Underwater Mortgages Could Sink Even Deeper

Home prices may be stabilizing in some areas in the nation, but the damage has already been done in the housing markets that saw the biggest boom and in turn the biggest bust.

Home buying in these markets reached a frenzied pace during the middle of this decade, and that means that a good portion of buyers purchased homes at the top of the market. No surprise that they have now sunk deepest underwater on their mortgages.

A new survey from Zillow.com shows that even in those markets where investor competition has returned and prices on the low end are beginning to stabilize, homeowners still owe far more on their mortgages than their homes are currently worth.

Las Vegas leads the way with 81.8 percent of borrowers underwater on their loans in the third quarter of this year, down barely one percent from the second quarter but still up 10 percent from the first quarter.

The bulk of underwater borrowers are in California, Florida, Arizona and Nevada. While home prices nationwide were down 8.5 percent in September from a year ago, prices in these states are still way down -- 34 percent in Las Vegas, 26 percent in Orlando, 23 percent in Phoenix and 11 percent in Los Angeles (National Association of Realtors). Again, that's from a year ago, but many of these cities have seen over 50 percent price declines from the peak of the market.

Some argue that "underwater" borrowers are no different than any other borrowers, as long as they continue to make their monthly mortgage payments, and as long as they continue to want to live in their homes, knowing they will have to wait out the market for home equity to gradually return.

But the danger is for those that need to sell, or for those who can no longer afford their monthly payments and don't qualify for a loan modification.

 

The government mortgage rescue programs do allow for modifications and refinances on homes with up to 25 percent negative equity, but many homeowners, especially in the hardest hit regions, don't think they will ever see equity again, and therefore see no reason to continue making payments on their loans, whether they are able to or not.

Many are simply sitting in their homes, rent-free, as banks struggle to catch up and contact them. Others are vacating the homes, mailing in the keys, and choosing a credit hit, rather than be strapped to a home that will only ever be a liability.

Home prices are improving, but there is a lot of government stimulus behind that improvement. The extension and expansion of the home buyer tax credit, as well as artificially low mortgage rates backed by the Federal Reserve's purchase of GSE loans and securities, will all expire by the middle of 2010, so it remains to be seen whether the very tenuous recovery we are now seeing in housing can endure on its own.

As foreclosures and unemployment continue to rise, the potential for a double dip in home prices is very real, and borrowers underwater now will only sink deeper.

- Via CNBC

Netherlands to levy 'green' road tax by the kilometre

The Dutch government said Friday it wants to introduce a "green" road tax by the kilometre from 2012 aimed at cutting carbon dioxide emissions by 10 percent and halving congestion.

"Each vehicle will be equipped with a GPS device that tracks how many kilometres are driven and when and where. This data will be then be sent to a collection agency that will send out the bill," the transport ministry said in a statement.

Ownership and sales taxes, about a quarter of the cost of a new car, will be scrapped and replaced by the "price per kilometre" system aimed at cutting the Netherlands' carbon dioxide emissions by 10 percent.

"Traffic jams will be halved and it helps the environment," the ministry said.

Dutch motorists driving a standard family saloon will be charged 3 euro cents per kilometre (seven US cents per mile) in 2012. That would increase to 6.7 cents (16 US cents per mile) in 2018, according to the proposed law.

Every vehicle type will have a base rate, which depends on its size, weight and carbon dioxide emissions.

Taxis, vehicles for the disabled, buses, motorcycles and classic cars will all be exempt.

"An alternative payment will be introduced for foreign vehicles," the ministry statement added.

The Dutch cabinet approved the road tax bill on Friday. It will need the backing of parliament before it becomes law.

- Via AFP

The Surge: The Untold Story

Understanding the Surge from ISW on Vimeo.

FHA Reserve Ratio Falls to 0.53%, Lowest in History

The Federal Housing Administration’s mortgage insurance reserves fell to the lowest level in history and the government said more steps are needed to shore up the agency that guarantees one of every five single-family loans.


The net capital ratio, or reserves after accounting for projected losses, fell to 0.53 percent in the year ended in September, from 3 percent in fiscal 2008 and 6.4 percent in 2007, according to an annual review sent today. While FHA said the fund “has good prospects,” it is changing its risk models to account for the possibility of the ratio falling below zero.

“Additional actions” will be needed to shore up the agency, Housing and Urban Development Secretary Shaun Donovan said at a news conference in Washington today. The insurance fund tripled in size last year and has taken on more risk as private industry sources for lenders to finance and insure home loans dried up and mortgage default rates rose to record highs.

“I don’t want to leave the impression that the reserves are adequate, that we have plenty of money,” said Donovan, whose department includes FHA. “FHA is not in the long-run self supporting, it isn’t returning money to the taxpayer.”

Donovan said the economy is worse than housing officials expected and projected claims against the insurance fund are higher than forecast. The fund is already below the 2 percent reserve threshold FHA is required to maintain by Congress and Donovan said it’s “critical” to build that cushion back up.

No Bailout 

Donovan specifically avoided using “the bailout word,” saying there is no extraordinary action Congress needs to take for FHA to continue covering claims.

“We have never had to make an appropriation and we can make adjustments to features of our loans to avoid that,” he said. “FHA is unique and the bailout term doesn’t apply the way most people think of it,” he said.

The 0.53 percent ratio is the lowest since FHA began publishing the data in 1990. FHA said under normal economic scenarios it expects the ratio to rise to 1.1 percent in fiscal 2010, according to the report. The ratio could dip to -1.03 percent if there is a significant drop in mortgage rates that cuts into premium revenue, the report shows.

Donovan said HUD postponed the initial release of the results by a week after instructing its auditors to remodel the projected losses with more pessimistic economic forecasts. The original audit showed the capital reserve ratio at 0.8 percent.

FHA Commissioner David H. Stevens said the forecasts used by auditors for home price declines, loss severities and interest rates accounted for the steeper projected fund losses.
The fund is “being depleted at a rate that gives us pause and caution.”

Temporary Role 

FHA, along with federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, accounted for more than 90 percent of all U.S. home loans in the first half of this year.
Donovan said it was a temporary role FHA played in previous economic downturns, and the agency will scale back as private money returns to the market.

“FHA is playing a critical role in restoring health to the housing market by helping working families access mortgage finance when private capital is tight,” Donovan said. “With this temporary increased role comes increased risk and responsibility.”

Stevens announced plans in September to tighten FHA’s underwriting criteria. The agency, which insured almost 50 percent of loans to first-time homebuyers in the second quarter, is increasing appraisal requirements and will have borrowers submit extra paperwork. Stevens also appointed a chief risk officer to help cope with the increased risk on its books.

Real Risks 

“There are real risks to the FHA and we are aggressively addressing those real risks with real reforms,” Stevens said in the statement.

FHA’s total reserves are more than $31 billion, giving it an overall capital resource ratio of 4.5 percent, according to the statement. The 0.53 percent net capital loan insurance ratio takes into account projected losses and is the yardstick Congress uses to determine the health of the fund.

FHA is required by Congress to maintain a loan reserve ratio of at least 2 percent to protect the insurance fund from defaults. FHA isn’t in danger of failing, and the mortgage insurance fund will likely recover on its own within two years without any policy changes, Stevens told reporters on a conference call in September.

- Via Bloomberg

FDA finds bits of steel, rubber in Genzyme drugs

Federal health regulators warned today that tiny foreign particles have been found in five drugs produced by Cambridge biotechnology firm Genzyme.

The Food and Drug Administration said particles including stainless steel fragments, non-latex rubber and fiber-like material were found in drug vials and could cause serious adverse health effects in patients.

The contaminated products, used to treat “rare, serious and life-threatening diseases,” are marketed as Cerezyme, Fabrazyme, Myozyme, Aldurazyme and Thyrogen.

Based on product lots tested to date, the particles were “believed to be found in less than 1 percent of products,” according to the FDA.

Genzyme notified the FDA about the contaminated drug vials through product quality reports that are required to be submitted by drug manufacturers.

“The FDA is actively investigating the nature of the contamination and seeking immediate implementation of corrective actions to mitigate the situation,” the federal agency said. “At this time, no adverse event reports attributed to foreign particle contamination have been received by FDA.”

Potential health affects from intramuscular injections of the contaminated drugs could include local pain, swelling and inflammation, according to the FDA. Potential adverse reactions from intravenous infusions of the contaminated products could be more serious, including damage to blood vessels or embolic events, and anaphylactic, allergic and immune-mediated reactions. The foreign particles also could affect how well the products work, the FDA said.

Shares of Genzyme Corp. dropped $3.67, or 6.9 percent, to $49.50 in afternoon trading.

The FDA announcement is the second case of contamination for Genzyme this year. In June, Genzyme was forced to shut down a key production facility due to viral contamination.

- Via Boston Herald

U.S. Posts $176.36 Billion Deficit for October

The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.


The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.

The October deficit figure is wider than the Congressional Budget Office's estimate for a $175 billion deficit in the month and wider than the $165.9 billion expected by analysts surveyed by Dow Jones Newswires.

The Treasury on Thursday also revised September's deficit to a slightly narrower $46.57 billion, from a previously reported $46.61 billion. Even with the revision, the U.S. in fiscal year 2009 posted a record total budget deficit of near $1.4 trillion -- three times its previous record.

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The staggering number has had U.S. Treasury Secretary Timothy Geithner pledging to rein in the deficit as the nation's economy recovers.

The U.S. at this point is expected to post a fiscal year 2010 deficit similar to that posted in fiscal year 2009.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.

- Via WSJ