of financial institutions and prevent further stress on financial markets.
The Fed extended through January a $200 billion program that allows investment banks to receive 28-day loans of Treasury securities through an auction. In addition, the Fed launched a new program to auction options of up to $50 billion under that program -- the term securities lending facility -- "for exercise in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends." That may prevent further market stresses at turning points when firms are closely managing their books, and allows firms to effectively buy insurance instead of carrying the securities over the term. The Fed offered a related program at the turn of the millennium to maintain stability through the Y2K transition.
The Fed carried out a long-sought extension of its auctioned loans for commercial banks. Those will now be available for 84 days in addition to the 28-day loans under the term auction facility. That program was created as an alternative to the Fed's discount window, which is generally used by banks for last-minute funding needs but can carry a stigma because an institution fears being seen as troubled. The $25 billion auctions for 84-day loans will start Aug. 11 and alternate biweekly with $75 billion in 28-day loans. The total credit available under that program will be $150 billion.
The central bank also said it would increase the size of a swap line with the European Central Bank to $55 billion from $50 billion to accommodate a temporary increase in the amount of U.S. dollars the ECB can auction. The ECB and Swiss National Bank are extending 84-day loans in addition to 28-day funds. The Swiss central bank's swap line remains at $12 billion.
Demand for the dollar funding has been rising at each auction since May. In the most recent auction Tuesday, 63 banks bid more than $101 billion for the $25 billion auction. That was the highest number of institutions to bid, and the highest ratio of demand to the amount of funds available, since the ECB opened its swap line with the Fed in December.
Most Fed officials support the efforts to improve market functioning. But their views on the financial situation vary. On one end, officials view the latest market stresses as a source of concern but one that shouldn't stand in the way of raising rates to reverse the aggressive easing -- from 5.25% last September. Officials on the other end believe conditions have worsened dramatically in the past month -- as seen through higher mortgage costs, shrunken bank balance sheets and wider credit spreads -- and add risks to the economy.
While the second quarter delivered strong growth, activity may slow once the effect of economic-stimulus payments fades. High energy prices, a weakening labor market and continued troubles in the housing sector could join tightening credit conditions as restraints to growth into the end of the year.
At the same time, officials are bracing for high inflation readings. Oil this month has pulled off its record high by roughly $20, and gasoline has dropped back under $4 a gallon. Both developments could support a moderating inflation rate in the coming months. But prices remain volatile, and officials are putting little faith in the pullback.
Wednesday, July 16, 2008
GMAC's Other Headache
The one bright spot for GMAC used to be its auto-loan business. Now, that, too, is dimming.
Declining values of gasoline-guzzling pickup trucks and sport utility vehicles are looming over the lender, adding to its existing problems with souring mortgages through its ailing home-loan unit. This leaves GMAC in worse shape than rival Ford Motor Credit.
And it is unlikely GMAC can look to General Motors Corp. for help. The auto maker, struggling to cope with a steep decline in sales of pickups and SUVs, announced production cuts Monday. The company has a 49% stake in GMAC after a consortium led by private-equity group Cerberus Capital Management LP, parent of Chrysler LLC, bought 51% of GMAC in 2006 for about $14 billion.
GMAC, set up in 1919 to provide financing to buyers of GM vehicles, made $50.8 billion in loans for new and used vehicles last year. The lender, which once propped up GM with steady profit during economic downturns, has been weakened by the billions of dollars it pumped into its struggling mortgage subsidiary, Residential Capital LLC. GMAC posted a net loss of $589 million in the first quarter, compared with a loss of $305 million a year earlier.
In addition, falling demand for pickup trucks and SUVs, which make up a sizable chunk of GM's production mix, amid $4-a-gallon gasoline, should further hurt GMAC. The value of gas guzzlers has dropped sharply in the used-car market. GMAC is saddled with inventories of thousands of these vehicles as they come off leases or are repossessed from owners unable to keep up with payments.
Typically, GMAC takes back vehicles at the end of leases and sells them to dealers at discounted prices based on estimated values. On average, auction prices on trucks and SUVs fell by more than 20% in May compared with year-earlier prices, according to data from Manheim, a wholesale auction company for used cars.
"GMAC is monitoring the market conditions closely," a GMAC spokeswoman says.
A representative of Cerberus said GMAC's management is "working hard to strengthen the balance sheet and emerge from this unprecedented economic environment better positioned for the future."
GMAC also faces rising delinquencies in loan payments and increasing numbers of repossessions as owners of pickups and SUVs owe more on the vehicles than they are worth.
Another worry is GMAC's high level of borrowings compared with its equity cushion. One measure of GMAC's leverage ratio, as calculated by Moody's Investors Service, shows that the company has 23 times its net worth in borrowings. Ford Credit has 11 times its net worth.
GMAC's leverage "is an aggressive measure and has negatively impacted GMAC's credit standing," says Mark Wasden, a debt analyst at Moody's.
GMAC has a hefty cash balance of $14.84 billion on hand, but steeper-than-expected declines in residual values mean GMAC won't ride to GM's rescue during this downturn.
By: Aparaijita Saha-Buena
Wall Street Journal; June 26, 2008
Declining values of gasoline-guzzling pickup trucks and sport utility vehicles are looming over the lender, adding to its existing problems with souring mortgages through its ailing home-loan unit. This leaves GMAC in worse shape than rival Ford Motor Credit.
And it is unlikely GMAC can look to General Motors Corp. for help. The auto maker, struggling to cope with a steep decline in sales of pickups and SUVs, announced production cuts Monday. The company has a 49% stake in GMAC after a consortium led by private-equity group Cerberus Capital Management LP, parent of Chrysler LLC, bought 51% of GMAC in 2006 for about $14 billion.
GMAC, set up in 1919 to provide financing to buyers of GM vehicles, made $50.8 billion in loans for new and used vehicles last year. The lender, which once propped up GM with steady profit during economic downturns, has been weakened by the billions of dollars it pumped into its struggling mortgage subsidiary, Residential Capital LLC. GMAC posted a net loss of $589 million in the first quarter, compared with a loss of $305 million a year earlier.
In addition, falling demand for pickup trucks and SUVs, which make up a sizable chunk of GM's production mix, amid $4-a-gallon gasoline, should further hurt GMAC. The value of gas guzzlers has dropped sharply in the used-car market. GMAC is saddled with inventories of thousands of these vehicles as they come off leases or are repossessed from owners unable to keep up with payments.
Typically, GMAC takes back vehicles at the end of leases and sells them to dealers at discounted prices based on estimated values. On average, auction prices on trucks and SUVs fell by more than 20% in May compared with year-earlier prices, according to data from Manheim, a wholesale auction company for used cars.
"GMAC is monitoring the market conditions closely," a GMAC spokeswoman says.
A representative of Cerberus said GMAC's management is "working hard to strengthen the balance sheet and emerge from this unprecedented economic environment better positioned for the future."
GMAC also faces rising delinquencies in loan payments and increasing numbers of repossessions as owners of pickups and SUVs owe more on the vehicles than they are worth.
Another worry is GMAC's high level of borrowings compared with its equity cushion. One measure of GMAC's leverage ratio, as calculated by Moody's Investors Service, shows that the company has 23 times its net worth in borrowings. Ford Credit has 11 times its net worth.
GMAC's leverage "is an aggressive measure and has negatively impacted GMAC's credit standing," says Mark Wasden, a debt analyst at Moody's.
GMAC has a hefty cash balance of $14.84 billion on hand, but steeper-than-expected declines in residual values mean GMAC won't ride to GM's rescue during this downturn.
By: Aparaijita Saha-Buena
Wall Street Journal; June 26, 2008
Monday, June 23, 2008
Employers Offer Aid To Avert Foreclosures
Some Companies Provide Loans, Grants and Counseling To Workers Mired in Mortgage Debt; Co-Workers Pitch In
Last December, 36-year-old Marta Rosario was on the verge of losing her single-family home in Miami to foreclosure. That is, until her employer, Baptist Health South Florida, stepped in to help.
The five-hospital health-care system loaned Ms. Rosario $5,000 interest-free, allowing the cardiology nurse to catch up on her mortgage payments. She'd fallen two months behind after a work injury last year forced her to take a lengthy leave of absence at reduced pay. "If it wasn't for Baptist, I don't know where I'd be," says Ms. Rosario, a single mother of three who also cares for her elderly parents.
In the wake of the mortgage crisis, a small but growing number of workers are getting help avoiding or coping with foreclosure from an unlikely source: their employers. So far, a handful of companies -- from small manufacturers to large companies like home-financing behemoth Fannie Mae -- are offering assistance, such as interest-free loans, grants and support in securing rental properties. They're also beefing up their employee-assistance programs, or EAPs, and adding more educational seminars on personal finance.
A January survey of 329 human-resource professionals showed that in 2007, 20% of employers said they received more requests from workers for pay advances than the year before, reports from the Society of Human Resource Management. Thirty-nine percent of respondents also saw an uptick in withdrawals from retirement savings -- widely seen as an indicator of financial woes.
Productivity tends to wane when workers are suffering from financial or other pressures, says Laura Wallace, manager of work/life programs at SAS Institute Inc., a business-intelligence software company. Providing help "just makes really good business sense," she says. "If you're worried about losing your home, your creativity is going to go out the window."
Baptist Health executives say it became clear that many of its 12,000 employees were struggling with mortgage problems late last year, when requests for loans from its Sunshine Fund surged. Launched in 1986, the program, funded by employee and matching company funds, was designed as a way for workers to help their fellow colleagues through emergency financial hardships -- and it was in danger of drying up for the first time. "If we grant all these requests, we'll run out of money," Brian Keeley, Baptist Health's chief executive, says he recalls thinking.
The chain's hospitals are located throughout South Florida -- where foreclosure rates are among the highest in the nation, according to foreclosure-tracking firm RealtyTrac Inc.
Faced with a growing number of desperate employees, the nonprofit established a new fund dedicated to helping workers who face foreclosure. The fund now has $280,000 -- employees contributed $10,000 of that -- and has helped more than 100 employees with mortgage-assistance loans averaging between $3,000 and $5,000 in the first five months of 2008. Employees have two years to pay back the interest-free loans.
Quality Float Works Inc., a manufacturing concern with 28 employees, also recently loaned two workers at risk of losing their homes $2,000 each interest-free. The money is being repaid in weekly installments automatically deducted from their paychecks, says Jason Speer, vice president and general manager of the small maker of hollow metal balls and valve parts in Schaumburg, Ill. "We treat our employees like family," he says. "We try and do what we can to make their lives easier."
In February, Fannie Mae set up a confidential email "hotline" for its employees with mortgage woes, says Joy Cianci, vice president of grant, program and volunteer initiatives. Since Fannie Mae is in the mortgage business -- it buys mortgages from banks and other lenders and packages them as investment securities -- the company can help qualifying employees quickly pursue a mortgage restructuring.
For workers who must sell their homes, Fannie Mae in March began identifying low-cost rental properties near its Washington, D.C., headquarters. And since these workers could have trouble securing a lease because of credit problems, the company also works with landlords to ensure they'll be paid through a monthly payroll-deduction plan. Employees who can't afford a security deposit for a rental property may be eligible to receive a financial-hardship grant.
Many employees are seeking counseling to help them navigate financial issues. At Cary, N.C.-based SAS Institute, 665 SAS employees have attended the company's financial-advice seminars so far this year, twice as many as in the first half of 2007, says Ms. Wallace. In reaction to the housing crisis, the global software provider recently added lectures on the topic.
Zappos.com Inc., an online shoe and accessories retailer, also runs free on-site seminars about financial issues for its 800 Las Vegas-based workers. "We're hearing a lot of employees being concerned about their future," says Rebecca Ratner, director of human resources. "In Las Vegas, we have one of the highest home-foreclosure rates in the country." According to RealtyTrac, one in every 96 Las Vegas households received a foreclosure filing in May, more than five times the national average.
To that end, employee assistance program providers say they're seeing a notable increase in demand for confidential phone counseling. "Two years ago, we got one to two calls a week. Now we get two to three a day," says Zachary Meyer, senior vice president and general manager at the LifeWorks unit of Ceridian Corp., an EAP provider in Minneapolis that serves 38,000 corporations. "Housing concerns are the No. 1 financial reason people are calling us." In the past, callers seeking financial advice mainly asked about debt management, he adds.
Most U.S. employers -- about 87% -- allow workers to make hardship withdrawals from their defined-contribution retirement plans, according to the Profit Sharing/401k Council of America, a national association. But many of those that don't are now starting to consider offering the option, says Stacey Carter, vice president at Segal Co., a New York benefits and human-resources consulting firm. Helping workers avoid foreclosure is the primary reason, she adds.
Indeed, more workers have in recent months been making hardship withdrawals, which don't have to be paid back but are subject to taxes and penalties. In the first quarter of 2008, Fidelity Investments in Boston saw a 16% increase from the same period in 2007 in 401(k) hardship withdrawals. Still, this represents just a small fraction of Fidelity's 13 million plan participants, according to a spokeswoman for the financial-services provider.
Other employers, ranging from universities and technology firms to service providers say they're also grappling with how to help employees save their homes, but say they've yet to find a way to help.
Peter Ronza, a compensation and benefits manager at the University of St. Thomas in St. Paul, Minn., says at least six employees have approached him since April with concerns of losing their home or having to file for bankruptcy. "It's not that we don't want to help," he says, but creating a loan program would first require setting up a committee to determine who qualifies. Plus, rejections might cause friction among the school's 1,500 employees, he explains. He has also had to deny requests for cashing in accrued vacation time for mortgage assistance because it's against school policy.
Still, some employers say the mortgage problems workers face aren't a workplace matter. "If you got over your head in a mortgage because you were too uninformed to understand or you stretched too far, an employer doesn't have an obligation to fix your mess," says Jay Whitehead, president of Crossing Media LLC, a business-magazine publisher in Edison, N.J. The company has 20 employees and Mr. Whitehead says he recently rejected one person's request for help with a mortgage. "It's an equity and fairness issue," he says.
By: Sarah Needleman
Wall Street Journal; June 17, 2008
Last December, 36-year-old Marta Rosario was on the verge of losing her single-family home in Miami to foreclosure. That is, until her employer, Baptist Health South Florida, stepped in to help.
The five-hospital health-care system loaned Ms. Rosario $5,000 interest-free, allowing the cardiology nurse to catch up on her mortgage payments. She'd fallen two months behind after a work injury last year forced her to take a lengthy leave of absence at reduced pay. "If it wasn't for Baptist, I don't know where I'd be," says Ms. Rosario, a single mother of three who also cares for her elderly parents.
In the wake of the mortgage crisis, a small but growing number of workers are getting help avoiding or coping with foreclosure from an unlikely source: their employers. So far, a handful of companies -- from small manufacturers to large companies like home-financing behemoth Fannie Mae -- are offering assistance, such as interest-free loans, grants and support in securing rental properties. They're also beefing up their employee-assistance programs, or EAPs, and adding more educational seminars on personal finance.
A January survey of 329 human-resource professionals showed that in 2007, 20% of employers said they received more requests from workers for pay advances than the year before, reports from the Society of Human Resource Management. Thirty-nine percent of respondents also saw an uptick in withdrawals from retirement savings -- widely seen as an indicator of financial woes.
Productivity tends to wane when workers are suffering from financial or other pressures, says Laura Wallace, manager of work/life programs at SAS Institute Inc., a business-intelligence software company. Providing help "just makes really good business sense," she says. "If you're worried about losing your home, your creativity is going to go out the window."
Baptist Health executives say it became clear that many of its 12,000 employees were struggling with mortgage problems late last year, when requests for loans from its Sunshine Fund surged. Launched in 1986, the program, funded by employee and matching company funds, was designed as a way for workers to help their fellow colleagues through emergency financial hardships -- and it was in danger of drying up for the first time. "If we grant all these requests, we'll run out of money," Brian Keeley, Baptist Health's chief executive, says he recalls thinking.
The chain's hospitals are located throughout South Florida -- where foreclosure rates are among the highest in the nation, according to foreclosure-tracking firm RealtyTrac Inc.
Faced with a growing number of desperate employees, the nonprofit established a new fund dedicated to helping workers who face foreclosure. The fund now has $280,000 -- employees contributed $10,000 of that -- and has helped more than 100 employees with mortgage-assistance loans averaging between $3,000 and $5,000 in the first five months of 2008. Employees have two years to pay back the interest-free loans.
Quality Float Works Inc., a manufacturing concern with 28 employees, also recently loaned two workers at risk of losing their homes $2,000 each interest-free. The money is being repaid in weekly installments automatically deducted from their paychecks, says Jason Speer, vice president and general manager of the small maker of hollow metal balls and valve parts in Schaumburg, Ill. "We treat our employees like family," he says. "We try and do what we can to make their lives easier."
In February, Fannie Mae set up a confidential email "hotline" for its employees with mortgage woes, says Joy Cianci, vice president of grant, program and volunteer initiatives. Since Fannie Mae is in the mortgage business -- it buys mortgages from banks and other lenders and packages them as investment securities -- the company can help qualifying employees quickly pursue a mortgage restructuring.
For workers who must sell their homes, Fannie Mae in March began identifying low-cost rental properties near its Washington, D.C., headquarters. And since these workers could have trouble securing a lease because of credit problems, the company also works with landlords to ensure they'll be paid through a monthly payroll-deduction plan. Employees who can't afford a security deposit for a rental property may be eligible to receive a financial-hardship grant.
Many employees are seeking counseling to help them navigate financial issues. At Cary, N.C.-based SAS Institute, 665 SAS employees have attended the company's financial-advice seminars so far this year, twice as many as in the first half of 2007, says Ms. Wallace. In reaction to the housing crisis, the global software provider recently added lectures on the topic.
Zappos.com Inc., an online shoe and accessories retailer, also runs free on-site seminars about financial issues for its 800 Las Vegas-based workers. "We're hearing a lot of employees being concerned about their future," says Rebecca Ratner, director of human resources. "In Las Vegas, we have one of the highest home-foreclosure rates in the country." According to RealtyTrac, one in every 96 Las Vegas households received a foreclosure filing in May, more than five times the national average.
To that end, employee assistance program providers say they're seeing a notable increase in demand for confidential phone counseling. "Two years ago, we got one to two calls a week. Now we get two to three a day," says Zachary Meyer, senior vice president and general manager at the LifeWorks unit of Ceridian Corp., an EAP provider in Minneapolis that serves 38,000 corporations. "Housing concerns are the No. 1 financial reason people are calling us." In the past, callers seeking financial advice mainly asked about debt management, he adds.
Most U.S. employers -- about 87% -- allow workers to make hardship withdrawals from their defined-contribution retirement plans, according to the Profit Sharing/401k Council of America, a national association. But many of those that don't are now starting to consider offering the option, says Stacey Carter, vice president at Segal Co., a New York benefits and human-resources consulting firm. Helping workers avoid foreclosure is the primary reason, she adds.
Indeed, more workers have in recent months been making hardship withdrawals, which don't have to be paid back but are subject to taxes and penalties. In the first quarter of 2008, Fidelity Investments in Boston saw a 16% increase from the same period in 2007 in 401(k) hardship withdrawals. Still, this represents just a small fraction of Fidelity's 13 million plan participants, according to a spokeswoman for the financial-services provider.
Other employers, ranging from universities and technology firms to service providers say they're also grappling with how to help employees save their homes, but say they've yet to find a way to help.
Peter Ronza, a compensation and benefits manager at the University of St. Thomas in St. Paul, Minn., says at least six employees have approached him since April with concerns of losing their home or having to file for bankruptcy. "It's not that we don't want to help," he says, but creating a loan program would first require setting up a committee to determine who qualifies. Plus, rejections might cause friction among the school's 1,500 employees, he explains. He has also had to deny requests for cashing in accrued vacation time for mortgage assistance because it's against school policy.
Still, some employers say the mortgage problems workers face aren't a workplace matter. "If you got over your head in a mortgage because you were too uninformed to understand or you stretched too far, an employer doesn't have an obligation to fix your mess," says Jay Whitehead, president of Crossing Media LLC, a business-magazine publisher in Edison, N.J. The company has 20 employees and Mr. Whitehead says he recently rejected one person's request for help with a mortgage. "It's an equity and fairness issue," he says.
By: Sarah Needleman
Wall Street Journal; June 17, 2008
Friday, June 13, 2008
Home Mortgage Update
The home-mortgage industry takes advantage of consumers' confusion to charge some people much higher fees than others, according to a study prepared for the Department of Housing and Urban Development.
The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders.
The report is based on an analysis of 7,560 fixed-rate home-purchase loans completed in May and June 2001 and insured by the Federal Housing Administration, an arm of HUD.
The study says lenders typically make better offers to borrowers in neighborhoods with higher general levels of education, and/or borrowers who obtain a home warranty.
Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates. However, homes with home warranty coverage may reduce interest rates, as the home becomes more reliable.
For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.
Borrowers who paid "discount points" to lower their interest rates typically didn't benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose "no-cost" loans -- in which all fees are built into the interest rate -- typically paid the lowest effective fees.
Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on "stale" seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.
The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders.
The report is based on an analysis of 7,560 fixed-rate home-purchase loans completed in May and June 2001 and insured by the Federal Housing Administration, an arm of HUD.
The study says lenders typically make better offers to borrowers in neighborhoods with higher general levels of education, and/or borrowers who obtain a home warranty.
Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates. However, homes with home warranty coverage may reduce interest rates, as the home becomes more reliable.
For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.
Borrowers who paid "discount points" to lower their interest rates typically didn't benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose "no-cost" loans -- in which all fees are built into the interest rate -- typically paid the lowest effective fees.
Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on "stale" seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.
Wednesday, June 11, 2008
More Home Buyers Working More Closely With Home Inspector
Is your home inspector a deal killer? I hope so, for your sake as a home buyer. But I doubt your real estate agent would agree.
A deal killer is a home inspector who reports everything found — everything — so you can make an informed decision about the house you are thinking of buying, and either negotiate a lower price with your eyes open or walk away from the deal.
Some real estate agents resent home inspectors who do "too good" a job. They feel that they have worked hard to present a home their buyers want to buy, or their clients want to sell. Then the home inspector screws up the deal.
Let's face it: If potential buyers are having an inspection done, they already love the house. If a home inspection reveals that minor fixes are necessary, then buyers will feel more confident paying the full price and won't walk away. But if it turns out that there is something more serious — and expensive — wrong that kills the deal, then real estate agents should be grateful for that information.
It will allow agent and client to either correct the problem before putting the house back on the market, or adjust the price so the cost of repair is reflected. No one wants to sell a home with hidden defects; that can lead to legal and insurance claims and damaged reputations.
Some buyers don't really want to believe the ugly truth about their dream homes. They'd prefer to stick their heads in the sand, and are receptive when an agent minimizes the problems.
But you need to listen to your home inspector, especially when he gives you bad news. Don't fall for a lipstick-and-mascara cover-up of a house that looks good but is rotten underneath.
Your home inspector isn't trying to scare you, he is educating you. And you need to listen.
A home inspection isn't just some game or a strategy to reduce the house price. This is your chance to learn about your home: what's good, what's bad, what needs repair now and what can wait a while.
In a seller's market, buyers often feel they have no time to wait for inspections. They might be in a bidding war and are afraid to lose. But what they should be afraid of is buying a house at an inflated price either without an inspection or not listening to what the inspector says.
But as the buyer, you need to take responsibility. Don't be rushed because your agent wants to close the deal or you think you'll lose your dream house in a bidding war. There are other houses. And if you don't slow down and check out the building before you purchase it, your dream home may end up a nightmare.
Pre-sale inspection
Sometimes a seller will have a pre-sale inspection done to make sure the house is up to standard, so that when it is evaluated by the buyer's home inspector it passes with flying colours.
This is not fluffing for sale or baking bread in the oven so the house smells good. This is real nuts-and-bolts stuff, solid information a seller can offer about what might need repair or improvement in the house.
Your home inspector can educate you about the deficiencies of your home, before potential buyers find them, so you can set a realistic price or fix the problems before you list the house.
Don't forget, most buyers of resale homes will want an inspection. They'll discover those deficiencies (if they have a good inspector, of course) and be able to use them as a bargaining tool to reduce the price.
New Home PDI
Many first-time buyers choose a new house, thinking it will be problem-free. They are afraid that a resale might present problems that must be repaired even before they unpack. The truth is, many new houses have all kinds of problems, big and small.
You shouldn't assume every new house is built properly. Many aren't. And if you move in and find problems, you'll need to take them up with the builder and the home warranty program.
How long do you have before the warranty is up on certain things in your new home?
Before buyers take possession of a home, they conduct a PDI (pre-delivery inspection) along with the builder. This is to make sure there is no outstanding work, and that any deficiencies are identified.
Many buyers do this on their own, but this is where it makes sense to hire a professional home inspector, with knowledge and experience in new-home PDI. Buyers might notice only the cosmetic problems, because they usually don't have technical construction knowledge and experience.
The problem is, some builders won't allow independent home inspectors to be present during the PDI. You have to wonder why. What are they trying to hide?
Do you think your builder's representative is going to disclose poor workmanship, building code violations or defects during your PDI? I doubt it.
If you haven't signed on with a builder yet, find one that allows a professional home inspector to accompany you on your PDI.
If it's too late and your house is being built, remember that until your new home changes hands, the builder still owns it.
Make sure you conduct an inspection as soon as you take possession, before it's too late to file a claim under the builder's warranty.
By: Mike Holmes
Globe and Mail; May 30, 2008
Wednesday, June 4, 2008
Secrets of the Home Sale
With the inventory of unsold homes at continued high levels, homeowners are going to great lengths to differentiate and distinguish their home. According to experts, there are a few simple tricks that can help create a more appealing space and a more attractive listing in today’s increasingly competitive market.
* Listing: What’s in a word?
When putting your home on the market, the right phrasing in your listing can be the key to attracting potential buyers. According to the 2008 MSN article, “What’s ‘beautiful’ worth? About $12,500” researchers have found that listings with the words “beautiful” or “gorgeous” sold homes 15 percent faster, while “landscaping” bumped sales 20 percent faster and “move-in condition” expedited the sale by 12 percent.
Contrary to popular belief, sellers should steer clear of words that highlight desperation such as “motivated” and “must sell.” The study found the inclusion of those words in the listing slowed sales by up to 30 percent.
* Branding: If you’ve got it, flaunt it.
Brand names create a point of differentiation and should be used as selling points for your home. There is no doubt that buyers will put more weight in brands they trust. If choosing to make upgrades before listing your home, consider quality, recognizable products because they will ultimately provide the best return.
* Staging: The ultimate showcase showdown.
When getting your home tidied up for potential buyers, there are some specific tips that will help your home appeal to a wider range of buyers.
* Cleaning:
The number one rule of staging is to get rid of unwanted and unused items. Whether packed away until the sale or permanently donated, de-cluttering allows buyers to see more of the home. This also includes moving furniture out of rooms that may seem overcrowded. Less is always more.
* Neutralizing:
When getting your home ready to sell, going neutral is the best way to go to appeal to the most buyers. Painting is one of the most cost-effective ways to transform a room back to its natural state. Warm neutral colors tend to be a stager’s preference because it keeps walls inviting while adding a touch of color in the room. Buyers can better imagine themselves living in a home when it is neutral.
* Landscaping:
Although the inside of the home can create atmosphere, the first impression can be a lasting impression. The outside of the house will set the tone for what a buyer perceives is inside. Create a pleasant yard that is well-kept and full of life. Plants and flowers also should be brought inside the home to help accessorize and accent high traffic areas such as the kitchen and living room.
* Listing: What’s in a word?
When putting your home on the market, the right phrasing in your listing can be the key to attracting potential buyers. According to the 2008 MSN article, “What’s ‘beautiful’ worth? About $12,500” researchers have found that listings with the words “beautiful” or “gorgeous” sold homes 15 percent faster, while “landscaping” bumped sales 20 percent faster and “move-in condition” expedited the sale by 12 percent.
Contrary to popular belief, sellers should steer clear of words that highlight desperation such as “motivated” and “must sell.” The study found the inclusion of those words in the listing slowed sales by up to 30 percent.
* Branding: If you’ve got it, flaunt it.
Brand names create a point of differentiation and should be used as selling points for your home. There is no doubt that buyers will put more weight in brands they trust. If choosing to make upgrades before listing your home, consider quality, recognizable products because they will ultimately provide the best return.
* Staging: The ultimate showcase showdown.
When getting your home tidied up for potential buyers, there are some specific tips that will help your home appeal to a wider range of buyers.
* Cleaning:
The number one rule of staging is to get rid of unwanted and unused items. Whether packed away until the sale or permanently donated, de-cluttering allows buyers to see more of the home. This also includes moving furniture out of rooms that may seem overcrowded. Less is always more.
* Neutralizing:
When getting your home ready to sell, going neutral is the best way to go to appeal to the most buyers. Painting is one of the most cost-effective ways to transform a room back to its natural state. Warm neutral colors tend to be a stager’s preference because it keeps walls inviting while adding a touch of color in the room. Buyers can better imagine themselves living in a home when it is neutral.
* Landscaping:
Although the inside of the home can create atmosphere, the first impression can be a lasting impression. The outside of the house will set the tone for what a buyer perceives is inside. Create a pleasant yard that is well-kept and full of life. Plants and flowers also should be brought inside the home to help accessorize and accent high traffic areas such as the kitchen and living room.
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