Citigroup stock has been hammered in the past 2 years as investor became increasingly worried about the exposure to troubled mortgage-backed assets. Analysts had warned that many of these assets would drop in value as housing defaults increased. Indeed, the number of foreclosures has been especially worrisome for CItigroup and other large financial companies.

What this investment does is much more substantial than just a cash infusion. THe governemnt is also providing protection from future losses, of which Citigroup would only be liable for 10%. Citi would have to eat the first $29 billion of losses.

Investors became increasingly alarmed when Citigroup failed to gain Wachovia’s deposit base as it had previously announced. Instead, Wells Fargo submitted a competing plan that was ultimately favored by Wachovia.

Investor sentiment was mostly positive and initially lead to an immediate increase in shares on European markets. US futures were also up, signaling a possible boost to the stock price. The stock had dropped 87% for the year on news of growing loan losses.

For homeowners with mortgages held by Citigroup, this is good news. Some strings were attached to this agreement. One major requirement was that Citigroup will have to work with delinquent borrowers, which will include loan modifications. CItigroup is required to do more to help distressed homeowners avoid foreclosure.

Citigroup is also prohibited from issuing more than a 1% dividend over the next 3 years. The governent however will receive an 8% dividend for its investment.

This move should restore some confidence among investors while helping Citigroup stop the bleeding from mortgage loan losses. Whether the actions will be enough remain to be seen. At a minimum though, it appears that the government has made a decision to allow Citigroup to remain viable, which is unlike the fate of other financial institutions that were allowed to fail.

We know that there were merits in the pilot program, and in the subsequent rollout to other lenders. By relaxing the standards on the mortgages it bought, Fannie Mae allowed for homeownership among borrowers that did not meet traditional guidelines for a conventional mortgage.

The problem was that Fannie Mae and Freddie Mac both were pressured into buying mortgages that included terms that were predatory in nature. Widespread use of exploding ARMs, negatively amortizing mortgages and interest only mortgages caused many homeowners to soon find themselves in dangerous situations. They are unable to afford their mortgage payments and they are unable to sell due to a lack of equity.

Now that the mortgage crisis has carried over into our nation’s financial institutions, it is important to reflect on how we got to this point of crisis. Additionally, it is important to find out why we ignored the warnings before we created this disaster. Steven Holmes made the following ominous statement in his article:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.

The Times article also made reference to a statement by an economist that studied the potential impact of easing credit restrictions:

“From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

These statements summarizes the increased risk and the consequences that could result from the easing of credit criteria prior to the subprime frenzy and subsequent meltdown. However, I doubt that even Holmes or Wallison could have predicted the levels of abuse surrounding exotic loan products.

The types of mortgages pushed on ignorant borrowers were unconscionable. Some homeowners had zero possibility of affording the mortgage payments beyond a couple of years. Others fell delinquent almost immediately.

Some homeowners were tricked into mortgages that resulted in huge balloon payments. They would have no money to pay these, and their credit situation would make a refinance impossible.

Other lenders encouraged flipping of mortgages, so that new fees could be added each time. The result was the fleecing of any equity from the home.

One of the most blatant causes of the subprime collapse was the use of “no doc” loans. Famous for requiring no substantiation of income or assets, these have since been nicknamed NINJA loans.

The government failed to protect homebuyers by allowing abuses by lenders and brokers. Additionally, they fostered an environment for such abuses by pressuring Fannie and Freddie to buy those mortgages. Eventually, these mortgages became the toxic base for today’s collateralized debt obligations (CDOs). There is no definitive answer as to the value or risk of many CDOs, and it appears that government intervention will be necessary to contain the damage made possible by its initial intervention.

Related Links

True Sources of Financial Crisis

1999 NY Times Article: Fannie Mae Eases Credit to Aid Mortgage Lending

After the call in telephone number was aired, phone calls immediately began streaming in. One caller said she had been on hold for almost 2 hours to get through.

Questions ranged from “how can I order my credit report?” to “what can I do to prevent foreclosure on my home?” We answered questions, offered feedback and provided referrals to supporting organizations that could provide further help.

Some of the common recommendations for seeking referrals included:

• For housing counseling help, contact a HUD-approved housing counseling organization. You can search for an approved agency by calling 1-800-569-4287 or visiting the US Department of Housing and Urban Development. You may also call the HOPE NOW hotline at 1-888-995-HOPE.
• For credit counseling help, seek assistance from a nonprofit charity that has a good rating with the Better Business Bureau.
• To order your free credit report, visit annualcreditreport.com or call 1-877-322-8228.

While we were unable to answer all of the incoming calls, we encourage viewers to still contact an organization that is ready to help them. All of us still take calls at our own agencies or place of work, and there are many other community resources available to meet those needs.

Here is footage from the WRAL call in segment for Five on Your Side: Credit on Call

Real Money Drain Was Providian

Washington Mutual acquired Providian in 2005 for $6.5 billion. It gained an estimated 10 million card holders, of which it also marketed profitable credit insurance and subprime mortgages.

However, there was an inherent problem with the Providian customer base. This is what caused the failure of Providian in the first place.

Providian was a master at marketing expensive, fee-laden credit cards to risky borrowers. They found that there was an entire class of consumers that had been up until then left out of credit card marketing.

Nevermind that many of these consumers could not afford the high cost of credit associated with these products. Providian was able to charge substantially more fees on their cards than what other card issuers typically did. The reason was that so many of their cardholders were low wage earners or had other financial difficulties.

What WaMu did not count on was the double whammy of credit card defaults and foreclosures by its customers. Even though they unloaded many of their mortgages onto Fannie Mae, they still had to bear the full loss of their credit card defaults.

WaMu’s clients had a higher than average rate of default for both credit cards and mortgage loans. It all stemmed from the targeting of poorer families by Providian prior to the 2005 sale to WaMu.

As a result, WaMu fell victim to massive losses because of its financially troubled customer base. The bank’s troubled balance sheet led to seizure of the bank by federal regulators. The entire process culminated with the sale of WaMu to JPMorgan Chase.

Everyone blames the subprime losses. Its true that these are to blame. However, the troubled makeup of the Providian customer base poisoned the Washington Mutual portfolio.

Now this base becomes part of JPMorgan Chase, which will have to find a way to stem losses and begin profiting from these customers. As an acknowledgment of such expected losses, JPMorgan Chase will immediately record a $31 billion reduction in the book value of these loans.

Still, JPMorgan Chase could benefit from this transaction. The benefit will not come from the troubled customer base however. The main benefit is the expansion of its banking operations to 5,400 branches in 23 states.

Foreclosure Prompts Suicides

On October 23, 2007, a couple in Prineville, Oregon gave up all hope. Raymond and Deanna Donaca died in their home of carbon monoxide poisoning after leaving their Cadillac Eldorado running in the garage. Fumes filled the house, killing the couple and their three dogs.

The couple was facing foreclosure and tried unsuccessfully to save their home. Investigators believe the couple committed suicide, believing that they were out of options.

In July, 2008 a Massachusetts homeowner faxed a suicide note to her mortgage company. Police Chief Raymond O’berg stated that the note advised that “by the time they foreclosed on the house today she’d be dead.”

Bidders that arrived at the home for the 5:00 auction found it surrounded by police cruisers. Inside, Carlene Balderrama lay lifeless, having used her husband’s high-powered rifle to take her life.

Other Debts Create Stress

Pressures from unpaid debt can affect people in different ways. In addition to mortgage problems, there are other types of debt that have similarly driven some people to extreme measures.

On July 29, 2008, 62 year old Emilio Saladriagas walked into the Rent-A-Center store in Bloomfield, New Jersey. The man set himself on fire in the lobby of the store in front of frightened customers and employees. It is believed that the sheer volume of late payment notices and collection calls promted him to commit the act.

Financial difficulties, along with infidelity are the 2 biggest reasons for marriage failure in this country. The stresses of collection efforts can put pressure on individuals, spouses, children and their employers.

Even churches and nonprofit organizations feel the impact, since they are usually the most effective outlet for financially distressed consumers. Still, these providers find that far too many debtors delay getting the help they need until it is too late.

If you find yourself in a bind, and are looking for an outlet, suicide is not the way to go. There are a number of charities that are available to help you get back on your feet. Even if you feel you have no options, your situation and future may still be much better than you realize. Get the help you need today.

 “A Declaration of Neighborhood Security: Safeguarding The Right to Protect Our Homes”

The Sheriff’s plan is designed to allow distressed homeowners the opportunity to understand their rights, get counseling help and follow through on a potential plan to avoid foreclosure. The pilot program has three stated goals:

1. Notify distressed borrowers about their rights through a massive publicity campaign.
2. Create a community consortium to examine community needs and recommend short and long-term legislative remedies.
3. Involve community residents and supporters to develop support for neighborhoods hit the hardest.

The Sheriff’s office has published a local hotline for residents to call so that they can learn how to avoid foreclosure. To get help now, call 215-334-4663.

Philadelphia Foreclosure Hotline:

(215) 334-HOME

HR 5830 is designed to stem the record foreclosures that have hit major housing markets across the nation. However, it does not go as far as some state laws that were enacted in response to the foreclosure crisis.

On Wednesday May 7, the amendment will be presented to the House for inclusion in the foreclosure bill. It is expected that lobbyists representing mortgage lenders will pressure members of the House to defeat the amendment on the floor.

The amendment would deny lenders the ability to avoid tough state laws by operating from another state with less stringent requirements. A similar preemption is what allows some credit card issuers to provide predatory loan products, such as fee harvester cards by basing operations out of South Dakota.

You may view the Miller-Latourette Amendment or call (202) 224-3121 and ask for your representative’s office to voice your opinion.

The approval process will likely take several months. The Board of Directors is hopeful that the urgency in the current housing situation will shorten the approval period.

Indeed, there are a number of people looking for homeownership help. On one side, we are trying to help people qualify for mortgages using more stringent loan criteria. Additionally, we are working to help people that have already bought their homes to avoid foreclosure and other financial problems.

HUD approval will help position Vision Credit to better assist clients with homeownership issues. It will allow us to receive direct referrals from HUD, from the North Carolina Housing Finance Agency, from RSVP and from our community partners. This approval will also open the doors for additional grant funding that we are diligently working to secure.

This will be a major benefit for current and prospective homeowners alike. The diversity of the housing counseling programs will provide benefits to a number of clients who have a multitude of needs.

We want our clients to know that we are continuously working to update and expand our current program offerings so that we may maximize our impact on our community. It is easy to only offer a couple of services, but we understand that we must expand our program offerings so that everyone receives the help that they need.

For now, the counselors at Vision Credit will be happy to answer questions and can provide housing counseling sessions at no charge. Thanks to a partnership between Fiscal Progress and Freddie Mac, we can currently help clients prepare for their first home purchase by pulling credit reports, providing credit scores and identifying credit improvement opportunities. For more information, contact Vision Credit at (800) 379-4720.

First of all, if you are having trouble making your mortgage payments, you should seek the help of a HUD-approved credit counselor. You likely will need the benefit of a budgeting session as well as to understand various mortgage delinquency or default resolution counseling options.

If you are trying to buy some time, there is another potential course of action. Steve Elias of NOLO has another idea that could be used by some homeowners facing foreclosure.

He has rightfully stated that you should always make the first (primary) mortgage payment whenever possible. What he has proposed is that if you cannot make all mortgage payments, you might be able to buy some time by skipping your second mortgage or home equity loan payments.

This is a risky proposition because it can leave you vulnerable to legal action. However, according to Elias, any legal action would likely include a judgment and another lien on your home.

This could represent a potential course of action if you cannot afford payments beyond your primary mortgage payment. However, you should understand that there are potential consequences of nonpayment of any debt.

This is a great article if you get a chance to read it. You may find it at NOLO.

Initial partners of Project Lifeline include Bank of America, Citigroup, Countrywide, Chase, Washington Mutual and Wells Fargo. Other lenders may be added to the list.

Critics say this does little more than delay the inevitable by 30 days. Others say that it gives distressed homeowners  a little more time without anyone breathing down their neck to resolve their delinquency.

For some homeowners, an extra 30 days might be enough time to receive a tax refund or a bonus. Others need to complete housing counseling programs for assistance. Still others may need more time to arrange a short sale, refinance or other solution.

Interested homeowners should take advantage of any delay in foreclosure by seeking help. The Hope Now alliance has been helping distressed homeowners find support through community partners. Call 888-995-HOPE for more information on getting help today.