The Strings Attached To TARP Funds Are Tightening

In the last 30 days here's what has happened to various recipients of TARP funds.

1. GM: CEO Rick Wagoner asked to "step down" by the White House
2. B of A: CEO Ken Lewis relieved of his responsibilities as Chairman
3. Chrysler: Forced into bankruptcy
   
4. Chrysler: CEO Robert Nardelli asked to step down

JMO: When each of these institutions requested, and received TARP funds there were responsibilities attached. It appear that the White House is sticking to its guns that things are going to "change". As you can see, the changes are being made at the top and that type of pressure can only be applied by a major shareholder, which is exactly what the U.S. Govt became when they loaned the TARP funds to these companies. The White House is sending a very clear message that no company is too big to fail.

Added Content for JMO Blog

when you log onto the JMO Blog you will see that we have added some content to the left banner. You will now see a link to up-to-the-minute real estate news as well as an ability to search foreclosures by zip code. We will continue to add relevant content as it becomes available.

When Cerberus buys, You should SELL!

Cerberus Capital certainly has the "anti" Midas touch, doesn't it? A few years back the hedge fund giant bought Chrysler which today revealed that it will file for bankruptcy protection. But wait, there's more -- and it's all mortgage-related. Twenty-four months ago its subprime division, Aegis Mortgage, went BK. And wasn't it Cerberus that bought a controlling stake in Residential Capital Corp., which recently avoided bankruptcy at the 12th hour? I believe that was Cerberus. And wasn't Cerberus (for a while) itching to buy now defunct subprime lender Option One from H&R Block? Yep, that was them too. And here's one more Cerberus incident: back in 1998 the hedge fund bought bonds in Cityscape Financial, a once high flying subprime lender that -- you guessed it -- went bankrupt too. We heard that investment actually worked out okay. All-in-all, nice track record there

The backlash begins...B of A ousts Lewis as Chairman

Ken Lewis has been replaced as Chairman of B of A, but will remain on as CEO.

JMO: for those of you that have been reading JMO for a while, you will recall that I said there would be a backlash from the Fed "rubber stamping" these acquisitions. As a former stockbroker, I recall that large acquisitions of public companies used to take months to complete with Govt approval not guaranteed. However, during the onset of the economic crisis (I'll consider AIG to be "ground zero"), somehow deals were being initiated on Friday and closing the following Monday. Ironically, in the attached article, Ken Lewis is being criticized for this lack of "due diligence". The Fed made the rules and Lewis followed them. I guess this is karma, because this is the same thing that happened to subprime borrowers. The banks made the rules and the borrowers followed them, then we blamed the borrower for not making better decisions.

Fed threatened "management changes"?

Did the Fed threaten to make "management changes" if Ken Lewis didn't stay hush, hush ?

JMO: in light of the ouster of GM's CEO and the Fed's involvement in the preparation of Chrysler's bankruptcy documentation (apparently averted at the 11th hour), one can only assume that there might be some truth to Ken Lewis' assertion that the Fed (Bernanke) pressured him to stay tight lipped about the true financial condition of Merrill Lynch.

Legacy Loans?...that sounds much better?

Since when did "Toxic Assets" become "Legacy Loans"?

JMO: Apparently we think that making it easier on our ears will somehow increase our confidence. Even with "foreclosure moratoriums" and "loan modifications", we still haven't dealt with the 100's of thousands of home that have ALREADY been foreclosed upon. Moratoriums/Modifications are of no use for these properties.

Bank of America is in the headlines....

B of A is in the headlines:

B of A is rebranding it's mortgage operations and dropping the Countrywide name.

CEO Ken Lewis claims he was pressured by the Fed regarding the Morgan Stanley deal.

Ken Lewis escapes being fired in January, only to find himself fighting to keep his job once again.

JMO: Ken Lewis has a history of making unpopular decisions that end up being great successes. He is currently being held accountable for acquisitions of Countrywide and Morgan Stanley. I think it is too soon expect a turnaround of these two companies. With the overall economy still in turmoil, and no discernible impact from the TARP funds I think it is unrealistic to expect that a few companies (B of A, GM, Chrysler, AIG) would be able to show significant improvement in less than a year.

Can Anyone Say "DUH!!!"

Imagine that!...redefault rates are higher when the loan modification causes the homeowners payment to stay the same or go up!



Regulators: Redefault Rate Unacceptably High

Federal bank and thrift regulators are warning servicers the redefault rate on loan modifications where the homeowner's monthly payment is unchanged or increased is "unacceptably high." They said servicers should strive to reduce and make the payments more affordable. The Office of the Comptroller of the Currency and Office of Thrift Supervision have discovered through their quarterly Mortgage Metrics Report that redefaults are cut in half to 23% if the monthly payment is reduced by at least 10%. "By contrast, about 51% of the loans in which payments remained unchanged were seriously delinquent after six months. The comparable number for loan modifications in which payments increased was 46%," the OCC/OTS report says. Only 42% of loan modifications in 2008 resulted in lower monthly payments, although that percentage rose to 50% in the fourth quarter. Modifications that increase payments or leave then unchanged "should only be used on a case-by-case basis where borrowers and servicers can have confidence that the modification is likely to be sustainable," comptroller John Dugan said. Separately, FDIC chairman Sheila Bair told bankers that the streamlined modification program FDIC introduced at IndyMac Bank last October has an 8% redefault rate. The IndyMac program modified 13,000 loans by reducing the homeowners' monthly payments to a mortgage debt-to-income ratio of 38%. After a few months in operation, FDIC adopted a 31% DTI ratio.

Sell Off Bad Assets or "You're Fired!"

Fed position is clear...sell off bad assets or "You're Fired!". Read below to see why we should begin to see more REO/Note inventory in the future

Treasury: Still Want Banks to Sell Bad Assets

The Treasury Department will continue to encourage banks to sell problem loans and securities to government-sponsored investment funds despite recent changes to the mark-to-market accounting rules, according to secretary Timothy Geithner. While the accounting rules may make its easier for banks to hold on to problem assets, the secretary stressed that the administration wants banks to clean up their balance sheets so they can raise private capital and increase lending. The proposed public-private investment funds give banks a way to sell problem assets and cleanse their balance sheets. "We will make sure that we encourage that kind of action," Mr. Geithner said on the CBS news show "Face the Nation." The secretary also said the administration is prepared to remove chief executives of banks receiving government assistance if those CEOs are not moving to restructure and strengthen their institutions. "We will do what is necessary to make sure our banking system emerges out of this stronger. The economy depends on credit to recover," he added.

Just Apply Logic

The article below shows encouraging data regarding mortgage interest rates. Nearly a 2% drop in 30 yr fixed rates since last year. Combine this with 30% decrease in home values and you've created a new market for homebuyers... Here's Why:

Last Year:
Home value: $350,000
Interest Rate: 6.65%
P & I Payment: $2.246.88

Today
Same home: $245,000
Interest Rate: 4.85%
P & I Payment: $1292.84

As you can see, you can own the same home for almost half the payment. This creates two types of home buyers. 1. first time homebuyers 2. full doc home buyers that can now prove sufficient income to qualify. This is why we are seeing the existing and pending home sales figures begin to rise. We just have to apply logic.

Simple equation: low rates + low home prices = more buyers. This is how the housing boom (bubble ) started in the first place, remember?

The Markets

Fixed rates hit their lowest levels in over thirty years last week after the government announced measures to purchase government securities and bad assets. Freddie Mac announced that for the week ending March 26, 30-year fixed rates averaged 4.85%, down from 4.98% the week before. The average for 15-year fixed fell to 4.48%. Adjustables also fell with the average for one-year adjustables decreasing to 4.85% and five-year adjustables falling to 4.96%. A year ago 30-year fixed rates were at 5.85%. "The Federal Reserve's announcement that it intends to purchase Treasury securities over the next six months caused bond yields to drop and mortgages followed," said Frank Nothaft, Freddie Mac vice president and chief economist. Rates for 30-Yr FRMs peaked last year at 6.63 percent on July 24th. With this week's 30-Yr FRM, the rate difference is almost 2.0%, which amounts to a savings of about $225 monthly for a $200,000 loan. And potential homebuyers are taking notice of these historically low rates. Both new and existing home sales rose 5.0% in February. First-time homebuyers accounted for half of all existing home sales, according to the National Association of Realtors."

3rd Consecutive Week Of Positive Housing Data

This article marks the 3rd consecutive week of positive housing data. I have a question for those of you still waiting...

• last year you waited to see who would become President...Barrack Obama
• Then you waited for the new President to take office... January 2009
• Then you waited for the bailout funds ... over $1.5 Trillion
• Then you waited for Obama's new plan...March 2009
• a year ago packages were being offered at 45-50 cents on the dollar
• 6 months ago packages were being offered at 50-55 cents on the dollar
• 3 months ago package were being offered at 55-60 cents on the dollar
• now banks are having success selling via MLS at up to 98 cents on the dollar

All the while, the housing market has shown signs of stabilizing (nationwide). There are fewer, verifiable bulk REO packages being offered and those that are being offered have asking prices 20% higher than a year ago. Now with the Neighborhood Stabilization Program fully funded and in place your investors will now be competing with State, County and City municipalities for real estate acquisitions (who do you think the banks would prefer to sell to, your investor or the State?)

The REO 'flip', 'assign', 'pass-thru' market has pretty much dwindled to a slow trickle. It was helpful in uncovering frauds and fakes, but how many deals were actually closed vs the enormous volume of deals that we were all involved in?.

The market is now ripe for legitimate, qualified, experienced investors to cautiously re-enter the market with sound acquisition and exit strategies. Those investors with buy/hold, buy/rent, buy/rehab and even realistic buy/sell strategies are taking advantage of low home prices and increasing demand. Lenders are inundated with qualifed buyers utilizing FHA financing and the new first time homebuyer tax credit has brought that segment of the market back to the levels we experienced during the housing boom.

So here's my question: What are you waiting for now????? Are you chasing the trend or profiting from it?