Mortgage Rates Still Waiting for Bigger News

BY: MATTHEW GRAHAM
Mortgage Rates Still Waiting for Bigger News
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Mortgage rates were almost flat again today. Most lenders were just a hair higher in costs vs yesterday. The most prevalent conventional 30yr fixed quote remains 4.0% for top tier scenarios, but 3.875% is still available. In general, the bond markets that drive mortgage rates are remaining nimble until they have a better sense of what the Fed will do in the policy meeting 2 weeks from now.

As we frequently discuss, the Fed Funds Rate doesn’t dictate 30yr mortgage rates, but the two tend to correlate over time. Moreover, the initial lift-off from record low rates will be a big deal for financial markets in general. It would be hard for mortgage rates not to get caught up in the volatility–most likely in a bad way.

In other words, the sooner the Fed officially hikes OR the sooner the economic data makes investors think the Fed is going to hike, the worse it probably is for mortgage rates in the short term. Of course markets have already been doing their best to get ready for such an occasion, and that’s one of the reasons interest rates pushed higher in the first half of 2015.

With all this in mind, the Fed Vice Chair, Stanley Fischer made some important comments last week. He said there was a strong case for a September hike and that there was “a little over two weeks before we make the decision.” That was enough to let markets know that September is an imminent possibility for a hike. Fischer went on to say “we’ve got time to wait and see the incoming data.” With that, we know that these 2 weeks of data may be helping determine whether or not the Fed hikes in September. That makes Friday’s job report (this week’s biggest piece of data) especially important.

Loan Originator Perspective

“Rates hovered in recent ranges again today as Friday’s Employment Situation Report (aka NFP) for August looms. Some tepid economic news that might have boosted bonds (ISM, ADP jobs projection) were apparently disregarded, and as of mid PM, MBS are down slightly from the open, but not enough to incite lender reprices. For better or worse, it’s all about NFP for now, we’ll see if that’s still the case Friday. Happy with your pricing? Sure could do worse than locking.” -Ted Rood, Senior Originator

“Bonds are waiting for Friday’s jobs report to make their next move. It is always risky to float into this report, so only those that can afford to be wrong should consider to do so. I think you are safe to float overnight, but regardless of trading lenders will be reluctant to pass along improvements with the jobs report coming out on Friday. Recent data has shown economy weakening some, so I think Friday’s report will be good for rates…but this is just a guess. ” -Victor Burek, Churchill Mortgage

Today’s Best-Execution Rates

30YR FIXED – 4.0
FHA/VA – 3.75%
15 YEAR FIXED – 3.25%
5 YEAR ARMS – 2.75 – 3.25% depending on the lender

Ongoing Lock/Float Considerations

2015 began with a strong move to the lowest rates seen since May 2013. The catalyst was Europe and the introduction of European quantitative easing. Investors bet heavily the move lower in European rates and domestic rates benefited as well. But with those bets finally drying up in April and with the Fed seemingly intent on hiking rates in the US, May and June saw a sharp move back toward higher rates. The implicit fear is that global interest rates set a long term low in April, and have now begun a major move higher.

July said “not so fast” to that potential “big bounce.” Some of the data began to suggest the Fed is still a bit too early in talking about raising rates in 2015–particularly, a lack of wage growth or any promising signs of inflation. But Fed proponents maintain that low inflation is a byproduct of temporary trends in the value of the dollar and the price of oil, and that once these factors level-off, inflation will ultimately return. That side of the argument suggests that inflation could increase too quickly if the Fed hasn’t already begun normalizing interest rates.
With all of the above in mind, locking made far more sense for the entirety of May and June, and we were not shy about saying so. The second half of July saw that conversation shift toward one where multiple outcomes could once again be entertained. In other words, we went from “duck and cover!” to “let’s see where this is going…”

Bottom line, locking is always the safest bet and it was the only bet from late April through early July. Since then, there’s been room for other points of view. We should know a lot more about how valid those points of view are as August and September progress.

As always, please keep in mind that the rates discussed generally refer to what we’ve termed ‘best-execution’ (that is, the most frequently quoted, conforming, conventional 30yr fixed rate for top tier borrowers, based not only on the outright price, but also ‘bang-for-the-buck.’ Generally speaking, our best-execution rate tends to connote no origination or discount points–though this can vary–and tends to predict Freddie Mac’s weekly survey with high accuracy. It’s safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie’s once-a-week polling method).
About the Author

Matthew Graham
Chief Operating Officer, Mortgage News Daily / MBS Live
A former originator, Matthew began writing for Mortgage News Daily in 2007, covering a wide range of topics. Seeing a need in the marketplace, his focus increasingly shifted toward relating MBS and broader financial markets for loan originators. … more

 

2013 Review and 2014 Forecast – Part I: The Last Bubble

Photo Credit: Glenn Cantor


• Stock market crash, right on schedule. Time to Short?
• Is the Yellen Fed doing a Roy Young?
• China’s Great Wall of Money crumbles. Who will be America’s IMF this time?
• Why do they call them Emerging Markets? Because it’s hard to get your money out in an Emergency.
• Gold says, “I’m not dead yet!”

What? You thought it could go on forever? The asset bubbles and re-bubbles and re-re-bubbles?

How many times can your reflate a torn up rubber raft?

Time to chuck it out and get a new one.

Except that there isn’t a new one. This is it. The only one we got and we’re all in it together.

And, gosh, looking back on it, over the past 20 years, maybe we shouldn’t have taken it through Class V rapids twice loaded with beer kegs.

But here we are, cheek to cowl, in this giant, flaccid, half inflated economy, damage from the last two runs shoddily patched, headed over the rapids again. Without so much as a roll of duct tape.

While the usual bearish crowd was busy capitulating over the past six months and calling for continued growth and a good year for the markets in 2014, maybe not as booming great as 2013, I’ve been following the data and it takes me to a different place, to an epic and virtually unstoppable calamity.

Not that I didn’t try to build an optimistic case to counter my June 2013 forecast The Post-Market Economy – Part II: The Crash of 2014, it’s just that the data kept dragging me off that run.

The ineludible obstacle in the path of any hopeful line of argument is the fact that the current recovery from the 2008 credit crisis that followed from the condition of over-indebtedness and risk-polluted credit markets has since 2009 been achieved by means of credit inflation which has produced even greater over-indebtedness.

Credit risk pollution, rather than pooled in an obscure corner of the credit markets and seeping into the global financial system by way of pension funds, this time around has been injected into the foundation of the endogenous credit structure by means of the Fed’s “yield curve shaping,” a polite term used by academics in place of the rude but more truthful term “long-bond price fixing.”

I don’t blame anyone for wanting to turn and look the other way. God knows we’ve been through enough, especially those citizens of the world who have not benefited from the regressive reflation policies of central banks. These have primarily benefitted the asset holding classes. A recent Gallup poll reveals 58% of Americans think the economy is getting worse, and I doubt they are in any mood to hear bad news about the future. Economic doomertainment is out of fashion, and that fact alone tells you that popular sentiment is still dower. In hard times, American Idol-type hopertainment makes a comeback.

It’s not all bad news. Fortress America economic and policies are working their magic on the trade deficit, and are creating a beneficent spread between U.S. and world oil prices that is providing a big assist to the recovery. But to spy objects of economic beauty you have to crane your neck to see over the ugly fact that as recently as the year 2000 only $2.4 of new debt creation was needed to produce $1 of GDP growth and today that ratio is $4.6 to $1. Credit-financed growth is fun while it lasts, but historically has proved most miserable in reverse gear.

If you have a strong stomach and a firm grip, grab your helmet and jump in for a guided tour of the Last Bubble. But don’t close your eyes. You can’t read that way.

CI: Let’s get right to it: the stock market. What happened in 2013 and what’s in store for 2014? You noted the tops of the last two bubbles precisely, the first in March 2000 and the second November 2007. May 2011 you said the stock market was set to top-out at the end of 2013 then crash. Is it “Time to short” again?
EJ: The “time to short” calls in March 2000 and November 2007 were a luxury of knowing three things: 1) the process that was producing the asset bubble, 2) the events that were likely to end them, and 3) the monetary and fiscal policy response to the liquidity crisis, negative wealth effects, and recessions they produced. The difficulty with this particular asset price inflation — I won’t call it a “speculative bubble” because it isn’t — is that it was manufactured explicitly to produce positive wealth effects. It’s the result of the Fed’s large-scale long-bond price fixing operation known as QE.

That makes this asset price inflation fundamentally different than the previous two. The stock market has been about QE since late 2008 and is still about QE and, or of course, about Janet Yellen. The Bernanke Fed’s policy of spurring aggregate demand with positive wealth effects using QE succeeded to a far greater extent than he’s been given credit for. But it’s a short-term fix, intended to “prime the pump” until the “engine of the economy” catches, or so goes the Keynesian model for counter-cyclical monetary policy. Philosophically it is in the traditional of the Keynesian reflation prescription of deficit spending, and it should be noted that whether the treasury bonds are on the Fed’s or the Federal Government’s balance sheet they are still claims on the real economy. In reality it’s all fiscal stimulus. Whether the liability to the economy is on central bank or central government account will be a precious distinction when the cows come home.

CI: So… “Time to short?”
EJ: With respect timing of a correction, this second instantiation of the original asset bubble is as predictable as the previous two. The difficulty is that the nature of this asset price inflation is unlike the other two and without precedent. The trigger for the crash of this last and perhaps final asset inflation since 1995, well, I’ve been talking about that here for years. It ends with the Fed’s misguided and arrogant bond price fixing operation and with the transition of the Fed chair position to Yellen. The question is do we get a more or less continuous mean regression to the sans-asset-inflation level as in 2000 and again in 2008 or something else.

CI: In 1999 your forecast for the NASDAQ crash was 80%, with no recovery to tear 2000 peak for ten years or more. In 2007 you said the S&P500 destined to correct 40% in 2008. This time?
EJ: The difficulty in forecasting the extent is lack of precedent. The market correction in 2008 resulted from the stock market pricing in the recession that the mortgage credit bubble collapse and American Financial Crisis (AFC) was causing. The 2008 correction process was roughly analogous to the Nikkei crash in 1990 that priced in the recession caused by the collapse of Japan’s 1980s property bubble. My estimate of a 40% decline in the DJIA in 2008 was guided by that, and other inputs. But this asset inflation is without precedent, and the pre-conditions, too, are unique, so I think an estimate of the extent of decline is educated guesswork. My estimate in 2011 was for the early 2014 DJIA correction on the order of 60%, and I’ll stick with that.

CI: Let’s review that 2011 Real DJIA forecast.
EJ: In May of 2011 I saw the stock market coming out of the AFC in a second reflation of the original 1995 to 2000 asset bubble that motivated me to start iTulip in 1998. My forecast for the Real DJIA looked like this mid-2011. Basically I expected QE-fueled asset price inflation to carry the market up until the end of 2013.

Forecast is for the inflation-adjusted Real DJIA to rise to slightly over 100 until the end of 2013.

A Dec. 30, 2013 update to the April 2011 chart, below.

The Real DJIA reached just over 100 before starting to correct in Jan. 2014.

CI: This may be more than a correction, then? I mean, really? A 56% decline?
EJ: In mid-2011 I projected what I called the Extended Asset Price Inflation Case. That’s the green line. The Real DJIA was to climb from 83 at the time to just over 100 by the end of 2013. Early in 2014 it begins to price-in a mid-gap recession later in the year. The first chart was published April 2011 as the watermark indicates. The update was generated from the same excel file. The DJIA data are from the Dow Jones & Co. and the inflation adjustments updated using the latest data from the Real DJIA web site that we’ve been using since 2006.

CI: So the crash you forecast in mid-2011 for early 2014 is happening? Wish you’d reminded me of this chart sooner!
EJ: That would appear to be the case. However, a crash of the full extent of 56% shown spells complete disaster for the U.S. economy. I seriously doubt that the Yellen Fed will stand by, or at least I hope they understand the danger. The correction is a delayed reaction to the beginning of the end of the Fed’s bond price fixing operation, which ending I have warned for years was to produce chaos in the bond market as market participants thrashed around trying to figure out what the market price of a long bond is without the Fed’s interference in the market. By the way, a member asked me about this in December in the Ask EJ section here, which is why the update has a Dec. 30, 2013 watermark on it.

CI: So why not short it? If you got the timing right.
EJ: I’ve found over the past 15 years that it pays to wait for the second break after the initial correction in a crash process, if that indeed what this is. There are cross-currents, such as capital flight from emerging markets into the U.S., possibly stronger than expected GDP and employment numbers for Q4 2013. That’s why I’m reluctant to short it just yet. But I think it’s a mistake to think that the declines in the indexes as normal market fretting over a transition to tighter monetary policy as the economy picks up. In Part II we take a closer look at additional indicators, such as VIX.

CI: Have you tried to build the case for that, for the market to correct, the “healthy correction” that everyone has been hoping for, followed by more gains as the economy picks up?
EJ: Yes but it’s just not credible. The markets are far more precarious now than at any time since I started iTulip in 1998. At time of the peaks of the two speculative bubbles in 2000 and 2007, the over-priced assets at risk were confined to narrow classes of assets, the macro-economy was less fragile, inflation was higher, and so on, as I cover in the next part. Additionally the Fed has already used up interest rate policy as a anti-deflation policy tool. The Fed is now limited Zero Interest Rate Policy (ZIRP) options, namely, loading securities onto its balance sheet.

What if the Fed reverses taper and re-starts asset-price inflation? Only if the markets are convinced
that the Fed and Congress can via fresh stimulus can prevent the economy from falling back into recession.
Traded Value percent GDP usually rises and fall with the market. This time firms used low yields to
issue debt and use the cash to buy back stock and propel prices upward, no trading involved.

CI: In 1998 and in 2006 “bubble or not” was hot topic of debate. Today seems like everyone thinks the markets are a bubble. Robert Shiller last week said he thought the stock market was a bubble but also said he was buying stocks anyway.
EJ: Which doesn’t make much sense. Maybe he thinks it’s reached a permanently high plateau. After working this problem since 1996 when I started to do research for iTulip before I launched it in 1998, my frame of reference is the sweep of the past 16 years. I don’t see the markets today as a bubble but as a last-ditch, maybe final, effort to get the economy back to the inflated level it got to in 2000 as a result of an extraordinary infusion of credit into the economy around 1994.

The original 1995 to 2000 asset bubble has now been reflated twice.

CI: Call it a re-re-bubble?
EJ: The attention today is on the second reflation of the original asset bubble shown in red in the chart above. That second reflation shown in yellow/green is topping out now, but the important feature to note in the chart is the the area in blue. The series of market extremes within that area was produced by the distortion of the credit structure produced by a set of interacting processes related to the operating of the global monetary system. Remember, the Fed expanded its balance sheet from 5% to 24% of GDP, and deficit spending reached 10% of GDP in 2009, and the Chinese lent us $1 trillion to make this happen. If there is a “next time” after this latest reflation fails, then what does that mean for the Fed’s and U.S. government’s balance sheets? The Fed’s balance sheet isn’t really infinite, despite what Greenspan used to assert. Can it be expanded to $10 trillion or $20 trillion to hold corporate bonds and junk bonds and all of the other debt that grew out of the Fed’s yield curve manipulations?

CI: Okay, I’m properly terrified.
EJ: Both the speed and extent of the Fed’s response is key, and that depends on their fully understanding the danger, as Bernanke did before that last crisis, and have an actionable plan as Bernanke did and in fact published in a famous November 2002 Deflation: Making Sire “It” Doesn’t Happen Here speech. I go deeper into this in Part II but this is key: inflation is dangerously low today versus 2000 or 2007 at previous market peaks. The conditions are far more similar to 1929 when inflation was already very low before the market crashed.

CI: You’ve met Yellen. Do you thing she understands this?
EJ: I met her very briefly, not long enough by any stretch of the imagination to inform an opinion of how she’ll respond to a second AFC and mid-gap recession. I seriously doubt she’ll do a Roy Young.

CI: What’s a Roy Young?
EJ: It’s a Fed chairman move that causes the banking and credit markets to collapse, followed by a failure to meet the exploding demand for money that occurs in a debt deflation.

The Fed has popped every bubble, starting with the 1920s stock market bubble. A 1% rate hike from 5% to 6% by
the Fed when Roy Young was chairman did the trick.

The moral of the 1920s is this: A central bank that fails to nip an asset bubble in the bud in times of low inflation is asking for trouble. When the bubble gets out of control, measures taken to finally bring it down can also bring down the credit structure and economy. Everyone forgets that it was the Fed that popped both the housing bubble and the stock market bubble. Both times inflation was well over 3% and rising, and the Fed Funds rate over 5.5% at market peaks. Now the Fed Funds rate is virtually zero and the CPI has trended down from 3.9% in 2011 to 1.5% in Dec. 2013. For the first time since we started in 1998 the deflationist camp is in a strong starting position.

CI: What can the Fed do?
EJ: The Fed can always expand its balance sheet even further, and I think that will be part of the strategy, but the Federal government will have to open its wallet again, too. The Fed is already holding claims on the U.S. economy amounting to nearly 25% of GDP as a consequence of doing so much of the heavy lifting to halt debt deflation after the AFC.

How much more can the Fed’s balance sheet hold? 100% of GDP? More?

CI: Are you a deflationist now?
EJ: I’ve been pointing out for years that these policies, starting with the NASDAQ bubble when I was writing about that in the late 199s, are taking us down a dangerous road. The fact is the economy has not recovered from the last recession and if the markets crash now we are almost certain to have the mid-gap recession that I forecast last year for this year. Ultimately the debt deflates and my worry has always been, as spelled out in the Janszen Scenario since 1998, that the debt will ultimately be deflated against the exchange rate value of the US dollar and that will be anything but deflationary.

CI: A mid-gap recession is a recession that happens before the output gap created by the previous recession closes, right?
EJ: Correct. The Congressional Budget Office broke the Real Potential GDP data series that we’ve been using here for years and this required us to formulate our own. It clearly shows that the output gap from the past recession remains open. This explains the low inflation environment.

Real GDP vs iTulip Real Potential Output (iRPO) identifies bubble-related output surpluses A and B.
First policy makers enabled the housing bubble to re-create the conditions of high employment
and low inflation of the NASDAQ bubble before it. When that failed the Fed used QE to try to get
the economy back on the historical potential output growth trend but has failed.

CI: QE didn’t work?
EJ: It did exactly what it was supposed to do but I think the financial media have done a poor job of explaining how QE works.

CI: Can you summarize?
EJ: Sure. The theory behind QE is that if the central bank can inflate financial asset prices on household balance sheets then households will go out and spend between 5% and 15% of capital gains on current consumption, the so-called wealth effect. The two assets that make up approximately 80% of household balance sheets are equities and home values, the other smaller contributors being such assets as pension funds, cash deposits, and so on, totaling up to the other 20% or so. Clearly the big bang for the asset inflation buck is inflating equity prices and home values. QE has increased personal consumption by approximately $200 billion per year since 2008.

QE inflated household balance sheets by approximately $11 trillion over five years. This translates into
approximately $1 trillion in incremental personal consumption expenditures or $200 billion per year.

CI: If the market crashes won’t household balance sheets shrink again and won’t the benefits of the Fed’s asset price inflation be lost?
EJ: Yes the wealth effect works both ways, positive and negative. If financial assets take a hit then so will consumption. In any case, if you read the Fed papers on QE it isn’t a long-term solution to boosting demand. It wears off pretty quickly. The long-term solution is rising incomes not capital gains, and that means jobs. You can’t run a consumer economy on capital gains, you need incomes.

As you can see that in the chart above, there is a lag between the start of each QE program, a decline in interest rates, and a rise in financial assets on household balance sheet, then a correction in assets, then the next QE. The last QE sent rates down from 3.6% to 1.2% added $10 trillion to the value of financial assets. If that reverses quickly before unemployment declines to, say, 5% then the economy is in a world of hurt. So the Fed has created a bizzaro world where the stock market is at all-time real highs due to its own asset reflation policy and it’s forced to back off even though the labor market isn’t strong enough yet to provide the incomes to substitute for capital gains to drive consumption. By withdrawing QE now the Fed is in effect causing a correction in the asset inflation that it created for the purpose of closing the output gap with capital gains as a substitute for employment income. In a way Yellen by continuing with Bernanke’s taper policy is doing a Roy Young.

CI: What about all of the households that got out of stocks and are sitting on piles of cash? There are well positioned for a major correction, right?
EJ: Much has been said about retail investors staying out of the stock market after the AFC and it’s partly true.

Households are sitting on $800 billion in cash versus $100 billion before the AFC.

Still, cash is less that $1 trillion of the $64 trillion in total financial assets or 1/64th of the total. Corporate equities make up $25 trillion.

CI: How does the Fed’s asset purchases of bonds inflate stock prices? They aren’t buying equities.
EJ: The inflation doesn’t come about directly though equity purchases but through the bond market. The way that artificially low yields inflate equity prices is complex and we’ll talk more about it in Part II, but one channel is the flood of cheap credit into the corporate bond market.

Low interest rates compelled firms to borrow $407 billion per year since 2009 vs $133 billion per year in the previous recovery. Firms used the cash for acquisitions, stock buy-backs, and are hoarding more than ever.

CI: You’ve pointed out in the past that the Next Bubble can be identified as that asset which kept on rising right through the last asset-bubble era recession. What asset was that this time?
EJ: Again, I prefer to call this an asset bubble because it lacks the speculative fervor of a speculative bubble, but if you’re looking for an asset that never took a breather even through the AFC it’s corporate debt. From 2007 before the crisis to today corporate debt liabilities grew from 24% to 37% of GDP. Before that, during the era of falling interest rates since 1983 that created the FIRE Economy and for 24 years until 2007 corporate debt to GDP doubled from 12% to 24% of GDP. Then it grew 36% in six years.

Corporate balance sheets may have a lot of cash on them but offsetting this is a record level of debt.

CI: Problem?
EJ: It’s entirely logical for corporations to take advantage of low yields but the fact is that the corporate sector is now heavily leveraged and if the economy rolls over debt repayment competes with other uses for working capital, like capital investment and payroll. It could exacerbate the next recession.

CI: We’ll get your conclusions on the stock market and economy in Part II. I have to ask about gold. The “stocks and houses” business media had a field day in 2013. Best gold doomer article was Gold: Turns a wealth destroyer, bites dust. What happened in 2013? What’s in store for 2014?

EJ: My June 2013 article explains the the valuation of gold as governed by Good as Gold for Oil or GAGFO pricing. I figured if the trends that began in 2011 that improved the GAGFO value of the USD continued in 2013 then the gold price was going to keep falling. The chart below is from the article, per the watermark created May 22, 2013.

CI: If I’m reading the May 22, 2013 chart above right it says gold at $1200 by the end of 2013?
EJ: Yes, if the trends I hypothesized as the cause of the gold price decline since 2011 continued, which they did, then the model indicates a gold price of $1200.

CI: The gold spot price on Dec. 30, 2013 was $1,205.50.
EJ: Close enough.

CI: What’s in store for 2014?
EJ: Wait, let’s unpack exactly what happened from 2011 to the end of 2013 to bring gold down from the 1800s to the 1200s. Two developments have improved the GAGFO value of the USD, the budget deficit and trade deficit. Since 2011 the rate of increase in government outlays has declined as GDP grew versus both growing together as typically happens, including a 1% of GDP cut in defense spending. More significantly for gold there’s been a radical reduction in the oil trade deficit. Of these two factors the oil trade deficit contributed by far the most to the decline in the gold price in 2011 and 2012. As oil imports declined, the accumulation of excess USD reserves by oil producing countries, which UST reserves they hedge with gold, also declined. Then in 2013 funds dumped their gold ETFs. They did this in order to not look stupid for holding gold instead of more equities for another year as stock prices went up and gold went nowhere. It was this selling of gold via ETFs that sent gold prices down in 2013.

CI: Is gold coming back to life in 2014?
EJ: Oil trade deficit improvement or not, other factors of the GAGFO value of the USD matter, specifically the budget deficit and the Fed’s balance sheet, both of which are claims on the real economy. Somewhere, no one knows exactly where, there is a threshold which when passed causes foreign holders of UST to assess that repayment of the current debt plus the additional debt need to reflate the economy is, over the average duration of all of the bonds, mathematically impossible. If that threshold is surpassed in this next crisis then the markets as we see them today are indeed the Last Bubble. If we have another market crisis like we had in 2008 or worse, those of us with exposure to the equity markets will be glad we have gold to hedge the risk of a fresh crisis.

2013 Review and 2014 Forecast – Part II: Global Manic Depression

manic depression (noun): the condition of an economy stuck in an
output gap that was created by a recession that was produced by
the collapse of an asset bubble, which output gap the central bank is
attempting to close by stimulating the economy with a new asset bubble.

• US macro good news, bad news — mostly the latter
• Fed fails to fill the output gap with asset price inflation
• The Fed broke my yield curve (recession indicator)
• We don’t need your stinking oil
• GAGFO or bust
• Stock market peak and here we go again

In 2007 I debated respected deflationists like Steve Keen who agreed with me that a credit crisis and recession were imminent. However, he and they were convinced that a price deflation and debt default spiral was to follow. It was my view that the Fed was going to throw everything and the kitchen sink at the credit markets and halt the deflation process.

That was then.

Back then I could point to the Fed’s plans going back to 2003 to prevent a repeat of The Great Depression. In 2008 as in the early 1930s the faulty credit structure of the American financial system was vulnerable to crisis and the Fed knew it, thus the extensive planning. Both credit crises happened for similar reasons: unregulated investment banks made a preposterous number of bad loans in the money markets, in the 1930s in the stock market and in the 2000s in the housing market. In the 1930s instance the extreme demand for money in debt deflation quickly overwhelmed the liquidity provisions of the System, then limited by the statutory restrictions of the gold standard. In 2008 and 2009, sans the golden handcuffs the Fed was able to expand its balance sheet by trillions of dollars to reflate at will.

The deflation debate in 2007 was far ahead of the mainstream economics “conversation.” The context of the inflation versus deflation debate was a credit crisis and deep recession that at the time few believed was likely but that we assumed was inevitable. The inevitability of a credit crisis was doubted by the mainstream business and economics community well into 2008 when my Harper’s article “The Next Bubble” was published. Also, the idea that monetary policy had made the U.S. economy asset price inflation dependent was viewed at the time as controversial.

Since then much has changed. The predicted credit crisis occurred and the Fed used most if not all of the policy measures described in its playbook to prevent a run-away debt deflation spiral. In 2013 Bernanke at press conferences defended QE as an effective tool of economic policy because it “inflated asset prices.” The solution to the credit crisis was the same: more credit. But more credit means more debt, and more debt means a bigger crisis later.

Through the past two asset price booms, busts, and reflations since the late 1990s the Fed has trained the markets to wait for the next crash as a buying opportunity for the inevitable reflation. Market consciousness today is infused with a manic depressive, bi-polar rationalization of the irrational conditions of the credit system.

The 1998 Janszen Scenario theorizes that at the end of this asset price inflation, deflation, reflation cycle lurks a final deep deflationary process to cap the asset price inflation era, to which monetary authorities and legislatures respond again with a final credit expansion. But, that rather than expanding the purchasing power of bonds it causes a loss of faith in the monetary units in which the bonds are denominated. A global US dollar, euro, and yen bond and currency crisis follows.

With the advent of QE I theorized that the trigger for this final act of the play that started its run in 1995 is the Fed itself. QE distorts the very foundation of the global credit structure, US Treasury bond, which foundation replaced gold in the early 1970s. With QE the Fed has achieved the impossible under the gold standard. It has taken away the last reliable measure of credit risk from the markets and put it into the hands of technocrats.

Adjusting interest rates on the short end of the yield curve via open market operations has long been accepted as the Fed’s primarily policy tool for meeting its mandate to maintain a stable price level in the economy. Generally short in duration, adjustments to the Fed Funds Target Rate in either direction up or down lasting six months to two years at most, these interventions in the money markets are known to the markets as temporary. But QE by the world’s reserve currency issuer has been going on since late 2008, for more than five years. That is not an intervention. It is price fixing, pure and simple. It is the Fed using its balance sheet against the collective balance sheet of market participants to set the price of the bonds that form the base of the credit structure the way gold used to, except that no one country could control the price of gold. No single country issued gold.

Here’s the thing. After five years of long bond price fixing, how can market participants know the market price of a 10-year UST?

The Fed Funds Target Rate is an afternoon sea fishing excursion a mile from the dock, the shore in clear view and the passengers on the boat able to judge the distance from the shore and the time to return to it (yield to maturity). QE is a week spent floating in the ocean in dense fog. All around the passengers as far as they can see is grey, then dark, then grey again. Then the Fed decides to turn the ship toward shore (taper). As the shore comes into view, passengers are finally able to judge their distance from shore. The reality of their position will invariably come as a shock, as either too close or too far, for a week of orientation — a continuum of price signals — has been lost.

The rational response for the passengers of the ship to the epiphanous bond price discovery? Panic.

The slowing of the Fed’s bond price fixing operations in the fall of 2013 has so far sent two bodies overboard: the U.S. Muni market and emerging market bonds.

Here I make the argument that, philosophically, the Fed’s decision to reduce asset purchases is equivalent in form and degree of misjudgment to the error made by Fed chairman Roy Young in the 1920s to tighten monetary policy at a time of an asset price peak and low inflation, when the underlying credit structure was fragile, to put it politely, perverse to put it bluntly.

In a careful study of the six economic eras of the last century I show that incoming Fed chair Janet Yellen Fed faces a unique set of challenges. The next crisis will be far more difficult to manage than the last, and there is neither evidence of a plan nor evidence of awareness that a plan is needed. The apparent obliviousness of the risks presented to the global economy by Bernanke’s post-American Financial Crisis policies lends a sense of unreality to the economic scene in 2014. more…

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6 Nonverbal Hacks for Your Website So it Captures Attention and Converts – Copyblogger

Written by: Vanessa Van Edwards

Image of a mime staring at camera, mouth agape and hands open with palms facing camera

You have 0.05 seconds to make a good first impression online.

That’s only 50 milliseconds to hook someone — according to researchers at Carleton University.

Most important, this happens before a user reads any of your content. So, you have to capture their attention with your website’s nonverbal cues.

Do you have any of the following?

  • Low conversions
  • High bounce rate
  • Short average visit duration
  • Low sales
  • Slow traffic

Then you need to optimize your website’s nonverbal first impression.

I’m a human behavior hacker, and I’m going to show you how to use science to optimize your website.

Why human behavior science?

Let me be blunt:

If you don’t understand online human behavior your website will fail.

Sure, you can produce killer content — and that’s a great start. But even if your blog unveils the meaning of life while saving baby pandas from grumpy cats, it’s not enough.

You have to understand your reader’s behavior to get them to convert. This is all about making sure your website produces a killer nonverbal first impression.

Below I have laid out six scientifically proven hacks to improve your website’s visual cues.

Hack #1: Understanding eye patterns

Do you know how your readers see your website?

The Poynter Institute tracked eye behavior as users read various web pages. They found that reader’s eyes follow an F-Shaped pattern on a website. Typically they start in the upper left hand side of a web page and move across and then down, across and then down.

See how we have added headings and buttons in the F pattern on our website:

science-of-people

Why this matters: If you know where people’s eyes naturally flow, you can place your content, headlines, and buttons within the eye map.

Hack #2: Use nonverbal trust indicators

Trust is a huge part of an online first impression. But you can’t just say you’re trustworthy … you have to show it.

It’s actually fairly easy to demonstrate trust nonverbally. Here’s how:

  • Show your hands. Body language research has shown that our hands are our best trust indicators. Meaning that when people can see our hands, they feel they can trust us. When choosing photos or filming videos for your website try to show your hands as much as possible.
  • Understand facial expressions. There are seven universal facial expressions. You want to make sure that the photos and videos on your website are conveying the right message. The biggest mistake I see is when people use photos of themselves smirking — this is the universal expression for hatred or contempt, not happiness (as many people believe).

We relaunched our website to include a header image showing my hands and photos that only showed positive facial expressions. Check out the difference in the number of visits after the relaunch (The spike is the day we announced the relaunch to our users):

traffic-spike

Why this matters: Picking the right photos for your website can be incredibly stressful—but they matter! Follow the rule of hands and facial expressions to guide you.

Hack #3: Initiate action nonverbally

When a user comes to your website you want to give a positive first impression and then have them take action. How can you do this nonverbally?

One way is to use hand gestures. You can use your hands to gesture where you want people to look at or what you want them to do.

For example, this is the confirmation page people get when they sign up to our Monthly Insights.

vanessa-happy-dance

As you can see, I ask them to follow me on Twitter. The previous page had only text and converted people to Twitter about 0.6 percent if the time. When we added the image it increased to 5.4 percent.

You can also use eye gestures. You do this by using images in which the person is looking toward the action item.

For example, if I want people to keep scrolling, I put in this image — nonverbally telling them to look down.

vanessa-eyes

You can also do this to get people to watch videos or click on buttons.

Why this matters: You want people to take action on your website. You can do this by guiding people nonverbally.

Hack #4: Focus where your visitors focus

Dr. Hong Sheng at Missouri University of Science used an eye-tracking software with an infrared camera to monitor eye movements of students as they scanned certain websites. She found that there were certain features on a website that drew the most attention:

  1. Logo
  2. Main navigation menu
  3. Search box
  4. Social networking links
  5. Primary image (whatever image was at the top of the repeating header or page)
  6. Written content
  7. Website footer

Why this matters: Trying to decide where to focus your efforts? These are the areas that most help your readers decide what they think of your website.

Hack #5: Website color psychology

In another Missouri University study, students indicated that color had a large effect on how much they liked or trusted a website.

Leo Wildrich at the Buffer Blog has an amazing post on the science of color and what each color represents for branding. Here are some top colors and what subconscious messages they send to users:

  • Blue: loyalty, stability, tranquility
  • Yellow: happiness, optimism, youth
  • Green: healing, success, hope
  • Black: power, mystery, professionalism
  • White: purity, cleanliness, innocence
  • Red: passion, sexuality, intensity
  • Purple: royalty, spirituality, luxury
  • Orange: energy, fun, warmth

Why this matters: Your nonverbal brand needs to match your mission. Using colors is an easy way to showcase what you are all about.

Hack #6: K.I.S.S. (Keep It Simple Stupid)

Embrace white space.

Stick to the basics.

Keep it simple.

A Harvard study found that the more complex a website, the less appealing the website is to visitors.

Here is an example of a website with high complexity (and therefore is not very appealing):

worlds-worst-website

This is the aptly named World’s Worst Website.

And here is a website with a low complexity score (so it is therefore highly appealing), the also-aptly named Simple.

better-banking

Google Research also found that users like “prototypical websites,” or websites that fit into a user’s expectations of the category. For example, ecommerce websites shouldn’t look too different from other ecommerce websites, blogs shouldn’t be organized too different from other blogs, et cetera.

Why this matters: Less is more.

Content isn’t everything

If you don’t make a good first impression, people are less likely to read your content.

Remember, your written content actually has very little to do with your first impression. Nonverbal cues are far more important than your words during those 0.05 seconds when visitors are developing their initial feeling about your site.

And if you don’t build trust and make it intuitive for visitors to navigate your site, they most likely will not sign up, purchase, or come back. Because nonverbal cues are critical to the success of your calls to action.

So keep on creating useful content, but don’t forget to pay attention to (and optimize) the nonverbal signals your website is quietly communicating … because your visitors hear them loud and clear.

Which of these six hacks are you most excited to implement right away?

Are there others you’ve used to achieve better nonverbal communication on your site?

Tweet me or join the discussion on Google-Plus.

Flickr Creative Commons image via Len Radin

About the Author: Vanessa Van Edwards is an author and behavioral investigator. She runs ScienceofPeople.com, a human behavior research lab. Get more from Vanessa on Twitter.

 

An $18 Million Lesson in Handling Credit Report Errors – NYTimes.com

Your Money

 

 

Steve Dykes for The New York Times

Julie Miller’s credit score topped 800, until Equifax mixed up her credit file. A jury gave her $18.4 million in damages.

 

 

 

 

Even after sending more than 13 letters to Equifax over the course of two years, Julie Miller could not get the big credit bureau to remove a host of errors that it inserted into her credit report.

Some paperwork associated with Julie Miller’s ordeal. She wrote to Equifax more than 13 times.

 

 

That indifference should surprise no one who has ever tried to deal with any of the three big credit reporting agencies, Equifax, TransUnion and Experian. “You feel trapped, like you are in a box,” said Ms. Miller, a 57-year-old nurse who works in a dermatologist’s office. “You have no control over this, and you can’t call them up and say, ‘You’re fired.’ ”

So she tried suing. That worked.

A jury in Federal District Court in Portland, Ore., last week awarded her a whopping $18.4 million in punitive damages, which, according to consumer lawyers, is the largest individual case on record.

If you think this has taught Equifax and the other credit reporting companies a lesson, you are a lot more optimistic than close observers of the industry. They say that despite the huge judgment, little is going to change for the millions of Americans who discover errors in their credit reports.

The credit bureaus are willing to tolerate these errors — and settle with consumers out of court — as a cost of doing business, according to credit experts and lawyers who work on these cases.

“Their business model is to keep doing the same thing over and over again,” said Justin Baxter, the lead lawyer on Ms. Miller’s case. “They can buy off a number of consumers with small dollar amounts and get rid of the vast majority of cases. To Equifax, that’s the cost of doing business.”

Ms. Miller made every effort to fix her report, exactly as consumers are advised to do. She initiated the company’s dispute process about seven times, and in most instances, Equifax would spit back a form letter saying it needed more proof of her identity. So she sent her pay stub and her phone bill. When that didn’t work, she sent her pay stub and her driver’s license. And when that failed, she sent her W-2 form and an insurance bill — at least three times.

But nothing ever changed: Ms. Miller, a model financial citizen who once had the credit score to prove it, had become mixed up with another, much less creditworthy Julie Miller. After she was denied a line of credit from KeyBank, she discovered 38 collection accounts on her credit report, none of which belonged to her, along with an inaccurate Social Security number and birth date. Her financial life was no longer her own.

Mixed files, as they are known in the credit industry, most frequently involve people who share common names with individuals who have similar Social Security numbers, birth dates or addresses. These errors are notorious for being among the most difficult to fix, credit experts said, and require human intervention to untangle the mess. But given the huge number of disputes, the process to address them is largely automated. And that is the excuse the industry advances to consumers who get stuck in its web.

The bureaus often outsource thousands of disputes daily to workers overseas. Those workers, often overwhelmed by the sheer volume of cases, are largely told to translate the problem into a two- or three-digit code that defines the gist of the problem (account not his/hers, for instance) and feed it into a computer.

But that process won’t untangle a mixed credit report. The reason files become mixed to begin with can be traced back to the computer formula the bureaus use to match credit data to a specific person’s credit report. It allows credit data, say a late payment on a credit card, to be inserted into a person’s file even if the identifying information isn’t an exact match. In other words, the system might add a late payment to the credit report of someone like Julie Miller even if the Social Security number is off by two digits or a birth date is off by two years, but enough of the other identifying information matches. That’s roughly what happened to Ms. Miller.

Partial matches aren’t always wrong, of course. Solid estimates on the number of mixed files are hard to find, though a 2004 study from the Federal Trade Commission said that partial matches occurred in about 1 to 2 percent of credit files, citing data from the bureaus. That might not sound like much, but when you consider that there are 200 million individuals with credit files at each of the big three bureaus, that translates to two million to four million consumers.

Other estimates put the number of actual mixed files at less than 0.2 percent to nearly 5 percent. The F.T.C.’s report said that mixed files were not always harmful to consumers because most credit account information was positive.

 

To that I say: Consumers with mixed files are supposed to take comfort in the fact that their credit report doppelgängers, on the whole, are likely to pay their bills?

There is a reason the bureaus operate this way. They would rather err on the side of including too much information in your credit report than leave information out, according to consumer lawyers and advocates. They also need to account for typos and small errors that can cause the credit agencies to leave out information — both good and bad credit behavior. Financial services firms are paying the bureaus to receive the most complete financial profile possible, even that means sacrificing a bit of accuracy. (The F.T.C.’s report said that lenders might actually prefer to see all potentially derogatory information about a potential borrower, even if it can’t all be matched with certainty.)

“The bureaus would rather accept the possibility of some mixed-file risk rather than the possibility that a debtor who owes a debt gets away with it,” said Leonard Bennett, a consumer lawyer in Newport News, Va., who said he has about 20 active mixed-file cases in any given month.

The dispute process is supposed to catch the people who fall through the cracks. But as people like Ms. Miller can attest, it doesn’t always work. The Fair Credit Reporting Act, the law that governs the big bureaus, requires the agencies to provide a reasonable investigation. Ms. Miller’s lawyer said their litigation revealed that there was no investigation at all. (It’s worth noting that Ms. Miller had problematic credit reports at the other two bureaus, but those agencies resolved the matter.)

“They testified that they get something like 10,000 disputes a day, so they don’t have the time to look at each one,” Mr. Baxter said. “Whether it is because the person has too many disputes to process or they choose not to, that is where the system falls apart.”

What else could she have possibly done? I asked the credit bureaus. Equifax declined to comment, and would only say that it was “very disappointed in the jury verdict” and was exploring its options, including an appeal. The other two agencies didn’t offer much guidance either, though TransUnion pointed out that the credit reporting industry resolved 70 percent of consumer disputes within 14 days.

Ms. Miller, however, had to endure repeated phone calls from debt collectors, who threatened to sue. She couldn’t co-sign a credit line for her son who was in his freshman year of college, and she said she put off refinancing her mortgage. It also meant that she couldn’t co-sign a car loan for her disabled brother. And plans to build a workshop on their property, which required a loan, would have to wait.

The jury’s giant award to Ms. Miller is generous and goes a long way toward compensating her for those lost opportunities. But lawyers say the initial awards are often reduced after being reviewed by the trial judge. An out-of-court settlement for the typical mixed-file case might be $50,000 to $250,000, depending on the case, while settlements for other errors may be far less.

Will Ms. Miller’s award have any lasting effect on the industry? Mr. Bennett, the consumer lawyer, is one of the optimists. “This case will change the calculus,” he said. “If they have to pay $2.5 million every time one of these folks gets to court, they might have to reconsider their procedures.”

It’s more likely, though, that the Consumer Financial Protection Bureau, which began overseeing the large credit bureaus last September, will have more impact. It has broad authority to perform on-site examinations, check records and examine how disputes are handled. Consumer advocates have long suggested that the credit agencies tighten up the way they match up data with consumers reports and strengthen the dispute process.

“Big punitive penalties may help force the bureaus to upgrade their 20th-century algorithms and incompetent dispute reinvestigation processes,” said Ed Mierzwinski, consumer program director at the United States Public Interest Research Group. “But C.F.P.B.’s authority to supervise the big credit bureaus is one of the most significant powers Congress gave it.”

Nearly every expert I spoke with conceded that Ms. Miller had few options. “She had two choices, and they both stunk,” said John Ulzheimer, a credit expert who has served as an expert witness on more than 140 credit-related lawsuits. “She could live with it, or she could hire an attorney.”

 

Default Mode: How Ocwen Skirts California’s Mortgage Laws

Capital and Main  | by  David Dayen
Posted: Updated:

capitalandmainnewslogo

The following story was reported by Capital and Main and published here in collaboration with The Huffington Post.

Lost documents. Incomplete and confusing information. Mysterious fees. Payments received but not applied. Homeowners waiting for a loan modification and suddenly placed in foreclosure. A nightmare of uncertainty, frustration and fear.

These incidents, described to me by numerous homeowners, mortgage counselors and defense lawyers, were supposed to be a thing of the past in California. After revelations of fraud and abuse throughout the mortgage business, including tens of billions of dollars in corporate penalties, state Attorney General Kamala Harris pushed through the 2012 California Homeowner Bill of Rights (HBOR), designed to standardize conduct by mortgage servicers – those companies that manage day-to-day operations on mortgages by collecting monthly payments and making decisions when homeowners go into default and seek help.

Yet one company allegedly committed all these HBOR violations: Ocwen, the nation’s fourth-largest mortgage servicer. According to the complaints, Ocwen (“New Co.” spelled backwards) either skirts around the edges of California law or simply ignores it, causing headaches for homeowners – and potentially illegal foreclosures. (Ocwen did not respond to a request for comment for this article, but in the past, it has pointed to its track record of assisting homeowners to avoid foreclosure.)

“Ocwen is one of the worst servicers in the state,” says Kevin Stein, Associate Director of the California Reinvestment Coalition, a nonprofit advocate for low-income communities.

Ocwen may not even be aware of the rules of the road. One lawyer, who requested anonymity because his client is currently negotiating with Ocwen on a mortgage, described a conversation with one of the company’s specialized home retention consultants. The lawyer asked the Ocwen representative about the servicer’s HBOR compliance efforts and the representative replied that she had never heard of the statute, had no training for it and knew of no process established to conform to it.

“Ocwen doesn’t give a hoot about the Homeowner Bill of Rights,” the lawyer told me. “They ignore the statute. It’s cheaper for them to ignore than to implement.”

Ocwen’s suspected flaunting of the law could be traced to its aggressive growth strategy. Until the past few years, the largest mortgage servicers were divisions of major banks, such as Bank of America, JPMorgan Chase and Wells Fargo. After being sanctioned for their own misconduct, these banks were forced to adhere to new servicing standards that increased their costs, as well as new, higher capital requirements associated with servicing that came from the Dodd-Frank financial reform law. As a result, banks commenced a fire sale, selling off trillions of dollars in servicing rights to non-bank firms like Ocwen. These non-bank servicers don’t own the loans, only the rights to service them, in exchange for a percentage of the monthly payments.

Ocwen calls itself a “specialty servicer,” with a particular focus on subprime mortgages, loans that often come to them already in trouble. Managing delinquent loans is a “high-touch” business, demanding lots of personnel to work with homeowners to negotiate affordable payments or foreclosure proceedings. Yet Ocwen has claimed to its investors that it can service these loans at 70 percent lower costs than the rest of the industry, raising red flags from regulators.

“I don’t think you can handle subprime mortgages by being efficient, with better computers,” says Benjamin Lawsky, head of New York’s Department of Financial Services. “You’re going to have a lot of people looking for help, and they’re not just a number, they’re real people with real problems who need help in real time, right now.”

What Ocwen calls efficiency has already led to significant misconduct. The Consumer Financial Protection Bureau (CFPB) and 49 states, including California, fined Ocwen $2.1 billion last December for “violating consumer financial laws at every stage of the mortgage servicing process.” Many of the stories from California homeowners mirror the charges in the CFPB settlement – overcharging homeowners, misplacing documents, illegal denials of loan modifications and more. And Ocwen also violates HBOR, the controlling state law for mortgage servicing.

Janice Spraggins of NID Housing Counseling Agency says that Ocwen failed to honor prior agreements that her clients secured with their old mortgage servicers. This is consistent with a recent report from CFPB citing numerous problems with mortgage servicing transfers, including lost documents, unapplied payments and homeowners who, having already started down the road to fixing their problems, have had to start all over again.

“The homeowner goes to the back of the line,” Spraggins says. “For whatever reason they’re not on the same page [as Ocwen].”

Other homeowners complain about how Ocwen satisfies the state requirement for a “single point of contact” — the one individual who is aware of their unique situation and who they can consult for timely updates on the status of their loan. Ocwen designates a “relationship manager” to handle these cases.

But homeowners say they get no specific email or phone number for their relationship manager; they must call the main customer service line, schedule an appointment and wait to hear back. The relationship manager, Ocwen clients allege, doesn’t always call at the designated appointment time, meaning the homeowner must go through the process all over again, dealing with customer service reps who frequently give out contradictory or misleading information.

“It doesn’t appear to be in compliance,” says Lauren Carden of Legal Services of Northern California, when describing Ocwen’s procedures. “They give you a single point of contact, but if you can never reach them, effectively you don’t have one.” Carden cited one client who tried for four months to reach their relationship manager, and only got the person on the phone once.

Saleta Darnell, a Los Angeles County child-support officer who lives in South Los Angeles, criticized Ocwen for adding charges to her loan, which the company took over from GMAC.

“I had a $1,389 monthly payment. When it got to Ocwen, the payment went up to $1,469,” Darnell says, adding that Ocwen had increased the total loan balance by $60,000 without explanation. Darnell immediately requested a loan modification. After several weeks of waiting, Ocwen notified Darnell by mail that she didn’t qualify for anything but an “in-house” modification. The in-house mod lowered the balance to the original amount, but with a significantly higher monthly payment of $2,316, more than half Darnell’s take-home pay.

LaRue Carnes, a Sacramento homemaker, needed a loan modification after her husband lost his job nearly two years ago. OneWest Bank transferred her loan to Ocwen last August. She had trouble getting her relationship manager on the phone, and had to deal with customer service representatives, often located overseas with limited English proficiency, who, Carnes says, never told her the same information twice.

“Dealing with the people answering the Ocwen line has been some of the most frustrating conversations of my life,” Carnes says.

Carnes says Ocwen lost the financial documents she submitted for her loan modification application on four separate occasions, which would violate state HBOR prescriptions for timely responses. Meanwhile, in the months of waiting, the family’s arrears ballooned from $11,000 to $54,000. And Ocwen would not post the payments Carnes did send in on time until as late as the 18th of the month, triggering additional hits to the couple’s credit report.

“How can you not process a check within your own system?” Carnes wondered. “I don’t understand how a company can do business like that.”

One reason is that Ocwen has a captive audience. Homeowners have no say in who services their loan. They get passed around from one company to the next, with the servicer having enormous power to tack on fees, deny loan modifications or pursue foreclosure. Homeowners experiencing difficulties must still work with Ocwen to keep their homes, creating pressure against speaking out. One lawyer had an Ocwen representative respond to a threat of a lawsuit for HBOR violations by asking, “Does your client want a modification or not?”

The homeowner who requested anonymity because of an ongoing negotiation submitted a completed loan modification application to Ocwen, only to find a notice of default taped to his front door. A completed loan application is supposed to freeze the foreclosure process while the servicer decides on eligibility, preventing a practice called “dual tracking,” perhaps the most serious HBOR violation. The homeowner, in this case, said he never received a letter required by California law, confirming receipt of the initial application, and was not assigned a single point of contact for months. In December, while waiting for an answer on a second application, the homeowner received notice of the pending sale of his property at auction. This led to the phone call, where an Ocwen representative claimed to never have heard of HBOR.

Attorney General Harris has urged homeowners to file any HBOR complaints with her office. That information goes to the Mortgage Fraud Strike Force and a state-appointed monitor for foreclosure-related matters, who spots trends and works with servicers on compliance. This can help at the margins but homeowner advocates are seeking stronger measures.

“There have been good reports about the monitor resolving problems on individual cases,” says Kevin Stein of the California Reinvestment Coalition. “But we would love to see the Attorney General more involved.”

In addition, under HBOR homeowners have a “private right of action” to hire legal counsel and sue Ocwen over violations. However, a California State Bar ruling stipulates that lawyers cannot collect fees for their services in loan modification-related cases prior to their completion. While this protects homeowners from foreclosure rescue scams, where lawyers would take money up front and skip town, it has significantly damaged HBOR enforcement. Though the HBOR statute includes provisions for attorney fees, the Bar ruled that HBOR suits are related to loan modifications, meaning that lawyers must for a period of time litigate for free against legal teams working for deep-pocketed servicers.

“I’m aware of many lawyers who have said, I can’t do this,” says one lawyer. “What appears to have been a good idea is now about as dangerous [for Ocwen] as wading into a pond and getting bitten by a guppy.”

The CFPB continues to investigate violations of its federal mortgage servicing laws. And Lawsky, the New York banking regulator, stopped a deal to transfer $39 billion in mortgages from Wells Fargo to Ocwen, citing concerns about Ocwen’s capacity and its relationships with subsidiaries that profit off Ocwen foreclosures, raising the possibility of conflicts of interest. Ocwen executive chairman William Erbey said on an earnings call that this has frozen all servicing transfer deals, stunting the company’s growth. Erbey runs four separate subsidiary corporations, including Altisource, which buys foreclosed properties to turn them into rentals. Critics argue that this gives Ocwen incentive to push homes into foreclosure, so Altisource can profit from them. But without new mortgage servicing rights to purchase, Erbey’s grand scheme will falter. In fact, Ocwen’s first-quarter earnings fell below expectations and the stock has sunk as regulatory scrutiny has increased.

But this doesn’t comfort those homeowners stuck with Ocwen, who have labored for years to get clarity on whether they can keep their homes. Some of these homeowners may yet get the modification they need – one Ocwen client I’ve spoken to is about to start a trial payment plan and another is negotiating terms. Still, the struggle exacts a real toll, both in financial terms with late fees and increased arrears, but also on an emotional level. Waking up day after day without knowing if you’ll have to pack up all your possessions and leave your home creates feelings of humiliation and shame that can’t be measured in dollars.

“We need to start repairing our credit, our good name,” says LaRue Carnes.

Meanwhile, homeowner advocates grumble that Ocwen executives, and their counterparts at other servicers, do not share such worries, because violating the law makes more financial sense to them than following it.

“All the power resides in the servicer,” says the anonymous lawyer. “Plainly they don’t care.”

(David Dayen is a contributing writer to Salon who also writes for The New Republic, The American Prospect, Politico, The Guardian and other publications. He lives in Los Angeles.)

Mortgage Applications Lowest Since 2000

 

Apr 30 2014, 7:55AM

 

The week ended April 25 was one of the slowest for mortgage application activity the industry has seen in years.  The Mortgage Bankers Association (MBA) said applications for both purchase mortgages and refinancing decreased and its Market Composite Index, a measure of overall mortgage applications volume, fell to its lowest level in almost 15 years.

 

The Composite decreased 5.9 percent on a seasonally adjusted basis from the week ended April 18 and was down 5 percent on a non-seasonally adjusted basis.  Refinancing activity fell 7 percent and purchase applications were off 4 percent from a week earlier on both a seasonally adjusted and an unadjusted basis and was 21 percent lower than during the same week in 2013.

 

Refinancing fell to exactly half of all mortgage applications from 51 percent the previous week.  This is the lowest share for refinancing since July 2009 and it is 13 percentage points below the level at the beginning of 2014.

 

Refinance Index vs 30 Yr Fixed

 

Purchase Index vs 30 Yr Fixed

 

“Both purchase and refinance application activity fell last week, and the market composite index is at its lowest level since December 2000,” said Mike Fratantoni, MBA’s Chief Economist. “Purchase applications decreased 4 percent over the week, and were 21 percent lower than a year ago. Refinance activity also continued to slide despite a 30-year fixed rate that was unchanged from the previous week. The refinance index dropped 7 percent to the lowest level since 2008, continuing the declining trend that we have seen since May 2013.”

 

Contract interest rates for fixed rate mortgages were lower or unchanged from the previous week while effective rates all decreased.  Interest rates for 5/1 adjustable rate mortgages did increase during the week with the average contract rate rising 10 basis points to 3.26 percent.  Points decreased to 0.35 from 0.36 and the effective rate decreased from the previous week.  Approximately 8 percent of mortgage applications were for the various adjustable rate products, essentially unchanged from the previous week.

 

The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances of $417,000 or less was unchanged at 4.49 percent, with points decreasing to 0.38 from 0.50.  The average contract interest rate for jumbo 30-year fixed-rate mortgages with balances greater than $417,000 decreased to 4.37 percent from 4.41 percent, with points dropping to 0.14 from 0.34.

 

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.17 percent from 4.20 percent with points decreasing to 0.10 from 0.41 and the rate for 15-year fixed-rate mortgages decreased to 3.53 percent from 3.55 percent.  Points for the 15-year decreased to 0.31 from 0.33.

 

MBA’s data is derived from its Weekly Mortgage Applications Survey which it has conducted since 1990 and which covers over 75 percent of all U.S. retail residential mortgage applications.  Survey respondents include mortgage bankers, commercial banks and thrifts.  Interest rate information is based on loans with an 80 percent loan-to-value ratio and points include the origination fee.  Base period and value for all indexes is March 16, 1990=100.

 

Types of Short Sale Programs

Repost – Types of Short Sale Programs by Jonathan Katz

Types of Short sale programsThere are different types of short sale programs from which you can choose best suited for you. Choosing a short sale program is really critical because selection of wrong program will not only cause the rejection of short sale, but also will waste your time money and resource. There are a number of short sale programs, but keep in mind that you may not be able to choose the specific programs. The selection of program may depend upon the type of loan and investor.

Different Types of Short Sale Programs:

Some of the most common short sale programs are given here to provide you an understanding of the options available to you.

Traditional Short Sale

A traditional short sale is the most common type of short sale program. Some short sale sellers don’t want the delay that can be inherent in government programs, so even though they might qualify for a Bank of America HAFA short sale, they opt for traditional short sale program just to avoid the delayed processing. For traditional short sale you will need to provide the hardship letter along tax returns and other documents. More and more banks will say, “Yes” to a short sale and “No” to a foreclosure.

VA Short Sale and FHA Short Sale

If your current loan is secured by the VA, then you have VA loan and if it is insured by FHA, you have an FHA loan. The best way to know about your loan plan whether it is VA or FHA, is looking at the percentage of original sale price. In the form of VA, your loan balance is 100% of the original sale price. If the original balance was closed to 97% of the sale price then it is probably an FHA loan.

The main things to know about a VA short sale and FHA short sale:

  • Neither type of loan will qualify for the HAFA short sale program, but you can receive a relocation incentive.
  • Due to the additional layer to the approval, your proposal will take more than the normal time required to close the short sale.
  • The government will pay for a full-blown appraisal (no BPO) and expect market value.

HAFA Short Sale Program

In case you have two or more than two lenders then you will need the participation of all lenders in HAFA short sale program to qualify for HAFA short sale. The HAFA is government short sale program that with few limitations can pay you or your bank up to $3,000 to do the short sale. In the starting of HAFA program guidelines were very strict, but with the passage of time these have been made relaxed. You can do a HAFA short sale on investment property now as well. The biggest benefit of HAFA short sale is that your bank has to release you from the personal liability and you don’t have to face deficiency judgment.

Freddie Mac Short Sale

Freddie Mac is also a government sponsored entity. If the Freddie Mac is an investor, then you will need to do a Freddie Mac short sale. This will be adding an extra layer to the approval of the short sale. Freddie Mac will need a long affidavit to be signed. In the case of Freddie Mac home will be sold at “as is” condition. Unlike many short sale investors, Freddie Mac will allow the seller to rent back for a few months.

Fannie Mae Short Sale

Fannie Mae is a government-sponsored entity. If Fannie Mae is the investor, then you will need to do a Fannie Mae short sale and this will be adding and additional layer of approval to the short sale process.

You might have a problem in that short sale if you have a second loan and that second lender demands more money than Fannie Mae would allow you. It may require dealing with second lender before opening the short sale at Fannie Mae. Fannie Mae normally does not postpone auctions. If you are closer to the trustee’s auction than you are to closing the short sale, Fannie Mae may opt to choose the foreclosure.

Fannie Mae HAFA Short Sale

Fannie Mae HAFA short sale program is considered the most complex short sale program. The government has been trying to make the processing of this program easy. It is possible that short sale would be delayed if your Fannie Mae short sale is through the Bank of America. You may have some relaxation if you are the principal resident of your home, but Fannie Mae no longer requires occupancy as a condition of the short sale. It is also no longer a requirement that your loan be delinquent.

Freddie Mac HAFA Short Sale

A Freddie Mac HAFA short sale needs to be preapproved in advance. This is also one of the complex short sale programs. The preapproval in advance itself is a biggest problem for some banks. Every bank does not seem to understand this preapproval requirement for a Freddie Mac HAFA short sale, but if your short sale program is approved by Freddie Mac and your servicer, it moves really quickly. You can expect to get approval within 30 to 60 days.

Cash for Short Sale Programs

Getting the cash for sale is the wish of every short seller, but there are rare chances that debt is forgiven and sellers are released from the personal liability. Consulting your bank is the better way to find out that if you can get cash for sale or not.  The Bank of America cooperative short sale or the Bank of America HIN Incentive programs are considered the most famous cash for short sale programs. There may be sellers who could qualify for both types of Bank of America programs and get paid.

Types of Short Sale Programs by Jonathan Katz

The Heartbleed Bug

Heartbleed Bug

The Heartbleed Bug is a serious vulnerability in the popular OpenSSL cryptographic software library. This weakness allows stealing the information protected, under normal conditions, by the SSL/TLS encryption used to secure the Internet. SSL/TLS provides communication security and privacy over the Internet for applications such as web, email, instant messaging (IM) and some virtual private networks (VPNs).

The Heartbleed bug allows anyone on the Internet to read the memory of the systems protected by the vulnerable versions of the OpenSSL software. This compromises the secret keys used to identify the service providers and to encrypt the traffic, the names and passwords of the users and the actual content. This allows attackers to eavesdrop on communications, steal data directly from the services and users and to impersonate services and users.

What leaks in practice?

We have tested some of our own services from attacker’s perspective. We attacked ourselves from outside, without leaving a trace. Without using any privileged information or credentials we were able steal from ourselves the secret keys used for our X.509 certificates, user names and passwords, instant messages, emails and business critical documents and communication.

How to stop the leak?

As long as the vulnerable version of OpenSSL is in use it can be abused. Fixed OpenSSL has been released and now it has to be deployed. Operating system vendors and distribution, appliance vendors, independent software vendors have to adopt the fix and notify their users. Service providers and users have to install the fix as it becomes available for the operating systems, networked appliances and software they use.


Q&A

What is the CVE-2014-0160?

CVE-2014-0160 is the official reference to this bug. CVE (Common Vulnerabilities and Exposures) is the Standard for Information Security Vulnerability Names maintained by MITRE. Due to co-incident discovery a duplicate CVE, CVE-2014-0346, which was assigned to us, should not be used, since others independently went public with the CVE-2014-0160 identifier.

Why it is called the Heartbleed Bug?

Bug is in the OpenSSL’s implementation of the TLS/DTLS (transport layer security protocols) heartbeat extension (RFC6520). When it is exploited it leads to the leak of memory contents from the server to the client and from the client to the server.

What makes the Heartbleed Bug unique?

Bugs in single software or library come and go and are fixed by new versions. However this bug has left large amount of private keys and other secrets exposed to the Internet. Considering the long exposure, ease of exploitation and attacks leaving no trace this exposure should be taken seriously.

Is this a design flaw in SSL/TLS protocol specification?

No. This is implementation problem, i.e. programming mistake in popular OpenSSL library that provides cryptographic services such as SSL/TLS to the applications and services.

What is being leaked?

Encryption is used to protect secrets that may harm your privacy or security if they leak. In order to coordinate recovery from this bug we have classified the compromised secrets to four categories: 1) primary key material, 2) secondary key material and 3) protected content and 4) collateral.

What is leaked primary key material and how to recover?

These are the crown jewels, the encryption keys themselves. Leaked secret keys allows the attacker to decrypt any past and future traffic to the protected services and to impersonate the service at will. Any protection given by the encryption and the signatures in the X.509 certificates can be bypassed. Recovery from this leak requires patching the vulnerability, revocation of the compromised keys and reissuing and redistributing new keys. Even doing all this will still leave any traffic intercepted by the attacker in the past still vulnerable to decryption. All this has to be done by the owners of the services.

What is leaked secondary key material and how to recover?

These are for example the user credentials (user names and passwords) used in the vulnerable services. Recovery from this leaks requires owners of the service first to restore trust to the service according to steps described above. After this users can start changing their passwords and possible encryption keys according to the instructions from the owners of the services that have been compromised. All session keys and session cookies should be invalided and considered compromised.

What is leaked protected content and how to recover?

This is the actual content handled by the vulnerable services. It may be personal or financial details, private communication such as emails or instant messages, documents or anything seen worth protecting by encryption. Only owners of the services will be able to estimate the likelihood what has been leaked and they should notify their users accordingly. Most important thing is to restore trust to the primary and secondary key material as described above. Only this enables safe use of the compromised services in the future.

What is leaked collateral and how to recover?

Leaked collateral are other details that have been exposed to the attacker in the leaked memory content. These may contain technical details such as memory addresses and security measures such as canaries used to protect against overflow attacks. These have only contemporary value and will lose their value to the attacker when OpenSSL has been upgraded to a fixed version.

Recovery sounds laborious, is there a short cut?

After seeing what we saw by “attacking” ourselves, with ease, we decided to take this very seriously. We have gone laboriously through patching our own critical services and are in progress of dealing with possible compromise of our primary and secondary key material. All this just in case we were not first ones to discover this and this could have been exploited in the wild already.

How revocation and reissuing of certificates works in practice?

If you are a service provider you have signed your certificates with a Certificate Authority (CA). You need to check your CA how compromised keys can be revoked and new certificate reissued for the new keys. Some CAs do this for free, some may take a fee.

Am I affected by the bug?

You are likely to be affected either directly or indirectly. OpenSSL is the most popular open source cryptographic library and TLS (transport layer security) implementation used to encrypt traffic on the Internet. Your popular social site, your company’s site, commerce site, hobby site, site you install software from or even sites run by your government might be using vulnerable OpenSSL. Many of online services use TLS to both to identify themselves to you and to protect your privacy and transactions. You might have networked appliances with logins secured by this buggy implementation of the TLS. Furthermore you might have client side software on your computer that could expose the data from your computer if you connect to compromised services.

How widespread is this?

Most notable software using OpenSSL are the open source web servers like Apache and nginx. The combined market share of just those two out of the active sites on the Internet was over 66% according to Netcraft’s April 2014 Web Server Survey. Furthermore OpenSSL is used to protect for example email servers (SMTP, POP and IMAP protocols), chat servers (XMPP protocol), virtual private networks (SSL VPNs), network appliances and wide variety of client side software. Fortunately many large consumer sites are saved by their conservative choice of SSL/TLS termination equipment and software. Ironically smaller and more progressive services or those who have upgraded to latest and best encryption will be affected most. Furthermore OpenSSL is very popular in client software and somewhat popular in networked appliances which have most inertia in getting updates.

What versions of the OpenSSL are affected?

Status of different versions:

  • OpenSSL 1.0.1 through 1.0.1f (inclusive) are vulnerable
  • OpenSSL 1.0.1g is NOT vulnerable
  • OpenSSL 1.0.0 branch is NOT vulnerable
  • OpenSSL 0.9.8 branch is NOT vulnerable

Bug was introduced to OpenSSL in December 2011 and has been out in the wild since OpenSSL release 1.0.1 on 14th of March 2012. OpenSSL 1.0.1g released on 7th of April 2014 fixes the bug.

How common are the vulnerable OpenSSL versions?

The vulnerable versions have been out there for over two years now and they have been rapidly adopted by modern operating systems. A major contributing factor has been that TLS versions 1.1 and 1.2 came available with the first vulnerable OpenSSL version (1.0.1) and security community has been pushing the TLS 1.2 due to earlier attacks against TLS (such as the BEAST).

How about operating systems?

Some operating system distributions that have shipped with potentially vulnerable OpenSSL version:

  • Debian Wheezy (stable), OpenSSL 1.0.1e-2+deb7u4
  • Ubuntu 12.04.4 LTS, OpenSSL 1.0.1-4ubuntu5.11
  • CentOS 6.5, OpenSSL 1.0.1e-15
  • Fedora 18, OpenSSL 1.0.1e-4
  • OpenBSD 5.3 (OpenSSL 1.0.1c 10 May 2012) and 5.4 (OpenSSL 1.0.1c 10 May 2012)
  • FreeBSD 10.0 – OpenSSL 1.0.1e 11 Feb 2013
  • NetBSD 5.0.2 (OpenSSL 1.0.1e)
  • OpenSUSE 12.2 (OpenSSL 1.0.1c)

Operating system distribution with versions that are not vulnerable:

  • Debian Squeeze (oldstable), OpenSSL 0.9.8o-4squeeze14
  • SUSE Linux Enterprise Server
  • FreeBSD 8.4 – OpenSSL 0.9.8y 5 Feb 2013
  • FreeBSD 9.2 – OpenSSL 0.9.8y 5 Feb 2013
  • FreeBSD Ports – OpenSSL 1.0.1g (At 7 Apr 21:46:40 2014 UTC)

How can OpenSSL be fixed?

Even though the actual code fix may appear trivial, OpenSSL team is the expert in fixing it properly so latest fixed version 1.0.1g or newer should be used. If this is not possible software developers can recompile OpenSSL with the handshake removed from the code by compile time option -DOPENSSL_NO_HEARTBEATS.

Should heartbeat be removed to aid in detection of vulnerable services?

Recovery from this bug could benefit if the new version of the OpenSSL would both fix the bug and disable heartbeat temporarily until some future version. It appears that majority if not almost all TLS implementations that respond to the heartbeat request today are vulnerable versions of OpenSSL. If only vulnerable versions of OpenSSL would continue to respond to the heartbeat for next few months then large scale coordinated response to reach owners of vulnerable services would become more feasible.

Can I detect if someone has exploited this against me?

Exploitation of this bug leaves no traces of anything abnormal happening to the logs.

Can IDS/IPS detect or block this attack?

Although the content of the heartbeat request is encrypted it has its own record type in the protocol. This should allow intrusion detection and prevention systems (IDS/IPS) to be trained to detect use of the heartbeat request. Due to encryption differentiating between legitimate use and attack can not be based on the content of the request, but the attack may be detected by comparing the size of the request against the size of the reply. This seems to imply that IDS/IPS can be programmed to detect the attack but not to block it unless heartbeat requests are blocked altogether.

Has this been abused in the wild?

We don’t know. Security community should deploy TLS/DTLS honeypots that entrap attackers and to alert about exploitation attempts.

Can attacker access only 64k of the memory?

There is no total of 64 kilobytes limitation to the attack, that limit applies only to a single heartbeat. Attacker can either keep reconnecting or during an active TLS connection keep requesting arbitrary number of 64 kilobyte chunks of memory content until enough secrets are revealed.

Is this a MITM bug like Apple’s goto fail bug was?

No this doesn’t require a man in the middle attack (MITM). Attacker can directly contact the vulnerable service or attack any user connecting to a malicious service. However in addition to direct threat the theft of the key material allows man in the middle attackers to impersonate compromised services.

Does TLS client certificate authentication mitigate this?

No, heartbeat request can be sent and is replied to during the handshake phase of the protocol. This occurs prior to client certificate authentication.

Does OpenSSL’s FIPS mode mitigate this?

No, OpenSSL Federal Information Processing Standard (FIPS) mode has no effect on the vulnerable heartbeat functionality.

Does Perfect Forward Secrecy (PFS) mitigate this?

Use of Perfect Forward Secrecy (PFS), which is unfortunately rare but powerful, should protect past communications from retrospective decryption. Please see https://twitter.com/ivanristic/status/453280081897467905 how leaked tickets may affect this.

Can heartbeat extension be disabled during the TLS handshake?

No, vulnerable heartbeat extension code is activated regardless of the results of the handshake phase negotiations. Only way to protect yourself is to upgrade to fixed version of OpenSSL or to recompile OpenSSL with the handshake removed from the code.

Who found the Heartbleed Bug?

This bug was independently discovered by a team of security engineers (Riku, Antti and Matti) at Codenomicon and Neel Mehta of Google Security, who first reported it to the OpenSSL team. Codenomicon team found heartbleed bug while improving the SafeGuard feature in Codenomicon’s Defensics security testing tools and reported this bug to the NCSC-FI for vulnerability coordination and reporting to OpenSSL team.

What is the Defensics SafeGuard?

The SafeGuard feature of the Codenomicon’s Defensics security testtools automatically tests the target system for weaknesses that compromise the integrity, privacy or safety. The SafeGuard is systematic solution to expose failed cryptographic certificate checks, privacy leaks or authentication bypass weaknesses that have exposed the Internet users to man in the middle attacks and eavesdropping. In addition to the Heartbleed bug the new Defensics TLS Safeguard feature can detect for instance the exploitable security flaw in widely used GnuTLS open source software implementing SSL/TLS functionality and the “goto fail;” bug in Apple’s TLS/SSL implementation that was patched in February 2014.

Who coordinates response to this vulnerability?

NCSC-FI took up the task of reaching out to the authors of OpenSSL, software, operating system and appliance vendors, which were potentially affected. However, this vulnerability was found and details released independently by others before this work was completed. Vendors should be notifying their users and service providers. Internet service providers should be notifying their end users where and when potential action is required.

Is there a bright side to all this?

For those service providers who are affected this is a good opportunity to upgrade security strength of the secret keys used. A lot of software gets updates which otherwise would have not been urgent. Although this is painful for the security community, we can rest assured that infrastructure of the cyber criminals and their secrets have been exposed as well.

Where to find more information?

This Q&A was published as a follow-up to the OpenSSL advisory, since this vulnerability became public on 7th of April 2014. The OpenSSL project has made a statement at https://www.openssl.org/news/secadv_20140407.txt. NCSC-FI published an advisory at https://www.cert.fi/en/reports/2014/vulnerability788210.html. Individual vendors of operating system distributions, affected owners of Internet services, software packages and appliance vendors may issue their own advisories.

References

Heartbleed logo is free to use, rights waived via CC0. [download logo in SVG format]

Page updated 2014-04-10 19:50 UTC.

‘Heartbleed’ Internet security bug is as bad as it sounds

By Hiawatha Bray

 

The word “Heartbleed” meant nothing at the start of the week. Today it is one of the hottest topics on the Internet — a simple security bug in an obscure piece of software that could compromise the personal information of millions. And while the Internet’s biggest companies scramble to fix the problem, users had better get ready to upgrade their own security practices.

“It’s not an academic exercise,” said Trey Ford, global security strategist at network security firm Rapid7 LLC in Boston. “I think this is a really big deal.”

So big that Ford thinks people should take a time out from online retailers, financial services sites, or online destinations that require entering sensitive information — names, addresses, credit card numbers. “I probably wouldn’t log into those for a couple of days or so,” he said.

To Ford, this isn’t another exaggerated Internet scare. Heartbleed really is that bad. But what is it?

Heartbleed is a bug that was accidentally added to a vital piece of software called OpenSSL, which secures thousands of Internet sites worldwide. OpenSSL software is built into Apache, the server software used by about two-thirds of the world’s websites to deliver Web pages to your computer. It sets up an encrypted data channel between your machine and the remote server. When it’s working properly, data traveling between the two machines looks like gibberish except to the authorized computers, which have keys for decoding the information.

OpenSSL is vital to Internet commerce, making it safe to move financial information online. But in 2012, during a software upgrade, someone wrote a bit of bad code that makes it possible to read unencrypted information from the memory of the remote server. This can include the encryption keys needed to decode the data stream, and e-mails, financial data, phone numbers — pretty much anything.

A security engineer at Google Inc. and a team of researchers at Finnish security company Codenomicon Ltd. uncovered the problem and raised the alarm on Monday. In the process, they kicked off an online panic that is quite justified.

OpenSSL “is at the cornerstone of trust on the Internet,” said Ford. It’s not just buying and selling. For instance, Internet e-mail services such as Yahoo Mail use OpenSSL to ensure the confidentiality of personal messages. So much for that: A security researcher was able to steal a Yahoo username and password from the company’s servers by using the Heartbleed trick.

Yahoo says it has fixed the problem on its servers. Meanwhile, other major Internet companies are also offering reassurances. I pinged Amazon.com, Facebook, tax preparation company Intuit Inc., and the Internal Revenue Service. All replied that their computers are not vulnerable to the Heartbleed problem.

But before you relax, consider that this bug was introduced two years ago. All this time, our “secure” data has been vulnerable. If some criminal gang had exploited the bug, I think we’d recognize them by a trail of emptied bank accounts, so this probably hasn’t happened. But if you worked at a spy shop like the National Security Agency or China’s Ministry of State Security, you’d be dead quiet about this handy little exploit. Instead, you’d use it to quietly scoop up intelligence on carefully selected targets.

Has this happened? Who knows? Exploiting a security flaw will often leave traces behind; you’ll know you’ve been hit, even if you can’t do anything about it.

But Heartbleed doesn’t leave a mark. Our passwords and personal data may already have been leaked out, scooped up, and filed away. Or not. It’s impossible to be sure.

Which is why Ford and other security analysts say there’s only one thing to do — change your passwords. Every last one, or at least every one that logs you onto financial, shopping, or social networking sites, the places where you share sensitive information. It’s also a good idea to delete all cookies from such sites.

But even this won’t protect you unless the sites you visit have upgraded their own software. Log onto a Heartbleed-affected server, and your new password could be as compromised as the old one. So Ford recommends taking your time. “Wait a day or two,” he said, “and then start changing passwords.”

In the early days of the Internet, global security scares came like clockwork; the Melissa virus of 1999, the I Love You virus of 2000 or 2001’s Code Red attack. Today the Internet is less vulnerable to sabotage. But as Heartbleed proves, there will never be a cure for carelessness.

Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.

Second Home Market Rebounding Strongly

Apr 7 2014, 11:33AM

Although the second home mortgage market experienced a severe decline during the housing downturn, Americans still aspire to buy second homes and have contributed to the growth of the market consistently since it hit its bottom in 2009 Fannie Mae said today.  While most mortgages are still originated to purchase or refinance owner-occupied primary residences, there is a significant market for mortgages to purchase second homes, those that are neither investment properties nor primary residences.  Fannie Mae’s new report issued today, Second Homes:  Recovery Post Financial Crisis, is part of its Housing Insights series.

Second home mortgages have accounted for an average of 4.76 percent of the purchase mortgage market since 1998 and the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been significant players, acquiring on average about 64 percent of the second home purchase mortgages by volume over that time period.

Fannie Mae uses information from the National Association of Realtors® (NAR) survey of second home buyers released last week to profile a typical second home buyer who is older, has a higher income, and is more likely to use a larger degree of cash to finance his purchase than the typical primary home buyer.  At the time of purchase 70 percent of second home mortgages had loan to value ratios under 80 percent compared with 44 percent of primary residence mortgages.

 

 

Second home mortgage originations have historically moved in tandem with the boom-bust cycle of the real estate market.  The share of second home mortgages more than tripled between the late 1990s and the peak year of 2006 then declined through 2009.  In every year since however the second home share of the purchase-money market (PMM) has increased.  During this period, however, the GSEs share of the market has decreased as the share of whole loans held by banks and other institutions has grown, suggesting that private lenders are becoming more willing to lend to these borrowers.  Between them the GSEs and bank portfolios now hold nearly 100 percent of the market compared to 77 percent in 2006.  Fannie Mae says one of the major reasons for this increase in market share is the exit of private label security (PLS) competitors from the larger playing field after the market collapse.

 

 

The boom years were good for second home mortgages which peaked at more than 15 times their 1998 volume during the housing bubble compared to around a 400 percent increase for other purchase mortgages.  However, the PLS share of second home originations, which was as high as 17 percent in 2006, has not rebounded as second home sales have recovered.

Fannie Mae says that geography played a role in both the decline and resurgence of the second home market.  Since January 1998, just over 1/3 of all second home mortgages have been originated on properties in Florida, California, and Arizona, three of the four states that then entered a multi-year foreclosure epidemic and witnessed huge price declines of over 40 percent each.  The only state with a larger price drop was Nevada, which was not a popular second home destination, accounting for only 2.5 percent of those mortgage originations from 1998 forward.  Those three Sunbelt states did not lose their popularity among second home buyers and accounted again for 34 percent of the second home mortgages originated in 2013.

While second home mortgages bubbled like all other purchase mortgages in the pre-2006 period, they did not perform as poorly as the others when the crisis hit.  While both first home and second home mortgages saw delinquencies trend upward in the years immediately after the bubble the second home purchase series outperformed the all other purchases series, indicating that second home borrowers have been better able to meet their mortgage obligations.

Fannie Mae noted many factors that will affect the future direction of second home purchases and second home mortgage originations.

  • Many buyers are affluent enough to pay cash and according to the NAR, between 2009 and 2013 an average of 38 percent of second home buyers did so. The remaining 62 percent who rely on a mortgage must have adequate income to qualify for those second home mortgage payments.
  • During the recovery housing wealth appreciation has lagged financial wealth. The recovery in financial markets has allowed many second home buyers, who are typically older and more likely to own financial assets, to sell some of their assets to buy second homes or use income from these assets to cover second home mortgage expenses. As shown in Exhibit E, older age cohorts, who are more likely to buy second homes, tend to own more financial assets.

  • The home price recovery rate in the three popular second home sites of Arizona, California, and Florida is another factor. The Federal Housing Finance Agency price indices comparing these three states to national averages show that two of the three have kept up with the national recovery, regaining about one third of their home price peak to trough losses but Florida lags far behind, having reclaimed only about 18 percent since bottoming out. Given this slow recovery and that Florida has accounted for the largest single share of second mortgage originations since 1998 (17 percent), home buyers have an opportunity to invest in Florida at bargain prices. That financial assets have recovered more quickly than home prices further increases this opportunity.
  • Yet another factor is the aging of the American population. The age group most likely to purchase a second home, those between 45 and 64 years of age, will grow at a slower rate than that of the total adult population between 2015 and 2060. Thus, while demand for second homes will continue to grow, it will likely occupy a smaller portion of the total purchase market. However, assuming that Americans continue existing investment patterns as they age and that aspirations of second home ownership do not wane, second homes should still occupy a significant place in the residential real estate market.

Fannie Mae concludes that although the second home mortgage market was also hit hard by the housing downturn, Americans still want to buy second homes and have contributed to the growth of the market consistently since its bottom in 2009.  The GSEs acquired roughly 60 percent of second home mortgage origination volume in 2013 and, barring rapid resurgence in PLS lending, should continue to be major players in the second home mortgage market.  “As the population continues to age, we expect people to continue to use their savings to buy second homes, thereby contributing to a segment of the mortgage market that will continue to grow in the years to come.”

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