What Type of Insurance Do I Need When I Buy a Home?

Question: What type of insurance will I need to purchase once I buy a new home? I am currently renting and have renter’s insurance at a low monthly rate, but was wondering if there is a similar type of insurance for when I own. I also hear that I need mortgage insurance, and am not sure what that means. Thanks for your advice!

Answer: When you purchase a home, you should be aware of several different types of insurance and you may need to purchase each depending on the type of home you buy. They include: 1) Homeowner’s insurance 2) Mortgage insurance and 3) Title insurance.

Since you are currently renting, you’re familiar with renter’s insurance, which covers issues arising from theft, fire, or personal liability within your leased apartment. With your new home, you will purchase a similar policy except it will be called homeowner’s insurance. Typically, homeowner’s insurance is not very expensive, it’s required by your mortgage lender, and it’s well worth the price and peace of mind. Your monthly or yearly premium will cover your home against theft, flood, fire, natural disasters, etc. It will also provide you coverage in case somebody slips and falls on your property and sues you.

Mortgage insurance (often abbreviated as PMI — private mortgage insurance) may be necessary if you are buying a home with less than a 20 percent down payment. Mortgage insurance protects the lender against a default (non-payment) by the borrower (you). Once you’ve paid down the principal on your mortgage or your property has appreciated so that you have 20 percent equity in your home, you will no longer need to maintain the mortgage insurance. Additionally, there are certain ways to avoid having to pay this type of insurance, including taking out more than one mortgage or a home equity loan to cover a portion of the down payment.

The third type of insurance is title insurance. This protects you from claims against the title to your new home from previous owners or third parties claiming to have a right to the property. These issues can arise if your home was previously transferred fraudulently, there were liens that were unpaid, encroachments on the land, etc. Title insurance is a one-time charge (no ongoing premiums) that is paid at settlement. There’s lender’s title insurance (mandatory) and owner’s title insurance (optional).

Reverse mortgages shift gears

Now, a new program made possible by federal legislation passed last year to address the foreclosure-driven housing crisis is also helping seniors use a reverse mortgage to help buy a home, provided they can come up with a large down payment. Before the Home Equity Conversion for Purchase program rolled out in January, seniors 62 years and older could only use reverse mortgage loans to draw out tax-free payments from the equity held in an existing home while continuing to live in it.

Many lenders are starting to offer these new loans in addition to traditional reverse mortgage products. But as withtraditional reverse mortgages, there are costs involved that can add thousands of dollars to the loan amount, which grows over time and has to be repaid after the last borrower leaves or sells the property or dies and the home is passed on to heirs.

"We had not been able to offer that option to seniors before," said Joseph DeMarkey, regional director for MetLife Bank, which provided the loan for the couple. "It's still the same underlying product that's been around for 21 years. It just allows people to use it for purchase finance as opposed to a refinancing tool."

Program participants are required to make a down payment typically ranging from 30 to 40 percent. The reverse mortgage loan amount is used to pay off the balance of the new home's purchase price. (see breakout for example of how it works).

People who have a traditional reverse mortgage on an existing home cannot refinance it into a reverse mortgage for purchase to buy a new home. Instead, the reverse mortgage on the existing home would have to be paid off before applying for the reverse mortgage for purchase.

The reverse mortgage for purchase program requires that the new home be the primary home, which means living it in for a least six months of the year. The home can be located anywhere in the United States.

"The home you are moving out of is irrelevant in regards to the new one. We are seeing folks who become snowbirds and are going to live in Florida for seven months of the year," said Eric Bachman, founder and chief executive officer of Golden Gateway Financial, an Oakland-based reverse mortgage broker that started offering the new loans earlier this year.

Borrowers never have to make a mortgage payment as long as they live in the primary home. Unlike with traditional reverse mortgages that require seniors to be homeowners, renters are not excluded from the new program. And if you already own a home, there is no requirement to sell it. In fact, you could rent it out, which is what Tubbs and Majid are doing with their Moraga home while waiting for the real estate market to improve before selling it.

Before taking out a reverse mortgage for purchase loan, borrowers are required to receive counseling from a nonprofit agency approved by the Department of Housing and Urban Development.

"It's a new way to use a reverse mortgage. It's catching on pretty fast," said Tricia Smith of San Mateo-based HIP Housing, an HUD-approved loan counseling agency in San Mateo.

While it may be the right move for some people, borrowers need to be aware of closing costs, fees and Federal Housing Administration mortgage insurance premiums that can add thousands of dollars to the cost of the loan, she said. Typically, those extras are financed in the loan amount.

The loan amount available to borrowers is tied to a percentage of the current reverse mortgage $625,500 lending limit or appraised value of the purchased home, whichever is lower. The older the borrower, the higher the percentage. The $625,500 lending limit amount expires at the end of 2009 unless Congress acts to extend it.

The down payment money that borrowers have to come up has to be from savings, retirement income or proceeds from the sale of an existing home. If the existing home is sold to provide the down payment for the new home, there are fewer closing costs involved than if the transactions were done separately.

Once the title on the home changes hands, the loan amount, along with accrued interest, mortgage insurance premiums and other fees, has to be repaid to the lender.

"It's not free money. It's a rising debt loan," said Smith.

That said, the product can be used to help retirees downsize to a smaller home or help renters become homeowners, she said. "They won't have to make a (mortgage) payment for the rest of their life," Smith said.


HOME EQUITY CONVERSION MORTGAGE (HECM) FOR PURCHASE REVERSE MORTGAGE
1. Must be age 62 or older.
2. Property can be a single-family house or condominium and must be the primary home. Investment purchases not allowed.
3. Loan amount is a percentage of the reverse mortgage $625,500 lending limit or appraised value of purchased home, whichever is lower. The older the borrower, the higher the percentage of loan amount.
4. Borrower must have substantial funds available for a down payment either from the sale of an existing home, savings or retirement income at time of closing.
5. No credit or income restrictions.
6. Borrower must participate in a consumer information session given by an approved HUD-approved counselor.

The subprime to prime mortgage handoff

Data released by the Mortgage Bankers Association confirms the trend that prime borrowers are the ones to worry about.

While the percentage of mortgages entering the foreclosure process in the 2Q held relatively steady at 1.36%, the change in composition is noteworthy.

From the MBA press release:

While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans. The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five.

Another interesting bit for taxpayers - there’s been a big jump in FHA foreclosures, currently at 1.15% percent. The FHA is essentially a government mortgage insurance agency so foreclosures. While the FHA brags on its website that it’s self-funded, if the losses become too much, it’s safe to assume in the current environment that the government would extend a helping a hand.

Also, it’s the FHA that essentially took on subprime lending last month when it agreed to give mortgages with negative equity in their homes. In July, it loosened its criteria so homeowners significantly underwater could refinance into an FHA loan. These borrowers can now borrow 125% of their home’s worth, up from 105%.

UPDATE: MBA just got back to me about what’s included in their prime category and it looks like Alt-A loans are mostly categorized as prime by those banks participating in the survey. That could be skewing things since Alt-A loans by definition are less than prime and extremely loose lending standards during the boom have made them look more like subprime loans. For example, borrowers taking out an Alt-A loan could state their income rather than prove it.

Tips on buying a home

When you hear advertising for REVERSE End Mortgages and the lender says you must buy mortgage insurance to cover your loan if you can’t pay for it. Bull!

1. Before some PMI (private mortgage insurance), the home must go into foreclosure.

2. When getting loans that seem like a terrific deal, ask questions, before it becomes too late.

3. If you try to sell your home and prices are still low and your offer to purchase your home is not what you as a seller wants, ask your lender about a short sale. This means what is due against the loan. Sometimes this is doable and can be worked out and if you were told to buy PMI insurance it’s with the understanding it is a great deal for you––wrong. This is only if you can sell the home.

4. When you go searching for a loan, just remember that if you use a secondary market that is used for a lesser down payment or no down payment, the mortgage on your home is sold after 90 days or whatever pleases your lender. It could sell three to six times more (change lenders). You, the original lender, never know or you could get lucky and not be sold at all. But if it is sold, remember each time your loan changes hands, the previous lender needs to file a release at the recorder’s office in the county your property is located in, so when you choose to sell, it goes smoothly.

There probably isn’t a person who at one point in time in their life that doesn’t want to own a home! But here is some food for thought. Try the lenders in your hometown and make sure you are comfortable with the loan and the terms.

If you choose to go online or go elsewhere, check with someone who has used that lender.

I have used lenders outside of home boundaries and I interrogate them to make sure they are the quality we need to be using.

Ask every question possible when going to purchase a home, when using PMI and make very sure you don’t have to be homeless and sitting along the street or in a tent or your car, when the air has cleared.

Buying a home or an investment property is still the American dream, but make sure it’s your dream and you have good results.

The Meaning of a Buyer’s Market

In the world of real estate investing, it is very important to pay attention to market conditions for they will dictate whether it is the best time to make a move or wait things out. With all that has been happening in the housing industry and financial sector these days, many experts and analysts are saying that it is indeed a buyer’s paradise.


When you hear the term “buyer’s market”, you can safely assume that buyer’s have the upper hand. In terms of investing in real estate properties including foreclosure homes, it could mean three things: low asking prices, acceptable interest rates and large inventories.

These three factors are very important if you want your foray in the world for real estate investing to be successful. If they are present, you will never go wrong. At present, you will be delighted with the many homes for sale to choose from, the high affordability of these homes and the reasonable interest rates. Keep in mind that having a high credit score.

Of course, having the advantage will mean enjoying certain perks. For example, you can always ask sellers to lower their asking prices during negotiations. If this is not possible, you can look for a seller offering incentives like shouldering closing costs.

Considering that it is a buyer’s market, you should not hesitate to ask for such things especially because of the tough competition among these sellers. And with the foreclosure crisis still rampaging on, most of the lenders/sellers are slashing down asking prices for these foreclosed properties in order to reduce their inventory and control holding costs.

A buyer’s market should be taken advantage of considering that, sooner or later, the market will eventually balance out. In an ideal market, the buyers and sellers are on equal footing and you should definitely not wait for this to happen if you do not want to lose all those advantages.

CORRECT: New Mortgage Insurance Applications Up In June

DOW JONES NEWSWIRES
New residential mortgage insurance applications rose in June from a month earlier, but the number was the second-smallest in the past seven months, according to a survey of the biggest private mortgage insurers.

Mortgage defaults grew slightly in June from May while cures fell in the same period. Defaults and cures remain elevated from a year earlier, though defaults have fallen from the highs in December and January and cures are lower than in February and March.

Insurers received 56,271 new applications for mortgage insurance in June, up 1.5% from May but 38% below June 2008.

New insurance written grew 11% to $7.65 billion in June from May but fell 44% from a year earlier.

The total amount of mortgage value that is covered by private mortgage insurance was $915.1 billion in June, with insurance typically guaranteeing a portion of that amount. In June, total insurer exposure was $209.6 billion.

Covered mortgages that went into default, or became at least two months overdue, rose 0.5% to 88,362 in June from May and jumped 30% from a year earlier.

Defaulted mortgages that cured, or were brought current after being at least two months overdue, fell 1.3% to 51,908 in June from a month earlier but were 20% more than in June 2008.

Mortgage insurance protects lenders from losses on defaulted mortgages and is typically required on mortgages obtained with less than a 20% down payment.

Mortgage Insurance Losses Narrow to $1.9bn

Underwriting losses in the mortgage and finance guaranty segment reached $1.9bn for Q109, but compared to the same quarter for 2008, losses might reach a plateau, according to a report from A.M. Best, a global credit rating system.

In Q108, mortgage and financial insurance companies registered $3.3bn in losses, an analyst at A.M. Best said. The losses are decreasing, but their magnitude still impacts the US property and casualty insurance industry’s net income, which plummeted by 87% in Q109 from the same quarter last year to $1.2bn.

“The year over year decline in earnings was primarily due to the severe and prolonged turmoil in the financial markets and the related impact on the industry’s net investment income and realized capital losses,” analysts said in the report.

Mortgage insurance companies protect lenders against loss on defaulted loans. Analysts couldn’t point to a specific cause for the quarterly losses, and a mortgage insurance firm could not comment ahead of Q2 earnings releases.

Mortgage Insurance Stocks Move Lower Amid Economic Concerns

NEW YORK (Dow Jones)--Mortgage insurance stocks were in the red Monday, weighed down by continued worries about the economy, though the rest of the insurance sector managed to buck the trend as Sandler O'Neill issued a positive second-quarter outlook for property/casualty insurers.

Among the insurance sector's worst performers Monday was mortgage insurer Radian Group Inc. (RDN), which fell 10% recently to $2.49. Fox-Pitt analyst Matthew Howlett noted in an interview, "mortgage insurers are more levered to economic fundamentals" such as jobs and housing. "People are getting more skeptical on housing and the default cycle," Howlett said.

Among other mortgage insurers, PMI Group Inc. (PMI) slid 3.7%, to $1.80, and MGIC Investment Corp. (MTG) dropped 1.7%, to $3.97. Struggling insurance giant American International Group Inc. (AIG), which has mortgage insurance operations, dropped 12%, to $16.03.

Several bond insurers were also down Monday, as Amabac Financial Group Inc. (ABK) fell 3%, to 85 cents, and Assured Guaranty Ltd. (AGO) slumped 2.2%, to $11.79. But MBIA Inc. (MBI) rose 1.8% to $4.03.

Most other insurers were also in the black. The Dow Jones U.S. Insurance Index was recently up 1.2%.

Sandler O'Neill issued a note to clients Monday predicting second-quarter book values for most of the insurers it covers will have had "significantly positive book value growth during the quarter." The firm projected the property/casualty group will show average growth of 9.4%, thanks to equity and bond market increases during the quarter.

The firm also said it expects "a fairly positive" earnings season for the property/casualty insurers. However, the firm noted there is a big unknown for the quarter: how much in favorable reserves will have been released. Noting 2008 and first-quarter 2009 results benefited from favorable reserve releases, the firm said "we believe that these favorable reserve releases can't last forever and expect favorable development to decline significantly over the course of 2009."

As for the mortgage insurers, Motley Fool analyst James Early told Dow Jones Newswires "we still have had a lot of negative housing news and a lot of negative employment news, which can morph into negative housing news. That's a negative from a business perspective; if the money's not coming in the door for those insurers, and they're paying out more, that's not good."

Consumer Protection on Wide Scale

WASHINGTON -- The Obama administration's proposed consumer-protection agency would have broad oversight for a range of products, beefing up the government's regulation of credit cards, mortgages and gift cards, as well as expanding its authority over financial firms.

Draft legislation unveiled Tuesday by the Treasury Department would for the first time make a single entity, the Consumer Financial Protection Agency, responsible for writing and enforcing rules across a range of financial products used by consumers.

Real Time Economics
What Would Consumer Protection Agency Do? "This agency will have only one mission -- to protect consumers," Treasury Secretary Timothy Geithner said.

Securities products overseen by the Securities and Exchange Commission and most of the insurance industry wouldn't fall under the new agency's oversight, a Treasury official said. But the agency would have subpoena power and would be funded in part by the financial-services industry.

The Treasury and White House plan to work with Democratic leaders in Congress to try to move the legislation quickly.

The measure is expected to draw opposition from the financial-services and business communities, which argue that the new agency would stifle product innovation and prevent firms from offering tailored products to customers.

"Basically, the government is deciding what every bank in every circumstance should offer," said Ed Yingling, president and chief executive of the American Bankers Association.

The proposed new agency is part of the Obama administration's efforts to revamp regulation of the U.S. financial system.

The new agency's reach would allow it to streamline federal mortgage-disclosure rules, and enforce recently enacted credit-card rules, Mr. Barr said. It could also potentially write rules to require banks to get permission from customers before enrolling them in costly overdraft plans.

The Tax Implications of Foreclosures

Foreclosure Tax Basics
A foreclosure transaction occurs when a mortgage lender repossesses a borrower’s property and then sells it to pay off the debt. In most cases, however, a foreclosure will only happen when the mortgage debt exceeds the property's fair market value, or FMV. In this situation, the federal income tax rules treat the foreclosure as a sale for the FMV amount.

Therefore, a tax gain will result if the property’s FMV exceeds its tax basis. (The tax basis of a principal residence usually equals the original cost of the property, plus the cost of any improvements.) On the other hand, a tax loss will result if the property’s FMV is less than the tax basis.

If a mortgage lender also forgives some or all of the debt against your property in conjunction with or after the foreclosure transaction, you have cancellation of debt (COD) income. That income is taxable unless an exception applies.

Remember: Just because your property is foreclosed doesn’t necessarily mean the lender will forgive any of the unpaid mortgage balance (the so-called deficiency). When there is no forgiveness, there is no COD income. That said, mortgage lenders in these tough economic times sometimes will forgive all or part of the deficiency, so COD income can be fairly common these days.

Don't Forget the Home Sale Gain Exclusion Break
Another thing to consider is whether or not you qualify for the federal home sale gain exclusion break, which allows an unmarried person to exclude (pay no tax on) a gain of up to $250,000 while married joint filers can exclude up to a $500,000 gain. To qualify, you generally must have: (1) owned the home for at least two years during the five-year period ending on the foreclosure date and (2) used the home as your principal residence for at least two years during the five-year period ending on that date.

The Bottom Line
Probably the most important thing to understand about a principal residence foreclosure is that the mortgage lender will not necessarily forgive any of the unpaid balance that remains after the property is sold. However, in the current environment, some forgiveness would not be unusual. Also, keep in mind that you may not know for quite a while after the foreclosure whether anything will be forgiven.

Tax-wise, the most important thing to understand is that a foreclosure can potentially result in a taxable gain, and it might result in some taxable COD income, too.

Fortunately, with a principal residence foreclosure, an otherwise-taxable gain can often be excluded for federal purposes thanks to the home sale gain exclusion break (state income tax results can vary). Also, some or all of the COD income may be tax-free thanks to favorable tax-law exceptions. However when no exception applies, the COD income is fully taxable.

Mortgage approvals rise in May

The number of mortgages being approved rose by 15.8% year-on-year during May, reaching 31,162 in total, according to new statistics from the British Bankers' Association (BBA).

This figure marks a continuation of a trend seen during the last six months, with the number of house purchase loan approvals, along with their average value, increasing steadily.

However, the BBA indicated that the mortgage market as a whole was still struggling, with net new lending standing at £2.3bn for May, the weakest monthly increase since early 2001.

Net new lending stood at £2.5bn in April.

"Steady monthly increases since last November have seen the number of loans approved for house purchase recover to levels seen in early 2008, although gross and net mortgage lending show a subdued wider mortgage picture," said BBA statistics director, David Dooks.

"However, unlike much of the mortgage market, the high street banks are still seeing lending growth and improved mortgage availability is reflected in higher average loan approval values."

Have Mortgage Delinquencies Hit Rock Bottom?

It is baffling just how many homeowners are going belly-up in their loans, especially considering that there are copious mechanisms in place to save those who are facing foreclosure or even see themselves nearing the road to foreclosure. The foregoing not withstanding, there is a school of thought that suggest that mortgage delinquencies have not yet hit rock bottom. Economists state that seven out of 100 homeowners are currently delinquent on their mortgage loans.

What makes matters is the number of those who are barely hanging on to their homes and who are being laid off, overtaken by consumer debt, and also fell victim to the lure of easy equity when they could ill afford to take out any money from their homes. Now upside down in their loans, there is no chance of refinancing and rescue is available only by qualifying for one of the government programs. Perhaps it is the notion that homeowners are finally seeking help that makes the Mortgage Banker’s Association comment on a decline in new foreclosure filings.

Unfortunately, investors are not buying the good news, especially since the drop in foreclosures could be the loans currently on hold while awaiting a decision to see if homeowners are eligible to participate in any one of the governmental programs. Thus, there is a good chance that the actual number of halted foreclosures may be unduly watering down the foreclosure rates, seeing that not all halted foreclosures will actually result in saved loans. In these cases, the halted foreclosures may buy some time, but eventually become foreclosures nonetheless.

With the upset in the housing market, the upset in the employment numbers does not bring any good news. As a matter of fact, states that are considered ground zero for the mortgage meltdown – Nevada, Florida, Michigan, and California – also report skyrocketing unemployment as well as projected job losses that are yet to hit the ailing economies of these states. Speculations are rampant that further economic downturns are likely to happen. When this occurs, the next wave of foreclosures is going to continue dragging down the markets locally but also nationally.

As such, it is a safe bet that mortgage delinquencies have not yet hit rock bottom, and may actually still be in the mid stages of their freefalls. This is especially true considering that other forms of mortgages are now beginning to also join the subprime mortgages in their foreclosures. With so many consumers living from paycheck to paycheck, even the loss of only one or two such paychecks can hail fiscal disaster for the consumer, and by extension for the lender who holds the mortgage papers.

Although not saying so loudly, investors are leery to once again jump headfirst into the mortgage market and not even the government incentives are sufficient to have them change their minds. This of course begs the question what it will take to once again make them comfortable to invest in the housing market. Some speculate that only governmental coercion could accomplish this feat, while other hope that a slowdown in foreclosures will be enough for the more daring ones to once again infuse cash into the housing market.

More fixed-rate mortgages go up

More big lenders have increased the cost of their fixed-rate mortgages for new borrowers.

The Abbey, the UK's second biggest mortgage lender, has put up the cost of its fixed-rate deals by between 0.25% and 0.5%.

Lloyds banking group has also made some of its fixed-rate deals more expensive.

The trend started last week when the Nationwide building society raised the cost of all its fixed-rate home loans by up to 0.86%.

The main factor behind the changes has been the increasing cost of swap rates.

These are the fixed rates at which banks and building societies borrow money from each other, for specified periods of time, to fund these particular mortgage deals.

"Swap rates have increased substantially in May and June and in particular last week," said Nici Audhlam-Gardiner, director of mortgages for the Abbey and the Alliance & Leicester, both run by the Spanish bank Santander.

"Following competitor moves and further swap rate increases, it has become necessary to increase the rates on some of the deals we offer," she added.

Going up

Other lenders which have taken similar steps recently are the Woolwich (part of Barclays), Northern Rock, Cheltenham & Gloucester (part of Lloyds) and the Halifax (also now part of Lloyds).

Fixed-rate deals have become very popular again in the past few months.

During April 69% of all new home loans were at fixed-rates, according to the Council of Mortgage Lenders (CML).

With the Bank of England's Bank rate still at a record low of just 0.5%, the expectation is that the official cost of borrowing can only go up when it is next changed. Some suggest therefore it may now be a good time to fix the cost of a home loan.

"People thinking of taking out a fixed-rate should not delay, but should move as quickly as possible," said Melanie Bien, of mortgage brokers Savills Private Finance.

"I think rates will go higher still."

According to the financial information service Moneyfacts, the average cost of a two-year fixed-rate loan, for someone with a 25% deposit, is currently 4.28%.

For borrowers who can only put down a 10% deposit the average rate is higher at 6.06%.

A Mortgage Modification While Unemployed Is Not Impossible

Some homeowners think that getting mortgage modification while unemployed is impossible. This couldn’t be further from the case. While it is true that you will have a more difficult time being approved for a mortgage modification while unemployed, many lenders do accept homeowners who currently do not have a job.

Unemployment is no rarity in today’s economic climate, and lenders are coming to cope with that.

Even someone who used to have a very stable position in their company is at risk at layoffs these days. Homeowners from all walks of life with homes that range in value from $60,000 dollars to $700,000 dollars are having problems sending in that monthly check to their mortgage lenders. Families who were having trouble before are facing impending foreclosure while those who were secure are now having trouble making ends meet.

If you are currently unemployed, it’s important to highlight your possible financial possibilities in the near future and how you are planning to handle your mortgage after the modification.

If you receive unemployment checks, your chances are higher to be approved that someone who is not. In some cases you get the same chances as someone with a job, depending on your debt to income ratio. If you bring in enough through unemployment and do not have many expenses, your chances for approval are significantly higher than otherwise.

Your best chance for getting mortgage modification while unemployed is for you to state your case in your hardship letter. The hardship letter tells the lender what is going on with you right now and why you can’t pay your mortgage at the current interest rate. And on top of that, you let the lender know your plans for getting out of your financial troubles and how you’re going to handle the payments once the modification is approved.

Lenders are looking for homeowners who are going to be able to pay the new mortgage rate after loan modification. Even if you’re unemployed, the lender will still consider you if you show that you have a real intent to get back on your feet and work with them.

Some lenders, like Citibank, are even reaching out to homeowners who have lost their jobs and attempting to work with them towards lower interest rates to keep them in their homes. Foreclosure doesn’t help anybody, and lenders know that more than anyone else.

Do you want to know how to get a mortgage modification while unemployed? Show you’re confident you’ll be on your own two feet again and tell your lender that you will do anything to stay in your home. It may just work.


By: Lindsy Emery

Regulator Says Mortgage Aimed at Elderly May Be Risky

By Margaret Chadbourn

June 8 (Bloomberg) -- Comptroller of the Currency John Dugan said a type of mortgage sold to older homeowners may pose the same risk as subprime loans, and that his agency was slow to act as rising foreclosures led the market to collapse.

“We all could have sounded the alarm earlier about risks that were developing in the subprime mortgage market,” Dugan said at an industry conference in Orlando, Florida, as he raised concerns about so-called reverse mortgages. “It is imperative that our consumer protection standards be robust.”

Congress stepped up efforts to curb predatory lending practices and halt foreclosures after the subprime mortgage market collapse in 2007. Lawmakers passed a $700 billion package that was signed into law in October and sought to shore up the financial system and halt the record pace of foreclosures.

“While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells,” Dugan said at the American Bankers Association conference on compliance issues. “Now is the time to get out in front of this issue - before real problems develop.”

A combination of job losses, lower pension benefits and declining values in retirement accounts will increase demand for reverse mortgages as homeowners older than 62 seek to increase their income by using the equity in their homes, he said. The loans are often attractive to lenders because insurance from the Federal Housing Administration limits their losses, he said.

Guidelines

Dugan said OCC will release guidelines on reverse mortgages, which let a homeowner borrow without having to make payments until they die, sell the home or fail to pay taxes. Regulators should establish more rules for borrowers and lenders, including requiring escrows for taxes on reverse mortgages, he said.

Risks that contributed to the collapse of the subprime- mortgage market also are a concern in the sale of reverse mortgages, Dugan said. Complex lending products have the potential to result in “skewed incentives” for servicers that are underwriting reverse mortgages, and the product is “fraught with consumer compliance concerns,” he said.

Dugan, who regulates more than 1,500 banks including units at Citigroup Inc. and Bank of America Corp., said the agency needs to be on “constant alert to emerging risks” and remain vigilant on regulatory compliance. He said lenders contributed to the worsening economy by using loose underwriting standards and failing to adequately protect consumers.

The Department of Housing and Urban Development has estimated borrowers with lines of credit often withdraw at least 60 percent of their funds once the loan is approved, Dugan said. HUD pledged to develop programs that give financial counseling to consumers, including those with reverse loans, he said.

Insurance deals need to cover valuable possessions

New research shows that two-thirds of respondents have a potentially valuable collection of items but many are unaware of how much it is worth.

Findings from Halifax Home Insurance revealed that 47% said they do not know how much their items could be worth while a further one in 10 have no home contents insurance in place.

Additionally, 38% think their valuables are covered but are not certain about the policy details.

David Rochester, head of underwriting at Halifax Home Insurance, said: "Although in many cases collectables are unique and irreplaceable, most people would at least want to recoup any financial loss in the event of them being stolen or damaged.

"We'd recommend anyone who has a potentially valuable collection to get it valued by an expert every two years and ensure they obtain a dated copy of the valuation certificate."

The survey also showed that 19% of people said they were keeping these collections in the hope that they will increase in value in the future.

Rate standstill prompts advice to fix home loans

BORROWERS were advised yesterday to lock in to a fixed rate mortgage after comments from the European Central Bank were interpreted as signalling an end to the current cycle of rate cuts.

Economist Austin Hughes of KBC Bank said it was now likely eurozone rates would not go below their current level of 1pc even if the first hike in interest rates seems far away.

Comments from ECB president Jean-Claude Trichet yesterday indicated that central bankers believe the worst is over for Euorpean economies, but that the turnaround would be slow.

Mortgage

Mortgage adviser Karl Deeter of Irish Mortgage Brokers warned that some fixed rate mortgages have already started to rise.

In March, before the ECB dropped its main rate to 1pc, homeowners could get a five-year fixed rate of 3.6pc from AIB, but now that has crept up to 3.69pc.

"Profit margins are moving upwards while the ECB's base rate moved down. Already that means you'll pay just over €20 per month more on a €300,000 mortgage."

Mr Deeter said the danger of a return to inflation was evident. Any rise in inflation would spark the ECB to start pushing up rates.

Commodity prices, such as gold, copper and oil, were all rising. These were all signs that inflation is coming, Mr Deeter said.

Frank Conway of Irish Mortgae Brokers said the cycle of interest rate rises appears to have run its course.

Mr Conway said that with fixed rate so low, the argument for fixing has never been stronger.

"For consumers who have experienced savage wage cuts (in the private sector) as well as increased taxation by way of income and pension levies, fixed-rate mortgages can provide excellent insulation against rising mortgage repayments.

"They also become a great budgeting tool for homeowners who need to manage their day-to-day finances," Mr Conway said.

The Professional Insurance Brokers' Association (PIBA) said consumers should consider fixing, but not at any price.

Its chief executive Diarmuid Kelly said some short-term fixed rates may not be optimal if interest rates rise substantially within the next two years.

"PIBA would caution against such short-term fixed rates, as they may not represent value taking account of likely medium term economic realities.

"The kind of stimulus packages being injected into the US and belatedly European economies are likely to lead to increased inflation to which the natural economic response will be increased interest rates.

"For an extra payment of €96.14 per month on a loan of €190,000 a person can avail of a five-year fixed rate rather than a two-year fixed rate giving them security against upsurging interest rates after this deflationary period," he said.

Months later, flood recovery still ongoing

TUMWATER, Wash. -- Most of the Tumwater Fish Hatchery is back up and running, but not all.

The Deschutes River backed up so high in January that the water level rose up to 6 feet, filling a huge space near the fish ponds with gravel, sand and other debris.

Crews have been dredging out the buildup, but their work isn't done. Part of the lower fish ladder still needs work.

The gushing waters also wiped out a safety fence where people can stand to get a good look at the falls, and will cost close to $3,000 to replace it.

"These are a bunch of small projects where that we're working," said Willie Nunn of FEMA.

The damages were small by FEMA standards, but large to most counties that don't have tens of thousands of dollars to spare for repairs. Thirty three of the state's 39 counties have ongoing repair projects.

FEMA works closely with the state to make sure each of those projects is getting done since they involve community infrastructure. But they also work closely with homeowners to make sure they're getting the help they need.

"If they feel that something's missing they need to call back, they need to let us know. They need to let the state know. Because if we don't don't know, we can't help," said Nunn.

Now, FEMA and the state are pushing to prevent the damages from recurring in future storms.

"If you've been flooded, you may qualify or be eligible for a mitigation grant that would elevate your home so that we can turn around and prevent the flooding in the future," said Kurt Hardin of the state Department of Emergency Management.

Studies indicate each dollar spent to prevent damage saves taxpayers $4 in repairs.

And residents shouldn't skip flood insurance, even if they don't live in a flood-prone area. Over the course of a 30-year mortgage, a homeowner's risk of flooding is one in four while the risk of fire is just one in ten. And one third of all flood insurance claims are by residents who live in low-risk communities.

"If a water main breaks and they get flooded, they may not be eligible for any assistance except flood insurance," said Hardin.

House prices could be rising by the end of the year, predict experts

House prices could begin rising again by the end of this year, ending a slump that will have wiped more than ?50,000 off the average property value.

Experts from Lloyds group, which owns 30 per cent of the mortgage market, and the brokers, John Charcol, believe the clouds covering the property market will begin to lift by the autumn.

There is already some evidence of a pick-up in the number of buyers and sales going through estate agents.

Separately, both the Bank of England and Council of Mortgage Lenders (CML) are seeing a rise in the number of mortgage approvals for home purchase.

To date, the levels involved are still well down on a year ago - around 50 per cent - and they have not been enough to halt the fall in house prices.

However, while prices are expected to show further falls over the summer, there are signs they will stabilise and even move upwards by Christmas.

The consensus is that the current bust will see house prices fall by around 25 per cent - more than than ?50,000 - from the peak of the summer of 2007 before any recovery.

According to the Nationwide, the fall has already been 18.4 per cent and it believes there is another 6 per cent to go.

He believes house prices will fall 8 per cent by the autumn, but will then rise by 3 per cent over the final three months of the year.
'Estate agents have been reporting increased interest from both first time buyers and movers since the beginning of the year and some of that interest is now translating into sales.

'The good news on the mortgage front is that over the last few weeks lenders have been increasing the availability of mortgages up to 80 per cent and 85 per cent Loan to Value.

'I expect the market to stabilise by the third quarter of this year and house prices to show a net fall of only 5 per cent in 2009.'

He stressed there would be no return of a boom, saying: 'House prices are unlikely to recover quickly… the prospect of increases in interest rates, plus lenders’ less generous affordability calculations, will inhibit house prices increasing too quickly.'

Fixed Interest Rates a “Mortgage Mistake”

Mortgage holders that took up banks’ fixed interest rate loan offers are losing thousands of euros annually, reports the regional daily Aamulehti.

The majority of fixed interest rate loans are in the neighbourhood of five percent. People carrying home loans pegged to fixed rates are losing thousands of euros annually in comparison to borrowers with home loans that are anchored to fluctuating reference rates, such as Euribor, according to the Financial Supervisory Authority.

The agency calculated that a four percent five-year fixed rate deal on a 150,000 euro loan will not beat out variable rates until interest rates reach 6.76 percent.

Mortgages linked to the fluctuating European inter-bank lending rate Euribor currently carry interest rates between 1.5 and 1.7 percent.

Between 2006 and 2008 up to a third of home buyers took out fixed rate loans. The popularity of these loans, some 160,000 which have been issued to date, has recently dwindled.

Budget 2009: Building and mortgage lending

Alistair Darling has said a lack of mortgage credit is holding the housing market back.

The chancellor announced construction firms would get £500 million of extra finance to build new homes, and the armed forces would receive £50 million to make home improvements.

He also said the scheme to guarantee mortgage backed securities would be used to help boost lending, particularly for first-time buyers, and an extra £80 million would be put into the shared equity mortgage scheme.

Peter Rollings managing director of estate agent Marsh & Parsons, said: "The government needs to think long term – sticking plaster over sticking plaster isn’t going to heal a wound that needs stitches.

"Crucially, demand for mortgages is there – it’s full to bursting. The banks just haven’t been able to lend. The government guarantees for new mortgage backed securities should offer lenders new finance to fund new lending to take the cap off pent up demand."

Good news also came for the environment as the chancellor announced £100 million for local authorities to build energy efficient homes.

Mark Blackwell, sales director at property and mortgage outsourcing specialist Xit2, said: "The budget announcement that new mortgage backed securities will be underwritten from today should reopen wholesale funding markets for good quality lending.

"Those at the property market coal face tell us demand to buy property is there – we hope these measures will have a noticeable and quick impact on the volume of lending lenders are capable of."

However, the Federation of Master Builders (FMB), has said the chancellor's announcement has not gone far enough for the beleaguered construction sector. Brian Berry, director of external affairs at the FMB said: "The chancellor had an opportunity today to invest in our housing but instead has offered a lukewarm package of financial measures that will do little to increase the housing supply or to make our homes more energy efficient.

"The amounts on offer of £500 million to support the construction industry and kick start stalled construction projects of new homes, coupled with the £100 million for local authorities to invest in energy efficient improvements are a drop in the ocean."

Retirement Still a Concern, but Everyday Expenses Take Priority

AXA recently surveyed Americans age 25 and older with annual incomes of $50,000 or higher, and found that the picture looks bleaker than it did for surveys the company conducted in October and April. In the latest survey, 65% of those polled said they were concerned about meeting everyday expenses, including the ability to pay their mortgage, should they lose their job, up from 54% a year ago.

“Our research showed that paying bills was a middle-of-the-pack concern last April,” said Christopher “Kip” Condron, chairman and chief executive officer of AXA Equitable, in a release of the survey results. “The fact that it is now a top priority underscores how the yearlong market volatility has shaken Americans’ sense of security about their immediate financial future, most notably as a result of job instability.”

AXA suggested that this concern about day-to-day expenses might have led consumers to be less focused about retirement savings. Since last year, consumers’ concern about keeping inflation, taxes, and declining markets from eroding retirement savings has dropped three spots on the overall ranking of financial concerns (from second to fifth). Similarly, concern about protection from market conditions fell two notches to the eighth spot.

Although meeting day-to-day financial obligations is clearly more important, the study found that securing guaranteed income for life remains the top priority for 69% of Americans polled. While half of the respondents indicated they have done nothing to change their financial picture, the results show that more have chosen to do something since October (26% compared to 21%).

“The fact that people are still concerned about the health of their retirement during the market volatility we are experiencing makes it clear that they still understand the importance of preparing for their financial future,” said Condron. “What is alarming, however, is that so many are still not taking the steps needed to achieve those goals.”

Men, Women Agree on One Thing: Retirement Will Have to Wait

The study shows that approximately 40% of men and women within 10 years of retiring plan to postpone retirement. Specifically, 39% of women said they will delay retirement by four years to a revised age of 66. Forty percent of their male counterparts will wait an extra three years and now expect to retire at the age of 64. In both cases, current market volatility is the primary reason for the shift in thinking, according to the survey.

In keeping with the generalization that women are often more conservative investors than men, women respondents show more concern about the economy, yet are less likely to make changes in response to their concern. While 75% of women polled said that receiving guaranteed income for life is a priority, only 58% of men agree, according to the results. Similarly, 74% of women said that paying everyday expenses is “very important,” but just 54% of men shared the same sentiment. In response to market conditions, the study shows that men are also more willing than women to make changes:


Almost three in 10 men (28%) expect to invest in a new product, compared to 20% of women.
More than six in 10 men (61%) plan to shift the asset mix of their investments, compared to 51% of women.
Affluent Investors Show More Concern

The latest survey also found that amid current market volatility, behaviors and attitudes not only varied by gender, but by age and affluence. Notable results include:


Approximately seven in 10 of the affluent polled (67%) are concerned about their ability to pay everyday expenses if they were to lose their job, compared to 60% of the non-affluent. (Affluence is defined by AXA as having an annual household incomes of $100,000 or greater.)

Six in 10 affluent are worried that they may not be able to pay their mortgage if they were to lose their job, compared to slightly more than half (54%) of the non-affluent.

More than three in four (76%) of the older affluent (age 45 and up) polled are concerned about securing guaranteed income for life, compared to just 63% of the younger affluent (ages 25 to 45).

Less than half (48%) of the younger affluent polled believe their personal financial situation has declined in the past year, while 66% of the older affluent feel they are worse off today.

The online survey was conducted in February by a third-party research firm among 1,116 randomly chosen U.S. consumers.

What can you get for $2.3 million?

BY JENNY STALETOVICH
jennystaletovich@bellsouth.net


As long as none of us has any money, why not take a gander at some really beautiful homes that few of us will ever be able to afford? Some ooze style; some come pimped with amenities like full home gyms, commercial-grade refrigerators, soaring fireplaces or guest houses; and some are just cool.

Monthly mortgage payments (not including taxes or insurance) on $2.3 million total $9,878 for a 30-year mortgage at 5 percent interest with 20 percent down. Estimated annual taxes are based on sale prices and include a $50,000 homestead exemption. Broward taxes are calculated using a countywide average millage rate.

Chicago Workplace Spotlight – Seaway Bank & Trust Company

Seaway Bank & Trust Company
645 E. 87th Street
Chicago, IL 60619
773.487.4800
www.seawaybank.us
President/CEO: Walter Grady


--------------------------------------------------------------------------------

A long-standing fixture in the African-American community, Seaway Bank & Trust Company was created to “counter discriminatory lending practices on Chicago’s South Side”. Founded in 1965 as Seaway National Bank of Chicago, the original founders knocked on doors of neighborhood residents to sell shares in hopes to raise $1 million in capital, which was needed to obtain a Federal charter.

Seaway did exceedingly well in its first year, amassing assets of over $5 million dollars and became nationally recognized as one of the largest Black-owned banks in the U.S. (largest in the Midwest) and one of the few “minority-owned banks with corporate trust services”.

Today, Seaway Bank & Trust Company has seven locations throughout Chicago (and recently including the suburb of Waukegan), with ATMs across the city and in O’Hare and Midway airports. Seaway continues to support local businesses and provide minority entrepreneurs with capital needed to shape a new generation of businesses. They are also known for the Seaway Community Development Corporation (SCDC), which features “the 1% Down Mortgage” – a program that has allowed “qualified buyers the opportunity to purchase homes with a minimal one percent down payment and no private mortgage insurance (PMI)”.

You can learn more information about Seaway National Bank & Trust Company by visiting this link.

Finance blog: Bored with Bankers Boards

I am too bored with the banks and the Government this week to rant on about them. That is not to say they don't deserve it, and they have continued to be remarkable in their disingenuousness and hypocrisy, but I would rather a few cheerier topics for once, so a few snippets from this weeks work. A far quicker read for you all as well.

More importantly, we have the answer to last weeks question, and something of a record. We have had the most entries ever, and not one of them was correct. Outstanding, and I thank you for your efforts, and the joy of being custodian for another week of some rather dubious pens & pencils.

You were asked who was the young army officer who took out a policy with the ‘Accident Insurance Company' in 1896, then went on to be involved in various military conflicts, usually involving cavalry charges, was taken prisoner of war, escaped, left the army, became a journalist, went to a war zone, was imprisoned, escaped, and then settled down a bit? Had I mentioned he subsequently became a Prime Minister you would have got it I'm sure. The answer is Winston Churchill. This weeks question is below.

Life Assurance
A topic that arose this week. Many have some form of life assurance, and if you have what is known as a term assurance or decreasing term (usually in connection with a repayment mortgage) these insurances do not have any savings element, and are pure insurance. Circumstances and prices change, so it is worth double-checking now and again to see if yours is at the lowest cost. Be aware though, if you have had any health issues since you took out your current policy, a new insurer might not give cover, so normally, if a premium seems cheaper, make the application but hold onto the old policy until you definitely know the new one is sorted. As an example, I did a check for someone this week, and we can replace their current policy costing £48 per month, with one costing £33, a saving of around £180 per annum, or 30%.

Clarity & Comparison
Will the Banks ever be regulated properly? I doubt it, because there is no will to do so, but I am about to start my own mini campaign for the regulation of savings and borrowing products, so that the terms are clear, easy to compare, and accessible. I'm sure this will be unsuccessful as well but fortune apparently does favour somebody or other.

R85
Another topic that arose this week. A little reminder for those on low incomes with savings; retired perhaps. The personal allowances were increased greatly last year, (to make up for Darling Alistair's 10% tax cock-up) so that for somebody who is 65 or more between April 2008 and April 2009, has a tax allowance of £9,030. (Higher if over 75.) This means you can have this much in pension, or savings interest without paying tax. I

f you have any savings accounts, or cheque account that pays interest, you can arrange to receive the interest gross by use of the very simple ‘R85', a form from the revenue you sign and hand to your bank or building society. (Contact me if you want one.) There is also a form to reclaim the tax over paid. It may not add up to much, but every little helps. (Where have I heard that before?)

Your Question
Mandy & The Mervyns are busy next week, cooking up something nice. They have lots and lots of money to print. Yummy. Sorry, I meant to say undertake a rational round of quantitative easing that will not lead to hyperinflation, and a loaf of bread costing £500. No, in fact I meant printing money. This leads us to your question. What is the largest denomination bank note printed by the Bank of England? Answers by e-mail please, and I promise to find something better than the much-maligned pens & pencils as a prize, and I am even prepared to probe the depths of the desk drawer again.

John.

John C. Cartlidge
Independent Financial Planner
Tel: 0151 336 6610
Email

Jobless rate surges in Florida, bay area

By Jeff Harrington, Times Staff Writer
In Print: Saturday, January 24, 2009

Florida economists are growing accustomed to repeating a phrase no one likes to hear: It's worse than we thought.

As a jarring punctuation mark to a dismal year for job seekers, the state's unemployment rate rocketed from 7.4 percent to 8.1 percent from November to December.

Florida shed a quarter million jobs in 2008, exiting December with 752,000 jobless workers out of a labor force of 9.3-million, according to the Florida Agency for Workforce Innovation.

In the Tampa Bay area, unemployment rose to 8.3 percent, the worst major metro area in the state.

Given the unexpected acceleration in lost jobs, economist Sean Snaith of the University of Central Florida said Friday that the likelihood Florida will reach double-digit unemployment this year "has gone up significantly.'' Indeed, a handful of Florida counties are already there, including Hernando, with an unemployment rate of 10.9 percent.

Historically, unemployment continues rising months after a recession ends. Under one best-case scenario, according to economists, the recession ends in the second half of 2009, and unemployment rises into 2010.

What does that mean for Floridians?

If 2008 was the recession's clarion call, 2009 is shaping up as the year of austerity.

Banks are restricting lending to the most creditworthy consumers, while paring down and eliminating lines of credit for others. To the dismay of the tourism industry, the U.S. Travel Association forecasts fewer people traveling in the country this year, and spending less when they reach their destinations.

Even enthusiasm for the Tampa-bound Super Bowl is tempered, with PriceWaterhouse­Coopers projecting visitors will spend $150-million — $30-million less than if the economy was thriving.

The age of austerity also is rewriting the ground rules for small businesses trying to squeeze a buck. Some are slowing down payments to vendors or lobbying heavily for discounts.

Henry Glime, president of Gallo Building Services in Tampa, isn't reluctant to negotiate with materials suppliers and contractors to find a pricing point that makes sense.

"You have to ask until they say, 'No,' '' he said. "If everyone gives a little bit, the whole project works and everybody ends up being successful.''

Contraction is broad

The housing downturn led the way into the recession, but it doesn't appear ready to lead the way out. Housing starts plunged to a record low in 2008, and home prices continue to fall. By far, construction took the toughest punch last year, accounting for 88,200 lost jobs statewide, or 30 percent of the total loss.

Heading into 2009, the contraction is much more spread out; Microsoft and Disney are among corporate icons announcing job cuts this week.

Retailers are particularly vulnerable, as those that endured disappointing holiday sales are still struggling to entice shoppers. Among the latest moves: Saks Inc. laid off 1,100 workers and cut out its 401(k) matching program, while Williams-Sonoma trimmed 18 percent of its work force, slashed inventory and cut back on catalog mailings.

Businesses find themselves in uncharted territory, which only intensifies the frustration and uncertainty.

The last time Florida's unemployment was this high was September 1992, a year after that recession ended. But unlike that recession and the ones in the 1970s and 1980s, this one is exacerbated by a credit freeze that shows no signs of thawing.

"Florida entered the recession a little earlier than the rest of the country, but there is no sign that the downturn will end sooner there,'' said Mark Vitner, senior economist for Wachovia Corp. "Home prices are still declining across much of the state, putting downward pressure on household wealth and making it more difficult for residents to refinance home mortgages and take advantage of falling interest rates.''

Stimulus package

As with any recession, the depth of the angst and the pace of the recovery vary house by house, industry by industry.

A potential $850-billion federal stimulus package could mitigate the pain. So, too, could moves by federal regulators to keep interest rates low, shore up banks and buy toxic mortgage-backed securities. But don't look for any quick-fix panacea or a V-shaped recovery once a turnaround begins.

"We shifted to a full-blown panic in September, and the thing about panics is you don't un-panic,'' said Scott Brown, chief economist with Raymond James Financial in St. Petersburg. "It takes a while to restore confidence.''

Time, in fact, may be the only solution. Enough time for investors to start trusting Wall Street again, for the shell-shocked but still gainfully employed to start eating out and shopping a little more. Time for banks to start taking a modicum of healthy risk.

Snaith, the UCF economist, thinks a stimulus mix of tax relief and government-backed infrastructure projects will at least mark a turning point.

"What it does is start to put a floor underneath this drop into despair we're seeing and give people a sense that there is a bottom, and we will start to climb out of this recession as we have every other recession in the past,'' he said. "It will get worse, but we're not going to see the Great Depression either. Let's get a reality check. Unemployment was 25 percent then, and we're not going to see that.''

New Northern Rock lending policy

Nationalised lender Northern Rock has been given longer to pay back its £26bn loan as part of government efforts to boost lending and the economy.

The bank had been encouraging customers to re-mortgage with other lenders so it could pay off the loan quickly, but this policy will now be relaxed.

"This means that more mortgage customers will the able to stay with Northern Rock," the bank said.

Northern Rock said "there will be no impact" on its savings customers.
Northern Rock, which was bailed out by the government after a run on the bank in 2007, added that "all government guarantees remain in place".

The bank has been encouraging existing customers to remortgage to other lenders, when their fixed rate product deal ends.

Challenging climate

"We have decided it is not appropriate for Northern Rock to continue to shrink its activities, they have made substantial repayments to the government and is ahead of its repayment schedule," said Chancellor Alistair Darling.

"It is right for them to maintain their lending in the housing market."

He added that the decision was made in the climate when "you're facing the departure of foreign-based banks and some of the smaller building societies are not going into too much lending".

Northern Rock made its announcement on the same day that the government unveiled a second package of measures to support the banking system.

The measures include a scheme to offer banks insurance against them losing more money from their bad debts.