Lee Walsh

In a recent article that Yahoo republished from the Wall Street Journal, Stephanie Simon wrote about a failed Colorado bank - New Frontier. She tells the story of a woman named Tina Gasner and her $260,000 business loan to start a pizza shop.

In the article Ms. Gasner blames the bank for misleading her into thinking her business plan was sound. The problem I have with this is that at the beginning of her statement she declares that she is an accountant.

Come on Ms. Gasner - it's time to "woman up".. and take some blame for selling yourself and the bank on a bad plan.

As an accountant she should have been knowledgeable in determining costs,revenues and profit margins.

Either she is a very poor accountant or she tried to borrow on a business plan that she knew did not add up.

Granted the bank was making a lot of bad loans, their criteria for lending failed the ultimate test. The bank was closed by regulators.

But Ms. Gasner and borrowers like her have to step up and take some blame. If you know that you cannot make the payments you should not be asking for the loan. You should not blame everyone else for letting you do something that based on your experience and knowledge you must have known had little chance of succeeding.

To be fair - the bank management and the loan officer that approved the loan were as delusional as the borrower.

This reminds of the days of the NINA loan. borrowers would apply knowing that they did not have a chance in you know where to make the payments over the life of the loan. They were leveraging themselves against all odds to get in on the flipping bandwagon. If a loan officer did the right thing and refused to process the application the borrower moved down the street until they found someone who would take the application.

I for one am glad to see products like the NINA and loan officers who only care about an easy commission out of this industry.

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Important Information About Your LIBOR ARM Mortgage And How Your Rate Can Change.

Several months ago I posted some information about the possible surge in the LIBOR rate that could impact millions of mortgages in the US.

Based on the recent history at the time it was possible that LIBOR rates could soar putting many Americans in financial jeopardy.

The good news is that although the LIBOR did continue to rise for a brief period in late Oct 08, it has recently tanked. The 6 month LIBOR rate has fallen almost 4% in the last 8 weeks. It is almost at zero.

How does this help homeowners with LIBOR based adjustable mortgages?

In some instances it means that homeowners with a mortgage tied to the LIBOR will see their payments decrease at each adjustment period.

If you have a conventional Fannie Mae or Freddie Mac LIBOR ARM mortgage the above sentence is talking about you.

If you have a sub-prime or any of the alternative mortgage loans written in the last 2 - 5 years you might not have much to party about.

Why? Because many of the sub-prime and Alt-A mortgages have a clause in the adjustment rider that says that your rate will never go below the start rate.

How do you know which loan you have?

How do you determine how low you rate can or cannot go?

You want to dig out your mortgage papers - that would be the big packet of documents that you received from the settlement agent at or soon after your closing.

You want to look for a document called the Adjustable Rate Rider.

You want to look for a section that is usually titled - "Limit On Interest Rate Changes".

This paragraph will spell out the rules for your mortgage's adjustments.

All ARM mortgages have caps or limiters that stop your rate from skyrocketing or dropping through the floor all at once. There are two types of caps. Perodic - these occur at each adjustment. And Life Caps - these caps set the maximum/high and in some instances the minimum/low that your rate can float up or down to.

This is in place to protect you when rates spike and the lender when rates tank.

If you have an LIBOR ARM or any other adjustable mortgage you should be aware of the adjustment caps.

The other shoe could be about to fall... the LIBOR rate has spiked in recent weeks. What is the LIBOR and why is something to be concerned about?

From a report on Bloomberg this week..
"The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent."

LIBOR is short for London Bank Inter Offered Rate. It is a rate index that is set by the British Bankers' Association.

Created in the mid 80's the index became widely used in the mid to late 90's in the US mortgage markets as the preferred index for adjustable mortgages. Most subprime and about 40% of conforming adjustable rate loans are based on a LIBOR index.

This means that these loan rates cannot be controlled by the FED.

If the LIBOR's recent increases continue this means that the adjustable rate mortgage payments that are tied to the LIBOR could more than double at adjustment time.

Most LIBOR based loans are tied to the 6-month index. This means that the rate is a rolling 6 month average. So will a short term spike cause you rates to jump? No. But an ongoing increase will.

If you have a LIBOR rate keep a very close watch on the monthly rate. Do not wait for the rate to spike before you have an exit strategy.

By now everyone has heard about the historic bail out of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) by the government. In the short term this looks like a good move. The two companies are saved from insolvency and they can continue with business as usual. Is this good or bad in the long run? I think it depends on how ready FHA is to take the lead in mortgage lending in America.

Look at some of the ramification of the take over.

1. The CEOs will be fired - Great… it should have happened a long time ago.
2. The boards will be replaced - same as above!
3. There will be restructuring of the balance sheets - not so good!

The devil is always in the details.

The restructuring will result in a new class of stock to be created that has precedence over current stock holders. This new senior preferred stock will earn 10% a year.

Fannie and Freddie will be required to make major cuts in their mortgage holdings. Over several years they will have to cut their portfolios by almost 70%.

Mortgage rates are currently in the 6% range - Fannie and Freddie will be forced to borrow at 10% - you do the math!

With Fannie and Freddie cutting their portfolios by more than two-thirds this means that conventional mortgage money will be choked at the source.

This leaves FHA as the sole survivor. Let’s face it with Fannie and Freddie cut to one-third of their original size they will become secondary players. Is HUD prepared for the role it is being thrust into. For years this agency has taken a back seat and is now at 3 times it’s former production levels. This change will put a substantially larger burden on HUD.

Let’s hope that HUD is up to the challenge.

The FEMA disaster recovery center is open for Seminole County residents and business owners who were affected by Tropical Storm Fay.

Crews from the Federal Emergency Management Agency and the State Emergency Response Team will help staff the center in Stanford. The office is open daily from 8 a.m. to 6 p.m.

People who were affected by tropical storm Fay can apply for disaster assistance at the center and get help with answers to questions about claims and disaster loans.

The office is located at: 520 W. Lake Mary Blvd, suite 101, Sanford , FL 32773

Applicants should register by calling FEMA toll-free at 800-621-FEMA (3362). Those with a speech or hearing impairment may call the TTY number at 800-462-7585 and apply. Multilingual operators are available. The toll-free telephone numbers will operate 7 a.m. to midnight daily until further notice. Application for disaster assistance can also be made by registering online at www.fema.gov or at one of the Disaster Recovery Centers (DRCs).