CNN is reporting that Countrywide Financial is expanding the scope of mortgage help to its customers.

Countrywide (CFC, Fortune 500), the nation’s largest mortgage lender and home loan servicer, has sought to address the growing number of defaults on its books by modifying loan terms, working out long-term repayment plans and other actions. The company said last month it helped more than 81,000 borrowers keep their mortgage payments manageable in 2007.

It looks like a move to save themselves - modify the loans to help customers avoid higher payments, or keep existing terms and have a large percentage of those loans go into default/foreclosure. What will happen to all the packaged investments that bought into those loans under the original terms? Will the investors get stuck footing the bill?

Under the latest plan, borrowers with subprime hybrid adjustable-rate mortgages, which typically were issued with a low “teaser” interest rate and then adjust higher after two or three years, could be offered the option of refinancing into a lower prime rate loan, or have their initial interest rate frozen for five years.

They weren’t prime borrowers when they first obtained these loans, but all of the sudden they’re given the option to refinance into a prime rate loan? What are the odds that this would work out? With home values falling all over the place, there’s not much incentive to many borrowers who put no money down. There will certainly be some people who will benefit from the new terms, but this will have little effect on hyperinflated bubble cities or regions.

Homeowners with fixed-rate subprime loans who have fallen behind on payments could be offered short-term repayment plans, loan modifications or other adjustments, including having their interest rate frozen or adding their overdue balances to their principal loan amount.

This is no different than a negative amortization loan - you’re behind on payments, so they’ll kindly roll your balance onto the principal (which will generate more interest, which means higher payments).

These proposed assistance or bailout plans sound nice, but they seem like nothing more than last ditch efforts to postpone the inevitable.

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Yahoo! Finance has posted an excellent article (from Businessweek) discussing the reasons why home prices could drop 25% or more before the housing market finally hits bottom.

Some experts have begun to suggest that a bottom is in sight. Pali Research analyst Stephen East wrote in a research note to his firm’s clients on Jan. 25 that “the sun is not shining very brightly, but at least the worst of the storm has likely passed.”

Uh.. yeah! I’ll have what he’s drinking.

Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. “A down market is getting baked into expectations,” says Chris Flanagan, head of research in JPMorgan Chase’s (JPM) asset-backed securities group. “People say: I’m not buying until prices are lower.’” He predicts prices will fall about 25%, bottoming in 2010.

If you’ve been reading this or any other real estate blog, then this isn’t news to you. It’s just a sign that the mainstream market is starting to recognize that the party has ended. Millions of people are just starting to wake up from a wild night with a massive hangover.

Cheaper mortgages won’t necessarily ride to the rescue, either. Thirty-year conventional fixed-rate mortgages failed to fall after the Fed’s two January rate cuts, averaging 5.5% on Jan. 30. Financing remains cut off for subprime borrowers (BusinessWeek, 12/11/07) and for owners whose home equity has dipped too low to qualify for a new loan. Fed rate cuts will ease, but not eliminate, the pain from resets on adjustable-rate loans.

Banks are trying to cover themselves and are pricing new risk accordingly. The Fed rate cut seems more like a move to help banks and businesses. Consumers (homedebtors) aren’t seeing much relief.

Observers with a Calvinist streak see a housing crash as not only necessary but also positive. It will force Americans to live within their means, which will enable the U.S. to work off some of its towering debt, says Peter D. Schiff, president of Darien (Conn.) brokerage Euro Pacific Capital, who was early in predicting the crash.

There is some truth that Americans need to live within their means to avoid problems like this, however what will it take to cause that change? As we live now we’re too used to a life of excess, using credit to buy everything and even pay utility or grocery bills. How bad of a recession do we need to get into before people wake up and realize that the lifestyle we’ve fallen in love with cannot be sustained?

The bigger the boom, the harder the fall.

Read the full article as it summarizes just about every reason for the housing market to fall. When will a recovery be in sight?

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Big apologies to our regular readers. The KoolAidMan took off on a last minute vacation halfway around the world, in the middle of the Pacific Ocean to be exact.

He’s had very little access to the internet and mainstream news, choosing to go hiking, diving, and fishing instead, but boy was he shocked to turn on the TV to hear the latest news from the Federal Reserve!

Just prior to leaving on this last minute yet well needed vacation, we made a post which mentioned that the Federal Reserve was “ready to take ’substantive additional action’ to cut interest rates in order to support lagging economy.” Well now we see they weren’t kidding around.

Will a major rate cut solve any problems, or is it merely a Band-Aid to temporarily delay an inevitable downturn?

Stay tuned as the KoolAidMan has much more to post in the next day or two related to the Real Estate market in a U.S. territory out in the middle of the Pacific Ocean. Over here it looks just like California only three years behind!

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CNN reports that Citibank delivered its worst quarterly results in its history with a $9.8B loss.

The financial giant also announced a writedown of $18.1 billion related to soured mortgage investments and a 41 percent cut to its dividend. At the same time, it said it was receiving a $12.5 billion infusion from investors in Kuwait, Singapore and the state of New Jersey.

…

Citi’s top line took a big hit. The company reported revenue of $7.2 billion for the quarter, down 70 percent from $23.8 billion a year earlier.

The results were far worse than forecast. Analysts had expected the company to report a loss of $1 a share on revenue of $10.64 billion, according to analysts surveyed by earnings tracker Thomson Financial.

Think about this for a moment: revenue for this quarter was down 70% since same period last year. Seventy percent is quite a large number.

Citigroup’s stock endured one of its worst annual performances on record last year and was the worst performing Dow component in 2007. Its shares finished the year down 47 percent.

It seems that some investors see this as an opportunity to get in near the bottom. Are things going to turn around for Citi (and the financial sector overall), or are there much deeper problems that have yet to surface?

Buckle up, for we have an interesting year ahead of us.

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