Are We Heading for Another Liquidity Crunch?

A couple of indicators in the market are being interpreted by some as suggesting that we are heading for another liquidity crunch, of the kind observed in the last quarter of 2008 following the collapse of Lehman. That crunch pre-faced a worldwide recession. How serious is the risk of a repeat occurrence?

CNBC.com Credit Crunch

Let’s take the indicators first. 'Exhibit 1 for the prosecution' is the EONIA-EURIBOR interest rate spread. This is the difference between the euro overnight interest rate and the 3-month interest rate, and its magnitude is an indicator of the health of interbank lending.

Following the Lehman collapse, this spread stood at over 110 basis points. A few months ago it was at around 20 bps, but just recently, amid all the volatility and negative sentiment on both sides of the Atlantic, it has widened out to over 55 bps.

'Exhibit 2' is the commercial paper (CP) and Libor spread. Normally, CP interest rates lie below Libor, the official interbank lending rate, reflecting its liquidity value as a tradeable product compared to a bank deposit. But this week the CP curve has traded above the Libor curve (for instance, in USD the 1-mo CP rate is 29 bps compared to 1-mo Libor of 22 bps).

In theory this would suggest a greater credit risk associated with those banks now borrowing via CP, but for a 1-month tenor it isn’t the credit risk, this spread widening indicates a higher perceived bank funding risk.

So are we heading for a repeat of the post-Lehman experience? In the current environment there is little appetite for complacency or soothing words urging the market not to panic, although conversely doom-mongering often ends up as a self-fulfilling prophecy.

There is little doubt that a serious credit event, such as a Greek sovereign default, would have a severe knock-on effect on the interbank market, not least because in one respect the circumstances would be very similar to the 2007 sub-prime crisis or the 2008 Lehman default: banks are not completely sure exactly who is exposed and to what extent. So they will shorten and/or pull lending lines to other banks.

The immediate impact of a catastrophe event like that would be very messy. So we can expect liquidity stress in the market certainly, and for banks that are still overly reliant on short-term unsecured wholesale market funding it will be painful.

That said, the defense still has a few cards up its sleeve. The big dissimilarity with 2008 is that markets are much more pessimistic anyway, and a catastrophe event such as a sovereign default would not be entirely unexpected.

Secondly, banks have learned the lessons of 2008 and have termed out much of their borrowing, and reduced their reliance on the interbank market by dint of greater use of secured ('repo') funding.

Thirdly, central banks have gone to considerable lengths to preserve interbank liquidity, with various measures that have included lowering eligibility criteria to obtain central bank funding. So ultimately while we can certainly expect continued volatility and harsher interbank conditions, we should not necessarily expect a repeat of the 2008 experience .

Of course in the current environment, there is very little for the market to be positive about, which is why the gold price is hovering at the $2000 mark. If it is touching $2500 by year’s end, this will tell us all we need to know about market sentiment. It is such negative sentiment that will drive market participants’ behavior, not cold logic, which is why it makes sense to view the threat of another liquidity crunch as real.

Time perhaps for the European Central Bank to restore its 1-year repo funding facility? And yes, time for some more positive economic statistics!

Short sale fraud plagues the housing market - Jul. 14, 2011

Short sale fraud plagues the housing market - Jul. 14, 2011

Top HAMP servicers stop getting payments - Jun. 9, 2011

Top HAMP servicers stop getting payments - Jun. 9, 2011

Foreclosure Solution

The current U.S. housing market and national financial crisis has caused untold stress and heartache for many American families. Foreclosure is one of the most devastating financial challenges that a family can face and one that many times can be avoided. The options available to Port St Lucie-area residents for foreclosure are many. Following is a brief explanation of these solutions, including their benefits and drawbacks:
Reinstatement
A reinstatement is the simplest solution for a foreclosure, however it is often the most difficult. The homeowner simply requests the total amount owed to the mortgage company to date and pays it. This solution does not require the lender's approval and will 'reinstate' a mortgage up to the day before the final foreclosure sale.

• Benefit: Does not require the mortgage company or lender's approval.
• Drawback: Requires that a homeowner be able to pay all back payments, fines and fees.

Forbearance or Repayment Plan
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe.

• Benefit: Allows the homeowner to make back payments over time.
• Drawback: Requires that a homeowner be in a financial position to pay not only their current mortgage, but also a portion of the back payments owed. Some mortgage companies will require a homeowner to 'qualify' for forbearance.

Mortgage Modification
A mortgage modification involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These typically result in a lower payment to the homeowner and a more affordable mortgage.

• Benefit: Reduces the payment a homeowner is required to make on a monthly basis and may reduce the principal balance of the loan
• Drawback: Requires that a homeowner 'qualify' for the new payment and will often require full documentation. Lender has to be actively pursuing modifications.

Rent the Property
A homeowner who has a mortgage payment low enough that market rent will allow it to be paid, is able to convert their property to a rental and use the rental income to pay the mortgage.

• Benefit: Allows homeowner to keep property indefinitely.
• Drawback: The issues that can arise with a rental property are many, and rent often does not cover the full cost of property ownership and maintenance.

Deed in Lieu of Foreclosure
Also known as a 'friendly foreclosure', a deed in lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property.

• Benefit: Many times in a successful deed in lieu, the lender will forego their right to a deficiency judgment.
• Drawback: Requires that a homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.

Bankruptcy
Many have considered and marketed bankruptcy as a 'foreclosure solution,' but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.

• Benefit: Does not require lender approval.
• Drawback: If a homeowner cannot afford their mortgage payment, a bankruptcy will only stall—not stop—the foreclosure process. Bankruptcy can be costly, is damaging to credit scores, and can only be declared once every seven years.

Refinance
If a homeowner has sufficient equity in their property and their credit is still in good standing, they may be able to refinance their mortgage.

• Benefit: In some cases, this will lower payments.
• Drawback: In today's market, a refinance will almost always raise mortgage payments, and is an expensive process.

Servicemembers Civil Relief Act (military personnel only)
If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Servicemembers Civil Relief Act. The American Bar Association has a network of attorneys that will work with servicemembers in relation to qualifying for this relief.

• Benefit: If qualified, this will lower payments on all consumer debt in addition to mortgage payments.
• Drawback: Must be active military to qualify.

Sell the Property
Homeowners with sufficient equity can list their property with a qualified agent that understands the foreclosure process in their area.

• Benefit: Allows homeowner to avoid foreclosure and harvest some of their equity.
• Drawback: In many cases today, homeowners do not have sufficient equity to sell their property without negotiating a short sale (see next solution).

Short Sale
If a homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more.

• Benefit: A short sale allows the homeowner to avoid foreclosure and salvage some of their credit rating. This also keeps foreclosure off the individual's public record, and in many cases will allow the homeowner to avoid a deficiency judgment. Borrower may qualify for another mortgage in as little as 24 months (as opposed to five years for a foreclosure).
• Drawback: Short sales can be a trying process in which a homeowner is best served by contracting with a qualified real estate agent to guide the way.

This represents only a summary of some of the solutions available to homeowners facing foreclosure. Please call me today for a free confidential evaluation of your individual situation, property value, and possible options.

Walk away from your mortgage? Time to get 'ruthless' - Jun. 7, 2011

Walk away from your mortgage? Time to get 'ruthless' - Jun. 7, 2011

House Panel OKs New Way to Fund US Home Mortgages - CNBC

House Panel OKs New Way to Fund US Home Mortgages - CNBC

Home prices: The double-dip is near

Home prices: The double-dip is near

Bank Can Seize Assets if You Default on Loan or Fall Into Foreclosure

If a Florida bank sells your foreclosed home and does not recover the entire loan amount, especially if you are a substantial mortgage holder, they can and probably will seize any and all of your assets.  In South Florida, almost 50% of loans are under default and a lot of their owners are concerned that the mortgage company can levy their income or even put their deposit accounts into a deep freeze.  Every state is different when it comes to banks seizing assets, and it also depends on the specific terms of the loans and accounts.  

Typical home loan issues don’t usually rear their ugly heads prior to foreclosures, they hit the homeowner once the bank has sold the home and walks away with less than what is owed to them.  Florida banks go to court for a “deficiency judgment” and win the right to seize assets. They pursue other assets, file liens on boats, planes and cars. 

Banks reserve the right to go after other assets if they find enough to tap into, as it’s expensive and very time consuming.  The mortgage companies are willing and ready to fight their court battles for multimillion-dollar homes or those owners who default on commercial properties.  They check for additional accounts in the same bank as where the mortgage is.  The terms of the savings or checking accounts dictate if they can move to freeze, sweep, garnish or seize any and all accounts to collect the money owed to them.

Smaller home borrowers are still at risk however, as banks may sell their deficiency judgments to collection agencies, who are properly staffed and prepared to spend ample time to come after the balance still due.  The judgments remain alive for up to 20 years. 

It’s extremely important for home borrowers to deal with their loan issues immediately, so as to avoid foreclosure and the many ugly issues that can and probably will follow.  The next best step is to do a short-sale through the bank, approach them honestly and fairly and clear up the loan issues.  Who wants to walk around for 20 years with a ticking time bomb on their back? 

 Get everything in writing, as some types of assets are off the table when banks start rooting around to collect money due on defaulted mortgages.
Unemployment Benefits, Social Security Checks, Veteran’s Benefits and some Railroad Retirement payments, among others, cannot be garnisheed at any time to cover a mortgage.  However, sometimes banks will mistakenly seize assets when monies, as mentioned above, are electronically deposited into individual accounts, and then you have to go to court to prove the funds came from exempt sources.

How the middle class became the underclass

How the middle class became the underclass

Lack of Credit Leads Some Borrowers to Controversial Payday Lenders - CNBC

Lack of Credit Leads Some Borrowers to Controversial Payday Lenders - CNBC