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  • Wed, Jul 13 2011
  • 2:06 PM » Are principal writedowns bad for bank equity?
    Published Wed, Jul 13 2011 2:06 PM by Reuters
    has a fantastic reaction to my about principal reductions, saying that “accounting is destiny”: If a bank has a loan on its books valued at par, and it offers a principal reduction, it must write down the value of the loan. It takes a hit against its capital position, and experiences an event of nonperformance that even the most sympathetic regulators will have no choice but to tabulate. If a bank has purchased a loan at a discount, however, the loan is on the books at historical cost. The bank can offer a principal reduction down to the discounted value without experiencing any loss of book equity. Of course this is a matter of mere accounting. Whether or not a bank takes a capital hit has no bearing on whether a principal reduction will increase the realizable cash-flow value of the loan. But accounting is destiny. The economic value of a bank franchise, both to shareholders and managers, is intimately wound up with its accounting position. A bank whose books are healthy may distribute cash to shareholders and managers, while a bank whose capital position has deteriorated will find itself constrained. A well-capitalized bank is free to take on lucrative, speculative new business, while a troubled bank must remain boringly and unprofitably vanilla. This is, basically, the muddle-through approach to troubled assets. If you keep them on your book at par, then you can claim to be well capitalized, and use all that capital to pay yourself well and expand into new businesses. Eventually, with luck, those businesses will be successful enough that they make enough money to cover the losses on the assets when they’re finally realized. But the real world doesn’t always work like that. See very good piece on Bank of America today: BofA maintains it has ample capital and can grow into new, more stringent capital requirements by 2019. The trouble is investors might not be so patient… BofA is juggling mortgage problems as the economy and housing again look shaky. Markets already...
  • 11:03 AM » Wallison: Still Wrong About Genesis of Housing Crisis
    Published Wed, Jul 13 2011 11:03 AM by The Big Picture
    Responding to Wallison’s Latest Defense of His Flawed Financial Crisis Inquiry Commission Dissent By David Min July 2011 > Introduction If you’ve been closely following the housing finance reform debate, you may have come across a pair of shrill blog posts penned by Peter Wallison, a senior fellow at the American Enterprise Institute and a Republican appointee to the . He responded to which criticized the research underlying Wallison’s dissent from the majority of the members of that commission, and his contention that U.S. affordable housing policies caused the global financial crisis. In these blog posts on and on , Wallison criticizes ”Faulty Conclusions” as “fallacious,” “fraudulent,” and “deceptive”; claims that it contains a “fake” chart; and describes the article as a “political screed.” As I describe below, these accusations are baseless and distract from the fact that Wallison does not actually address the main arguments of “Faulty Conclusions.” Wallison does not contradict the claim that his FCIC dissent depends critically on the categorization of millions of home mortgage loans as “high risk” that are not actually high risk. Wallison also fails to answer other serious issues with his arguments that were pointed out in “Faulty Conclusions.” This issue brief will reexamine my core criticisms of Wallison’s dissent from the Financial Crisis Inquiry Commission and respond to his criticisms of my column “Faulty Conclusions.” Background Wallison, of course, from both the Financial Crisis Inquiry Commission majority report and from his fellow Republican commissioners, in which he alone blamed the global financial crisis on U.S. affordable housing policies. , including the following: • Parallel bubble-bust cycles occurred outside of the residential housing markets (for example, in commercial real estate and consumer credit). • Parallel financial crises struck other countries, which did not have analogous affordable housing policies • The U.S. government’s market...
    Click Here to Read the Full Article

    Source: The Big Picture
  • 11:03 AM » Is Fed Really Going to Need to Sell Mortgage-Backed Securities?
    Published Wed, Jul 13 2011 11:03 AM by WSJ
    Federal Reserve officials said in the minutes to their June policy meeting that they will eventually sell down their portfolio of mortgage-backed securities at a gradual pace, over three to five years. A look at the numbers makes one wonder, however, whether the Fed will need to actively sell much if any of its holdings. The portfolio is already shrinking on its own, as mortgages get prepaid by borrowers or mature. In the past year, the portfolio has contracted from $1.118 trillion to $909 billion, or roughly $200 billion. If that annual pace of runoff keeps up, the portfolio will shrink away to nothing within four and a half years. If the decline is geometric – in other words by 20% per year – it will get to less than $300 billion within five years. Either way, the Fed wouldn’t be selling much. Of course, mortgage prepayments could slow if interest rates rise. But given the soft state of the economy, it’s not hard to imagine rates staying put or even falling further.
  • 11:03 AM » Why the Housing Tax Credit Failed
    Published Wed, Jul 13 2011 11:03 AM by Google News
    Getty Images President Barack Obama Today’s Journal takes a look at is going back to the drawing board on housing. Most of the administration’s efforts are focused on three main problems facing the housing market: How to address the problem of extended unemployment; how to tackle the high rate of borrowers who owe more than their homes are worth; and how to ease the glut of foreclosures at a time when traditional housing demand is weak. The administration could tackle those problems by making it even easier for underwater borrowers to refinance, by trying to draw more investors into oversaturated housing markets, and by coming up with new ways to write down loan balances for certain borrowers. The administration’s first round of housing market aid included modifications for troubled borrowers and low-interest rates to spur refinancing and home sales. Of course, the aid also included tax credits worth up to $8,000 for home sales. Discussion about a new round of housing aid raises the question: Was the tax credit worth it? Judged against the immediate results, the tax credit succeeded in spurring a big boost in sales and, coupled with low prices, helped break a downdraft in home prices. But sales plunged sharply once credits expired and housing has been weak ever since, leading some economists to conclude that the credits did little more than shift sales forward and give a rebate to homeowners who would have bought homes anyway. As the latest discussions make clear, housing is still a mess. The tax credit’s biggest shortcoming may have been that it gave everyone a false sense of security that the housing market was fixing itself when all the tax credit did was gloss over much deeper rot within the system. An article Tuesday from argues that just as the tax credit made the market look better than it was last spring, so too could the sharp post-credit drop-off in sales have overstated the market’s weakness, hurting consumer confidence. That’s likely one reason you don’t...
  • 11:03 AM » Real Estate News: U.S. Tackles Housing
    Published Wed, Jul 13 2011 11:03 AM by Google News
    Churchill Brown : Built around the time Oklahoma became a state in 1907, this home in the state’s capital measures nearly 9,500 square feet and includes a mahogany dining room, a wine cellar and a large front porch. Here is a look at real-estate news in today’s WSJ : : The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president’s re-election in 2012. : The Obama administration is tapping Carol Galante, a housing official and former affordable housing developer, as the next commissioner of the Federal Housing Administration. : After years as the lending market’s undesirables, aspiring home buyers with less-than-stellar credit are being offered home loans again—with some of the same conditions and catches critics say tripped up subprime borrowers five years ago. : This three-bedroom apartment overlooking the Thames and City of London is part of a four-pavilion development near the Tate Modern designed by Richard Rogers, the architect behind the Pompidou Centre in Paris. : Built around the time Oklahoma became a state in 1907, this home in the state’s capital measures nearly 9,500 square feet and includes a mahogany dining room, a wine cellar and a large front porch. : After more than a decade of false starts and failed partnerships, Westchester developer Louis Cappelli is still betting he can turn the now-vacant site of the Concord Hotel in the Catskills into a gambling resort destination. : The Metropolitan Transportation Authority is aiming to turn some of Westchester County’s oldest train stations into new dining and retail hot spots. There’s just one catch: Those who run the stations will have to agree to keep serving commuters their daily coffee during the morning rush. : Actor Michael Imperioli, best known as Christopher Moltisanti on “The Sopranos,” and his wife Victoria are selling their income-generating property in TriBeCa for nearly $7 million.
  • 11:03 AM » Bank of America Settlement Data Sought From Clients by New York
    Published Wed, Jul 13 2011 11:03 AM by Business Week
    Bank of America Corp.’s proposed $8.5 billion settlement over mortgage-securitization trusts is being probed by New York Attorney General Eric Schneiderman, who is seeking client information from more than 20 companies.
    Click Here to Read the Full Article

    Source: Business Week
  • 11:02 AM » Revolving Door of FHA Leadership Continues as Carol Galante is Named Acting Commissioner
    Published Wed, Jul 13 2011 11:02 AM by
    Shaun Donovan, secretary of the U.S. Department of Housing & Urban Development (HUD) has announced that Carol Galante has been designated by President Barack Obama as the Acting Federal Housing Adminstration (FHA) Commissioner and Assistant Secretary of Housing. Galante will be replacing Robert C. Ryan, who is moving on within the department to become Senior Advisor for Housing Finance. Ryan originally joined HUD team to oversee the FHA’s enterprise risk management functions.
    Click Here to Read the Full Article

  • 11:01 AM » Chart of the day: Where does the mortgage-interest deduction go?
    Published Wed, Jul 13 2011 11:01 AM by Reuters
    Check out page 44 of the Joint Committee on Taxation on the way that household debt is treated for tax purposes. I’ve put the table into chart form, to make it easier to see what’s going on. Apologies for the rather weird y-axis on the chart: it’s serving a double purpose, counting total returns for the left-hand column and dollars for the right hand column. I would have done a dual axis, but I was having difficulty making that work in Excel. In any event, the big picture here is clear. Households earning more than $200,000 a year account for less than 10% of the returns, but get 30% of all the benefits. And households earning more than $100,000 a year get 69% of all the benefit. The mortgage-interest deduction might be a middle-class tax break, but realistically it’s an upper-middle-class tax break. The JCT is also very clear on the two separate ways in which it’s fundamentally unfair, benefiting owners at the expense of renters: The deduction for home mortgage interest reduces the after-tax cost of financing and maintaining a home. Because the Federal income tax allows taxpayers to deduct mortgage interest from their taxable income, but does not allow them to deduct rental payments, there is a financial incentive to buy rather than rent a home. Taxpayers are also allowed to exclude gains from the sale of their principal residences of up to $500,000 from gross income. There is no such exclusion for other types of investments, further reinforcing the financial incentive to buy rather than rent a home. Homeowners also receive preferential treatment under U.S. tax law because the imputed rental income on owner-occupied housing (that is, the cost of rent which the taxpayer avoids by owning and occupying a home) is not taxed. Consider two taxpayers: one rents a home at a $1,000 monthly rate, and the other owns a home which carries a $1,000 monthly mortgage. All else equal, a renter pays taxes on a measure of income that includes the $1,000 used to pay rent and the homeowner...
  • 11:01 AM » More data on mortgage delinquency and downpayments
    Published Wed, Jul 13 2011 11:01 AM by Reuters
    Last month, in a headlined “how the mortgage industry lies with statistics,” I bemoaned the fact that I couldn’t find good real data to compare to the massaged data which went into this chart. What this chart purports to show is that if you’re writing qualified mortgages, the default rate is low whatever the downpayment; it’s the non-qualified mortgages which see enormous default rates above 15%. But now Glenn Costello of the Kroll Bond Rating Agency has taken the same data from CoreLogic and crunched it for me in exactly the way I requested of Anthony Guarino, the man who put the above chart together. And if you look at the data in a non-massaged way, it looks very different indeed: The first thing to note is that all of the bars on this chart apply to qualified mortgages: the unqualified ones aren’t even included. And yet the y axis goes much higher than the official mortgage industry’s chart — one of the bars reaches a whopping 40%, about which more in a minute. The greenish bars, on this chart, are all the mortgages with downpayments of 20% or more, broken down into three groups: downpayments of 20-25%; 25-30%; and more than 30%. (The chart actually shows LTV, or loan-to-value, which is the opposite of a downpayment: to get the downpayment, you subtract the LTV from 100.) The worst performance for this group happened in 2006, for mortgages with a 20-25% downpayment: they ended up with a delinquency rate of 10.3%. That’s very high, and that single datapoint alone would suffice to show that the 20% downpayment level isn’t a guarantee of safety when it comes to mortgages. But just look what happens when you compare the mortgages with a 20-25% downpayment to the mortgages with a 15-20% downpayment. Now we’re looking at the bluish bars — they range from 15-20% downpayments all the way to 3-5% downpayments. But for the time being, just look at the lightest blue bar and compare it to the darkest green bar. That’s where the 20% downpayment dividing line happens, and the...
  • 11:01 AM » Falling Home Equity Spurs Fear of Strategic Default
    Published Wed, Jul 13 2011 11:01 AM by CNBC
    Yesterday a lot of folks, including myself, were slightly incensed at the announcement by mortgage insurer PMI that it is launching a pilot program offering cash bonuses to borrowers who stay current on their mortgage payments.
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Mortgage Rates:
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  • 15 Yr FRM 2.65%
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  • Jumbo 30 Year Fixed 3.45%
MBS Prices:
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Recent Housing Data:
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  • Refinance Index -3.68%
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  • Purchase Index -0.47%