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.

New home sales, consumer confidence fall

WASHINGTON (Reuters) - U.S. new home sales fell in May while consumer confidence hit a 10-month low in June on worries about jobs and the business climate.

"These are numbers that are consistent with a slowing down in activity, a moderation on the consumption side," said Steven Wieting, an economist with Citigroup Global Markets in New York.

Sales of new U.S. homes fell 1.6 percent last month to an annual rate of 915,000 units from a downwardly revised pace of 930,000 in April, the Commerce Department said on Tuesday. Analysts had been looking for May new home sales of 925,000.

While sales fell, prices rose. The median sales price of a new home climbed 1.5 percent in May to $236,100 from $232,700 in April. That marked a reversal from April, when prices took a big tumble but sales rose strongly.

However, adding to the gloomy picture for housing, a separate report released on Tuesday showed existing U.S. single-family home prices declined in April, extending a string of negative year-on-year decreases that started in January.

As woes deepened for the housing sector, the second-largest U.S. home builder, Lennar Corp. (NYSE:LEN - news), posted a quarterly loss, forecast a loss for the current quarter, and warned the housing market could tumble further.

The drag the struggling housing market has created for the broader economy looks set to persist, analysts said.

"Housing's contribution to (economic) growth will be negative in both the second quarter and the third quarter," said Steven Wood, chief economist at Insight Economics in Danville, California.

U.S. stocks slipped for a third straight day as investors worried about potential fallout from the ailing subprime mortgage market. The blue chip Dow Jones industrial average closed down 14.39 points at 13,337.66.

Prices for U.S. government bonds were little changed, while the dollar fell against the Japanese yen.

CONFIDENCE SLIPS

While the U.S. economy appears to have gained strength after expanding at an anemic 0.6 percent pace in the first quarter, concerns remain the stalwart American consumer may stumble under the weight of high gasoline prices and hard-to-afford mortgages.

The Conference Board said its index of consumer sentiment fell to 103.9 in June, the weakest since August 2006, from an upwardly revised 108.5 in May. Economists polled by Reuters had been looking for a reading of 105.5.

"A perceived softening in present-day business and employment conditions are the major reasons behind this month's pull-back in confidence," said Lynn Franco, director of the Conference Board's Consumer Research Center.

The business research group's present situation index fell to 127.9 in June -- its lowest level since November 2006 -- from 136.1 in May. The expectations index slipped to 87.9 from 90.1 a month ago.

"Even though gasoline prices have fallen back from their peak, it seems that they have taken their toll on the consumer," said Nigel Gault, chief U.S. economist at Global Insight in Lexington, Massachusetts.

"In addition, the labor market component of the Conference Board survey hints at softening in the job market," he said.

While economists say shifts in consumer confidence do not always portend changes in spending, two reports on Tuesday showed chain store sales growth softened last week.

Redbook Research said chain store sales rose only 1.4 percent last week from a year earlier, slowing from 2 percent a week earlier, while the International Council of Shopping Centers and UBS Securities said sales rose 1.7 percent from a year ago, off from 1.9 percent in the prior week.

U.S. economy to expand in coming months

NEW YORK — The U.S. economy should expand modestly in coming months as a healthy job market continues to trump weakness in housing prices, a gauge of future business activity showed on Thursday.

The Conference Board said its index of leading economic indicators rose a higher-than-expected 0.3 percent in May, boosted by rising stock prices, higher consumer expectations and the availability of jobs.

Economists said that jobs should continue to be plentiful, despite an unexpected surge in jobless claims last week.

The Labor Department reported Thursday that unemployment claims totaled 324,000 last week, up 10,000 from the previous week, to the highest level since mid-April.

While the big increase was unexpected, analysts said it did not change their view that the labor market remains hardy. Even with the increase, analysts noted claims remain close to their average — 319,000 — over the first 5 1/2 months of the year.

While the overall U.S. economy grew at a lackluster 0.6 percent in the first three months of this year, many analysts believe the pace has picked up significantly in the spring.

The Conference Board's upbeat report shows that the impact of the housing slump has been fairly contained so far, said Patrick Newport, an economist with Global Insight.

"It just hasn't spilled over to the rest of the economy," he said. It also indicates the economy is doing better than last month's leading indicators report suggested, Newport said.

May's increase reversed a revised 0.3 percent drop in April, down from the original 0.5 percent decline that economists blamed on soaring gas prices and a drop in building permits.

The report, designed to forecast economic activity over the next three to six months, tracks 10 economic indicators.

The advancing contributors in May, starting with the largest, were weekly unemployment insurance claims, stock prices, building permits, consumer expectations and vendor performance.

The negative contributors, beginning with the largest, were real money supply, average weekly manufacturing hours and interest rate spread.

With the latest report, the cumulative change in the index over the past six months has gone up 0.3 percent.

Wall Street is fairly confident that falling home prices and rising mortgage defaults won't damage the broader economy. Treasury Secretary Henry Paulson said Wednesday the housing slump is nearing an end and that the losses so far have been contained.

But if mortgage rates keep rising, fewer people will want to buy homes and fewer homeowners will be able to refinance. If that happens, the residential real estate market's troubles could snowball and dampen consumer spending.

The Federal Reserve's Open Market Committee, which sets short-term interest rates, meets next week and is widely expected to leave rates unchanged as they have been for about a year.

A pickup in the economy has raised worries about rising inflation, however.

Stocks rose on Thursday, after the Philadelphia Federal Reserve's report on manufacturing activity in its region jumped a stronger-than-expected 18 in June, up from 4.2 in May.

According to preliminary calculations, the Dow Jones industrial average rose 0.42 percent to 13,545.84 after dropping 146 points Wednesday.

Broader stock indicators also rose. The Standard & Poor's 500 index rose 0.62 percent to 1,522.19 and the Nasdaq composite index advanced 0.65 percent to 2,616.96.

On Tuesday, the Commerce Department said construction of new homes fell in May as the nation's homebuilders were battered by the crisis in subprime lending and rising mortgage rates. Industry sentiment about the housing market fell in June to the lowest point in more than 16 years.

Secondary effects from the housing downturn like layoffs and restrained consumer spending could also start surfacing, said Aaron Smith, an economist with Moody's Economy.com. But the overall drag on the economy from the housing industry should decline in coming months, he said.

"Building permits cannot continue declining at the pace they have," Smith said.

Rates on 30-year mortgages down

WASHINGTON - Rates on 30-year mortgages, after rising for five straight weeks, edged down slightly this week as investors digested news that suggested the economic drag from housing could last longer than expected.

Mortgage giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.69 percent this week. That was down from 6.74 percent last week, when rates had jumped to the highest level in 11 months.

Analysts said the slight retreat occurred because financial markets saw two weak reports on housing as indications that troubles in the slumping sector are continuing to mount.

The government reported that construction of new homes and apartments fell by 2.1 percent in May, leaving building activity 24.2 percent below the level of a year ago, while the National Association of Home Builders said its index of builder sentiment in June fell to a 16-year low.

Builders have been slashing prices and offering other incentives to move a glut of unsold homes. Demand has been hurt by mounting troubles in the market for subprime mortgages, loans offered to borrowers with weak credit histories.

"Mortgage rates eased this week due to market concerns that the housing market will be a longer drag on the economy," said Frank Nothaft, Freddie Mac's chief economist.

The overall economy slowed to an anemic 0.6 percent growth rate in the first three months of this year, the weakest performance in more than four years, with housing one of the key factors depressing activity.

All mortgage rates tracked by Freddie Mac showed declines this week.

Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, fell to 6.37 percent, down from 6.43 percent last week.

Five-year adjustable-rate mortgages averaged 6.31 percent, down from 6.37 percent while one-year adjustable mortgages fell to 5.66 percent, down from 5.75 percent last week.

The mortgage rates do not include add-on fees known as points. Thirty-year and 15-year mortgages each carried a nationwide average fee of 0.5 point. Five-year adjustable mortgages carried a fee of 0.6 point while one-year ARMs had a fee of 0.7 point.

A year ago, rates on 30-year mortgages stood at 6.71 percent, 15-year mortgages were at 6.36 percent, five-year adjustable-rate mortgages averaged 6.32 percent and one-year ARMs were at 5.75 percent.