Countrywide. Citigroup. Washington Mutual and Merrill Lynch. All well known names in the world of finance, and all are now feeling the pinch due to an unstable real estate mortgage market and the lasting impacts the subprime mortgage crisis is having on their bottom lines.

For Countrywide, the second quarter of the year was a real let down with the company drawing from an $11.5 billion credit facility to help keep it afloat, followed by announced workforce cutbacks shortly thereafter.

Now with the first week of October behind us, Citigroup, Washington Mutual (WaMu as it likes to be known) and Merrill Lynch announced their organizations would be taking major hits in the pocketbook for the third quarter of 2007.

Citigroup came out with a press statement last week projecting that the company will suffer a 60 percent decline in third quarter income between 2006 and 2007. The statement also explains the company’s need to write down more than $3 billion in various financial instruments including subprime mortgage-back securities, highly leveraged financial commitments and fixed income credit trading.

As for Merrill Lynch, a release distributed Friday by the company said it also expects to report a loss for the third quarter. Earnings were adversely impacted by collateralized debt obligations (CDOs as they are called), and subprime mortgages, resulting in more than $5 billion in write-downs, with the company projecting a net loss of up to 50 cents a diluted share.

In its release, WaMu announced an expected 75 percent decline in quarterly net income compared to third quarter 2006. Ongoing weakness in the housing market, along with held-for-sale mortgages, net losses in the company’s trading securities portfolio and losses on investment grade mortgage-back securities were cited as key contributors to the projected loss for the quarter.

Given that these financial institutions all had vested interests of some sort in the subprime fiasco, these losses should come as no surprise. Still, the federal government and the mortgage industry are now left with the mess and are in the midst of cleaning it up, which will take years.

However, in the end, these losses will balance out against profits generated by the institutions’ other lines of business and the companies will all survive just fine. Tightened lending guidelines are already in place at the national and state level, so future borrowers should be more well qualified and capable to maintain the standard of living they want to enjoy by buying a house they can actually afford.

As for distressed homeowners facing foreclosure into the foreseeable future, these types of problems on the lender’s side of the transaction are probably going to make it more difficult for them to refinance or restructure their financial situation in order to save their homes.
The situation might adversely impact investors as well, making it more difficult to obtain the financing they need in order to help out those distressed homeowners looking for a way out of foreclosure without ruining their credit.

RealtyTrac will continue to follow the financial mess the subprime mortgage crisis has left behind, and to explain its potential impact on distressed homeowners, investors, real estate professionals and would-be home buyers looking to find bargain real estate in this current market.

For many real estate investors, the foreclosure market is smoking. Foreclosures nationwide are heating up, especially in once-supercharged real estate bubbles like Florida, California, Nevada and Arizona.

But in Michigan, where foreclosures are widespread and a hot market for real estate investors, people are burning down the homes to avoid foreclosure . . . literally!

Last month, a Michigan homeowner in foreclosure was arrested for allegedly setting her three-year old Grand Rapids home on fire to collect the insurance money, according to the Grand Rapids Press.

Sheryl Christman, a 38 year old housewife, torched her home just four days shy of losing  it to foreclosure. Christman was arraigned Sept. 1 on a felony arson count that is punishable by up to 20 years in prison. She was released from Kent County jail on Oct. 1 on a $20,000 cash bond.

The fire completely destroyed the home, which is valued at $150,000. Fire investigators were suspicious because the blaze roared out of control quickly.

The married mother of three allegedly planned to use the insurance settlement money to be with her boyfriend. Investigators convinced the boyfriend to wear a wire, recording a conversation between  him and Christman. Court papers claim that she admitted to setting the blaze.

Foreclosure fraud — and now arson and insurance fraud — are becoming issues in Michigan and across the country. As foreclosures continue to rise, tragic stories like the case against the Gaines Township woman may grow as well.

At RealtyTrac, we’ll keep you informed of these and other developments.

It wasn’t very long ago that President George W. Bush came out with a public policy statement negating any possibility of either a homeowner, or a lender bailout, given the impact the current mortgage crisis is having on the nation’s housing economy.

So it comes as a surprise of sorts that the White House issued a statement earlier this week supporting the recent passage of HR 3648 by the House of Representatives, while at the same time asking that a key provision of the bill be watered down to the point of making its implementation temporary at best.

Titled the “Mortgage Forgiveness Debt Relief Act of 2007,” HR 3648 is sponsored by Rep. Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, and a number of other sponsors. The provision that is the focus of the White House proposal goes to the crux of the bill – to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income.

At present, under the Tax Code a homeowner who loses a home to foreclosure has to pay income taxes on any portion of the mortgage debt the lender may decide to forgive. The IRS currently considers such forgiven debt to be additional gross (and taxable) income for the year.

This can directly affect the homeowners’ ability, or desire for that matter, to proceed with such things as short sales and other types of workout situations that may offer them foreclosure relief, for instance.

“…the Administration strongly believes this relief should be temporary to assist homeowners during the current mortgage market transition period and to avoid distorting consumer and lender decisions on new mortgage loans,” the statement said.

The White House also goes on to justify its position, stating that the Tax Code, as it currently exists, already provides relief to the most financially-distressed mortgage borrowers from having to pay tax when a debt has been discharged in bankruptcy.

Given such reasoning, amending the legislation’s core concept may indeed be justified because in the free market system under which this country operates homeowners, like any other consumers, should not be rewarded for making bad financial decisions in purchasing more home than they could really afford in the first place.

Still, the Administration’s view that this assistance be temporary, and should last only so long as it takes for the mortgage markets to emerge from the current “transition period,” may be flawed from the get go. Most people facing foreclosure at any time, no matter the cause, probably don’t have either the income or the equity to pay the higher taxes on the forgiven debt to begin with. And the timing and true length of a market turnaround in the current circumstance, when it occurs, is uncertain at best.

Will this effect the number of foreclosures coming down the pike as non-traditional ARM’s continue to reset at higher interest rates for the next few years? Probably not in the near term at least, since most major lenders are still holding out from agreeing to workout deals and short sales.

However, many industry experts believe that lenders will eventually have to come around to accepting the idea, even if begrudgingly, as their REO inventories continue to expand at a more rapid pace as those subprime loans reset their rates.

Stay tuned to ForeclosurePulse and RealtyTrac as this story continues to develop.

In an interesting post on his excellent, informative FHA Mortgage Guide blog, author Peter Miller notes that, over a 5-year period, FHA and VA loans have basically lost half of their market share. While this may speak more to the nature of a loan market that approved virtually anyone, anywhere for any loan, anytime, it also suggests that those in the government responsible for managing programs intended to increase home ownership may not have been as proactive as they should have been over the past few years. Despite the fact that they're not as sexy as "no doc, no talk, just walk" loans - all of which seem to be going into default now - VA and FHA loans tend to be much safer, and an all-around better alternative to the risky, toxic products that have been at the heart of the current foreclosure mess.  

With President Bush proposing the FHA Secure program, hopes abound that some of these governmental programs will continue to help deserving families move into homes, and prevent some disenfranchised homeowners from losing theirs.

Television reporters — their crystal balls in tow — were talking about it like it was a done deal before it was even announced. Analysts were beyond whether it was going to happen. They were guessing just how much it was going to be cut. And in the end they were all, to a certain extent, correct.

The Federal Open Market Committee did finally cave in to pressure from peers, industry analysts, and even the public at large and slashed the federal funds rate 50 basis points Tuesday to 4.75 percent in hopes of curtailing the housing crisis befalling this country, while still keeping a careful eye on inflationary concerns.

In a simultaneous move Tuesday, the Fed’s Board of Governors also reduced its discount rate (the rate charged by banks to each other to borrow funds overnight) by 50 basis points to 5.25 percent. This is the second reduction in the rate in as many months.

The impact, and reaction, to the cut in the Fed’s short term rate that dictates the interest consumers pay on myriad types of personal and business loans, was immediate and strong — whether for or against it. Wall Street was ecstatic, ending the trading day both Tuesday and Wednesday up markedly. So were lending institutions like Bank of America, which immediately lowered its prime rate.

Some analysts weren’t so sure it was the right thing to do at the moment. One Yale University economist even testified before a congressional committee Wednesday that a drop in consumer confidence could result in a recession within the next year’s time.

In a statement released Tuesday, the FOMC justified making the move (the first rate decrease in years after 17 consecutive upward rate “adjustments” under Alan Greenspan’s leadership, followed by more than a year of a wait and see stance with Fed Chairman Ben Bernanke at the helm).

“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,” said the FOMC statement. “Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.”

Translation: the Fed’s not sure, but they have to do something. Lowering interest rates always has the potential of increasing inflation rather than controlling it, as we saw with home prices over the past six years. It will take years for the fallout from this latest move to be felt and measured. In the meantime, the Fed says it remains ready to act as needed to promote price stability and sustain the nation’s overall economic growth.

In a published report released Wednesday, RealtyTrac VP of Marketing Rick Sharga stated that the reduction of the federal funds rate may help moderate future foreclosure activity somewhat in two important ways: 1) some people who may have gone over the edge into foreclosure may be spared if the reduction means the rate on their adjustable rate mortgage isn’t reset as high as originally anticipated; and 2) money that has been held out of the credit pool by investors may find its way to Wall Street after all.

Overall, it is way too soon to tell whether this latest move by the Fed will help or hinder the nation’s economy and pull the housing market out of its slump. In the meantime, investors, prospective homebuyers and real estate professionals working the foreclosure market will still have an ample supply of inventory to work with.