Today Ben Bernanke tossed ideas for how to fix the housing and mortgage markets to the senate once again. Several ideas put forth have some merit because they are focused on helping homeowners stay in their homes, avoiding foreclosure. Below is a breakdown of the main ideas:

• The government could change the current FHA Hope Now program (which to date has been a complete failure) to lower the interest rates, up front mortgage insurance (MI) premiums, and ongoing MI premiums. Currently interest rates for these loans are high… pushing the combined rates to 8%, an unaffordable level for most homeowners.

• The government could buy delinquent and “at risk” mortgages and us government funds to subsidize the rates, effectively lowering the final rates for homeowners to 4.5% or so on a 30 year fixed rate mortgage.

• Costs for modifying loans could be shared, providing an incentive for servicers to streamline the modification process (like Indy Mac). The proposed amount is $1000 from the government to the servicer for each loan modified.

The Treasury is already buying MBS from Freddie and Fannie,
but may increase these purchases to push rates lower. The Fed already announced last week that it will loan $600 billion to Fannie and Freddie. While all of these measures could help, the bottom line is that data suggests that when home equity evaporates foreclosures increase… and right now foreclosure rates are pushing 20%. Unless government sponsored modifications also write down mortgage balances, no one can qualify for these loans anyway. This is one reason the current FHA programs are a failure.

Meanwhile, the big three auto makers are again addressing
congress and begging for $35 billion in loans. I have a better idea for how to save the economy! Since the US Census Bureau cites the number of US citizens, over the age of 18, as 227,719,424 in 2007… why not simply take some of the 200 billion or so not yet handed as gifts to lenders by Paulson and simply divide it up and send each citizen a check for $100,000 or so? THAT’S what I call STIMULUS! Seems like that would solve a lot of problems. Anyone want to start a petition on this one?

CitiBank is being saved by a $300+ billion infusion of cash, and this bolstered investor confidence Monday, causing shares to move higher across financials and other industry sectors. More than $300 billion of CitiBank’s toxic debt will be backstopped by government guarantees against loss. Another $20 billion will also be given to the struggling bank, adding to the $25 billion they’ve already received. Will this translate to more available credit to homeowners? After last week’s Senate hearings during which Henry Paulson and Ben Bernanke were grilled over use of bailout funds thus far, we hope that CitiBank will break the pattern and use the money appropriately to help homeowners stay in their homes and avoid foreclosure.

Fannie Mae and Freddie Mac announced a freeze on foreclosures through January 9th, 2009. While we applaud this move, it simply pushed off the inevitable for too many families. But since Obama has indicated that he may place a freeze on foreclosures once he takes office, it may be only a matter of weeks in January before Fannie and Freddie’s freeze is extended, possibly into the spring. This makes sense if lenders will also be pressured to modify mortgages, waive pre-payment penalties, and restructure missed payments to keep people in their homes affordably once the freeze has ended.

Existing home sales in California last month moved higher from September sales numbers. Although San Francisco and western Bay Area counties continued to fare better than areas inland and other parts of the US, prices are still in decline. This is understandable and will continue until mortgage lending is freed up once again and foreclosures reduced. But the 4.9% increase from September ‘08, and 63.7% increase in California sales volume from October 2007, are good signs signalling strong foreclosure property sales. This is an important trend to watch. Once inventory numbers shrink to lower levels prices will likely stabilize and then (finally!) rise again.

What’s in store for you? Obama is speaking as I write this, announcing his selections for Treasury Secretary and other important members of his economic team. Obama doesn’t minimize the seriousness of our economic issues… but his selections for these positions clearly emphasizes his intent to place middle class concerns front and center in his policies. Given his plans to convert our economy to one that is growing and healthy again the future may be brighter than it looks right now… something we can all be thankful for.

As I write this Treasury Secretary Paulson is testifying be¬fore Congress… sounding defensive with his voice raised! Congress is grilling Treasury Secretary Paulson and Ben Bernanke today regarding the Hope Now Program and the use of TARP bailout funds. Their focus was on why Treasury funds under the TARP bailout plan have not been better utilized to keep people in their homes. It is clear that the Hope Now Program is a complete failure, and few bor¬rowers are actually getting their loans modified through it. Sheila Bair, leader of the Indy Mac modification program, is having much better success in completing modifications… So Congress is now considering adopting her program nationally.

The bottom line is that homeowners are having a rough time when they try to deal with their lenders directly to get their loan modified. I’ve made some calls to lenders myself and can confirm that they are not working with homeown¬ers in a reasonable fashion. Until a national program is created it’s better to use a loan modification company for modifications. Congress is hammering Paulson over the way TARP funds are being used, especially in the case of PMC buying National City with these funds. There is gen¬eral fury about this in Congress! Increased regulation will be key in restoring tax payer and investor confidence.

The stock market fell again Monday and the bear market continues to drive indexes lower globally. A major issue on the table right now is whether to offer Treasury Funds to US auto makers… who are failing yet again due to econom¬ic conditions. Since auto makers have resisted retooling to build eco-friendly cars and trucks for at least 3 decades, there is valid resistance to bailing them out.

Real Estate lending continues to struggle in the face of a secondary MBS (Mortgage Backed Securities) market that is dysfunctional. Although bailout money has flowed into large lender’s balance sheets, they continue to horde the cash instead of increasing lending. Now the trouble has bled over into other types of credit, auto loans and other lines of credit are restricted. If you have a home equity line with an open balance you may wish to draw on the line and put the money in an interest bearing account to ensure that the available credit is not taken from you just when you need it. Call me for resources and analysis of your scenario.

Treasury Secretary Paulson has changed the terms of the bailout. After promising that the 700 billion would be used to purchase troubled home loans in order to keep Ameri¬cans in their homes he has now reversed course. Instead, it was announced today that the money WILL NOT be used to purchase troubled loans, but rather simply given to the banks to encourage them to lend. It’s a typical bait and switch as far as I’m concerned and Wall Street seems to agree. When will people learn that giving all the money to those already rich and powerful does not help the little guy down the line? This is a big disappointment and deserves a big backlash.

Loan modifications are the big buzz as it becomes clear that lenders are not aiding home owners who need to mod¬ify their mortgages. After doing several weeks of research into how modifications work and the various methods modification companies are using, I’m pleased to announce that I’ve located two in particular that I can refer clients to. My favorite is a law firm who has been doing modifications for 14 years with success. Most importantly, the process this firm uses does not damage the credit of the borrowers involved and protects them legally. Fees run less than refi¬nancing and can be paid in payments over time if needed. Contact me for more information.

Last week it was finally announced that we are officially in a “recession”… BIG SURPRISE, eh? New stimulus plans are being worked on in Congress as the global recession worsens. Europe, and especially China, have all introduced rate cuts and economic stimulus packages. Today it was an¬nounced that US auto makers are going to get some bailout money as well. American Express has decided to become a bank, a trend among many financials.

How does this affect you? There are still jumbo loans avail¬able at excellent rates. Loans under $417,000 still have the best rates and easiest qualifying. It remains to be seen if the December 31st deadline for closing “agency jumbo” loans (those between $417,000 and $729,750) will stay intact. If it does then the new limits on January 1 for “high cost” areas like Marin will go to $625,500 on one unit prop¬erties for Fannie and Freddie loan products. One thing is certain. Unless the secondary mortgage market is restored to functionality real estate values will continue to contract.

Southern California home sales jumped 65% in September,
setting new sales records as the biggest year over year
jump in 20 years+ of sales history. Nearly half of those
sales were foreclosed properties. We saw interest rates
drop briefly in August and early September, so this may
be one reason for the sudden spike in closed sales as folks
grabbed those lower rates. The good news though is that
this means that foreclosure inventory is selling, a much
needed trend. As foreclosure inventory gets sold, and loan
modifications gain momentum, inventory should begin
to stabilize. It will take some time for this to happen, but a
step in the right direction is certainly welcome.

The idea of a second stimulus package is gaining ground in
the media and in Washington. In a testimony to the House
Budget Committee Ben Bernanke, Federal Reserve Chairman,
said congress “should consider including measures
to help improve access to credit”. He went on to state that
consideration of a stimulus is “appropriate”. Within the
hour the White House said the administration is “open” to
the idea. Several plans are being brought forward by Nancy
Pelosi and others.

Today stock indexes are fell today after an upward bounce
yesterday. The current bailout pushed forward by Treasury
Secretary Henry Paulson may be taking an unintended and
troubling turn. Apparently a number of banks who have
jumped on the “bankwagon” to get a piece of the $250 billion
advanced by the treasury are using the money to buy
smaller competitor banks instead of using the money to
recapitalize so that they can make new loans. With the US
economy in recession it’s a given that stocks will continue
to be volatile into 2009 as investors search for earnings.

Important trends for you relate to agency (Fannie & Freddie)
and FHA (HUD) loan limit changes on the horizon.
Right now “agency jumbo” loans to $729,750 are available,
but this limit changes on January 1 to $625,500. So
buyers should act now if they plan to get one of the larger
loans. You may want to tell your sellers about this change
also, since it can impact their pricing. FHA rates are higher;
this is essentially the new subprime. Mortgage rates went
down yesterday across the board and the LIBOR index has
dropped, good news for folks with ARMs that have already,
or are about to, reset.

Panic or writing on the wall? After huge stock market
losses last week Monday’s market opened with gains
higher than any other one day on record. But don’t break
out the champagne yet… because the crisis is far from over.
Monday’s gains brought us back to around Wednesday of
last week in terms of stock index levels. Today we have an
almost flat market so far with mixed indexes, some higher,
some lower. Expect more huge swings and volatility in
coming weeks. Stay cool. Talk with your financial advisor,
but above all, don’t get caught up in emotional selling. This
said, more losses may be writing on the wall into the next
quarter, so plan accordingly.

World banking heads agreed that the global crisis demands
coordinated action. So Monday opened with coordinated
global rate cuts. But the amount ($250 Billion) that the US
plans to inject into our failing banking system is a pittance
of the trillions Europe is already injecting into theirs. This
leads some to argue that gains from the US plan will be
small. Combine this with the prospect of a recession that
lasts 18-24 months, and which some say could be “deep”,
and it looks like additional economic stimulus will be mandated
to turn the tide. I expect we’ll be hearing more about
a new stimulus package before long. The IMF says credit
loses will reach 1.4-1.6 trillion dollars.

In the local real estate market we seem to be experiencing
somewhat flat sales numbers, and continued lowering
of pricing as we seek a bottom. The LIBOR indexes rose
sharply in the past week, so folks with ARM home loans
that are resetting will feel abruptly higher rates, keeping the
refinancing of these notes into fixed rate loans extremely
important. Look for the stimulus package increases to loan
limits to become permanent as we approach year end
(when higher loan limits would expire).

What can you do? VOTE! Perhaps the most important thing
any of us can do is plan to vote for a president who will
bring solutions that work to the table. In the meantime FHA
loans continue to refi subprime mortgages while Fannie
and Freddie loans offer attractive rates. We may also see
more pressure on existing loan servicers to modify loans
voluntarily. The silver lining to this mess right now is low
inflation, thus low mortgage rates, allowing buyers to buy,
and refi’s to pick up speed.

Yesterday brought a Fed rate cut by a half point that was
part of a series of coordinated cuts by the European Central
Bank, the Bank of England, The Bank of Canada, the
Swedish Riksbank and the Swiss National Bank. But this is
only one step. Stock losses are growing as the credit crisis
expands to global markets. The trend signals a bear market
and likely a global recession. As I’ve written previously
the markets are directly affected by census emotions, and
we’re seeing investor panic as the indexes drop below historical
thresholds. This week’s update is devoted to giving
you knowledge to get through this situation with the best
outcome possible for all.

Credit trends are showing tightening money (yet again)
due to the expanding freeze on credit that is rippling
through a variety of credit sectors. This condition has
spread to all credit sectors, including commercial paper. So
it’s more imperative than ever to ensure that your buyers
are pre-approved… especially buyers needing jumbo loans.

It might be timely to remind your sellers that the ultimate
price of their home depends almost exclusively on the
eventual appraised value, NOT their listing price. Appraisal
reviews are more common now, especially in declining
markets. This means that the lender may lower the appraisal
value if they think the property is worth less than the
agreed purchase price. When you write purchase contracts,
or review offers, plan that the review could extend the escrow
period by a week or more.

FHA programs that promise to write down loan principle
are not proven yet. We won’t know until more of these
close in the next 3 months whether the borrower’s credit
scores are lowered by participating in these FHA loan programs.
I’ve heard that when lenders do a short sale or loan
modification the original lender may place a derogatory
mark on the credit report that is as serious as a foreclosure.
More on this later when additional data is available.

My best advice is to stay calm and keep things in perspective.
The stock market crisis only serves to illustrate the
relative strength of real estate as an investment. With pending
sales up nationally in August by 7.4% there ARE homes
being sold. Compared to a 33% loss in stock values real
estate here remains a solid investment.

Huge stocks losses in the past week eclipsed former records
as a sell off on Monday pushed the DOW index down
by over 777 points. This is the largest drop in one day for
the DOW in its entire history. The S&P and Nasdaq also lost
more than 7% of their values during Monday’s tumultuous
session. The trigger for this sell off was the House’s failure
to pass a bailout package for the struggling US financial
system. The global economy is certainly suffering as a
result and several more banks fell this week.

Washington Mutual was bought by JP Morgan and Wachovia
was absorbed by Citi Group this week. Both WAMU and
Wachovia were prominent promoters of negative amortization
loans… so their portfolios were susceptible to huge
losses. You can expect more bank failures unless sweeping
legislation passes the house in the near future.

The senate passed the “bailout” plan, (which some call
the “rescue” plan) last night by a large margin. In spite of
this the DOW is down today as I write this by more than
260 points. The house will still need to pass this bill for it to
be made law. Calls for updated regulation of the banking
and investment sectors are increasing as politicians point
fingers and search for ways to ensure this crisis does not
repeat itself. With the conversion last week of major investment
firms like Merrill Lynch to banks, the era of investment
banking on Wall Street ended with a whimper.

How does this affect you? Well, the most pressing challenge
is that the credit markets are essentially frozen right
now. This makes it harder to get loans for any reason.
Although our Fed and the European equivalents are pouring
billions into the banking industry in attempts to get
banks to lend again, it is still uncertain that banks will
begin lending again at reasonable rates. The premiums to
get loans right now are steep, which translates to higher
interest rates for all types of credit, including auto, real
estate and college lending. The LIBOR indexes, upon which
many ARM loans are based, jumped this week… another
unsettling bit of news. The House will most likely pass the
Senate bill. One piece of the bill increases FDIC coverage
to $250,000 to safeguard people’s savings, and other sections
offer ways to ensure that CEOs and banks needing aid
eventually pay back tax payers. These welcome changes
should help to ease the current crisis.

Morgan Stanley and Goldman Sachs are becoming commercial
banks (they have been investment firms under
the SEC), a shift in status that brings them under tighter
federal banking regulation. Investment banking is officially
dead with this development, the end of an era. It also likely
marks the end of an era of lax regulation. This is a good
thing for the average citizen.

The S&P 500 is down 27+ points as I write this. The DOW is
down over 200 points also, as investors sell in response to
breaking news about more US banking troubles, this time
focused on regional banks also. Yes folks. What’s happening
right now is unprecedented and extremely serious, not
only for the US economy, but for the global economy. The
good news is that this may not last.

To gain some perspective, consider the following from
analyst Barry Habib… “There have been 10 bear markets
for the S&P 500 stock index since 1957 (i.e., market drops of
at least 20%), including the current decline which is down
19.8% as of last Friday’s close from its 10/09/07 all-time
high. Of the 9 previous bear markets, all of which eventually
recovered and reached a new closing high, 6 of them hit
their bear market low during the month of October, including
the last 3.”

The big news for mortgages is that the Fed is trying to
create an entity that can buy troubled mortgage debt to
get it out of the general marketplace. I applaud this move.
Although tax payers may initially take a hit, it still seems
better to give the government control of this debt for 2
reasons; a) this gets the debt that has made investors nervous
out of the market so trust can be rebuilt and, b) this
may give the government the ability to change the terms
of these mortgages (like fixing them at a low rate) to keep
people in their homes.

How can you move forward? With stocks losing value, this
makes real estate in Marin an even better investment. Your
neighbors agree. Of the properties sold in Marin in August,
only 13.5% were foreclosures. Contrast this to Solano
County’s 61.3% , Alameda’s 32.5%; Contra Costa’s, 54.4%;
Napa’s, 39%; Santa Clara’s, 24.7%, San Mateo’s,16.6%; and
Sonoma’s, 41.6%. Marin values right now mean that there
are prime investment opportunities are out there.

Today the VIX is up by 8 million. The VIX shows trading
volume, how many shares are changing hands, and is
called by some “the fear index”. The rise from yesterday’s
already high numbers shows that Wall Street investors
are very concerned about economic issues in the spotlight
right now. Yesterday’s losses of over 500 points on the
DOW alone meant that yesterday was the worst day in
trading since 9/11/01.

The Feds did not cut Federal Funds rates today. This is in
opposition to market expectations and may trigger another
sizable sell off today. As always, the Fed’s primary concern
is mitigating the effects of inflation, so for me this is not a
surprise.

As I write this the DOW’s initial reaction to the Fed’s decision
is a sell off and the Dow dropped by 70 points within
minutes of the news of the Fed’s decision. The market
wanted the cut, which helps businesses, but in my opinion
the Fed made the right call in holding for now. Other major
indexes are also falling. The falling S&P index, where most
financial stocks tracked, is being hit by the Fed’s decision
and concern about AIG, the largest insurer in the US. AIG
insures many bank owned assets, so its failure would
leave financial firms exposed to increased risks.

Bank of America is now the proud owner of Merrill Lynch
and $154 billion in toxic mortgage debt originated through
sub-prime loans. Merrill had purchased First Franklin, a
major sub prime lender, when it failed last year. This debt
amount equals 15% of the nation’s total sub prime debt.
Way to go B of A! Time will reveal whether this was a
very stupid move, or a brilliant one. And I’ll be watching
closely.

How does this affect you? Well now that Fannie and Freddie
are owned by the US Treasury rates for loans they can
handle (up to $729,750) are essentially unchanged from
yesterday. Fixed rate loans with no interest only feature
are by far the best deals in loan rates today and I suspect
this trend will continue as lenders shy from anything they
perceive as risk. The DOW has lost 25% of its value in the
past year making Marin real estate a better investment
comparatively. With most real estate locally (in Marin) still
holding strong value, it’s a good time to buy a home!