NCBLC Blog

NEW YORK (CNNMoney.com) — Mortgage financing firm Freddie Mac rocked credit markets further Tuesday as it reported a $8.1 billion writedown in its assets and set aside $1.2 billion to take care of credit losses. The firm reported a net loss of $2 billion, or $3.29 a share in the period, wider than the loss of $715 million, or $1.17 a share, a year earlier.

Analysts surveyed by earnings tracker Thomson First Call had forecast that it would trim losses to 22 cents a share in the period, although how the reported net loss compares to those forecasts could not immediately be determined.

While problems in the mortgage markets have been well-known for months, it had been hoped that Freddie Mac <http://money.cnn.com/quote/quote.html?symb=FRE&source=story_quote_link> (Charts <http://money.cnn.com/quote/chart/chart.html?symb=FRE&source=story_charts_link> , Fortune 500 <http://money.cnn.com/magazines/fortune/fortune500/2007/snapshots/543.html?source=story_f500_link> ), which buys securities backed by the safest form of mortgages, would be spared the worst of the problems. But Tuesday’s report shows that the problems appear to be spreading beyond those earlier estimates.On Nov. 9, the other government-sponsored mortgage finance firm, Fannie Mae <http://money.cnn.com/quote/quote.html?symb=FNM&source=story_quote_link> ( Charts <http://money.cnn.com/quote/chart/chart.html?symb=FNM&source=story_charts_link> ) reported lower earnings Nov. 9 that raised questions about its accounting. Shares of Fannie have fallen nearly 25 percent since that report, and Freddie Mac has fallen nearly 15 percent during the same period

Stocks slid on Monday as a brokerage downgrade of Citigroup Inc (C.N) sparked a sell-off in financial services companies on concerns about credit losses and the housing slump.Goldman Sachs cut Citigroup to “sell” and said the bank may have to write off $15 billion over the next two quarters as mortgage losses reduce earnings. Investors also got hit by more disappointing news on the housing front. Lowe’s Cos. Inc (LOW.N), the No. 2 U.S. home improvement chain, slashed its full-year profit outlook, underscoring the toll on consumers of the drop in home values.

In addition, a brokerage said Freddie Mac (FRE.N), the No. 2 U.S. home funding source, may suffer between $1 billion and $5 billion of subprime mortgage losses. “Financials keep on going down,” said Giri Cherukuri, head trader at OakBrook Investments LLC, which oversees $1.3 billion in Lisle, Illinois. “You had the Citigroup downgrade and there are general worries about how many more writeoffs there are to come.”

The Dow Jones industrial average (.DJI) was down 150.96 points, or 1.15 percent, at 13,025.83. The Standard & Poor’s 500 Index (.SPX) was down 19.41 points, or 1.33 percent, at 1,439.33. The Nasdaq Composite Index (.IXIC) was down 32.93 points, or 1.25 percent, at 2,604.31.

In the bond market, prices rose and yields dropped to two-year lows as investors bought Treasuries in a safe-haven move away from stocks. The benchmark 10-year note rose 11/32 for a yield of 4.13 percent.

Citigroup shares fell 5.2 percent to $32.26 on the New York Stock Exchange, while shares of Bank of America Corp (BAC.N), the No. 2 U.S. bank, declined 3.3 percent to $42.89. Shares of JPMorgan Chase & Co (JPM.N), the No. 3 U.S. bank, shed 3.4 percent to $42.63. The S&P financial index slid 3.03 percent. Shares of Lowe’s slumped more than 6 percent to $23.38 after the retailer slashed its full-year profit outlook. Shares of top-ranked rival Home Depot Inc (HD.N) declined 2.1 percent to $28.47. The S&P retail index (.RLX) was down 2.5 percent.

Shares of Freddie Mac declined 8.9 percent to $37.10 on the NYSE after Credit Suisse said in a research note the company may recognize a loss of between $1 billion to $5 billion on its subprime AAA portfolio.

The KBW mortgage finance index tumbled 5.2 percent.

On the Nasdaq, shares of Apple Inc (AAPL.O), the iPhone maker, led decliners, falling nearly 1 percent to $164.62. The stock, along with other sector bellwethers such as Research In Motion Ltd ( RIM.TO <http://RIM.TO> )(RIMM.O), have been on the defensive on concern that the credit crisis may hurt technology spending.

By David Landis

Kiplinger’s Personal Finance

Published: November 18, 2007

Collecting bad debts from tapped-out consumers is hardly a glamorous way to make money. But it can be profitable.

Portfolio Recovery Associates pays pennies on the dollar to buy accounts that credit-card companies, utilities, hospitals and other businesses have given up for dead. Its staff of 1,000 collectors then recover two to three times that amount over the next five to seven years.

The stock seems like a good way to profit from record levels of consumer indebtedness ($2.4 trillion, including mortgage debt, or 18 percent of disposable income). But nearly half of its shares have been sold short by speculators, who apparently expect PRA to stumble.

And in the second quarter, the Norfolk, Va., firm did falter a bit. At a recent price of $51, the stock (symbol PRAA) was down 23 percent from its July peak. But, says PRA chief executive Steven Fredrickson, consumers who are defaulting on no-money-down mortgages may decide that their credit-card accounts are worthy of salvation. In any case, he says, payment rates on the accounts in his firm’s portfolio haven’t changed appreciably. He attributes the second-quarter shortfall to a relatively low collection rate at a newly opened call center in Tennessee (one of seven nationwide) and a slowdown in collections on pools of bankruptcy accounts bought in 2005.

A more telling predictor of PRA’s future may be the amount of new debt it has been buying. Although collection rates can dip in times of rising unemployment, more misery means more defaulted debt on the market at better prices.

During the second quarter, PRA bought $2.5 billion in bad debts (at an average cost of 2.5 cents on the dollar), its second-highest quarterly total ever. Although these new accounts can take a year or more to begin paying off, they set the stage for future profitability.

The receivables-management business, as it is euphemistically called, has few dominant players, and almost anyone with capital (such as hedge funds) can play. Skeptics say new participants are driving up the cost of bad-debt pools and driving down profits for everyone.

But PRA’s robust buying indicates that prices for bad-debt pools have been moderating. The company recently doubled its line of credit with one of its banks to prepare to take advantage of what it hopes will be a buyer’s market for bad debt.

Meanwhile, the stock trades at just 16 times estimated 2007 profits, and analysts forecast 14 percent earnings growth next year. PRA could top forecasts if its relatively new for-fee collection business — it collects bad debts on behalf of others — continues its recent growth. The unit’s second-quarter revenues were up 45 percent from the year-earlier period.

Auto sales could hit 15-year low
By Ben Klayman

Three top investors in the automotive industry painted a grim picture on Sunday for the sector in 2008, with one executive predicting a possible slump in U.S. sales to levels not seen in 15 years.

The weakest forecast is for a possible 9.4 percent decline. But all three — Jerry York, an adviser to billionaire investor Kirk Kerkorian; financier Wilbur Ross; and Thomas Stallkamp, a former Chrysler president — were more pessimistic than many in the battered industry. “While I am very negative on the autos sector over the next 12 to 18 months, I’m just not sure how bad it could be,” York, a former board member of General Motors Corp and chief financial officer of Chrysler, said at the Reuters Autos Summit in Detroit. “We all know housing is a debacle.”

U.S. light auto sales could slip to 15.5 million or less next year, York said. That would be down from near 16 million this year, a drop of 3 percent to mark the second consecutive annual decline and the lowest tally since 1998. Stallkamp, a partner at private equity firm Ripplewood Holdings, which owns several auto parts makers, said the market could slump to 14.5 million, the lowest level since 1993.

“I’d say it’s somewhere between 14.5 (million) and 15 (million), somewhere in there and it’s hard to tell,” he said. “Today, I’m a little more towards 14.5 (million).” Such a decline would be felt throughout the sector, CSM Worldwide auto analyst Michael Robinet said. “That would certainly be one of the worst years on record given the gravity of the industry,” he said.

U.S. auto sales fell almost 11 percent in 1991, when the economy was in recession. Ross, an investor who specializes in restructuring troubled businesses and has assembled an auto parts empire through acquisitions, said the U.S. consumer was “pretty well tapped out” as he predicted auto sales would slip a few hundred thousand units from this year.

Most automakers have predicted U.S. auto sales next year in the range of just under 16 million to 15.5 million, with Japan’s Nissan Motor Co Ltd at the low end. However, the crumbling U.S. housing market is spooking consumers, the investors said. “I hope I’m wrong on 14.5 (million) to 15 (million),” Stallkamp said. “But I think the mortgage issue is going to freak people out and that will hit pretty hard in ‘08.”

Ross called it “a sort of poverty effect from house prices going down.” The U.S. automakers’ market shares will suffer more than foreign rivals in such a weak market, Stallkamp said. “You’re going to see some continued retrenchment in construction and the building trades that will hit the Big Three particularly,” he said.

The investors see the Big Three U.S. automakers cutting factory production instead of returning to overly generous discount deals such as GM’s zero-percent financing offers, first rolled out after the September 11, 2001, attacks. “I think you’re going to see less discounting in general,” Ross said. “Now that they have a little better control of the factories and now that the factories are a little more right sized.”

None of the three predicted a recession for the U.S. economy in 2008, but York said “it feels like it’s on the way.” Stallkamp, on the other hand, sees global credit markets stabilizing in the first half of 2008, with the holiday shopping season a key indicator. He sees U.S. auto sales coming back in 2009.

The U.S. automakers, already slashing jobs and factory production, will “have to get smaller faster” and push for more sales overseas in a weaker market, Stallkamp said. “Maybe I’m too pessimistic on how low it’s going to go,” he said of the U.S. market. “Maybe I live in Michigan. This is a pretty crummy place to be right now.”

(Additional reporting by Poornima Gupta, James B. Kelleher and Kevin Krolicki; Editing by Braden Reddall)

(For summit blog: http://summitnotebook.reuters.com/)

Smart MoneyDow Jones & Company & Hearst SM Partnership

Struggling Homeowners Faced With Hidden Mortgage Fees

By Aleksandra Todorova
November 16, 2007

AS FORECLOSURES CONTINUE to plague the subprime market, a little-known industry practice is further hurting homeowners who are already having trouble keeping up with their ballooning mortgage payments: excessive and questionable fees. A recent study conducted by Katherine Porter, a law professor at the University of Iowa, found that mortgage lenders are charging delinquent borrowers with fees that go well beyond the typical late charge. Included in the bill are such things as faxing or emailing mortgage payment information, overnight delivery charges and unnecessary property inspections, among others. After poring through 1,700 recent Chapter 13 bankruptcy cases filed by homeowners, Porter found that, in 70% of the filings mortgage creditors claimed they were owed more than what the borrower believed. On average, the gap was a whopping $6,309 — all due to added fees. Even worse, four out of 10 mortgage companies didn’t even submit proper documentation itemizing the charges. The one bright spot for these debtors: Once the bankruptcy court reviewed the cases, it threw out many of the fees.

In a recent case that involved the refinancing of a Wells Fargo mortgage that was in the midst of a Chapter 13 bankruptcy repayment plan, a court awarded $67,202.45 to the debtor, Michael Jones, after discovering that the bank had made a variety of accounting errors and charged him more than $15,000 in fees that the court deemed impermissible, according to court documents. In an emailed statement, Wells Fargo told us they cannot provide specific comment on this case as it is pending appeal, adding that “all of our practices and procedures in the handling of bankruptcy cases follow applicable laws and we stand behind our actions in this case.”

Max Gardner, a consumer bankruptcy attorney in Shelby, N.C., says he encounters questionable fees in 95% of the bankruptcy cases he handles. “It’s really an epidemic of fraud,” he says. “I don’t know how else to describe it. It’s been going on for years.”

And these fees aren’t just limited to those on the verge of bankruptcy. Unsuspected and unexplained charges can be tacked onto a borrower’s account as soon as they are late with a single payment, Porter says. And because the fees are rarely itemized, most folks don’t even suspect they’re being overcharged. Dania Perez, a housing counselor at the Tampa Bay Community Development Program, a federally-certified counseling agency, recently met with a homeowner who was trying to bring her mortgage up to date after several late payments. The borrower complained that, in addition to late fees, she was charged another $1,000 for drive-by inspections. (Such inspections — also known as broker price opinions — take place when a lender wants to make sure that a house that might end up in foreclosure is in good condition). After requesting a breakdown of the fees charged, she discovered that her home underwent nine inspections in one week. She’s still fighting the charges. “I’ve told her she needs to contact an attorney,” Perez says. “Clients can’t do this kind of battling on their own.” The biggest problem is that homeowners are stuck in a legal gray area. If and when the mortgage company provides legal documents, they can be extremely difficult for the average consumer to decipher and retaining a lawyer often doesn’t make financial sense if the disputed charges are less than the legal fees you’d incur.

Another issue is that mortgage companies simply don’t have an incentive to provide good customer service — and avoid charging egregious fees — in the first place, explains Jack Guttentag, professor of finance at the Wharton School of Business, who runs a mortgage advice web site for consumers, mtgprofessor.com¹. Blame it on the credit markets, which have changed the way banks extend and service mortgage loans. Years ago, the banks that approved and originated loans also serviced them, meaning that they handled the borrowers’ payments. Naturally, they had an interest in good customer service: If a customer wasn’t happy with Bank A, they could go refinance with Bank B. Today, the lender that originates the loan very rarely keeps it, says Guttentag. Rather, mortgage loans are bundled together into trusts and sold as securities to investors, such as hedge funds. The trusts select a third party, known as a mortgage servicer, to collect payments from borrowers. These servicers can be independent companies or the mortgage servicing arms of well-known lenders such as Countrywide or Wells Fargo. As a result, consumers have absolutely no control over who’s going to service their mortgage, Guttentag says. “They also can’t get out of that relationship except by paying off the loan.” Even if they refinance, who’s to say that their new lender won’t pass the loan to the same servicer they had before.

Fees, meanwhile, are a good source of income for servicers who get to pocket the money. (Other than that, they earn a percentage of the mortgage amounts they process, typically 0.25% of prime mortgages and 0.50% of subprime mortgages. They also collect interest on payments for the short period between receiving the customer’s check and disbursing it to the investors.) In her research, Porter came across a variety of egregious fees, such as $50 fax fees, $137 overnight delivery fees and $60 payoff statement fees. Even bigger charges kicked in when a servicer got an attorney involved either at the start of a foreclosure process or during bankruptcy. In one example, a borrower was charged $31,273 in attorney’s fees. “Consumers who get behind, who make mistakes, are a very big source of profit for the servicer,” she says. What can borrowers do to protect themselves? Here’s a quick guide.

1. Monitor your mortgage

Just as you should review your credit reports once every several months to prevent identity theft and look for errors, you should also monitor your mortgage statements and look for any added fees, says Max Gardner. Most statements don’t include detailed explanations of the fees charged, but you can request a breakdown. Some of the most common fees include:

Late fees: These should be stipulated in your contract; typically it’s a penalty of about 4% to 5% of your mortgage payment.

Property inspection, broker price opinion fees: When you’re late with a payment, the servicer can send an inspector by your house, typically for a drive-by assessment of its value. Charges will vary by lender, but it’s important to make sure your house hasn’t been inspected too many times.

Demand fees, payoff statement fees, fax or overnight-delivery fees: The servicer charges you when you request specific information, for example, the payoff amount if you are looking into refinancing.

Attorney fees: You’re charged whenever an attorney gets involved in your case. In loan modification negotiations, for example, consumers will not be charged closing costs, as is the case with refinancing a loan. But if an attorney needs to review documents the borrower would have to pay the fees upfront, according to Perez.

Insurance-related charges: If the homeowner falls behind on homeowners insurance payments, servicers can quickly replace their policy with one from an affiliated company,
Gardner explains. These policies are often significantly more expensive than what you’d get if you shopped around.

2. Dispute questionable charges

Should you see anything on your statement that you don’t understand, you’re entitled to request an explanation of each charge under the Real Estate Settlement Procedures Act. You can request information about what the fees were charged for, who they were paid to, when they were incurred and, if attorney fees are involved, what exactly the attorney did, Gardner explains. The mortgage company has to respond within 60 days of receiving your letter.

3. Talk to your lender

If you miss a payment or know you’re going to be late, contact your lender immediately, Porter says. Lenders are more open to negotiating with customers who have missed one or two payments than with borrowers who are three or more months behind. After three months, accounts are typically transferred over to a subservicer (an agency that deals with delinquent accounts) or a loss mitigation department whose main concern is to foreclose at the lowest cost to the lender. Links in this article:
http://www.mtgprofessor.com/

O. Max Gardner III

http://www.maxbankruptcybootcamp.com

http://www.maxgardnerlaw.com

URL for this article:
http://www.smartmoney.com/consumer/index.cfm?story=20071116

Excerpts below from an article in CNNMoney.com give a view of another large mortgage lender.Evoking Depression-era memories, Wells Fargo & Co. President John Stumpf on Thursday became the latest banker to predict continuing difficulties in the U.S. housing market as risky mortgages made to overextended borrowers disintegrate into large loan losses.

 In one of the more bizarre turns in the subprime mortgage crisis, the Banks have now tried to assert that the blame for the historic number of home foreclosures really falls on the Bankruptcy Reform Act of 2005, which the Banks themselves spent more than $75 million dollars to get the law changed to favor creditors more than debtors.  

Summarizing, the Bloomberg news article says that the subprime mortgage problem was caused by recent bankruptcy reform. The reform law allegedly made it much harder for the average person to discharge credit card debt in bankruptcy. The consequence of this is that people with crushing credit card debt wound up defaulting on their mortgages instead!In other words, banks lobbied for a law that favored them. In practice, it wound up hurting banks. They tried to prevent people from defaulting on their loans. Instead, the defaults moved from one type of loan to another type of loan (from credit card payments to mortgage payments).  You can read the entire article at : http://tinyurl.com/2cvuug.

The argument is fiction at best and just plain old false information at worst.  The fact of the matter is that in most cases the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it easier for debtors to discharge credit card debt in both Chapter 7 and 13 cases.  This was especically true for the subprime credit card debt since the vast majority of subprime consumers earn less than the median income in their respective states. The median income in many cases is the benchmark for abuse under the new law.  And, in Chapter 13, the new law has increased the number of Zero-payment plans for unsecured creditors by ten-fold.

It is time for the mortgage originators to step up to the plate and admit that they created this crisis be developing and market mortgage loans that were simply beyond the ability of many consumers to repay.  Many knowledgable commentators have stated that the so-called 2-28 adjustable rate mortgage was developed for the sole purpose of forecing the consumer into a refinance when the first reset date hit.  The one thing the originators never counted on was that the system would implode to the extent that there would be no new money available to refinance these loans when the mortgage payments doubled.
 

House Bill 3915 is commonly referred to as the Anti-Predatory Lending Act of 2007.  While NCBLC is strongly opposed to all forms of Predatory Mortgage Lending, it cannot support this particular Bill.  NCBLC believes that there are two major problems with the Bill as currently drafted. First, although the Bill imposes new duties on mortgage brokers and loan originators, it fails to provide the impacted consumers with a Federal claim for relief for breach of those duties. Second, the Bill would pre-empt and declare unenforceable all state anti-predatory lending laws.  As a result, the landmark law in North Carolina, just to mention one, would no longer be enforceable if this Bill becomes law.  NCBLC has therefore joined in with every other major National Consumer Group in expressing opposition to this legislation.  The NCBLC letter to Congress can be viewed at this link:

http://www.nclc.org/issues/predatory_mortgage/content/HR_3915_opposition_letter.pdf

New York Times________________________________________

Talk of Worst Recession Since the 1930sBY DAN DORFMAN

After what Los Angeles money manager Arnold Silver called “a brutal three days,” the question is: What now for the market?A Wall Street superstar this year who runs Balestra Capital Partners, Jim Melcher, says he’s “worried about a recession. Not a normal one, but a very bad one. The worst since the 1930s. I expect we’ll see clear signs of it in six months with a dramatic slowdown in the gross domestic product.”

Noting that consumption is already slowing, Mr. Melcher figures sharply rising unemployment is inevitable. Another of his worries is that central banks around the globe, America’s included, are debasing their currencies, which is setting the stage for a new round of higher inflation. Our bear figures the next six to 12 months will be awful for investors as the market goes down “pretty substantially.” His frightening outlook calls for an additional 20% to 30% decline from current levels. A drop of that magnitude would put the Dow down in a range of roughly 9,100 to 10,400. Asked how he could conceivably give credibility to such an ominous forecast, Mr. Melcher observes: “I’ve never seen a market with more risk and what’s significant is that risk is not yet priced in.”

O. Max Gardner IIIMax Gardner’s Bankruptcy Boot Camps

Next Open Boot Camp: Dec. 7 to 10 (Spaces Open) www.maxbankruptcybootcamp.com PO Box 1000 Shelby NC 28151-1000704.487.0616 (v)704.418.2628 (c)

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