Lee Walsh

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).

Florida - Seminole county FEMA assistance - was your home or business affected by Tropical storm Fay?

Seminole County has received a declaration from the Federal Emergency Management Agency (FEMA) for Individual and Public Assistance for homeowners and public facilities affected by Tropical Storm Fay. Please call 1-800-621-FEMA (3362) to apply for federal assistance or go to their website by clicking here.

Thirty of Florida's 67 counties are now eligible for Public Assistance.

At the FEMA site you can get the information you need to determine if you qualify for FEMA assistance.

If you have an insurance policy you should file your claim before applying for FEMA assistance.

although FEMA help is primaraly for homeowners without insurance coverage there is also some assistance available to supliment your insurance coverage.

Individual Assistance can include grants to help pay for temporary housing, home repairs and other serious disaster-related expenses not met by insurance or other assistance programs. Low-interest loans from the U.S. Small Business Administration (SBA) also will be available to cover residential and business losses not fully compensated by insurance.

For additional information also go to this website by clicking here.

According to one Florida mortgage banker they are.

I received an email from the Mortgage Bankers Association of Florida that contained a reprint of an editorial from the Miami Herald by Alex Sanchez. Who is Alex Sanchez? He is president and chief executive officer of the Florida Bankers Association.

According to the Florida banker's perspective, Florida mortgage brokers are Satan incarnate and are solely responsible for the sad shape in which the financial sector and housing in general finds itself.

Here are some of the misdeeds blamed on mortgage brokers by Mr. Sanchez in his editorial.

• "More than 80 brokers who were caught stealing from clients by siphoning funds from escrow accounts and issuing excessive fees were allowed to continue working in the industry."
  
• "Here-today-gone-tomorrow mortgage originators were in the practice of doing whatever needed to be done to close the loan. As we now see, some unscrupulous individuals working in the mortgage industry were willing to lie, cheat or steal just to seal the deal."
  
  
• "Banks, which are well capitalized (meaning they have required rainy-day funds) conduct a series of examinations to determine the credibility of a loan before its issuance, including verification of income, requiring a solid deposit and performing substantial credit checks. According to recent news articles, others peddled mortgages "that required no money down and minuscule payments for the first few years." Some even forged records like tax forms, account balances and income statements."

First I would like to correct Mr. Sanchez's understanding of Florida lending law.

Mortgage brokers cannot get near escrow money. They could not siphon off escrow funds if they wanted to because in no part of the transaction does a mortgage broker collect or have access to escrow funds.

Granted, some brokers have been caught in questionable and in some instance illegal practices. These people should be barred from any type of employment in our industry and prosecuted to the full extent of the law.

In fact, I doubt that you would find many in our industry that would not vote for special penalties for these people.

But, are bad brokers alone in this problem? No. Real estate agents, title agents, appraisers, bankers, builders and attorneys have all been guilty.

Unethical people from every sector have stepped up to take advantage of a system in disrepair. But for a banker to blame mortgage brokers for the mortgage problems we are facing that was in a large part created by the banks is nothing more than a smoke screen to hide the real problems in our industry, which is the greed of many bankers.

What sector created the no income, non-owner, high loan to value mortgage?

What sector threw out the window payment history, employment history, and assets, and used instead a credit score to make a lending decision?

What sector was responsible for overseeing the underwriting practices for these mortgages?

What sector pushed these products on mortgage brokers and offered them in some instances two times the normal compensation to deliver these loan products?

What sector threw principles of decisioning out the window for short term profits?

The answer is one that Mr. Sanchez will not want to face. It is squarely on the door step of our bankers.

Mortgage brokers do not have any money to lend. They are simply providing origination services for bankers.

I know Mr. Sanchez is going to continue to cry that broker fraud is the problem. The facts are different. If you remove all numbers of mortgage fraud, no matter what sector committed it, we would still have a major lending crisis because the lending practices of the majority of the banks involved in mortgage loan production were operating on automatic with no one watching the store.

They were asleep at the wheel. Blaming others for their lack of responsibility will not change that fact.

Shame on you Mr. Sanchez for not accepting your (industry's) fair share of the blame.

If you would like to read the complete message from Mr. Sanchez see this link.
http://www.miamiherald.com

If you would like to contact Mr. Sanchez directly to voice your opinion about his statements you can reach him at:

Alejandro “Alex” Sanchez
President
Florida Bankers Association
P.O. Box 1360
Tallahassee, FL 32302
850.224.2265
asanchez@floridabankers.com
www.floridabankers.com

I guess I could end this by saying that some of my best friends are bankers…