Appraisal Hanky Panky

A cornerstone of the mortgage business is that everyone in the process, borrower, lender, and ultimate investor, can rely upon the sanctity of the appraisal process. Lenders require that appraisers be licensed, something that is required by law in every state. Many lenders place additional requirements on appraisers, perhaps that they be licensed for a minimum number of five years. 

The good lenders also have requirements that mortgage brokers must meet and they rely upon the mortgage broker to select a qualified appraiser in the area. In the overwhelming majority of cases, this works just fine because the underwriting process also includes an appraisal review. This is beginning to change.

Many large lenders are beginning to require that appraisals be ordered through appraisal management companies, AMCs, with whom they contract.  We have now had experience with a few of these and they are disasters. They do nothing more than insert another level of bureaucracy into the process. We have found that the "management" is nothing more than clerks passing paper back and forth between the ordering company and the appraisal.

Their internal "review" is a joke. It does not increase appraisal quality to have one more so-called expert review appraisals. Worse yet, they take a large fee for the process which ultimately adds to the cost paid by the consumer.

In one case, we needed to have field review of an appraisal we already had. We had to order it through an AMC who apparently could not find anyone in the county to do it for the fee they paid, $150 out of the $210 we had to pay.  Ultimately the order went to someone who is 133 miles away from the property who had to drive across three counties to get to the subject property. After paying for gas to drive 266 miles, how much is left for a day’s work? How much does someone that far away know about the local market?

In a more recent case, we waited three weeks for an appraisal, compared with a normal one week turnaround. I ended up paying over $500 in lock extension fees because the delay caused us to blow the lock.

The worse news is that the appraiser selection process at that company is, in my view, horribly tainted. To get on that AMC’s panel, you don’t have to meet some stringent quality or experience requirement. You just have to pay $10,000 to “buy” a zone, a territory consisting of a couple of ZIP Codes. Appraisals ordered with the AMC in their zone would be routed to them.

A lender ought to expect an AMC to recruit a panel of the most highly qualified appraisers in an area. What they are really getting is the appraiser who was willing, in effect, to “bribe” the AMC to send it orders. Are they the most qualified? I doubt it. To see this for yourself,  click here and then select your state and area.

Frankly, it looked to me that the "best" areas were taken while in what appear to be predominantly minority areas, no one had signed up. The implications of that are insidious.

The economics are rotten too. Appraisals cost between $300 and $400 these days and if you add $10,000 to an appraiser’s cost of doing business, the cost to the consumer has to increase.

It just stinks!

Piling On

I'm sure that you remember watching a football game where the ball carrier was tackled, was down on the ground, the play had been whistled dead, and yet four more players jumped on the pile. That sure seems to be happening with Countrywide.

You will recall that another lender, Ameriquest, was accused on similar improprieties, alleging that they had taken advantage of consumers. Before it was all over, the Attorneys General of 49 states and the District of Columbia had joined in the suit! Talk about piling on!

In the end, in one of those "we didn't do anything wrong but whatever you say we did we promise not to do again" type settlements Ameriquest paid $300 million into a fund to reimburse wronged borrowers and paid another $50 million to the states to reimburse them for legal costs. Another result of the action was that Ameriquest then started the process of closing their operations, shuttering some 229 retail offices.  The company basically does not exist today.

We all know that if the Bank of America acquisition goes through, Countrywide will also cease to exist as a brand name.  Bank of America is acquiring the company at about $2 per share, down from a top of $45.  My calculations of the value of their loan servicing portfolio is many times the acquisition price, but a big question is the extent of the legal liabilities that BofA will also assume.

There are a number of suits that have been filed, including one by employees who lost money tied up in their retirement accounts, money that was invested in Countrywide stock. They sued the company and the executives who, they said, misled them too.

In the latest action, the States of Illinois and California have filed suits that will become suits against BofA.  Top Countrywide executives are variously named in the suits also.  You can count on this being a long, drawn out legal battle. The allegations in the suit are ones you have heard before, all practices they engaged in to sell unsuitable products to borrowers who didn't understand what they were getting into. 

From all the people I know in the industry who tell me what was going on at Countrywide and similar lenders, it is likely that the allegations are all true. But someone has to prove a lot of things before there is a settlement, and you can rest assured that the cost will be a lot more than $325 million. What ultimately happens is a matter of conjecture, but if you are an aggrieved Countrywide borrower, I would not hold my breath.

Tales from the Mortgage Trenches

I get a lot of calls from people who find my name and hope I can help them with a mortgage problem. Frankly, it is sad to hear from so many who are in dire straits and for whom solutions are not available. Here are a couple of recent stories.

Tale 1 – a lady, not a previous client, has an Option ARM that she got several years ago when she bought her home in Northern California. She had hoped to flip it in a couple of years, but of course the market has not allowed her to do that. In fact, the property is worth a little less than she paid for it and although she still has some equity, it would largely disappear in sales commissions should she sell it.

She enjoys the home, wants to stay there but her loan has become toxic. She could still afford an Interest Only loan and could afford a fully-amortized loan if the interest rate were reasonable

But her rate has just risen to over 7.5% and she cannot afford it. Neither can I arrange a refinance because she cannot document her income. Bottom line, she loses big if she sells her home and she loses if she stays there with her current toxic loan.

I suggested she call her lender to discuss a way where they could modify the terms of her loan to something that she could afford. Their response? We can't [read won't] help you unless you have missed a couple of payments. She has FICO scores in the high 700's and is unwilling to start missing payments just to bring her lender to the negotiating table.

Tale 2 – Several years ago we arranged financing for a nurse. We fully documented her income and it was a good loan. However, she lives in an area that has suffered more than most with declining real estate values.  Her home is now worth less than the loan balance. It is a 5/1 ARM that will adjust next year to market rates.

Her current rate is 5.625% and she can afford the payment. She would like to refinance at the current market rate for, say, another 5 years. Of course, this would require a loan greater than 100% Loan-to-Value which is not available today. Her lender said that they were unable to help her and to call back in 2009 when it was closer to the reset deadline. 

Bottom line, I keep reading stories about how many homeowners are benefiting from work-out plans with their lenders, but I am having trouble believing them. At one end of the spectrum, hundreds of thousands of people have lost their homes. They certainly didn't benefit from any renegotiation program. And there are others like the ones above, folks with good credit scores who are willing to stay in their homes and make payments and who seem deserving of some relief. I think they will never be served either.

It makes one think that the Public Relations Departments are making a lot of this up. Indeed, someone sent me a press release from FannieMae that indicated that they would be able to refinance homes up to 120% LTV. But that release has disappeared from the FannieMae website and no lender I talked with had ever heard of it. 

Pretty sad.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Countrywide and Bank of America

This is part four of this series but I got tired of calling it "Depressing News," although it still is. In the latest news flash, Bank of America has told David Sambol, currently President of Countrywide, that his services will not be required as, if, and when the proposed merger takes place.  It would appear, however, that he will get the previously promised $28 million in compensation.

In a very kindly worded announcement, BofA said that they wanted the combined mortgage operation run by someone with a "deep understanding of the Bank of America culture and operating model."  Thus it would appear that BofA is buying the chicken coop without the top foxes and that the proposed merger is more likely to occur.

What is to be learned here?  The thing that I see is how blinded those who are benefitting from a structure can be to changes that can and will affect them. Whether it is President Mugabe of Zimbabwe or Angelo Mozilo of Countrywide or an almost successful Presidential candidate, they are part of a culture in which they tell themselves they are so successful that they can't lose. 

There is a fundamental part of human nature that seems to affect all of us.  The quick demise of Countrywide from high-flyer last year to almost bankrupt company being picked up for ten cents on the dollar was appalling only because of its speed. Had you asked Countrywide's highest executives about their prospects a year ago, they would have told you that they were bulletproof.

I want to make the distinction between types of seemingly random events. The type of disaster that hit Parkersburg, Iowa last week was random. You do not know where a tornado will happen, although it is more likely in Iowa than in, say, New York. But if you look at the Parkersburg website at http://www.parkersburgiowa.info/ I defy you to find any consciousness that some 40% of the town would soon be leveled. 

The Countrywide event is different. It is the result of a grave miscalculation of the risks involved in profligate lending. You wonder what Mr. Mozilo's approach to underwriting would have been had all losses been deducted from the $474 million in stock that he cashed in. It's easy to play risky games if you are playing with OPM, Other Peoples’ Money.

What is less understandable it that there was plenty of evidence that strongly suggested that the foreclosure rate was going to be high with subprime loans, perhaps in the 20% range, as now appears to be the case. Notwithstanding the evidence that suggested Countrywide's actions were incredibly risky, they went ahead and did them anyway.

Finally, speculation is that the Countrywide name will also vanish. That is not unusual. Remember that after the crisis of the '80s and '90s, many Savings & Loan Associations changed their names to Savings Banks, a name that appeared more appealing to consumers. But it does seem to be a sad end for one of America's most recognized brand names, even if it is fitting.  The brand joins WorldCom, Bear Stearns, Enron, and a host of others on the scrap heap of American business names brought down by greed. 

Depressing News – Part 2

In Part 1 of this series, I discussed the acquisition of Countrywide by Bank of America, a deal which was announced a few months ago and is to take place later this year. I stated that the value of the servicing portfolio of almost $1.5 trillion was probably the most valuable asset of the company. The lingering questions are what the other assets are worth and what hidden liabilities might yet be uncovered.  You always wonder about when the next shoe is going to drop.

We can now say that another shoe has dropped. A lingering issue has been that of the precipitous decline in the value of Countrywide's stock. It reached a high of $45 per share last year and is now less than $5 per share. Particularly distressing were management's continuing reassuring public statements about the health of the company while they themselves were systematically unloading shares that they owned.

Angelo Mozilo had filed with the SEC a planned liquidation of stock. Indeed, the purpose of these filings is to establish a long-term liquidation plan that is not tied to performance that the executive would know about as an insider. However, Mr. Mozilo kept modifying his plan so as to increase the rate of liquidation of his stock. You'd have to have come to town on a turnip truck not to believe that he increased his sales rate due to the mounting evidence of bad news. Ultimately Mr. Mozilo sold $474 million during a period when his fellow shareholders were getting virtually wiped out.

It should come as no surprise that executives would enrich themselves at the expense of shareholders. That is deplorable but not uncommon practice these days. Those of us on the sidelines in the mortgage business certainly believed it was worse than was being admitted.

However, the Countrywide executives are in a state of denial. Only last week a senior executive admitted that some loan officers may have erred "from time to time." There is a great difference between "from time to time" and "all the time" and "we were encouraging them to cheat." What is more depressing is the extent to which executives seem to have not only condoned but encouraged widespread and ongoing disregard of underwriting standards that resulted in billions of dollars of losses and bringing the nation's largest mortgage lender to its knees.

In a suit filed previously by irate shareholders, a Federal judge ruled yesterday that the executives must answer charges. A report in The New York Times on May 15, 2008 quoted the judge as saying, "It defies reason, given the entirety of the allegations, that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels."

This is not what has been said in the media. Indeed the politically expedient thing to do is to accuse mortgage brokers. Indeed current legislation being discussed in Congress focuses many additional requirements on mortgage brokers. 

Indeed, malfeasance among mortgage brokers occurred in large part because they were being encouraged by the lenders. The lender's sales people were out beating the bushes telling brokers of lax standards. The brokers knew that the lender would approve most packages they submitted regardless of quality.

My belief is that non-broker entities were at least as culpable. Lenders like Countrywide were just as quick to approve bad packages submitted by their own employees as they were loans submitted by brokers.

This demonstration of the lack of ethical conduct at the nation's largest lender should serve to tell both the public and Congress that new regulations need to apply to everyone in the industry, large and small, brokers and lenders alike.

They and borrowers also need to know that there always have been a large number of mortgage brokers whose ethical standards were never compromised, regardless of temptation. Those people are still in business and are still trustworthy advisors to borrowers who seek them out. A good place to start is http://upfrontmortgagebrokers.org

Depressing News

It was pretty depressing reading the paper this morning.  The first article I read was about Bank of America and its potential acquisition of Countrywide, a deal made several months ago but not yet consummated.  Several analysts were questioning whether BofA should go ahead with the deal.

A little background information is in order. Countrywide was, like many lenders, running short on cash last year as the credit crisis started. In August 2007 they stuck a deal wherein BofA purchased $2 billion in Countrywide Preferred stock. The capital thus injected allowed Countrywide to continue normal operations in spite of the beginnings of the capital market freeze that is now obvious to everyone.

At the time, Countrywide's common stock was selling for about $22 per share, just about half what it had been earlier in the year.  While Countrywide maintained a positive outlook, even forecasting profitability after their first quarterly loss in its history, the reality of the marketplace was that losses were mounting, as has now been acknowledged.

There was obviously a lot more going on behind the scenes and in January 2008, BofA and Countrywide announced that they were merging. At the share price on the day it was announced, Countrywide shareholders would have gotten about $7 in BofA stock for their Countrywide stock. The stock closed today at about $5 per share.

The questions that was being posed today was, "Should or will BofA go ahead with the merger?"  The question revolves around the issue that everyone in mortgage lending faces today: maybe the assets worth less than I think they are and maybe the liabilities are larger than they appear today.

On the one hand, they are buying a company for about $4 billion that had a market value of $25 billion the year before.  Plus they have access to Countrywide’s customer base and can sell them other BofA products. Sounds like a good deal. But the crown jewel is the Countrywide servicing portfolio.

Remember that servicing is the collecting of payments from borrowers and transmitting the money to the institution that bought the loan. In round numbers, the value of servicing varies as to type of loan but in general the servicing is worth a little less than 1% of the value of loans being serviced.

Countrywide's servicing portfolio is almost $1.5 trillion. That means that the value of servicing is a little less than $15 billion. The way I see it, if you pay $6 billion and get a servicing portfolio worth $15 billion, you got yourself a good deal. You get all the rest of the company, its many offices, its tens of thousands of employees, and all the rest of those assets for free.

But then again there are those liabilities. As Countrywide noted in a press release of first quarter 2008 results:

"securities retained in prior securitizations and nonagency inventory subject to fair value adjustments were written down."

The question is what else is there in the woodpile that you don't know about. 

As much as I worry about am insensitive, bureaucratic, behemoth lender that will have a market share of the mortgage business in excess of 25%, I worry even more about what might happen if they don't do the deal. I don't see how Countrywide can avoid bankruptcy and who knows where that will lead.

As if that wasn't depressing enough, in the next article I read about analysts questioning whether FannieMae and FreddieMac have enough capital!  I'll talk more about that next week.  Stay tuned.

Jose Canseco Makes "Mathematical Decison" to Walk Away from His Mortgage

It seems that the debate over athletes as role models resurfaces at least once or twice a year. When professional athletes make headlines with doping scandals, infidelity, gambling, dog fighting, etc. the nation responds with a hearty chorus of "what about the children?!"

The latest athlete scandal might have us saying "what about the homeowners?!"

Jose Canseco announced this week that he was making a fiscal decision to foreclose on his mansion:

"I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else," he said.

Canseco said the foreclosure was not a difficult issue emotionally. But he sympathized with the millions of other Americans who have already lost or face losing their homes because of soaring interest rates on sub-prime loans.

Celebrity foreclosures aren't anything new. But the tone of this particular announcement does seem to be different and in tune with what is happening in the real estate market across the country. Calling a foreclosure a "mathematical decision" and "not a difficult issue emotionally" doesn't really set the tone desired by the struggling mortgage industry.

Could it be that the national foreclosure trend is hitting celebrities and athletes too? If so, would the stigma of foreclosure start disappearing as celebs are seen turning over the keys? What do you think?

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

It is a Great Time to Buy a Car

The Federal Reserve board decided to cut rates after all today. That means the prime rate is now a low 2%. Auto rates should be falling soon with the new, they're already below 7% for a new car.

So you can get a good rate on an auto loan, why else is it a good time to buy a car?

• Auto dealers are facing slumping sales. Analysts predict a million fewer new car sales this year.
• Gas is expensive. You can reduce your commute costs by switching to a more fuel efficient vehicle.
• The internet makes it easy. Compare cars online to find the best deal.
• Cash strapped consumers may be extremely motivated sellers.
• There are some great used car options. A lot of cool low-MPG cars have been on the market for a few years. The Toyota Prius and BMW Mini have both been sold in the US since 2001.
• Your tax refund and economic stimulus rebate are coming in the mail soon and would make for a good downpayment.

If you are shopping for a car, here are some tips for saving money:

• Research first. Spend some time reading online and comparing prices to narrow down your list of options. Do some test drives to see if you really like the choices.
• Wheel and deal online. Most auto dealers have specialized internet sales departments that you can play against each other from the comfort of your computer. Keep negotiating until you get a great deal.
• Buy used.  Unless you plan to keep the car for a long time, you can save a bundle by buying a car that has been gently used instead.
• Wait until the last weekend of the month or the quarter if buying from a dealership. This is when car sales teams are racing to make their numbers.
• Finance your purchase online. Online auto loans offer very low rates and fees. And the best part is that a dealership will often try to undercut the rates and give you a better deal.
• Use a downpayment to lower your auto loan rate and save money on interest.

We've got more tips to help you save $3,000 on your car purchase online. 

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Are You Ready for Another Rate Cut?

Experts are divided as to whether or not the Federal Reserve Board will cut rates again this Wednesday. Another quarter point cut would leave the Fed Rate at 2.00%. This would be the lowest fed rate since November 2004, around the same time when the U.S. homeownership rate peaked at 69.2 percent.

What would another rate drop mean to you? Well for one thing, your high-yield savings account is going to take another APY hit. Currently, an ING savings account earns a pretty lowly 3%. If you're a saver, like me, this isn't happy news.

On the positive side: You should be able to get a great low rate on an auto loan. Plus, auto dealers are struggling with a slowdown in new car sales, meaning that they could be eager to make you a deal.  And home equity loan rates would be stellar if you could find someone to give you one. The stock market would also probably benefit from a rate cut and you could see your credit card APR drop a bit.

On the negative side: Another rate drop could play a role in an even weaker dollar and even more inflation on food and gas prices. And mortgage rates? They're not playing along with the Fed. Rates for a 30-year mortgage have been pretty steady and didn't drop with the Fed cut in March.

Do you think the Federal Reserve Board is going to cut rates again? Do you think they should cut rates or leave them alone? Share your feedback in the comments section below.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Another $7 Fee

In the grand scheme of things, adding $7 to the cost of getting a mortgage is not a big deal. After all, loan closing costs already include fees for processing, underwriting, document drawing, appraisal, settlement, and title insurance that total something like $2,500. So what's the $7 for?

It's for what is called Secondary Use of the credit report. When we meet clients and take their application, we get a credit report that typically costs about $20.  Normally that would be the end of it. But every lender we deal with relies upon some kind of Automated Underwriting system. The most frequently used are those of FannieMae and FreddieMac. But many lenders have their own "engines," as they refer to them.

In the process of uploading a file to these systems to get our approval, we enter in the credit report number assigned to it by the provider. Then the Automated Underwriting System goes to the agency that issued the report and has it reissued. That would be in lieu of ordering a new report which would cost another $20 and result in a "hard" inquiry that can result in lowering your FICO scores.

Re-issuing the old report does not add an inquiry. The lender ends up getting the same one we got but they can also be assured that the report is genuine. That eliminates one opportunity for fraud although being able to get inside a report to delete negative items would be exceedingly difficult. 

Up until recently, there was no charge for this service, although everyone realized that the computers at the bureaus really do have to turn on again to reissue a report.  The difficulty was in the agencies through which the reports were ordered. Apparently there was a lot of programming that need to be done. Frankly, I think that the biggest problem was how to take the fee on the reissue and pass it through to a company like mine. But that's just a guess.

Now when a lender re-issues the old report, it will be added to the bill and passed on to the customer.  That's no big deal, but imagine someone who has a really difficult loan. If his mortgage broker submits it to five different lenders, guess what? He and you are going to incur a $7 charge for each of those re-issues.

Now perhaps my industry will accommodate this change and lenders will agree not to re-issue the credit report again until they have looked at it and are virtually sure that the loan will be approved. That's the way it ought to be anyway.

Just be aware of this change and be sure to mention it to your loan officer. He will be surprised that you are so knowledgeable and it will improve your relationship.

I am Not a Communist – Part 2

As I previously noted, I believe that there is an important role for government in helping to clean up the credit crisis and restore order to the mortgage market. For those who complain about government intervention, may I remind you that most likely you get the biggest tax deductions most people qualify for:those for mortgage interest and property taxes. So if you want to deny someone else's benefits, you should be willing to give up yours. Not ready to do that? I thought so.

Borrowers who acted stupidly, who are in over their heads, will have to suffer the consequences. But there are some very decent citizens who do deserve to be helped.

The big problem area in this whole foreclosure mess is with the folks who find that their home is worth less than the loan balance. Their credit is OK. Perhaps it wasn't when they bought – which was why they got a subprime loan - but let's assume that they have cleaned up their credit.

They have adequate income and they can prove it with paycheck stubs and the like. The final important ingredients are that it is their primary residence and they intend to stay in the home for a long period of time. In a normal market they would now be able to refinance out of their toxic loans into normal loans at a reasonable rate with payments that they can afford. But no one is doing 110% LTV loans.

My own plan, which exactly no one offered in Congress, would be to have their current lender offer them a loan equal to their current loan even if it was greater than the value of the home. It would be at a market rate for A-paper loans, say 6%. The current lender does not take a hit and he ends up with a loan that is less likely to end up in foreclosure. 

The borrower gets a loan that is no larger or smaller than his current loan – i.e.- he is not being bailed out either - except that the new loan is not toxic. It is affordable. Yes, his home ultimately has to appreciate back above his loan balance before he gets any equity, but time will cure that.

The plan bouncing around Congress is different. And it includes help for this type of borrower. They would be offered a new loan at 85% of the current appraised value of the home. Does that mean they have instant equity? I guess so. The current lender, assuming it goes along with it, will be offered a payoff of 80% of the appraised value. That may be only 60% or 70% of the initial loan but more than the lender might get in a foreclosure. We'll see how that Bill proceeds.

The other thing I am in favor of is a tax credit for home purchase. The current plan includes such a credit for people buying a home out of foreclosure, but I think we need to do more. The fastest way out of this problem will be to increase the rate of sales. That will slow or eliminate the price decline and it will certainly slow the foreclosure rate.

In conclusion, I believe that an important function of the government is to maintain the public confidence in our markets and in our economy. That was what the Bear Stearns action was all about. Restoring a sense of trust to investments such as mortgage backed securities will be important in how our financial markets and our currency are perceived.

Remember that in the earliest days of our Country, one of the Federal government's first actions was to assume the debt obligations that had been incurred by the 13 States during the Revolutionary War. It became our National debt. That was an important step in creating world confidence in our new nation's creditworthiness. Government should play a similar role now.

I am Not a Communist – Part 1

When someone proposes something that can be viewed as political, people holding other opinions often start name calling. I think there is a role for government in the credit crisis, but I don't want to be labeled a Communist. Actually, my views tend more to the Libertarian end of the political spectrum. I believe in free-will, free markets, self-reliance, self-improvement, education, and that government ought to get out of the way.

Of course, government getting out of the way is simply not been what has been going on in my lifetime. Even in the era of deregulation that started under Reagan, government is at every party, not always as an invited guest.

Today we are experiencing the worst credit crisis in a couple of generations, a crisis that has happened in spite of a great deal government regulations. It has happened in part because of a appalling lack of enforcement of those regulations. Government regulators were asleep at the switch. The question now is, "What is the proper role for government in getting out of this mess?"

First, it is really easy to decry bailing out people who acted irresponsibly. Yes, people should have not bought homes they couldn't afford. Yes, they should have understood the loans they were getting. Yes, they should have done a lot of things. I have heard a lot of that but saying it doesn't help. It is really important to separate those subprime and other borrowers into smaller groups that have common characteristics. They become easier to understand.

Let's remember that the great majority of homeowners who got subprime loans are not going into foreclosure. They may have been talked into buying a home by some smooth-talking real estate agent whose co-conspirator was a subprime mortgage guy. Their toxic loan may be a huge burden to them, but they are in their homes and have achieved their part of the American dream, and they will be better citizens.

Ones in trouble still have solutions other than walking away. They can get second jobs or they can have a brother-in-law move in and pay rent. I don't think that we ought to worry about these folks. Maybe the ones most deeply hurt will be able to work out better loan terms with their lenders. But eventually, without help from the government, most will find a reasonable solution and become stable members of their communities

There are others that do not deserve sympathy or help. Many "investors" didn’t think that the risks inherent in real estate applied to them. Those who bought homes on speculation, hoping to turn them for a quick profit, are going to lose money, and properly so. The bad news is that foreclosing on them will add another home onto a saturated market. That hurts the neighborhood, and the affected neighbors didn't do anything wrong.

In the next installment I will discuss a plan that is under consideration in Washington. What will ultimately be enacted is unclear and what the effect will be on the real estate market is fuzzy as well. But what is clear is that we have one heck of a mess on our hands and we need to take bolder steps to fix it.

 

Who Ought to Write the Rules?

The recently resigned Governor of New York cut a wide swath as a reformer and discoverer of dirty tricks on Wall Street.  As New York's Attorney General his investigations into violations of securities law, particularly with the mutual fund industry, brought him widespread recognition and he was subsequently elected Governor. Many felt that he had presidential aspirations. We know how that farce ended. Those who would like to see a list of his targets can go to: http://en.wikipedia.org/wiki/2003_Mutual-fund_scandal

His successor as Attorney General was Andrew Cuomo, son of the popular ex-governor of New York, Mario Cuomo.  Cuomo the Younger had served in Washington D.C. in the Clinton Administration, first as Under Secretary of the Department of Housing and Urban Development, or HUD. He got a promotion upon the untimely resignation of his boss, Secretary Henry Cisneros who had been indicted on 18 counts of illegal activities. Cisneros agreed to plead guilty to a lesser charge and was subsequently one of 149 people pardoned by President Clinton.

As HUD Secretary, Cuomo would have had a great opportunity to fix many of the problems that were subsequently to surface in the mortgage industry, like the subprime mortgage fiasco. After all, if it wants to, HUD plays a key role in regulation of the mortgage industry.  But it can also be just a stepping stone for some bureaucrat who has no idea about what he ought to be doing.

Most people think that Cuomo's career at HUD was, at best, undistinguished. In fact, he came under severe criticism from independent investigators within HUD.  In a November 2, 2006 article in the New York Times, independent investigators said that they:

"had repeatedly criticized Mr. Cuomo’s plan to revamp the agency as devoting too much staff to public relations functions and too little to oversight"

and

"HUD’s very poor management allowed this slow-moving theft of huge proportions to go undetected, until it was too late."

That would appear to be what typical politician/bureaucrats do but would hardly seem to be a record of accomplishment for greater office. But after Clinton left office, Cuomo returned to New York and after and unsuccessful bid for the Governorship, ended up being elected Attorney General in 2006.

He seems to have been cut out of the same "investigator" cloth as Mr. Spitzer, although he has focused on the Student Loan industry before turning to the mortgage industry.

He then uncovered evidence that Washington Mutual, one of the nation's largest lenders, had, allegedly, pressured a company called eAppraiseIT, an appraisal management company owned by First American Corp.  WaMu is alleged to have pressured the company to inflate appraisals so that they could loan more money. WaMu ordered over 250,000 appraisals through eAppraiseIT.

Cuomo can't go after WaMu because WaMu is federally chartered and under the supervision of the Office of Thrift Supervision, a unit of Cuomo's old turf, HUD, whose Director is miffed that Cuomo didn't share information with them as they had the authority over WaMu.

Next up were FannieMae and FreddieMac, each of which has had it's own management and accounting scandals over the past few years. These two Government Sponsored Entities are theoretically regulated by the Office of Federal Housing Enterprise Oversight (OFHEO), a unit of the Department of the Treasury. What the Attorney General of New York is doing with them would have to be classified as strange, even bizarre.

Cuomo wants the appraisal process to be independent of pressure and coercion, as do all responsible people. He has apparently asked that Fannie and Freddie buy loans only from companies that have followed some as yet defined process that will separate appraisers from anyone who might pressure them. 

How this is to be achieved has not yet been decided but it will likely involve much greater involvement in "appraisal management companies." Oddly enough, this seems actually worse to me.  After all, it seems that WaMu would have had trouble pressuring 1,000 independent appraisers, but did apparently find a way of pressuring the single point of contact, the management company.

It also seems likely that as an independent broker, I will not be able to order appraisals from a stable of smart, trustworthy appraisers that I have developed relationships with over the last 28 years.

Where am I supposed to get an appraisal? Maybe from the one outfit in the country that really knows every single neighborhood in the country, the Post Office. Maybe they can train the letter carriers to do appraisals in their spare time.

The other issue I grapple with is a jurisdictional one. Certainly if eAppraseIT violated NY State Law, they should be charged, the AG ought to present his case, and let a jury decide. If he decides that there is a better way to protect the good citizens of New York by regulating how appraisers get chosen in his State, then he ought to go the N.Y. legislature and get some new laws passed. Then he can enforce them too.

But I am having a tough time seeing how he has any ability whatsoever to call Fannie and Freddie on the carpet and tell them how to run their businesses nationwide. More particularly, I don't think that the AG of New York ought to be able to tell me how to run my business in California. We'll see.

On the other hand, it does appear that he uncovered some malfeasance that the actual regulators should have but didn't uncover. So, assuming his allegations have merit, he was doing a job that SHOULD HAVE been done by those agencies.

For anyone who is interested, there is a lot of nitty-gritty that makes fascinating reading. To see AG Cuomo’s complaint detailing the alleged hanky-panky, check out:

http://www.oag.state.ny.us/press/2007/nov/EA%20Complaint.pdf 

Finally, in late breaking news, the most recent Secretary of HUD, Alphonso Jackson, has just resigned his office too. It has been alleged that he used the perquisites of his office improperly. 

After all the problems at HUD, you would think that a manager with experience in the real estate industry would be appointed to this important department. But it seems that it is just another a stopping point on the career paths of incompetent politicos. Could competent management at HUD have lessened the impact of the trillion-dollar credit crisis caused by the subprime fiasco? It's hard not to think that if they had done their jobs that it would have gotten this bad.  It's sad for our citizens. We deserve better. 

The Wrong Kind of Appraisal Fix – Part 1

Of all the proposals to "fix" the mortgage industry that are floating about, perhaps the worst is one that was hammered out – and I use the term in its most direct meaning – between the Attorney General of New York and mortgage giants FannieMae and FreddieMac.  It will turn the entire appraisal industry on its head.  It's an incredibly stupid move.

Here is a little background.  A fundamental tenant of the appraisal process is the market value determined by the appraiser ought to be based upon a logical analysis of the facts. In fact, the rules the govern appraisers was created by The Appraisal Foundation. The rules are known as The Uniform Standards of Professional Appraisal Practice. At its core, the process is supposed to be independent with appraisers able to do their work without influence or pressure. The Foundation also helps the States create licensing standards.

Large lenders like the big banks and S&Ls typically had their own appraisal departments. Most of these lenders were doing loans for their own portfolio so if there was pressure put on the appraisers, it would have been to come in with "conservative" – read "lower" – values.

In addition there is a huge body of independent appraisers and it was from this group brokers like me chose appraisers. I think that this system has worked well and I have a collected a stable of reliable appraisers throughout the State of California.

But all appraisers are not created equal.  There are good ones and bad ones. The best are responsive, thorough, and their work holds up under scrutiny, such as an appraisal review. On the other hand, some are, first by reason of experience, just not very good. In fact, I can recall some disasters when we have had to use some doufus appraiser that has been forced upon us by one of the mega-lenders.

One development that started a few years ago it the creating of what are known as "appraisal management [you have to use that term loosely] companies."  There is no doubt that a lender would not know about appraisers in every community in which it might need an appraisal done. So companies like First American set up shop as central clearing houses. It would make arrangements with appraisers all across the country so that when a lender ordered an appraisal, it would be farmed out to a local appraiser in that area. They would also, theoretically, offer a quality control function to assure quality.

Well things can go wrong in that process. The New York State Attorney General, Andrew Cuomo, found that Washington Mutual, one of the nation’s largest lenders, put undue, and perhaps illegal, pressure on First American, allegedly forcing them to raise appraised values. But he has no jurisdiction over Federal chartered lenders like WaMu who is supervised by the Office of Thrift Supervision.  So, unable to nail the real culprit, he looked for someone to blame and found most of the rest of the industry.

Independence is important, no doubt, but it is important that the people who know about mortgages, not a bunch of lawyers, make decisions about the future of the industry. Between USPAP and state licensing, there are plenty of rules on the books. Someone just needs to enforce them, and it's not Mr. Cuomo. 

There are times when we have had to use "appraisal management companies." It hasn't been fun.  They take 40% of the fee for doing NOTHING!!!!! The appraiser gets 60%. 

Does this improve loan quality? No. Does it make the process more efficient? No. Does it reduce costs to consumers? No. Is appraisal quality going to go up? No. In fact, many good appraisers will just leave the industry rather than take a 40% pay cut. Who will be left? You can figure that one out.

So why are FannieMae and FreddieMac about to cave in to this stupid idea? You would have to chalk it up to political pressure.  But it sure isn't going help consumers.

Better News for ARM Borrowers

In addition to the subprime borrowers and other homeowners with toxic loans, there has been a great deal of concern expressed about the potential damage to the economy due to resetting of other types of ARMs. This concern was well warranted back in 2007 when the index values that these loans were tied were all high.

But recent action by the Federal Reserve has lowered short-term rates and that means the index values that ARMs are tied to have dropped too.

Here are a couple of examples:

Example #1 - A 5/1 ARM tied to 1-year Constant Maturity Index (CMT) with a margin of 2.75%

During most of 2007, this index was about 5% so if you were to add the margin of 2.75, you would end up with an interest rate of 7.75%. If a borrower's initial ARM rate was 5%, you can see that he would be in for a big increase. On a $300,000 loan at 5%, the payment would be $1,610 but would increase upon adjustment to 7.75% it would rise to $2,080, an increase of about 30%.

Today, however, the CMT is only 1.54% so adding 2.75% and (likely) rounding up to the next .125% yields 4.375%.  In other words, both the rate and the payment would actually go down to $1,511. 

Example #2 - A 3/1 ARM tied to 6-month LIBOR with a margin of 2.25%.

This index was about 5.5% most of last year so when a LIBOR loan would have reset, it would have gone to 7.75% too. The payment would have increased in the same way the CMT loan payment did.

Today, LIBOR is not as low as the CMT index, but it is about 3%. That means that a LIBOR ARM would reset to 3% + 2.25% = 5.25%.  That would mean a very small adjustment to the borrower whose loan started at 5%.

Strangely, even with this good news, the media are still talking about another million homeowners facing foreclosure due to their ARM loan resetting. 

That doesn't mean that there aren't many, perhaps a million, homeowners whose loan balance is higher than the current value of their properties, but at least if they have an ARM like these, they will still be able to afford the payment and won't lose their homes.

It also doesn't mean that ARM borrowers who have enough equity and the intention of staying in their homes for a long while shouldn't consider a refinance into a long-term fixed rate mortgage. They probably should. But I know one problem and that is that some people whose loan will adjust down, let's say to 4.25%, will look at a 30-year loan at 5.5% and see that the payment will go up somewhat.

Some of these people will be tempted to wait. Bad decision! They will think that they can out-guess the market and refinance just before rates move up. Not a smart move because no one, especially amateurs, can make that call successfully.

The benefit of a refinance will come down the road when interest rates inevitably move higher. That is the purpose of long-term rate PROTECTION.  [Emphasis added on purpose.] 

So if you have an ARM, get out your loan documents and acquaint yourself with the terms so you know what is going to happen to you. They make a plan and execute it.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Foreclosures and the Government

I remember and old joke that went: Beware of someone showing up and saying, "I'm from the G'ubment and I'm here to he'p you."  That still seems funny today because when someone from the Government says that, we all laugh, hold onto our wallets, and run for the nearest door. 

Well, these aren’t the old days anymore and it's not a joke. There are tragic consequences of relying upon government intervention.  For example, I really feel sorry for anyone along the Gulf Coast who expected disaster relief from the ravages of hurricane Katrina. Mismanagement of that tragedy continues.

With that in mind, it's not all that difficult to imagine why so little has been accomplished by the government's efforts to lessen the impact of the foreclosure problems on the citizens.  There are a number of initiatives that have been launched to help people by restructuring debts to help people stay in their homes.

It is very difficult to get a handle on the exact number of people who have benefited from initiatives like the Hope Now Alliance, the expansion of FHA loan limits, and increasing loan limits at FannieMae’s and FreddieMac. For example, the Hope Now Alliance, a consortium of the majority of lenders, counseling services, and trade associations stated that over a million homeowners had been helped. For the press release, see http://www.fsround.org/hope_now/pdfs/17-28FebruaryRelease.pdf

If you recall, the number of homes that had been predicted to be foreclosed upon was estimated to be something like two million. Thus you might be led to believe that half of them had been helped. The talk from the street paints a different picture.  It has been claimed by some groups that over half of the borrowers who are in foreclosure never even bother to call their lenders.  More and more seem to be moving out and mailing their keys to the lenders.

Other stories tell of phone calls never returned. Obviously no help there. Still others say that rather than being restructured, in many cases borrowers are just being given more time to catch up on payments. That seems to me to be a little like allowing a condemned man one additional cigarette before letting the firing squad get on with its business.

Meanwhile the Foreclosure Train is rocketing down the tracks and as housing prices drop, more and more homeowners find themselves upside down, owing more then their homes are worth. About ten percent of homeowners now find themselves in that position. That group will include many otherwise creditworthy borrowers who cannot now refinance out of toxic loans because their equity has evaporated. Without equity and facing more stringent lending standards, they are unable to refinance.

Regardless of the arguments against a bailout, I think that there is a role to be played by government beyond being a cheerleader. Perhaps they  just don't see how they personally are affected by something like the buy out of troubled investment bank Bear Stearns by JP Morgan Chase for a mere $2 per share. That stock was selling for more than $150 per share last year.

That is just a portion of the losses and write-downs that have been made public so far, something like $160 billion.  The larger problem is that, by some estimates, the total problem may be as high as $800 billion and that will touch EVERYONE. The economy lost 63,000 jobs in the last reporting period, and some of those losses were due to the credit crunch affecting employers.

This country is in a severe credit crisis.  Critics of government intervention don't yet see that the damage that can potentially be done by intervention is less than what will occur by doing nothing.

Foreclosure Update

A couple of years ago when I started writing about the potential effects of profligate lending, everyone was caught up in the hoopla about "expanding homeownership opportunities."  Home values were soaring and everyone associated with subprime lending was making obscene amounts of money. No one wanted to hear negative news.  Even my letters to HUD never got a response.

Let's be charitable and say that their attention was elsewhere, but regardless, I know how the operators of the radar station on Oahu felt on the morning of December 7th when they called headquarters to warn of the incoming Japanese planes and no one paid any attention to them.

What is bizarre is that even people in positions of regulatory power like the Comptroller of the Currency whose agency regulates the Nationally Chartered banks, the ones with N.A. after their names, didn't do anything even after they recognized the problem. For example, in December 2006 John C. Dugan, head of the Office of the Comptroller of the Currency, gave a speech where he warned that Option ARMs, the time-bomb loans with the artificially low payment rates, were dangerous for consumers.

Well, they were dangerous for lenders too, as we have now found out. The question is, "Why didn't he use his regulatory power to stop or slow it?" Indeed, what's the purpose of having power if you don't use it?

Today, we have a different situation. Every day the papers have articles on one aspect or another of the subprime mortgage-credit crisis-foreclosure problem.  Now it's hot news.

The government has come up with several programs to help rescue people in trouble, yet after a little time has passed, it seems as if each program helps only a disappointingly small percentage them.  They are not solving the problems!

There are a couple of new proposals on the table and we'll see how they go through Congress.  One would be a revision of the Bankruptcy Act that would allow judges to modify mortgage loan terms, a power they do not now have.

Another one which I particularly like would provide relief to otherwise creditworthy people whose homes have gone down in value to the point where the loan balance is higher than the value of the home. These people are "untouchable" in the current market.  They can't get a normal loan even though by every measure other than LTV, they are excellent borrowers.

We'll just have to watch to see how this unfolds but I sure hope that people move more quickly in implementing programs.  There is no sense coming up with a solution after everyone is dead!

You might be interested in seeing a map that shows the concentration of subprime loans.  When you look at it you are likely to note a strong resemblance to bomb craters.  Many borrowers and lenders will agree with you.   CLICK HERE

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Maybe, Maybe Not

I was chatting with a client the other day and he tried to get me to make some predictions about where interest rates were headed. Of course, I don't have any more ability to predict the future than you do, but he didn't want to accept my protestations. He wanted answers. So I told him that what was going on was a case of "maybe, maybe not." Here's what I meant by that.

In Ye Olden Days I think that it was easier to predict interest rates because you only had to keep track of a few of variables, the most important of which was the anticipated rate of inflation. When the inflation rate was rising, the model everyone used said that interest rates would rise too. That meant that the interest rate you could get on an investment minus the rate of inflation still yielded an acceptable return.

There were some other variables here too, like the current growth rate for the Gross National Product, the projected government surplus or deficit, and the level of the national debt. But in a way these all tracked back to their potential impact on the rate of inflation.

Today things are a lot more complicated. For openers, we have a world economy where the economies of all the other countries are all intertwined with ours.  So it isn't just our rate of inflation, still an important variable, but how our rate of inflation compares with that of other countries. Is that important? Maybe, maybe not.

And then there is the old National Debt issue. Today, Japan and China own more than a trillion dollars of our Treasury securities.  Indeed the $159 billion economic stimulus package just enacted will largely be financed by Japan and China so American consumers can go out and buy more of their toys and electronics. Is that important? Maybe, maybe not.

This is also related to the trade balance or, more properly, the trade imbalance.  In the early 1970s our balance of trade went from positive to negative and I used to worry about that.  Of course, the imbalance was only a couple of billion dollars a year. Now, it's a couple of billion dollars every day!  Is that important? Maybe, maybe not.

Another factor is the exchange rate between the dollar and the currencies of our trading partners. It used to be that our dollar was worth a lot more than the Euro, the British Pound, and the Yen, for example.  Today it's just the opposite.   That is obvious to anyone who has traveled to Europe where everything is horribly expensive. When you whip out a bunch of dollars, they don't buy much. Is that important? Maybe, maybe not.

And then there is the fact that we still have to import a gazillion barrels of oil every day.  It isn't $3 per barrel oil either, or $10, or even $50 oil.  It's $100 per barrel. Of course, that's probably related to the fact that the oil producers aren't all that keen on collecting a bunch of devalued dollars any more. They want something that is worth something and although the price of oil is commonly traded on the basis of dollars per barrel, you can bet that when the value of the dollar declines, the price of oil in dollars goes up. Is that important? Maybe, maybe not.

The only reason why the rates are jumping around and why the stock market is going up and down by 200 or 300 points every day is that no one, especially all the experts in New York and Washington and London and Paris and Singapore Hong Kong and Tokyo has any more of an idea about what it all means than I do.

This is going to come as bitter medicine to some who have particularly strong feelings about something they think is going to happen in the future.  In spite of how strongly you feel about something, no matter how thorough your analysis, you simply do not have any ability to predict what might happen tomorrow or next week or next month.  The more that people think that they have found a pattern and can predict the future, the more expensive the lesson will be when reality finally rears its head.

Still think I'm wrong?  Who gave Barack Obama or John McCain a chance just a couple of months ago?

All of us, you included, have to get used to the idea that today is today and you have some options available today. If you have to make a decision today, look at the facts as you see them today and go for it.  Good advice?  Well, I hope it's better than, "Maybe, maybe not."

Light at the End of the Tunnel, for Some Homeowners

With all the nasty economic news around these days, it's hard to be optimistic.  Foreclosures are at all time  highs, default rates are up, home sales figures are in the tank, and more and more areas are showing year-to-year declines in housing values. So what's the good news?

Short-term rates are down which means that ARM loans, which are all tied to some kind of short-term index, are down too. These changes in rates were started in the marketplace before the Fed took its most recent With its .75% cut in the Discount Rate, all it is doing is acknowledging that rates are dropping and they are going along with it.  It may be conventional wisdom to think that what the Fed affects mortgage rates, but it just isn't true. The man in the street doen't know what is going on in the market, but he can read the newspaper, so he thinks that it is because the Fed lowered rates. Whatever, the bottom line is that this is good news for people with ARMs. Here's how.

A concern has been that non-subprime ARM loans that are resetting in 2008 will add to the problems of resetting subprime loans and Option ARMs. This is now less of a problem.  For example, the 1 year CMT index that is commonly used in ARMs has fallen from 5% a year ago to 3.26% today.  Here is what that means to borrowers.

A borrower with a 5/1 ARM taken out 6 years ago that reset in January 2007 was faced with a dramatic increase. The original note rate in 2002 would have been in about 5% with a margin of 2.75%. So when it adjusted a year ago, the note rate would have been 5% + 2.75% = 7.75%. That would require a much higher payment, almost 40% higher than the initial rate. And that’s for an A-paper loan to borrowers with good credit.

Today, however, with the index having fallen to 3.26, the note rate would only be 6%. That's still an increase of 18% but more manageable.  6% has always been an excellent rate for mortgages and, frankly, if a borrower can't afford that, he shouldn't have bought in the first place.

You can see that the millions of these loans that will be resetting are not going to pose additional threats to the economy. But this news affects only borrowers whose loans are tied to the 1-year Treasury index.  Many other loans are tied to 6 month LIBOR and the 11th District Cost-of-Funds indices.

These are stubbornly higher because rate in Europe where the LIBOR (London Interbank Offered Rate) is not directly tied to the U.S. interest rate market. That index is 4.6% but even with a lower margin, typically 2.25%, the resulting note rate would be 6.85%. The COFI index, always a slow moving index, will come down slowly too. It is now at 4.17% so with a margin of 2.25% the note rate would be 6.42%

Regardless of which index is used, you can see that the end result is still an interest rate that starts with a 6, much better than one that starts with an 8. 

What does this mean for subprime and Option ARM borrowers?  The margins on these loans is higher than the ones we have just discussed, but still the rates will be lower. And it makes it easier for a lender to negotiate something that is better for the borrower and yet which is in line with what the investors who own the loan are seeing in terms of general market rates.

The problems caused by profligate lending aren't going to go away any time soon, but at least it solves a potential problem for some borrowers and makes renegotiation more likely for others.

A final word of advice. Fixed rate mortgage rates are as low too. 15-year fixed Conforming loans are actually below 5%, almost as good as they were back in 2002 and 2003 when the refinance boom was on. It's shaping up to be another banner year for refinancing and it always makes sense to get out of any ARM and into a fixed rate loan when rates are down. If you have an ARM, I would take this opportunity to get off the roller-coaster.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Last Man Standing

When you look at my industry today you might think everyone was playing a game of Last Man Standing. I started thinking about this when I found a several year old list of the top lenders in the country.  Four of them are gone, either having shut down or been absorbed by others and that doesn't include the two I'm about to mention The count of companies that have either shut down, have dramatically cut back operations, or have been acquired now totals 217. That goes well beyond the subprime area and affects many companies that never went near subprime.

Of perhaps more interest is the fact that it affects so many companies that would have thought to have been bullet-proof.  The obvious one is Countrywide which having seen their market value plummet by about $30 billion became an attractive take-over candidate.  Bank of America, which previously had bought some convertible preferred stock, bought the company for 15 cents on the dollar if you assume that the stock market valued its stock rationally last year.

Or maybe it wasn't rational given that the SEC is currently investigating the CEO unloading his shares as the stock was sinking. Is it reasonable to think that perhaps he had better information about the state of affairs in the industry and his company than the average guy?

The question about whether this was a good buy or not will not be known for a few years until the true extent of the liabilities becomes apparent. For example, Countrywide has $11 billion of loans in its portfolio that it would love to sell but for which there are no buyers. They are madly working trying to take those borrowers and get them into normal loans.  At that point they can sell the loans. But until they sell them, who knows what they are worth. 

The latest rumor involves Washington Mutual which arguably was the number two lender in the country.  It is in what have been described as "very preliminary" talks with JP Morgan Chase.  That's not much to hang your hat on but it look at it this way:  Six months ago the company was worth $35 billion and probably will again someday.  If you could buy the company today for $10 billion, that would be a pretty deal, wouldn't it?

If you want to see an ugly stock chart, check WaMu's using the ticker symbol WM.

Stay tuned.

If You Have a Student Loan, Have I Got a Site for You

Almost two-thirds of college grads leave campus owing money on student loans. On average, their student loan tab is close to $20,000 … and growing. Student debt levels grew 8% between 2005 and 2006, while starting salaries rose by only 4%, according to the Project on Student Debt. And another 5 million or so of us take out student loans every year.

Even in good economic times, far too many people find themselves in student loan hell, with huge debts that haunt them and have them paying interest on interest for decades. With the economy tanking, lots more people just starting out are going to join them there. All it takes is a dose or two of career confusion, perhaps compounded by a job loss or an accident, and someone with a bright future can soon face a very dismal prospect: ballooning student debts and financial woes for as long as they live. (I am not exaggerating.)

If you or someone you love has a student loan, here is a site you might want to bookmark: Student Loan Borrower Assistance, which was funded by the Project on Student Debt and painstakingly researched and developed by the National Consumer Law Center. Turning to it sooner rather than later can help you save a fortune as well as untold grief.

I wish it had been there when I was trying to help a young man I'll call Jim. He was the first person in