The House Judiciary Committee of the U.S. Congress recently approved a bill regarding mortgages and bankruptcy. The legislation (H.R. 3609) would enable homeowners with some mortgage types, including subprime and interest-only, to gain more favorable mortgage repayment terms as part of a chapter 13 bankruptcy.

According to a press release issued by Congress member Linda Sanchez’s office, the mortgage bankruptcy bill is intended to provide “relief” to homeowners affected by the crisis involving subprime and other unconventional loans. It was co-sponsored by Sanchez and North Carolina congressman Brad Miller. The bill applies to non-traditional mortgages which were initiated during the time between 2000 and the date when the bill comes into effect, if it is passed.

Sanchez was quoted as saying that the bill would provide assistance to “hundreds of thousands of families” at risk of having their homes foreclosed upon. However, she also stated that the bill incorporates “safeguards” designed to prevent it from benefiting those who simply bought a home which was more expensive than they could afford.

The press release indicates that this mortgage bankruptcy bill, if passed by Congress, would allow bankruptcy judges involved in chapter 13 bankruptcy cases to extend repayment periods, change the mortgage principal to be the same as the home’s true value, decrease excessive interest rates, and take other measures to enable continued home ownership by people with subprime and other unconventional mortgage types.

Chapter 13 is a type of bankruptcy which helps income earning individuals who are having difficulty making payments to repay some or all of their debts. According to uscourts.gov, chapter 13 cases involve arranging installment payments over a period of three to five years. It indicates that, in cases involving a mortgage, this can enable people to keep their homes, but they will still have to afford each of the mortgage payments under the new payment arrangement by the date at which they are due.

Overall, the mortgage bankruptcy bill in Congress would help home owners with unconventional mortgages who are facing bankruptcy to potentially avert foreclosure, by obtaining more reasonable mortgage payment terms. However, it will have to be approved by the full Congress and the President before it can take effect.

Subprime loans, which offer higher interest rates to home buyers with poor credit records, have come under increasing scrutiny in recent months due to high foreclosure rates and deceptive practices applied by some lenders.

Freddie Mac and Fannie Mae are two corporations which were created by the U.S. federal government decades ago, but are now owned by share holders. They play an important role in the mortgage industry which impacts home buyers, lending institutions, and investors.

Freddie Mac was created decades after Fannie Mae came into existence. According to FreddieMac.com, the company’s goals were defined by the U.S. Congress in 1970; they include the expansion of affordable housing and making sure that lenders have sufficient money to issue low interest mortgage loans. The web site states that Freddie Mac doesn’t directly issue mortgage loans to homeowners. Instead, it buys mortgages from lending institutions which want to sell them; this provides lenders with more money and allows them to make additional loans. Then it earns money from interest paid on the mortgage, as the original lender would if they had retained possession of the loan. It goes on to use the mortgages as a basis for selling “mortgage-backed securities” to investors. The company also takes measures to educate potential home buyers about mortgages and home-buying in general, including informational sections on its web site and free workshops which are held across the nation. Freddie Mac is another name for the Federal Home Loan Mortgage Corporation.

Fannie Mae, or Federal National Mortgage Association, was formed in 1938. The Fannie Mae web site indicates that it was originally a government agency, but became a separate corporation in 1968. The goals stated by its web site are much the same as those of Freddie Mac. It indicates that Fannie Mae works with over one-thousand lending institutions in the United States. It is based in Washington, D.C. unlike Freddie Mac, which is headquartered in Virginia. Both corporations have a limit ($417,000 dollars in the continental U.S., as of 2007/2008) of how large a mortgage they are willing to purchase from lenders. This contributes to the higher interest rate on mortgages for more expensive homes, as banks aren’t able to sell them to Fannie Mae or Freddie Mac. Fannie Mae also makes charitable contributions aimed at eliminating homelessness and promoting the expansion of home ownership.

Basically, Freddie Mac and Fannie Mae perform a similar role in the economy, which benefits both lending institutions and mortgage borrowers. They help lenders gain revenue from mortgages more quickly, and enable home buyers to have greater access to new mortgage loans.

During the past year, some states have enacted or scheduled the introduction of new regulations which apply to mortgage brokers. These have included Colorado, Massachusetts, and Alaska. Such regulations have focused on eliminating deceptive practices and requiring brokers to become registered with the government. It is also possible that additional regulations will be introduced at the federal level.

Most recently, in mid-October, the Attorney General of Massachusetts issued new regulations of this type. According to a press release issued by the Attorney General’s office on the 17th, the new regulations prohibit some types of broker and lender practices which are considered to be deceptive or unfair. Expanded regulations which apply to mortgage brokers include the prohibition of initiating a loan for which the broker does not have a “reasonable belief” the borrower will be able to repay it, and the requirement of greater disclosure by the broker regarding “no doc” and “stated income” loans. The new laws also ban brokers from brokering mortgages which are “not in the borrower’s interest” or in which the interests of the borrower and broker are conflicted.

Much earlier in the year, the state of Colorado enacted new regulations applying to mortgage brokers and required many of them (with some exceptions) to complete a process to become registered as a broker. The Rocky Mountain News published an article on the subject in January, indicating that the new law requires FBI and CBI criminal investigations, fingerprinting, a two-hundred dollar registration fee, and other requirements before someone can become registered as a mortgage broker.

The state of Alaska will bring about new mortgage broker regulations in July, 2008. According to the official State of Alaska web site, brokers and lenders will be required to become licensed and meet various requirements to do so; among other changes, a fund (supplied by lenders) will be established to help provide compensation to borrowers who fall victim to mortgage lending activities considered not to be ethical and/or legal.

New regulations are also possible in the federal government; according to an Associated Press report in late October, the Office of Thrift Supervision’s director spoke of the need for national broker registration and license requirements, so that dishonest brokers would not be able to relocate from one state to the next and continue their unethical practices. The recent sub-prime mortgage crisis, along with the related foreclosures and bankruptcies, seems likely to spur additional regulation in this field.

With the decreasing number of home sales and the ongoing subprime mortgage foreclosure crisis, some corporations in the mortgage industry have enacted major layoffs of their employees in recent weeks and months. Bankruptcies and layoffs in related industry sectors have also occurred because of this situation.

Multiple layoffs have been announced by this industry just in the past week (as of 09/13/07); the Sydney Morning Herald reported on the 10th that the mortgage lender Countrywide Financial would eliminate twelve-thousand jobs in the coming months. The Reuters news agency reported that Lehman Brothers Holdings and National City Corp plan to carry out layoffs of over twenty-one hundred employees, and the Kansas City Star published a news story indicating that H&R Block announced its intention to cut nearly six-hundred additional jobs at its subsidiary, Option One Mortgage Corporation.

Many mortgage industry layoffs occurred in August as well. Reuters reported on August 17th that NovaStar Financial, which issues subprime mortgage loans, cut its work force by thirty-seven percent (approximately 500 workers), and indicated that 35,752 jobs were cut in the financial sector during August (more than had been lost in a single month for at least fourteen years). The Arizona Republic newspaper published a news report in late August stating that 1st National Bank Holding Company (based in Arizona) had announced layoffs of 541 employees. Other sources reported layoffs at additional companies in the mortgage industry, including GreenPoint Mortgage, IndyMac Bancorp, and Accredited Home Lenders.

Fewer new mortgages are being initiated for various reasons, contributing to these layoffs; home sales are decreasing, lenders are applying greater scrutiny to mortgage applicants, and the availability of subprime rate loans is being cut back. Fewer employees are now needed to process the new mortgages. Some mortgage industry companies have even filed for bankruptcy. According to the Baltimore Sun newspaper, about sixteen lenders have gone bankrupt from December, 2006 through September, 2007. The economic situation has also brought about layoffs in the construction industry and other real estate related sectors.

Mortgage industry layoffs are likely to continue as long as the housing market remains weak. It remains to be seen whether or not it will be possible for the quantity of mortgages to increase again, despite stricter credit history requirements being applied to potential borrowers. With the many foreclosures occurring due to questionable subprime rate loans, the amount of mortgages being issued (and thus the number of people employed) by this industry may have been unrealistic and unsustainable.

The pending home sales index has fallen to the lowest level it has seen since the September 11 terrorist attacks due to the recent mortgage market meltdown. This comes as a quite a shock to most economists, who were looking for about a 2% decline and instead saw a whopping 12.2% fall.

However, others say the drop was to be expected given that the mortgage market has been experiencing disruptions that haven’t been seen since 9/11.

Rising delinquencies and defaults in July and August created difficulties in mortgage backed securities sales and many lenders left the mortgage market completely because of it.

Still, Realtors remain hopeful, believing that the problems are temporary and that the majority of buyers don’t face the financing problem because they qualify for conventional financing, rather than subprime loans. They are focusing on the fact that the market has been somewhat stable since mid-August.

Unfortunately, Mike Larson, real estate analyst for independent research firm Weiss Research said the fact that the mortgage market went from bad to worse from July to August suggests that the next pending home sales report could be worse still, and that there is problems ahead for other home sales measures, such as the even more closely watched existing home sales report. “We have these issues with mortgage credit that started to hit in July, but they gathered steam into August,” he said. “This housing downturn is not just a one-month event.”

Mortgage application volume fell 4 percent during the week ending Aug. 24, according to the Mortgage Bankers Association’s weekly application survey.
The MBA’s market composite index fell to 615.2 from 641.1 the previous week.

Refinance volume fell 4.2 percent, while purchase volume dropped 4 percent from the prior week.

Mortgages have gone increasingly delinquent and into default in recent months, with adjustable-rate mortgages, especially among subprime borrowers, among the worst-performing loans.

Adjustable-rate mortgages, which have accounted for the bulk of rising delinquencies and defaults, accounted for 15 percent of all mortgage applications during the week, down from 18.6 percent during the prior week and 26.8 percent during the comparable week one year ago.

Dozens of mortgage lenders have gone bankrupt in recent months as lending volume continues to tumble while performance further deteriorates.

The average interest rate for a traditional, 30-year fixed-rate mortgage fell to 6.41 percent from 6.49 percent the previous week. The rate was 6.39 percent one year ago

IndyMac Bank announced today that it will resume originating prime, single-family residential, full doc jumbo loans after they temporarily reduced the origination of these products due to the recent credit cruch in the secondary markets.

“Given our strong financial position, we are fully committed to the market for prime jumbo home loans,” commented Michael W. Perry, Indymac’s Chairman and CEO. “Until the secondary market recovers, we plan to retain this product in our investment portfolio at what we believe will be attractive returns.”

French banking giant BNP Paribas on Thursday suspended three of its funds exposed to US high-risk property loans, sparking further turmoil in world stock markets.

BNP Paribas Investment Partners, a unit of the French bank, said the funds — Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia — will accept no redemptions or subscriptions until further notice, the bank said.

The announcement sent shares tumbling in Asian markets that were still open when the news broke, as well as in London, Paris and Frankfurt, dealers said.

A Paris-based dealer said the news had shaken the market, reversing opinion on financials which rallied strongly Wednesday thanks to reassuring comments on exposure to the US subprime market, where mortgages are provided to people with poor credit histories.

“Basically, BNP is now saying it’s got major problems with the credit market,” he said.

There are growing jitters about the potential fallout for the world economy from problems in the US subprime lending sector.

BNP’s announcement adds to these fears and follows a similar decision last Friday by the German mutual fund Union Investment which froze one of its funds that has exposure to the US subprime market.

BNP said in a statement it was suspending the calculation of net asset value in the three funds invested in asset-backed securities, due to a “complete evaporation of liquidity in certain segments of the US securitisation market.”

American’s are hooked on credit card rewards and while those that give consumers free airline miles are pretty old hat, lenders are constantly coming up with new ways to lure the plastic addicted to switch accounts.

Two of the newest variations involve mortgages and both are rather creative.

In May American Express announced a new program, the first in the nation, that allows cardholders to say “charge it” to their mortgage lender. In the past the holder of almost any card could take a cash advance to make a mortgage payment, but mortgage companies were not usually willing to pay the sizeable merchant fees required by the credit card companies to process loan payments directly. Under this new American Express program cardholders can even out any cash-flow problems involving mortgage payments or effectively shift the due date and can earn reward points for doing so.

IndyMac Bancorp (IMB) said last night the market for mortgage-backed bonds has become “very panicked and illiquid.”

American Home Mortgage (AHM) also announced last night it is closing most of its operations today with nearly 7,000 employees losing their jobs.

Yesterday, we blogged about Positive Carry, a 124-foot yacht that is now up for sale from former hot-shot mortgage trader John Devane of United Capital.

The great long-time investor John Templeton used to say look for points of maximum pessimism for investment opportunities. The mortgage market is definitely at one of those points today.

However, this might be one point of maximum pessimism investors may want to avoid. Mortgage-backed securities are typically purchased by institutions who borrow to purchase these securities. The ability to borrow is now gone or greatly reduced meaning a lot less buying power in this market. This also means housing prices are going to get a lot weaker than anyone anticipated.

Both the housing and mortgage markets are two points of maximum pessimism investors can afford to miss for now. This is one leverage mess that will take time to work out.