Archive for February 2013

Officials Debate Executive Pay for Bailed-Out Firms at Hearing

February 28, 2013

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I don’t think that the government has any right to tell a private business what to do but in this case when they accept government money they become partners with the government having the majority vote.  Please read the article below and let me know what you think.

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Following a recent report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which charged that Treasury has not appropriately limited compensation for executives at companies bailed out by TARP, a House subcommittee held a hearing on the matter.

House Representatives heard from Special Inspector General Christy Romero and Acting Special Master for  TARP Executive Compensation at the Treasury, Patricia Geoghegan.

“While taxpayers struggle to overcome the recent financial crisis and look to the U.S. Government to put a lid on compensation for executive firms whose missteps nearly crippled the U.S. financial system, Treasury continues to allow excessive executive pay,” Romero stated in her testimony.

She pointed to flaws in the Special Master’s approval process for executive compensation packages and decried the Special Master for not following recommendations from her office or the guidelines set forth by Treasury.

Kenneth R. Feinberg, who previously served as Special Master, set forth in his compensation guidelines, “base cash salaries should rarely exceed $500,000, and only then for good cause shown, and should be, in many cases, well under $500,000.”

However, both Feinberg and Geoghegan have continued to approve executive pay packages that far exceed this amount.

The Special Master previously approved executive pay at seven companies. Today, the office is responsible for just two companies—Ally Financial and GM.

Most recently, the Special Master approved compensation packages exceeding $500,000 for 23 executives at Ally and GM.

Romero also complained the Special Master “did not independently analyze the basis for awarding cash salaries greater than $500,000,” but instead relied heavily on justification from the companies themselves.

“Despite SIGTARP’s previous warning that Treasury lacked robust criteria, policies, and procedures to ensure that Treasury’s guidelines to curb excessive pay are met, Treasury made no meaningful reform to its processes,” Romero stated.

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Officials Debate Executive Pay

Bernanke Highlights Benefits, Risks of Fed Stimulus in Testimony

February 28, 2013

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This makes sense to me. Please read the article below and let me know what you think.

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Federal Reserve Chairman Ben Bernanke underscored benefits of the Fed’s quantitative easing policy while also pointing to associated costs and risks in his written testimony to Senators Tuesday.

Bernanke began his testimony by assessing current economic conditions. Despite gains in employment, he described the job market as “generally weak.”

“With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy,” he explained.

One “accommodative” policy is the Fed’s large-scale purchases of longer-term securities meant to support economic growth by keeping longer-term interest rates low.

Currently, the Fed purchases $40 billion in agency mortgage-backed securities each month and another $45 billion in longer-term Treasury securities on a monthly basis.

These purchases, as indicated by the Federal Open Market Committee (FOMC), will continue until there is “a substantial improvement in the outlook for the labor market in a context of price stability,” Bernanke said.

Although the plan is to continue, Bernanke says FOMCassesses asset purchases within a “cost-benefit framework.”

According to Bernanke, the benefits of the purchases and policy accommodation are clear.

“Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC’s 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods,” Bernanke said.

Still, there are several potential risks involved, one of which is the possibility of rising inflation.

“For example, if further expansion of the Federal Reserve’s balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC’s price-stability objective at risk,” he said.

Another concern is the possibility low interest rates could over time “impair financial stability” if portfolio managers become dissatisfied with low returns and respond by taking on more risk.

To read the complete article please use the link below.

Bernanke Highlights Benefits -Risks

Interthinx: Mortgage Fraud Risk Climbs to Highest Level Since 2009

February 27, 2013

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How about that – more fraud. I think that this will continue until the home owners AND lenders are prosecuted. Please read the article below and let me know what you think.

In the fourth quarter of last year, the risk of mortgage fraud elevated to the highest level since 2009, Interthinx reported Tuesday.

According to the company’s Mortgage Fraud Risk Report, the mortgage fraud risk index climbed to 159, representing a 16 percent increase from Q3 2012 and 9 percent increase from Q4 2011.

Interthinx pinpointed the source of the increase to a surge in property valuation fraud risk, which rose 25 percent from Q3. Property valuation fraud occurs when property values are manipulated to create equity. Interthinx explained investor activity in recovering metro areas creates rapid price changes and opportunities for value manipulation.

The other types of fraud the index tracks are identity, occupancy, and employment/income.

Reflecting the national trend, the number of “very high risk” metros spiked from 70 in Q3 to an unprecedented 125 this quarter, the report revealed.

Five states contributed at least five more high risk metros to the list. Ohio bumped up the Q4 figure by adding 8 metros, the most out of any other state, while California, Georgia, and Michigan added 6, and South Carolina added 5 metros.

In addition, 26 states have at least one newly added “very high risk” metro not seen on the Q3 list.

In Q4, the riskiest metros were located in Florida or California, with Lakeland-Winter Haven recording the highest value, 292. Other metros in the top five were Merced, California (288); Tampa-St. Petersburg-Clearwater (286); Yuba City, California (285); and Jacksonville (285).

To read the complete article please use the link below.

Mortgage Fraud Risk Climbs

Study Reveals Misrepresentations in the RMBS Market

February 27, 2013

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This is another example of outright fraud where no one has been prosecuted. I think that the lack of any threat for these cases played a huge role in the real estate collapse.  Please read the article below and let me know what you think.

Following the financial crisis, a prevalence of misrepresentations in the residential mortgage backed securities (RMBS) market has exposed investors to greater risk, according to a recent report authored by university researchers Tomasz Piskorski, Amit Seru, and James Witkin.

The researchers studied private-label RMBS sold in 2007 in search of misrepresentations regarding occupancy status and second liens. Private-label RMBS totaled about $2 trillion in 2007.

Overall, the researchers detected one of these two categories of misrepresentations in one out of every 10 loans.

When misrepresentations involving HELOCs are included, the rate jumps to 12.2 percent.

More than 27 percent of loans to non-owner occupants were categorized as for owner-occupants, and more than 15 percent of loans with second liens were miscategorized to hide the second lien, according to the findings.

While some might attribute these misrepresentations to low- or no-doc loans, the researchers explain they “find significant extent of misrepresentation even when we focus on fully documented loans.”

Misrepresentations of owner-occupancy are slightly lower for fully-documented loans, but the researchers found the opposite is true for second-lien misrepresentations, which are actually more prevalent among fully-documented loans.

The researchers clarify that these instances are not simply cases where “buyers know less than the seller,” but instead are cases in which “buyers received false information on the characteristics of assets.”

In fact, lenders—seemingly aware of the discrepancies in loan facts and representations—often charged higher interest rates on loans with misrepresentations when compared to similar, accurately-represented loans. However, the heightened interest rates were not effective in covering the added risk, according to the study.

Importantly, the researchers state, “We find that these misrepresentations have significant economic consequences.”

To read the complete article please use the link below.

Misrepresentations in the RMBS Market

Bipartisan Group Proposes Formula for Sustainable Homeownership

February 26, 2013

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Although some argue the push for homeownership was the root cause leading to the housing downturn, a report from the Bipartisan Policy Center’s (BPC) Housing Commission argued it was actually a wide range of factors that converged to create the crisis and offered its own formula for encouraging “sustainable” homeownership for those with modest incomes.

After the collapse of the housing market and the hundreds of thousands of foreclosures that came with it, many questioned “the elevated status of homeownership,” the commission explained in a report titled Housing America’s Future: New Directions for National Policy.

But, according to the report, policies encouraging homeownership weren’t the main problem, though “overly exuberant home buying provided an important stimulant.”

A few of the real culprits named in the report included factors such as the relaxation of underwriting standards, emergence of abusive and predatory mortgage products, and activities of unqualified borrowers who submitted false or inadequate credit information.

While the Consumer Financial Protection Bureau (CFPB) has offered up new rules to prevent risky lending practices, the commission believes “the pendulum has swung too far from the excesses of the pre-bust era” and stated “today’s credit box is tighter and more restrictive than underwriting practice and experience justify.”

With past mistakes in mind, the commission argued sustainable homeownership should be encouraged among lower-income borrowers and can be achieved through broad availability of prime, fixed-rate mortgage financing and adjustable-rate mortgages with clear terms and limits on adjustments and maximum payments. The commission also recommended counseling for those who may need it.

To make its point, the report cited a study from the North Carolina’s Center for Community Capital that assessed 46,000 low-income homeowners who received traditional 30-year fixed-rate mortgages between 1999 and 2009 through a program. The study found 95 percent of those homeowners were continuing to make mortgage payments at the end of the decade, even surviving the housing crisis. The default rate among the loans was also less than one-quarter the default rate of subprime loans that the borrowers might have otherwise received, but the default rate was still higher compared to prime loans not part of the program.

The households in the study had a median income of $30,000 and oftentimes put down less than 5 percent on their home purchase. Overall, the researchers in the study found low-income households with mortgages that were properly serviced and without risky features can perform “quite” well.

To read the complete article please use the link below.

Formula for Sustainable Homeownership

Home Values Post Biggest Annual Increase Since 2006; Rent Gains Slow

February 26, 2013

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Home values in January posted their biggest annual increase since July 2006, beating national gains in rent, according to a recent report from Zillow.

The Zillow Home Value Index rose for the 15th straight month to $158,100 in January 2013. According to Zillow, national home values have not been that high since June 2004. The improvement represents a 6.2 percent year-over-year gain and a 0.7 percent increase from December 2012.

The winter season, however, slowed gains for the Zillow Rent Index, which was down 0.2 percent from December, but still 4.3 percent higher compared to a year ago.

“The winter months are typically when things cool off in the housing market, but high demand and continued tight inventory in many markets have helped keep things at a boil through the early part of 2013,” said Dr. Stan Humphries, Zillow’s chief economist.

For every 10,000 homes nationwide, Zillow reported 5.54 homes were lost to foreclosure in January, down 0.8 homes month-over-month and 2.3 homes year-over-year.

Although the pace of completed foreclosures is slowing, Humphries noted foreclosure activity remains high.

“This will have the dual effects of nurturing rental demand, as displaced former homeowners seek new lodgings, and of adding supply to many markets, as foreclosed properties re-enter the market,” Humphries explained.

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Home Values Post Increase

Firm Predicts Job Relocation Surge from Former Underwater Borrowers

February 25, 2013

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Challenger, Gray & Christmas, Inc., a nationwide outplacement firm, is predicting a relocation surge in 2013 by job-seeking homeowners who are finally able to list their properties.

As home prices improve, more homeowners have been lifted out of negative equity, and thus more free to sell their properties and relocate. According to a recent reportfrom Zillow, 1.9 million homeowners were freed from negative equity in all of 2012.

“One factor that has kept unemployment rates high has been the inability of underwater homeowners to relocate for employment opportunities. With home prices bouncing back, even those who may now simply break even on a home sale might consider moving to a region where jobs are more plentiful. This could spark a more rapid decline in the unemployment rate over the next year,” said John A. Challenger, the firm’s CEO.

According to a December report from the Bureau of Labor Statistics (BLS), 130 metropolitan areas had an unemployment rate that was 8 percent or higher and 47 metros registered rates 10 percent or higher. At the same time, 20 metro areas have a rate that sits below 4.5 percent, well below the national average of 7.9 percent as of January 2013.

“It is likely that employers in these low-unemployment regions are actually struggling to find available workers with the skills need to fill job openings,” Challenger said.

As for trends the firm is seeing, Challenger says relocation increased for job seekers going through the firm. In 2012, an average of 13.3 percent of those finding new positions each quarter relocated for the opportunity, up from 11.7 percent in 2011. In 2009 and 2010, the relocation rate was at about 10 percent.

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Job Relocation Surge