Foreclosures rising, interest rates falling

November 11, 2008

Bank of Israel has cut rates today. Rate cuts will go on for now. With commodity prices collapsing, they’ll hit zero in the US, and possibly in the UK too.

The Bank of Israel cut the benchmark interest rate by half a percentage point to a record 3 percent in an unscheduled move, citing concern that the global economic slowdown is “significantly deeper” than previously estimated. It has lowered the lending rate by 1.25 percentage points in the past five weeks.

Bank Governor Stanley Fischer has cut borrowing costs three times since Oct. 7, twice at unscheduled meetings, to bolster a slowing economy and match global rate cuts. Gross domestic product may expand 3.8 percent this year and 1.7 percent in 2009, the least since 2003, Excellence Nessuah Investment House Ltd. said today.

Without continued and significant government help, American Express is one of the top companies that may fail to survive this crisis. IT is in deed one of the worst placed:

American Express Co. won U.S. Federal Reserve approval to become a commercial bank, gaining access to government funds as credit-card defaults climb with economies slowing around the world.

The Fed waived a 30-day waiting period on the application because of “the unusual and exigent circumstances

“Monday’s quick decision is an ominous sign that either things are a lot worse than AmEx described in its recent third- quarter earnings, or that AmEx sees the writing on the wall and recognizes that a Federal fund infusion is its only path to survival,” said Red Gillen, a senior analyst with Boston-based consulting firm Celent.

Debt Funding

Profit at American Express has been squeezed as rising consumer defaults force it to set aside more reserves and the market for bonds backed by credit-card debt seized up. Customers failed to repay loans in the third quarter at almost twice the rate of a year earlier and credit-card lenders couldn’t sell any asset-backed debt last month for the first time in 15 years.

TARP Aid

At least 42 regional banks have received preliminary approval or said they’re interested in participating in the government’s Troubled Asset Relief Program. The Wall Street Journal reported today that it isn’t clear whether American Express applied for financial aid provided through TARP.

Earnings Trail Visa

The company has posted four straight declines in quarterly profit and lost about half its market value this year as it set aside funds for soured credit-card debt. American Express makes loans to consumers, exposing it to defaults fueled by more than 700,000 U.S. job losses this year, unlike Visa Inc., which processes payments and said yesterday that quarterly adjusted earnings doubled to $448 million.

The unconvincing efforts of the government at stemming foreclosures are continuing. Once again, I agree with what Sheila Bair is suggesting; some of the money set aside for Tarp should have been used to bail out some of these reckless borrowers, because they are the root and fuel of this crisis.

Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, will accelerate anti- foreclosure efforts by streamlining loan modifications to lower monthly payments for more struggling homeowners.

Fannie and Freddie, will target loans in which borrowers are at least 90 days delinquent and have high loan-to-income ratios by  offering homeowners reduced interest rates and longer terms of as much as 40 years to trim monthly payments.

The initiative expands efforts by the Hope Now Alliance. The success rate in the past for “curing” delinquent loans with modifications similar to what the government proposes was about 50 percent for both prime and subprime borrowers with damaged credit, according to data from the Mortgage Bankers Association.

A Central Role

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac, a provider of real estate data based in Irvine, California, said on Oct. 23.

Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their gross income, a threshold of affordability, by lowering the principal, reducing interest rates and extending the length of the loan term. The plan doesn’t include money from the Treasury’s $700 billion bank rescue and isn’t mandatory for companies that received federal aid.

Conditions and Fees

Homeowners that qualify will receive notices about the program. Their loan modifications won’t become final until they have made three consecutive payments, and there is no limit to the number of times a loan can be modified. The new payment will include all of the borrower’s monthly housing costs, such as taxes and condominium payments.

Bair Objects

Federal Deposit Insurance Corp. Chairman Sheila Bair, who has advocated using some of the money from a $700 billion bank rescue program to help with loan modifications, said today’s announcement doesn’t go far enough.

“This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages,” Bair said. “As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.”

Bair said there are still questions about implementation including: Allowing extended amortization prior to interest rate reductions; the length of caps on payment increases, interest rate caps; and compliance reporting, according to the statement.

Housing Slump

Fannie and Freddie’s loss mitigation efforts so far have fallen short, according to a FHFA report last month. Fannie and Freddie’s success in resolving delinquencies fell in the second quarter, the companies took on fewer loan modifications and workout plans for borrowers, and their success for loans in loss mitigation declined to a 37.2 percent rate from 43.7 percent in the first quarter, FHFA data shows. Company executives estimated about 10,000 borrowers a month may qualify for the new program.

Lower property values will keep eroding home equity, complicating even more refinancings. The S&P/Case-Shiller home- price index of values in 20 U.S. cities dropped 16.6 percent in August from a year earlier, the fastest pace on record. The index has been lower every month since January 2007.

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One Response to “Foreclosures rising, interest rates falling”

  1. Edwin said

    Thank you very much for your post. Absolutely excellent information and very useful for me. Great done and keep posted. Looking forward to reading more from you.

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