Thanks to Daniel Englander of Minyanville's Buzz and Banter
After six months of doing everything in it's power to conceal the truth from taxpayers, disgraced AIG (AIG) finally came clean and told its owners, the US taxpayers, what we already seemed to know: that the firm had been used as a conduit to funnel hundreds of billions of dollars to firms such as Goldman Sachs (GS) and even European banks such as Deutsche Bank (DB).
Let's just reflect on this for a moment. Our Government has determined, with no vote or discussion, that certain firms needed to be saved. After all, if AIG could not make do on its CDO obligations, Goldman would suffer. And why should Goldman suffer if it were properly hedged? The reality, of course, is that Goldman was not properly hedged. In a truly free market, Goldman would have a tombstone right next to lesser firms such as Bear Stearns and Lehman Brothers.
I could go into a huge discourse on the extensive Government influence that Goldman and its former executives have. You certainly do not need six degrees of anything to get from Goldman to the seat of power in American finance: the AIG decision was made on Hank Paulson’s watch, who is only Goldman’s former CEO. What’s done is done at this point, and there is certainly no going back.
But something can be done. AIG executives recently received nearly $200 million in bonuses. This from the group that destroyed, in a remarkably short period of time, one of the great American business franchises. These bonuses are for the very geniuses that decided that writing virtually unlimited insurance on the health of certain securities was a good idea. Hey, I would do that too: Heads, I win, I get paid a ton of money; tails, I lose, the U.S. Financial system melts down, the Government bails me, my firm and my counterparties out, and... I make a ton of money! Nice deal if you can get it.
Here is what we ought to do. Every firm that got made whole on the taxpayer bailout of AIG needs to pay their pro-rata share of the bonus. It’s a drop in the bucket – what's $200 million on $100 plus billion? – but it is the right thing to do. I think we have forgotten about the right thing, and its disturbing to say the least. I understand the fact that there are contracts. I also understand that if the firm went broke like it should have, those employees would be unsecured creditors. Good luck with that claim.
I also understand that, much like some of the best FBI agents are reformed criminals, many of these financial products ‘specialists” have the best expertise to manage the triage we are going through. Fair enough. But they are working for the counterparties, the ultimate beneficiaries of our hard earned tax dollars. The least the Goldman’s of the world can do is pay that bill.
Amen to that.
• The next time you open up your 401k statement or Roth IRA after months and months of it being lower, it may have a net balance higher than the previous mailing. We all will feel a little relieved, maybe even walk with a slight swagger. Vindication! Even though we didn't sell when the averages rolled over it's not going to zero. See, we were right to practice the Wall St mantra of buy and hold. Or were we?
Will we be better off? You may not feel that way after you read this article from Matt Taibbi who says Wall St insiders are using the bailout to stage a revolution.
Perhaps it's a bit vulgar in some verbal descriptions, but he cuts to the chase. From the audacity of individual chicanery to the inside deal cutting where government and regulations are formulated to further the cause of power profits, he's got it all.
• Once you read this, you need to get mad. I want you to get mad as Hell!
I was both fascinated and disappointed by the new TV series, Kings.
Fascinated that a TV series would highlight the reign of an autocrat, a monarchy. Here in hopefully, an always democratic republic. The disappointment arises from the implication that the one in charge has been selected by God.
Further extending my fascination was that the king was being blackmailed by his brother-in-law to continue and/or extend a war for the benefit of the brother-in-law's profiteering and/or power grab. The blackmail's threat was the removal of the gold the kingdom held in it's treasury. There's a quaint notion: a nation and it's fiat currency backed by something of intrinsic value.
The concept of Divine intervention removes the need for individual accountability. We need people to be more accountable to themselves and to others – I believe God helps those that help themselves. Abdicating personal responsibility or worse, subjugating other's personal liberties in response to a belief in Divine intervention is a grave disappointment.
• Yields initially spiked higher in response to comments from China's Premier Wen Jiabao.
"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."
Yields have since gone back down and are now lower than where they started the day.
• Can Marijuana Help Rescue the Economy?
• I saw the Jon Stewart / Jim Cramer head-to-head last night. At least I saw the beginning: Stewart was much too serious and Cramer had his hat in hand looking for absolution. I did like Stewart's point about the network being more responsible or potentially being more responsible for what and how it airs certain programming. But it would also behoove consumers to be somewhat more cynical when you hear others tell you what to do with your money.
• Equifax in conjunction with Fair Issac has created a new Beacon Mortgage Score with "unprecedented predictive" powers. Maybe this one considers that housing prices can actually go down after a bubble bursts.
If the American Public had to abide by Mark-to-Market accounting:
1) We'd need to come up with 20% of the lost value of a new car we had just purchased, in cash, the same day we drove it home from the dealer.
2) Each day we drove the car, we'd need to settle up, in cash on that same day, the difference between the car's sales price and it's used value each day we drove it.
3) We'd need to come up with, in cash today, the difference between our home's current value and the value of the loan backing it.
3a) In this case, the value of the loan backing all our homes -- if that loan is securitized -- is zero. This means you have to come up with the entire purchase price of your home, in cash, today.
4) If you are lucky enough to have paid cash for your home, you need to come up with, in cash today, the difference between the value when you bought it and the value it has today. (If you bought in the last 4-5 years, figure on 15-35%.)
4a) We'd need to come up with, in cash today, the amount of all our outstanding credit card balances, if part of a securitized CDO (Collatoralized Debt Obligation).
The problem is when you start treating loans like equity and marking them to market, instead of marking them to maturity, or marking them to the discounted NPV of Future Cash flows, you're calling the loan immediately. But a loan is meant to be repaid OVER TIME. If you have to mark it to market today, then you are not allowed any time to pay it off. Thus the conundrum of Mark to Market. If I had the money, I wouldn't need the loan.
Thanks to Minyanville's Buzz and Banter and Particularly Minyan Joe, Malibu.
• What did Brad Pitt and Nancy Pelosi actually expect would happen?
• Buying an office building close to the White House is not the same as being elected President. Would someone kindly inform Eliot Spitzer of the difference?
• Even if GM files for Chapter 11 we as taxpayers will be picking up the tab for loan guarantees to the creditors.
• $750 Billion in Mortgage Debt Overdue according to new figures released Thursday morning by the Mortgage Bankers Association.
• Does our President Obama have the testicular fortitude to do the right thing and be unpopular? Will he please let the banks fail and the shareholders absorb the costs of their many grievous errors compounded over and over again? When will he have the kahones to say, “You did it, now live with it.”
• Who haven't you spoken with in a long time? Why not try giving them a call to just say hi.
• Todd Harrison of Minyanville fame wrote the following in 2005. Talk about nailing it:
In particular, I'm concerned that one of two things must happen in the years ahead. Either the US dollar must further devalue, as it has to the tune of 25% since 2002, or asset classes will deflate in sync. I'm unsure if these are mutually exclusive events but we'll likely jockey between the two as we figure it out. I will also offer that the greenback will serve as a proxy of isolationism as America delicately dances through a difficult war and sets protectionist policies in place. As we edge through the new world order, our economic ranks and societal structure will continue to shift. While last year’s election brought the dichotomy between blue states and red states to bear, a more disturbing conundrum has evolved that has little to do with party lines or political affiliations. As we digest initiatives of eminent domain, understand the motivation of the new bankruptcy laws and come to accept that our social security and pension programs are inherently flawed, the growing chasm between the “haves” and “have nots” has become increasingly apparent. The middle class is steadily eroding as we balance the lifestyles of the rich and a struggle to exist."
• Yeah, I feel fine!
• News out of the House Financial Services committee yesterday afternoon lit up the stock indexes with hope. Reuters reports that they are expected to hold a hearing on marked-to-market accounting on March 12. This helped GE (financial in disguise) and the banks recover from the day's earlier lows. Heed this warning from Minyan Peter on the Buzz and Banter:
“With the news that the House Finance Committee will look at marked-to-market accounting next week, I would remind Minyans that what we are talking about is a change in accounting, not a change in cash flows. At the end of the day, it is the realized cash flows on their loans and securities which will ultimately determine what banks make it. The accounting treatment - whether accrual or marked-to-market just determines when the problems become obvious to investors."
• Principal reduction will be the last resort in the government's refinance and loan modification plan.
• One in five mortgages, or 20% are underwater in the United States with principal balances exceeding current market values.
• We here at MyMortgageInfo.net have never ask for nor received any form of corporate welfare. And in that spirit we hail Obama's administration vow to 'end direct payments to large agribusinesses that don't need them'.
• We are all for "level playing fields". Let competition flourish.
The concept and reality of closing costs pose a real challenge to today's borrower and practitioner. Understanding the beliefs that are currently held and where they come from and reconciling them with reality is one of our biggest challenges as practitioners.
Every borrower wants to know what their closings costs will be. Each poses this question in a different manner:
“How much cash do I need at closing?” “What kind of points do I have to pay?” “How much is the closing credit and what does it cover?” “What is included in prepaids?” “How much are all the costs beyond my seller assisted down payment?”
“How much cash do I need at closing?”
“What kind of points do I have to pay?”
“How much is the closing credit and what does it cover?”
“What is included in prepaids?”
“How much are all the costs beyond my seller assisted down payment?”
Some of the mystery concerning closing costs come from how each of the different industries (real estate, title, lending) involved refer to the charges that appear on the HUD-1 Settlement Statement and how they are labeled on that form.
Everything on page two of the HUD-1 is totaled and labeled “Total Settlement Charges” as part of the preprinted form. It is that same figure that is brought forward onto page one into the preprinted section “Settlement charges to borrower (line 1400)”. A lot of the confusion stems from the perspective of whether you are refinancing or purchasing a property. Let's break it down into each group and review each of the charges that can take place.
Refinance
Refinances are where most of the confusion comes as some of the items that are included in “Total Settlement Charges” are not transaction costs because as an existing homeowner you already pay these items and would continue to do so whether you completed the refinance or not. These include interest on the outstanding principal, real estate taxes and homeowner's or hazard insurance. These are included in two sections in the HUD-1 entitled “Items Required by Lender to be Paid in Advance” and “Reserves Deposited with Lender for”.
The first is for interest on the new loan until the end of the month in which settlement takes place and the second is for your escrow accounts should you have them. In addition, each of these sections makes provisions to collect mortgage insurance if it is required. If you had mortgage insurance on your existing loan and it is required again based on the combination of value and loan amount then it is a continuation of an existing condition with adjustments for the current loan-to-value and is not actually a new cost.
Other charges include the following:
Appraisal, line 803: Must be done to ascertain the value of the property especially if a refinance. If this is a purchase then we use the lower of the sale price or the appraised value to determine the loan-to-value (LTV).
Credit Report, line 804: Typically consists of a tri-merge in-file which is then run through an automated underwriting system (AUS). Must verify accuracy of the data included in the report.
Lender fees: These include a funding or underwriting fee, a tax service fee and a flood certification. The funding fee is for the underwriting that the lender performs. The other two charges are typically to third parties to insure that the real estate taxes are paid and kept current for the life of the loan and to determine whether the subject property lies in an area designated as a flood plain.
Title Charges, Line 1100: Includes the cost for conducting the settlement, performing the title abstract and examining it and preparation of the title insurance binder. The most costly item in this section is usually the title insurance premium which is regulated by the state's insurance commission. At a minimum, you must pay for a policy to insure the lender against loss due to a title issue claim. If it is a refi you may be entitled to a reissue rate discount. Be sure to ask.
Miscellaneous Title charges: These items may include courier or overnight fees and the preparation and recording of any necessary releases from existing lien holders.
Government Recording and Transfer Charges, Line 1200: Here are where some of the heftiest charges occur. For a refi in Fairfax County, Virginia, the charge is typically $46 to record a deed of trust. But the charge for the county for the tax stamps is 0.0833% of the loan amount or “$.0833 per $100 rounded to the next highest $100”. The state charges a substantially higher rate of “$.25 per $100 rounded to the next highest $100”. A $300,000 loan would have $249.90 going to the county and $750 going to Richmond.
That should be it unless you are buying down the rate with prepaid interest or “points”. They would appear toward the top in lines 801 and/or 802.
Purchases
The biggest contrast between refinances and purchases is the issue of "cash-to-close" and how the different charges are viewed between the two transactions. As stated previously, a borrower who is refinancing is paying many of the "settlement charges" already and will continue to do so whether they refi or not. For the purchaser, all the charges feel like and are typically considered closing costs especially for the first time buyer.
Whereas the move-up buyer is currently paying interest on an outstanding principal balance (unless it is owned free and clear), real estate taxes and a hazard insurance premium it is for a completely different property and transaction. While the move-up buyer may feel that they are essentially paying twice for same costs they are in reality trading one set for another. However, first time home buyers are presumably trading a single rent payment for costs they have never before encountered and it can be daunting.
What are the specific additional costs and charges that a buyer sees beyond those described above for the refinance? There are several meaningful differences:
Items Required by Lender to be Paid in Advance, Line 900: As a purchaser of a new home you will want to insure the property against calamity. In this section, the charge for the first year's hazard or homeowner's insurance premium will be noted as paid outside closing (POC) or be collected as part of the net funds due.
Title Charges, Line 1100: Your charges for title work may be less for one or both of the following reasons: There is now a seller that some of the time charge can be allocated to and very often settlement or title companies will provide discounts to realtor's buyers for bringing them the settlement work.
Government Recording and Transfer Charges, Line 1200: This is the one charge that is substantially different and bigger. The state and county not only charge based on the mortgage amount as in a refinance but also have the same type of charge based on the sale price.
Additional Settlement Charges, Line 1300: As a purchaser you will typically incur a charge for a survey of the subject property and for a pest inspection. This of course will depend on the sale's contract negotiations and who was stipulated to pay for these services.
Some of the other charges a purchaser may encounter include the Home Warranty premium, proration of the condo or home owner's association fees, a recordation fee for something such as a power of attorney, utility setup and/or turn-on fees and the realtor administration fee.
Many of these fees are non-negotiable. The county will not record your deed of title and deed of trust without collecting its pound of flesh. No recordation means no loan as lenders will require their lien to be “perfected”. But that doesn't mean you have to end up paying for it. In the future we will discuss “no closing cost” options and seller assisted closing costs. In the meantime, if you have a question or concern call or write us.
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