Sub-Prime Mortgage Companies in Major Trouble

Things are cooling off fast in the Sub-Prime mortgage business. Several companies who were in the vanguard of lending to homebuyers with iffy credit ratings are closing their doors. Others are desperately looking for buyers who will take the firms off their hands.

Default rates on these loans has jumped dramatically, and realistic people are expecting more defaults as low-interest and interest-only Adjustable Rate Mortgages (ARMs) reset to their permanent higher interest rate. Those reset dates are just starting to fall due, and can raise payments by hundreds of dollars a month.

Of course, this is leading borrowers to scramble for refinancing, as their reset dates approach. Sadly, fewer and fewer loan outfits are ready to refinance a loan for someone with a questionable credit history, so it's getting harder and harder for the homeowner, soon to be beset with a house payment he or she can't afford.

This problem is affecting even huge banks and other corporations, which buy these loans from the loan brokers and other finance companies. It's getting scary out there for the deep pocket folks, who have been planning on nice profits when the higher rates kick in on these loans.

The problem is made worse by the flat or falling housing market in many areas, including the Twin Cities. In some cases, homebuyers have purchased homes with 0% down payment, creatively financing the entire purchase price of their home with one of these ARMs. They figured that they'd just refinance before the resetting of the interest rate. Trouble is, they now owe more on their existing mortgage than the home is currently worth. They're upside down on their loan.

Typically, such borrowers don't have much cash on hand to make up the difference between what they owe on the home and what lenders are willing to loan them. Worse, the fancy-schmancy mortgages with the adjustable rates and the 100% financing are just about drying up out there. You can still get one, maybe, if you're not too much upside down and your FICA credit score is over 700, but it'll take some hunting. If your credit score is around 650, you can just forget about it right now. Nobody's going to want to talk to you, especially if you have no equity in your home or are upside down on your mortgage. If your credit score is over 750 or so, you'll have no problem, but you're probably not in this situation anyhow.

Lots of folks are going to do what lots of folks have already done...walk away from the home and let the foreclosure happen. That's already starting, with foreclosure rates jumping like Mexican jumping beans. They'll go back to renting again, and the home will be on the market, joining the glut of homes already out there. That will drive prices for existing homes lower, making the problem even worse. The rental market will do well, and rents will rise, due to the increased demand, making life even tougher for folks living on the margin.

Worse, homebuilders are going to be hit hard, since a glut in the home marketplace makes it tough to sell all those new homes they want to build. Many builders have already cut back on their future plans for developments, and have had to offer deep discounts to get buyers into the homes they've already built.

What to do? Well, if you own a home with a traditional mortgage and you've built up equity, don't worry about it. Just keep making the payments. If you have a home with little or no equity, an ARM that will reset soon, then worry a lot. Start making phone calls to see if you can line up a refinance now, even if your ARM doesn't reset for quite a while. If you're upside down on your loan, meaning that you owe more than your house is currently worth, worry even more. Try to find a way to raise as much cash as possible, with the goal being to wipe out the difference between the home's value and the amount you owe on it. If you can do that, you'll be more appealing in a refinance.

If you're in a bad spot and have a poor credit score, then your worrying is more than justified. Given the current nervous state of lenders, you'll have a very difficult time getting a new loan, particularly if you have no equity or negative equity. You need to talk to a credit counselor who is not a loan broker and see if there's a solution for you. It could be a tough spot.

You'd be amazed at which major banks and corporations are tied up in this potentially disastrous situation. Wells Fargo, CitiGroup, Wachovia...all have their fingers deep in the subprime mortgage pie. Even General Motors, which just spun off its GMAC division, which had tons of money in the subprime mortgage business, may have to take a hit of almost $1 Billion in writeoffs. That's not good, given its current weak position in the automotive marketplace.

Real Estate Weekly Update

The market continues to be soft here in the Twin Cities for sellers. This past week, there were 2400 new MLS listings put on the market, and 1000 MLS listings went pending. Inventory levels continue to hover at the 43,000 active properties mark. This is up from 38,000 actives as of last year at this time.

Compared to one year ago at this time, pending sales are down almost 16%. Thankfully, new listings processed were also down this week 3% compared to last year at this same time. The rise in interest rates over the past month has also created more affordability problems for many buyers.

In spite of this "doom and gloom," the Singhal Team continues to find qualified buyers who are looking to buy. Sellers however are being forced to be "realistic" on sales price.

Market update

Should we believe everything we have heard from the media regarding today's real estate market? Numerous reports speculate the local and national real estate market might be declining. Unfortunately, the media only reports part of the story about today's real estate market. True, the market in the Twin Cities and nationally is in a state of correction. Contrary to what is being reported in the media, the bubble has not burst. It is a very good time to sell a home and even better time to buy. Here are just a few points to consider: interest rates are at record lows, builders are cutting priced due to oversupply on new construction homes, plus there is a good supply of existing homes available.

H&R Block posts loss on U.S. subprime woes

NEW YORK (Reuters) - H&R Block Inc. (NYSE:HRB - news), the largest U.S. tax preparer, posted a fourth-quarter loss on Thursday, as the deterioration of the U.S. subprime market hurt the value of its mortgage business.

The company also said the value of its subprime unit Option One Mortgage Corp. fell to $1.1 billion as of April 30. H&R Block agreed on April 20 to sell Option One to Cerberus Capital Management for a price tied to its closing date value. The deal is expected to be finished in the quarter ending October 31.

Block posted a net loss of $85.6 million, or 26 cents a share, reflecting $678 million in losses attributed to Option One, its UK tax business and other units up for sale.

Excluding discontinued operations, income rose 9 percent to $591.2 million, or $1.81 a share, in the quarter ended April 30, from $541.7 million, or $1.63, a year earlier. Even on this basis, Block fell short of the average forecast by 7 cents.

The shortfall and the depressed value of Option One sent shares of H&R Block down 4 percent.

"Missing their number didn't help," said FTN Midwest business services analyst Kartik Mehta, who has a "buy" rating on Block shares. "I think investors wanted them to buy back more shares and add leverage, but getting a bank charter has hindered them."

FTN's Mehta said Block earnings fell short because its tax rate was higher than expected, while development spending squeezed profit margins in the tax preparation business.

BEYOND TAX

The Kansas City-based company has tried for years to expand from once-a-year tax accountants to a full service banking, loans and advice company. Some moves, such as expanding into mortgages, have backfired, while its promotion of refund anticipation loans prompted regulatory action and lawsuits.

Among its latest efforts is building a consumer bank, for which Block seeks a federal charter. H&R Block expects that by offering savings accounts, credit cards and financial advice that will generate revenue even after tax season.

During a conference call with analysts, the company said it would not buy back stock until it meets regulatory capital requirements for the bank unit. Chief Executive Mark Ernst said Block likely won't be able to repurchase shares until the fiscal fourth quarter.

The company repeated it expects to complete its sale of Option One to Cerberus during the October quarter. Block said the unit's net asset value fell by roughly $300 million to $1.1 billion as of April 30.

Under the Cerberus agreement, which calls for a $300 million discount, H&R Block will receive $800 million in cash upfront plus up to $300 million in Option One profit over following 18 months.

Block also will retain about $300 million in tax loss benefits, which will help offset any losses.

For the quarter, revenue rose 8 percent to $2.4 billion, also falling shy of expectations. Tax services revenue rose 8 percent to $1.9 billion, as clients served through U.S. branch offices and online rose 4.4 percent to a record 20.3 million.

Operations in Canada and Australia also boosted results, with 22.9 million clients served. Consumer financial services revenue rose 57 percent to $120.2 million.

Looking ahead, Block said it expects earnings from continuing operations of $1.25 to $1.45 per share in fiscal 2008, below the current average forecast of $1.47.