Saturday, May 31, 2008

Loss in Lincoln Park

This is the first of a double weekend HELOC Heaven example post. Our profile is a buyer who bought at the end of the Great Housing Bubble. The price was higher than it really was and they ended up losing everything - well everything but money since they were 100% financed. So lets look at the property -

Here is the property info -

BedroomsStyleLotYear BuiltBathroomsGarageSquare FeetPrice
4 Single Family Home 7450 1945 1
1200 $185,000

Here are the financials -
  • The property was purchased in June 2006 for $325,000.
  • The first mortgage in June 2006 was for $260,000 using an ARM with Eastern American Mortgage Co.
  • The same day second mortgage, also June 2006, was for $65,000 also with Eastern American Mortgage Co.
  • The foreclosure process started Feb. 2007.
  • The REO property was previously listed at $185,000 and has been reduced to the current price of $175,000.
As stated above, the property was 100% financed at purchased. The previous owners held the property for almost a decade so this was not a scam on their end. The lender, Eastern American Mortgage Corp has gone out of business - it looks like they closed up shop in January 2008.

So back to the example, 100% financing on a property and within 8 months the foreclosure process started. Counting back 90 days to the first missed payment - that means within 5 months of purchasing the property the new owner was in trouble. Now whoever purchased the loan from Eastern American Mortgage is going to lose $150,000 outright plus the foreclosure expenses. The property financials do not look good anymore but packaged in an SIV or some other cool acronym this really must have looked like a winner.

Lender Troubles

Quick post -

This article in the LA Times discusses that there is much less walking away then previously reported - In mortgage meltdown, 'walkaway' homeowners may be suburban myth. Here are the two key paragraphs -

"So many of the loans made were irresponsible -- for the borrowers and for the lenders," said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County. "Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the sub-prime meltdown as much as possible on their borrowers."

It is generally agreed that the real culprit in the meltdown is the proliferation of exotic mortgages that hit borrowers -- many with paltry down payments and therefore almost no equity in the home -- with huge payment shocks in the early years of the loan. The new payments are often raised to levels that the borrowers could never have afforded but expected to escape via a refinancing or a sale of the house into a rising market.

In summary - the lender philosophy was blame the borrow and house value keep rising.

Friday, May 30, 2008

Redlining HELOCs

Are lenders redlining HELOCs? That is a question Washington lawmakers are asking today. First, what is redlining?
It is a discriminatory practice, involving lenders which refuse to lend money or extend credit to borrowers in certain "struggling" areas of town.

An article from CNN Money titled US Lawmaker Questions Lenders on Frozen Home Equity Loans explores the issue that people in certain areas are having their HELOCs shut down independent of equity levels and credit scores. Just targeting a neighborhoods, zip codes or other geographic regions is against the law. Here is a snippet from the article

Rep. Dennis Kucinich, D-Ohio, who chairs the Domestic Policy subcommittee, sent letters to nine lenders Thursday asking why they have suspended home-equity lending in certain areas of Ohio that have been hard hit by the downturn in the housing market.

"People have had their home equity lines suspended whether their credit is good or not, and whether they have sufficient equity in their houses or not," Kucinich said in a statement.

The letter sent to lenders asks what criteria are being used to determine which borrowers are having their home-equity loans suspended, and requests information on how lenders are assessing the value of the homes for borrowers receiving suspension notices. Kucinich also asks what other loan products the lenders have suspended, or are considering suspending.

There probably are people who own 100% of their property and are having their lines closed. It is more likely that there is some models showing worse case scenarios for falling housing prices and these being used to close lines. With current projections of a 10% house price drop across the nation, with projections of another 40% in targeted localities, these calculations will affect HELOCs.

There is a great post yesterday at Calculated Risk regarding a bankruptcy ruling against stated income HELOC lines. Here is an important section:

[T]he Court found that the Hills knowingly made false representations to the lender, the lender's claim that it "reasonably relied" on these representations doesn't hold water, because "stated income guidelines" are not reasonable things to rely on. In essence, the Court found, such lending guidelines boil down to what the regulators call "collateral dependent" loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower's ability or willingness to repay. If you make a "liar loan," the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that's your lookout, not the borrower's.
In summary, many HELOCs were given ONLY on the appraised value of the property. Not the borrowers credit score or the ability to pay.

With the falling property values and more stringent lending practices HELOCs will become less common and harder to qualify for. Opening a HELOC was like obtaining a new credit card - very easy. Getting and holding a HELOC will be more and more difficult, but lenders will also have to explain and justify the new practices. These can not just be done because your neighborhood's values are falling - it must be done on an individual by individual basis. That means alot more work for when closing lines.

Thursday, May 29, 2008

Article or Advertisement?

This article from the Asbury Park Press reads more like an advertisement for using a realtor to buy a shore home rather than an article about a couple relocating. The story about the couple is really quite bland - he works in Westchester and she works in Basking Ridge, they will now commute from West Long Branch. Oh, how sweet, he will get to sit on the Parkway for hours during the summer. Of course the article did not discuss the cons, and the biggest pros discussed is how great working with a shore realty company can be.

Even the title sounds like it was written by a Realtor "Low Rates Help Young Couple End High Rents and Build Equity." With the market still falling there is very little chance of building equity in the next few years. More likely they will be lucky if they do not end up underwater. Well, here are some of the most "informative" snippets:

George Asfendis said, "We were paying over $1,800 a month rent. We wanted to stop paying rent and build equity. We felt we were ready to buy — the prices were affordable and the interest rates were low. Mary and I both love the Jersey Shore area. We decided that was where we wanted to buy our home and raise a family."

The couple looked for a few months before deciding on a West Long Branch home. They credit their Realtor with helping them find the right house.

"Being busy and over an hour away from the area we wanted to buy in made it difficult. We really relied on our Realtor," said George Asfendis. "She was able to zero in on what we were looking for, help us find the right home and make the transition easy. She was instrumental in guiding us through the whole process. She was entrenched in the area and gave us a lot of good recommendations and contacts."

Now maybe the realtor was terrific but having the meat of the article discuss how wonderful she was is a bit much. The article never discusses the low rates they found or what kind of loan they received to build up the equity. At least it did mention the commute:

The Asfendis are pleased to be in their new home and feel it is in a great family neighborhood and definitely worth their daily commutes. The couple has made some improvements since purchasing the property such as updating the kitchen and half bath and replacing a roof and furnace.

The couple probably spend another $100,000 minimum fixing up the place. Once the summer comes it would be interesting to find out if the daily commute is still worth it. If an hour is a long commute to visit an area and see the houses how much fun will sitting on the Parkway be for 4 hours per day at least, and that will be without accidents.

Now to the really important part of the advertisement, I meant article:

Ellen Kale, president of the Monmouth County Association of Realtors (MCAR) said, "The Jersey Shore offers many opportunities for home buyers like George and Mary. It is a great place for families. Working with a Realtor who knows the area and market can help a buyer focus on what is important to them and save time in finding the right home."

MCAR is a trade association serving 7,000 Realtors and Realtor associates and more than 12,000 Monmouth/Ocean Multiple Listing Service (MOMLS) users.

This sounds like a press release rather than an article. If APP also discussed some FSBO sites and other ways to find shore properties than it may be more objective and informative. Overall the article sounds like a Realtor advertisement. MCAR and MOMLS should feel good about the free advertising.

Wednesday, May 28, 2008

Why Bother Saving?

The South Jersey Courier Post has an article on the US Savings Shortfalls and that they cut across all demographics. Americans currently save less than 1% of their incomes, and worse is that we know we are not saving enough. Every one seems to have an emergency funding source lined up - HELOC, credit cards, even raiding the retirement accounts. But no one seems to be saving. According to a Pew Research survey

Three out of four Americans say they aren't saving enough, according to the telephone survey of 2,413 adults conducted earlier this year.

This nationwide "savings shortfall," as Pew dubbed it, is the majority situation in virtually every key demographic group -- rich and poor, male and female, black and white.

According to the survey, people feel they should be saving and are just not doing it. Here are some of the reasons why -

In another survey released last month by Pew and the Gallup organization, a majority of respondents said they hadn't improved their financial lives in the past five years. Twenty-five percent said they hadn't moved forward while 31 percent said they had fallen backward.

Homes are nearly 60 percent more expensive (in inflation-adjusted dollars) now than in the mid-1980s.

The costs of many of the anchors of a middle-class lifestyle -- not just housing, but medical care and a college education -- have increased more sharply than inflation.

These are not even taking into account the recent increase in gas and food prices. When food, housing, gas, medical are and education are rising where will the money come from to save? With real falling wages the only area to save is to cut anything that can be cut.

Slightly more than half of middle-class respondents said they've had to reduce their spending in the past year and they expect to have to continue these cutbacks in the year ahead. A quarter of the people in this same group said they expected to have trouble paying their bills. And about a quarter of the middle class who are employed worried that they could lose their jobs.

In a consumer driven economy any cutback will have a ripple affects. With spending being cut but increases on necessities where can the money to save come from. Just saving alone will require a huge paradigm shift from our debt and credit addicted habits. Will the current credit crunch and housing market downturn be enough to make that shift? We will see.

Tuesday, May 27, 2008

Free Falling

Today's report from the S&P Case Shiller index makes things look very bleak. Record plunges if 14.1 first quarter for year-over-yaer - at a pace five times faster than the last housing recession. This article called Home Prices Fell at Record Pace in First Quarter from Reuters discusses how bad things really are -

Falling home prices have become the scourge of the housing market that is seeing its worst downturn since the 1930s. Home values since last year have been dropping below balances owed on many mortgages, leaving borrowers with no equity and more likely to succumb to foreclosure.

The crisis in foreclosures, which pressure prices even lower, has spurred numerous plans by regulators and lawmakers that aim to keep borrowers in their homes by forgiving a portion of their loan's principle.

The fall of home prices is intertwined with the decline in auto sales and other discretionary spending. The free fall is picking up speed - just how close we are to the bottom is the important thing. With the constant comparison to the Great Depression, hopefully the bottom is closer rather than farther away.

HELOC for a Car

There is a very interesting article in the New York Times discussing how HELOCs were used to fuel the auto sales during the Great Housing Bubble. And how much did the HELOCs fuel auto sales -

Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers.
Wow, one out of every nine vehicles were purchased through a HELOC. Check out the following graphy to see that almost 30% of autos in California were purchased through a HELOC and almost 20% in Florida.

During the Great Housing Bubble money was being given away. Everyone was doing great and everyone was a financial genious. Now with HELOCs getting shut down everything is being affected. Compound that with the rise in gas prices and things look bleaker everyday - across the board for everyone. At least the smart ones paid for the entire vehicle prior to foreclosure so the bank writing off the HELOC in essence paid for the car.

Monday, May 26, 2008

Next Stop - Construction Loans

Very interesting interview in Barrons with Hedge Fund Manager Sy Jacobs. The article is titled Where the Financial Crisis is Headed Next. The full article can also be viewed here. Here are some key quotes:

Subprime is such a small piece of the banking industry, but construction lending is a core product. If the housing market stays weak for much longer -- and it seems to be getting weaker -- construction-loan losses are going to be a big problem.
Jacobs is expecting the fall out from the construction industry to easily eclipse the sub-prime issues.

Bear was not the sacrificial lamb to the market gods. It got knocked down by the same winds that are affecting everybody else. Credit destruction is a process -- not an incident. And avoiding that particular meltdown doesn't mean that things are getting better -- and yet that is how financial stocks in particular and the market in general have acted ever since.
Just because the problems have been avoided does not mean anything has been resolved. All the structural problems still exist and are still iln place.

Home-equity line of credit (HELOC] is 16% of [Wells Fargos] portfolio. More than a third of their HELOC exposure is in California, which is now developing very badly on the home-price and employment fronts. And delinquencies and losses are already rising pretty sharply. But they also have a big unfunded exposure to the undrawn lines of credit. Also, despite their reputation for being conservative, their loan-loss reserve at the end of March was lower than their annualized charge-off rate for the first quarter. Given the prospects for rising losses that we see, that's not conservative. We think they will disappoint this year and next and, as a result, their premium multiple will go down.

Wells Fargo, however, is known as a well-run bank. One example of that is the company's reputation for being very effective at cross-selling its products.

We're most concerned with their exposure to home-equity loans at the top of a real-estate bubble. Remember that home-equity lines of credit sit on top of first mortgages. So if home prices depreciate, which is what is happening now, and a home goes into foreclosure, the home-equity line often gets wiped out. The first mortgage holder can get most of their money back, but the home-equity line absorbs all of the loss.

The home equity is lost on every foreclosure. The first mortgage is the first loan to be reclaimed.

Between the HELOC losses and the construction loan losses the next few years could be substantially worse the anything that happened during the sub-prime debacle. And the interview does not even mention probelms with the option arms recasts...

Sunday, May 25, 2008

Boonton Refi Fun

Todays example is someone who caught the cash out refi-fever. During the peak when the house price continued to rise things were going well - but once the bubble started deflating this homedebtor lost everything. They lost the house and the second income that refinancing and HELOCs were providing. Here is a look at the recently foreclosure and currently bank-owned property:

Here is a look at the property info:

BedroomsStyleLotYear BuiltBathroomsGarageSquare FeetPrice
5 Single Family Home 21780 1958 3
2300 $449,000

Here is a look at the financials:
  • The property was purchased May 2003 for $225,000.
  • The first mortgage in May 2003 was for $213,750 with Quicken Loans.
  • The mortgage was refinanced in August 2003 for $220,000 with Atlantic Home Loans.
  • The mortgage was refinanced again in May 2005 this time for $345,000 with an ARM through American Home Mortgage Acceptance.
  • A HELOC was taken in November 2005 for $25,000 also through American Home Mortgage Acceptance.
  • The mortgage was refinanced again in May 2006 for $381,000 with an ARM with Quicken Loans.
  • A second mortgage was also taken in May 2006 for $30,000 also with Quicken Loans.
  • The foreclosure process started in December 2006.
  • The property is currently bank owned and for sale at $434,900, reduced down from $449,000.
When the owner purchased the property they were able to come up with $11,250 - which was a 5% down payment. While that is not huge, during the Great Housing Bubble that was a decent down payment, after all people regularly put 0% down. However within three months of buying the house they pulled $6,250 of the down payment back out with a refi. The owners did pretty well for almost two years, then they pulled the rest of the down payment $5,000 plus another $120,000 taking out a total of $125,000 of equity out. Six months later another $25,000 was pulled out. And yet another six months after that another $41,000 was taken out through a refi and second mortgage.

It took less than two years between from when the refinancing started to when the property went into foreclosure. During that time the owners took out $186,000. That averages to $46,500 per year tax free the second income provided the own through the home equity.

If the bank gets the full asking price, after the 6% standard realtor's commission the bank will get $408,806 which means the bank will stand to lose approximately $2,000. Not a huge loss on the property but when adding in the foreclosure costs just breaking even will probably cost north of $50,000.

Saturday, May 24, 2008

The Big Slump

The following Bloomberg report titled U.S. Economy: Home Resales Decline, Inventories Jump illustrates the current national real estate problems. While on a regional or micro scale things can be even more glib, the national outlook does not look much better. Lets take a look at the article -

Sales of previously owned homes in the U.S. fell in April and the supply of unsold properties reached a record, signaling no let-up in the 27-month housing slump.

Purchases declined 1 percent to an annual rate of 4.89 million, higher than forecast, the National Association of Realtors said today in Washington. The median price fell 8 percent from April last year, the second-biggest drop.

Recent reports signal little relief for the housing market. The number of banks reporting tighter lending standards approached a record in April, a Fed survey showed. Builders broke ground on single-family homes last month at the slowest pace in 17 years, Commerce figures showed.

Restricted access to credit will continue to depress property values, eroding household wealth as home equity shrinks. The declines are likely to weaken consumer spending further.

During the Great Housing Bubble everyone felt like they mastered their finances. The property purchased was increasing almost exponentially. Their net worth was suddenly very impressive. They could easily get huge home equity loans and lines of credit. As the Great Housing Bubble is collapsing so is the illusions of great wealth.

Friday, May 23, 2008

"Unprecedented Home Equity Loan Losses"

This eye opening HELOC press release from from the Comptroller of Currency, John C. Dugan has some pretty eye-opening statistics and data. The title alone - Comptroller Dugan Tells Lenders that Unprecedented Home Equity Loan: Losses Show Need for Higher Reserves and Return to Stronger Underwriting Practices sets off alarms. Here are some key parts:

Home equity loans and lines of credit grew dramatically in recent years, more than doubling, to $1.1 trillion, since 2002. In part, that’s because of the rapid appreciation in house prices, the tax deductibility feature of home equity loans, and low interest rates.
These relaxed standards included limited verification of a borrower’s assets, employment, or income; higher debt to equity ratios; and the use of home equity loans as “piggyback” loans that helped borrowers qualify for first mortgages with low down payments and without mortgage insurance, resulting in ever-higher cumulative loan-to-value ratios.
Looked at in dollar terms, losses on all home equity loans, including HELOCs and junior home equity liens, rose from $273 million in the first quarter of 2007 to almost $2.4 billion in the first three months of 2008 – a nine-fold increase. And the largest home equity lenders are now saying that they expect losses to continue to escalate in 2008 and beyond, Mr. Dugan said.


In assessing loan loss reserves for home equity loans, he said, banks need to recognize that they are in uncharted territory. “New product structures, relaxed underwriting, declining home prices, potential changes in consumer behavior – all of these factors make it difficult to predict future performance of home equity loans,” he said.
Circumstances have changed fundamentally, and historical trends have little relevance in estimating credit losses. As a result, qualitative factors such as environmental analysis and changing consumer behavior clearly should be factored into the reserve calculation. Likewise, lenders should take into account the very real possibilities that unemployment or interest rates will increase from their quite low current levels.

Times are changing. Unprecedented losses for HELOCs. Historical trends not providing accurate formulas. Things are going to get much worse before they get better. And this is coming from the Currency Comptroller.

Thursday, May 22, 2008

Update to NJ - Bad, but not as bad as others

On May 14th the post NJ - Bad, but not as bad as others discussed how the NAR report differed significantly from the Zillow and Freddie Mac reports in the Atlantic City Area.

From the NAR Report: "Home prices in the Garden State rose in a number of areas, including the Atlantic City region, where the median sales price increased 4.8 percent in the first quarter, to $277,400.

Today in The Press of Atlantic City in an article titled Real Estate Agents Debate Local Statistics discusses doubts about the numbers being generated. Here are some of the interesting points:

Kevin Dawe, a real estate agent with Balsley Losco Real Estate in Northfield, said last week's report that the median home price in the Atlantic City area rose 4.8 percent in the first quarter didn't match what he's been seeing.

In particular, Dawe said the figures from the National Association of Realtors, and other information gathered from state and local Realtor groups, seemed to disagree with what the Multiple Listing Service showed.
Breunig had a theory as to why the NAR survey shows rising prices locally that real estate agents aren't seeing.

The Realtor survey tracks median home prices, the price at which half of all sales were for more, half for less.

The subprime mortgage crisis and subsequent credit crunch have made it far more difficult for low-end buyers to get a mortgage, he said, which has reduced the number of low-end sales. The homes that sell for disproportionately from the upper half of the market, artificially raising the median price.

Good to see others coming to the same conclusion for the same reason!

From Housing Boom To Bankruptcy Boom

As we spiral down the debt cycle - a cycle that was masked during the housing boom by mortgage equity withdrawals - things will get much worse. There are two rock bottoms on the debt spiral - foreclosure and bankruptcy. Some people are choosing foreclosure, while others look to bankruptcy as the way out. This Newsweek article called Bankruptcy: Chapter 11s on the rise takes a look at current bankruptcy rates and issues.

The article starts out with a story about a woman who bought a new home before selling her old home and ran into financial trouble. This is a story we hear over and over again. Something that was common during the bubble since housing were selling themselves, but in normal times owning two houses can be a huge financial strain. So back to the story, the woman was going to file bankruptcy but instead is working with a credit counselor who modified her interest rates. Wonder why Newsweek did not include someone who filed bankruptcy in a bankruptcy story? With such high numbers I am sure someone would tell there story. So lets look at what the article does discuss:

... Despite the increased cost and inconvenience of declaring personal bankruptcy as a result of legislation passed three years ago, filings have jumped substantially in the last few months. More than 4,000 bankruptcy petitions were filed per day in March and April, on average, according to the bankruptcy data and management firm Automated Access to Court Electronic Records (AACER). That's up more than 30 percent from a year earlier and the highest number since the law went into effect. "There's a real sense of financial panic out there," says John Colwell, a bankruptcy attorney in San Diego who has seen his business increase 50 percent in the last year. "And I don't see it abating anytime soon."

...Squeezed by rising costs for everyday necessities like gas and groceries and unable to tap into their homes for temporary relief—declining values have left some people owing more than their homes are worth; it's also more difficult to get home equity lines of credit or loans—many people have turned to their credit cards "as a last resort," says Robert Lawless, a professor of law at the University of Illinois who follows bankruptcy trends. Once they max out their cards, they find it hard to keep up with payments.
Consolidated Credit Counseling Services Inc. founder Howard Dvorkin says his Florida-based nonprofit organization fields about 1,800 calls a day now—up from 1,000 a year ago—and, unlike in previous years, they're coming from consumers across all income levels. "You always saw people who were struggling, living off their credit cards," he says. "But what I see now are upper-middle and even upper-class people having the same problems."

The financial woes seem to be increasingly widespread geographically. The problems were once concentrated in areas like California and Florida, which have been hit hardest by foreclosures and plummeting home values. But bankruptcy filings are now up across the country, with sharp rises in the past few months in states like New Jersey, Ohio, and Oregon—where the number of filings has nearly doubled since January, according to AACER data.

The credit crunch and rising prices are hurting almost everyone from coast to coast. People are using credit to stave off making drastic cutbacks and hard choices. We have been doing this for a while, but when credit was almost too easy to get the problems went unnoticed. Now the downward spiral appears on the express track - things are happening so fast with people's debt problems that it is hard to know what all the problems will be and where they will surface. From one boom to the next, one brought a happy facade the other is bringing real misery.

Wednesday, May 21, 2008

Reverse That Mortgage

One part of the mortgage appears still very busy. It seems like every time we turn on a radio or television program a reverse mortgage ad comes on. With spokespeople like Robert Wagner and James Garner pitching you the benefits of having a Reverse Mortgage, what problems could there be? Well in article by CNN Money titled Reverse Mortgages: Beware the Come-ons, some of the techniques and benefits raise a few questions.

Last year, borrowers took out more than 132,000 reverse mortgages - 50% more than the year before and almost 10 times as many as five years ago.
There's also a downside to reverse mortgages' growing popularity, however. Loan-origination fees that can top $7,000 on a $500,000 home are attracting aggressive salespeople intent on getting you to take out a reverse mortgage whether you need one or not. Some may try to persuade you to invest the proceeds in high-priced financial products, such as annuities, boosting their commissions even more.
A reverse mortgage can generate cash, but it's not the only way or necessarily the best. Up-front costs can exceed 10% of the loan, making a reverse mortgage a very expensive option if you're borrowing a small amount or you plan to move in a few years. In such cases, you might pay far less by taking out a home-equity line of credit. And hanging on to your home might not be a great idea. You may be able to generate more income by selling and moving to a less expensive place.

A 2006 AARP survey found that one in 10 reverse-mortgage borrowers had been pitched a financial product along with their loan, most often deferred annuities but also long-term-care policies. Buying an annuity with reverse-mortgage proceeds rarely makes sense though. As the example below shows, you're unlikely to earn more with an annuity than you are being charged in interest and fees on the reverse mortgage. Worse, you might have to pay surrender charges that are upwards of 20% to take money out in the first few years.
The federal government requires you to meet with a counselor before taking out a reverse mortgage. The quality of the counseling is uneven though. This spring, HUD will promulgate new standards for counseling and require a discussion of the implications of using loan proceeds to buy annuities. If you want a rigorous analysis of whether you're better off with a reverse mortgage or a less expensive home, however, you should consult a fee-only financial planner. (Don't let him sell you an annuity either!) After all, you want to be sure that the equity you took years to accumulate enriches your retirement rather than a salesman's wallet.

To sum up, if your Reverse Mortgage company, broker or salesperson is trying to sell you a annuity to purchase with your reverse mortgage funds - they are scamming you. First they take a large origination fee for the mortgage, then converting to a annuity requires even more fees. Add the difference in interest between the mortgage and the annuity and the company selling the reverse mortgage is doing significantly better than you.

Many people are using the reverse mortgage to scam people out of millions of dollars. The article also provided a great graph of the difference between the interest on the annuity and the interest for a reverse mortgage. Basically, in many cases you are paying a large price to borrow your own equity.

Notice in the first year there is a $17,000 difference and by the end of ten years it is $111,000. Not a bad profit for the lender. Wonder how some of the reverse mortgage issues will factor in slumping housing markets? We always hear that your will never be thrown out of your house - but it will take another 20 years or so for those real statistics to show up. Reverse mortgages are starting to sound like something to good to be true, which usually are too good to be true.

Tuesday, May 20, 2008


First home equity lines get slashed - the latest is Washington Mutual. Combine that rising gas and food costs and stagnant or declining wages so many people are in such a financial slump they are doing what they think is best to make it through. Maybe one reason people have not made drastic spending changes is that day after day we hear the worst is over. But in reality there is still a long way to go. Some Great Housing Bubble luxuries will not be coming back any time soon - like 0% down home purchasing or borrowing 120% of one's equity. Today there is an interesting article from News 10 NY called "To spend debt-on-debt can sour future purchases."

With the fall of the housing market and the recent rise in fuel and food prices, more consumers are struggling to make ends meet. Many are relying heavily on credit cards, for not just their wants, but also their needs.
“Credit cards are meant to be a convenience, not a crutch and when people start using credit cards for basics and then they can't make the minimum payment or they make the minimum payment and they start accumulating balances,” said [Frank Conrad, a retired bankruptcy judge and now an adjunct professor of bankruptcy at Touro College]. “This is a mistake. Debt-on-debt ultimately ends up in bankruptcy.”
It will take some sacrifices now, but the new lifestyle will pay off in the future.
During the Great Housing Bubble it was very easy to live an unaffordable lifestyle - we just kept HELOCing. People are already doing cutbacks and still living well beyond their means. The debt culture has been so ingrained within our current generation that it will take something bigger than the part of the credit crunch and housing crisis we have seen so far to make us change our ways.

While changes are occurring more frequently on a individual basis, a paradigm shift will have to take place that requires us to have a fundamental outlook change on living beyond one's means.

Monday, May 19, 2008

Evolving Squatters

Interesting article from Reuters regarding how with rising home foreclosures a whole new breed of squatters have evolved. This article makes squatters appear to be a new breed of law-circumventing entrepreneurs. And the methods used will make it hard for neighbors and police to detect they are squatters. Here are some of the key parts -

In some regions, squatting is taking on new twists to include real-estate scams in which thieves "rent out" abandoned homes they don't own. Others involve "professional squatters" who move from one abandoned home to another posing as tenants who seek cash from banks as a condition to leave the premises -- a process known by real-estate brokers as "cash for key."

... [Detective Erin Camphouse of the Los Angeles Police Department's Real Estate Fraud Unit] cited another case in which a Los Angeles man recently "leased" three abandoned homes to unsuspecting renters through Craig's List, the online classified advertising company. The renters paid first and last month deposits, moved their belongings in and lived in the homes for several months. "In one case, there were loose ends of rehab on the house that needed to be done and the crook wasn't coming through or wasn't completing it. So they offered to do it instead of paying rent. They put down tiles and carpet and all that kind of stuff. And it wasn't until the sheriff put the lockout notice on the door that they realized something was wrong."

... "We know the people are squatters. But we have had the cops there. We had the electricity shut off and the cops wouldn't put the people out. We have to go to court to get them out. They claim to be tenants," [ New Jersey real-estate broker Bill] Flagg said.

... "These people claim that they have a lease but they can't find it. And the property owner has been removed from the property or been foreclosed on, so they have no interest in confirming if this person is a valid tenant," [Bill Collins, president of the New Jersey chapter of the National Association of Real Estate Brokers] said.

... "And they have caught wind that what most of these banks are doing is giving cash for keys, so cash for eviction -- anywhere from $1,000 to $1,500. So here you have a squatter who goes into a property, takes up residence, tells you that he is a tenant, goes to court and says that he is a tenant.

"The rise of squatting is a natural consequence of these properties sitting there empty caused by the whole foreclosure crisis," said Steve Berg, a vice president at the [National Alliance to End Homelessness].

It is very interesting that the article describes this squatter as tenant or landlord is happening throughout the country. The article sites examples here in New Jersey, as well as Mass. and California. In states like Mass. and New Jersey where there are strong tenant rights laws (see here) this is an excellent scam. It will probably be hard to prove who is the a real renter in cases and who is a squatter - and that gray area will just get bigger and bigger.

Also, squatters are usually thought viewed as homeless vagabonds. But when they appear to be friendly tenants or are taking care and improving the property, neighbors will view things differently. Unless the neighbors know the squatters are living their illegally and for free - which seems unlikely the they will know since the police do not - there will be few complaints. Expect in the future to hear that people had no idea their neighbors were squatters - saying "but they were so friendly and nice."

Sunday, May 18, 2008

A Touch of HELOC in Morristown

Today's example is of a homeowner who bought early in the Great Housing Bubble. They tried for several years to be good homedebtors. But along the way they tasted the HELOC and liked it so much they went back for more. The were not the serial refinancers they were just dabbling but it became to much and now the bank owns their property. Here is a look at the house -

Sorry there are no inside pictures of this one. Here is a look property info -

BedroomsStyleLotYear BuiltBathroomsGarageSquare FeetPrice
2 Townhouse 0 1943 1
980 $189,000

Here is a look at the financials -

  • The property was purchased in July 2002 for $160,000.
  • The first mortgage was taken July 2002 for $155,200 with First Residential Mortgage Services.
  • The property was refinanced in May 2003 for $154,135 also with First Residential Mortgage Services.
  • In July 2004 a HELOC was taken out for $51,200 with Washington Mutual Bank.
  • In July 2006 the HELOC was increased/modified to $66,200.
  • The Foreclosure process started in Dec. 2007.
  • Currently the bank owned (commonly called REO or Real Estate Owned) property is for sale and priced at $189,000.
When the previous owners purchased the property they put a down payment of 3% which came to $4,800. While 3% is not a substantial down payment during the Great Housing Bubble 0% down payment was acceptable. A year later after paying off just over $1000 on the loan they refinanced. Refinances were pretty common in the early Bubble years due to the lowering of the interest rates. This was just a plain refinance - there was no cash out.

Just two years after investing in the house the owners took a hefty HELOC line. Now they owed more approximately $205,335 for the property. Just taking out a HELOC does not necessarily mean people are going through the money. Even during the Great Housing Bubble there were people who may have taken out a HELOC as an emergency fund. For most people just staying in a house for a few years generated a pretty hefty equity.

If you are taking a HELOC as basically a rainy day fund you would not need to increase the line. But these buyers did just that - raised their HELOC limit by $15,000 just 2 years later. At this point the leans against the property would total $220,335. Within 17 months of increasing the HELOC, the foreclosure process had started - and foreclosure processes usually do not start until 90 days after the late payment. So just over a year after borrowing another $15,000 the mortgage payments were not being made.
If the bank is lucky enough to negotiate the full asking price of the property they will lose $42,675. Not a huge financial sum to write-off but is still significant.

The second income that the house generated for the five years the previous owners had it was approximately $12,000 per year. A $12,000 a year second income may not make one live like a rock star, it is not a bad little extra chunk of change.

Shiller Foreclosure Analysis

Excellent article by Robert Shiller today in the New York Times called the Scars of Losing a Home. The entire article is an excellent read - here are some key parts:
ACROSS the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.

... [W]e have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

... MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

But we are now seeing the president’s Ownership Society plan operate in reverse. Already, the homeownership rate has fallen — from 69.1 percent in the first quarter of 2005 to 67.8 percent in the first quarter of 2008. That’s almost back to the 67.5 percent level where it stood when Mr. Bush took office in 2001. And it is likely to fall further.

The pain of this reverse movement could leave a psychological scar that will be with all of us for the rest of our lives.

The Great Housing Bubble and downward economic spiral is happening to everyone in the country whether they realize it and accept it or not. The reverberations and affects will be felt from one coast to the other. And he is 100% correct in mentioning all of the actors involved with the current mess. The home owner suffers the most and is the most visible since the bubble burst. However, jobs and entire industries have disapeared over night.

In 1969 Caroline Bird wrote a book called Invisible Scar. In the book she describes being inspired to write the book for a new generation that were not alive to realize the economic conditions and problems that had recently taken place. The memories of the Great Depression's economic hardship and suffering were fading. She wanted to preserve that knowledge and lessons learned for current and future generations.

Probably 30 years in the future sociologist and social scientists will be documenting the Great Housing Bubble for posterity. I would not be surprised if this article was in the bibliography.

Saturday, May 17, 2008

Bubble Smarts

During the boom everyone seemed to be making money. People felt they were so financially clever after all they were making money on their investments. Also if the lenders were approving their loans than everything was fine. There appeared no reason to question if a loan made sense - pre-bubble loans were made if one could afford them. Homedebtors assumed if they were given a loan they could afford it. Homedebtors still clung to the illusion that the lenders worked for them and were looking out for their best interest.

Like the woman profiled in today's New York Times article, there was always a plan. This article is titled A Thicket of Easy Loans that Entangled One Mortgage Holder. It is actually a refreshing article by someone who felt they were so smart and had everything figured out and are now realizing that they were wrong. Unfortunately the fall is not worth the new knowledge. Let's take a look at the article

ROBIN SOTIRE thought she had a financial plan all worked out when she moved from Arizona to Connecticut in the summer of 2006 to handle her mother’s estate and care for an elderly aunt. She was going to sell her house in Arizona, fix up her mother’s three-family home in Stamford using home equity loans, and then sell both houses. With the profits, according to her plan, she hoped to pay off a $645,000 mortgage she had meanwhile obtained to buy her dream home in quiet, rural Redding.

But Ms. Sotire’s dream soon deteriorated into a financial nightmare and has turned her into a statistic in the national foreclosure story. The self-employed healer and metaphysical mystic is in at least $1.6 million debt and facing foreclosure on both Connecticut properties. After taking out a combination of first and second mortgages, refinances and home equity loans on all her properties, she plans to file for bankruptcy.

... Ms. Sotire said the cycle began when she assumed responsibility for her mother’s house in Stamford after her mother died in 2003. She paid off her mother’s reverse mortgage debt on the Stamford house with a loan and took out second mortgages to fix up the property. She refinanced several times, including a March 2006 loan for $484,250 and second mortgage of $186,250 at an interest rate of 12.5 percent through Go Mortgages, a company now out of business.

... Though she had more than $500,000 of first- and second-mortgage debt for the Stamford loans, and still owed $149,000 on the Arizona house, she went ahead and bought the Redding colonial. She said she even used some of the money from the mortgages and equity loans for a $70,000 down payment on the Redding home.

... Jack Scherban, a Stamford lawyer who represented Ms. Sotire on the closings of several of her loans, said he cautioned her that she might be in over her head.

“It was piling on. I said, ‘Are you sure you can do this?’ but she definitely had a plan,” he said. “She’s very strong-willed and she was going to go through with it.”

... As she juggled the Stamford and Redding properties, Ms. Sotire fell into a cycle of refinancing to get cash to stay afloat and avoid the steep increases of adjustable rate loans.

... The bills between the properties soon became overwhelming. Her monthly bills on the properties were adding up to more than $12,000 at one point, and the lenders moved to foreclose.

... Ms. Sotire said she never lied on her loan applications, telling the various brokers that she was self-employed and that she had the potential for making $60 an hour when seeing clients.

Even though she knew it was a risk to buy the Redding home before the other properties were sold, she said she needed a quiet house where she could work.

“At times I was robbing Peter to pay Paul and was amazed when I got mortgages, but I really thought I’d be able to pay everything,” she said. “When houses didn’t sell, everything spiraled down. Looking back, I’m smarter and would do things differently.”

In story after story people would look at their net worth and fathomed themselves to be financial whizzes. And many times they justified their financial acuity by the fact that banks lent them money. After all banks and financial just don't lend anyone money - or at least before the Great Housing Bubble they didn't.

Also people seemed to forget that if you borrow your equity you still have to pay interest on it, and eventually pay it back yourself or sell the property to pay back the debt. But during the Great Housing Bubble everyone could pay back every loan - somehow. Everyone who has given a loan could pay it back - somehow. The average person was soon transformed into a great real estate genius - no matter the training or the investment. Until the Great Housing Bubble Illusion became the Great Housing Delusion.

Friday, May 16, 2008

Nonprime Mapping

The Federal Reserve Bank of New York has posted some Dynamic Maps of Nonprime Mortgage Conditions in the United States. Lets take a look at the New Jersey numbers -

Loans per 1000 housing units - 21.8
In foreclosure per 1000 housing units - 2.7
REOs per 1000 housing units - 0.4
Share ARMs - 68.7%
Share Current - 60.8%
Share 90 days delinquent - 9.0%
Share in foreclosure - 12.5%
Median combined LTV - 83.3%
Share low FICO & high LTV - 7.4%
Share low or no documentation - 44.0%
Share ARMs resetting in 12 months - 40.3%
Share late payment last 12 months - 52.6%

Further analysis can be done on a county-by-county basis.

No HELOC for You

The HELOC cut backs are coming to New Jersey. Today the Record features a story on New Jersey banks reining in home equity. Between falling house values and tightening credit standards it is hard to believe anyone is surprised this is happening here. Lets take a look -

The action leaves some homeowners — in New Jersey and elsewhere — with less borrowing power than they thought.

Many lenders in recent years let homeowners borrow against 100 percent or more of the value of their homes. But as home prices have slipped, lenders tightened policies, generally allowing loan-to-value ratios — including first and second mortgages — of only 85 percent or less of the updated market value.

Offering more a loan to value ratio of more than 100% was never a sound lending practice. Taking into account a 6% realtor fee and possible foreclosure costs any lending over 90% LTV is very risky. But a lot of things during the Great Housing Bubble was not rational. So how are things looking in New Jersey.

Bank of America lowered its loan-to-value ratio in New Jersey to 85 percent this year, said David Bradley, a company spokesman. The previous limit was “somewhat higher,” said Bradley, who declined to be more specific.

... Countrywide, which is under contract to be sold to Bank of America, said in an e-mail that about 122,000 customers nationwide were affected by its decision to suspend access to some existing home equity lines of credit.

... Chase dropped the limit on its loan-to-value ratio for new loans this year to 80 percent from 100 percent in all but two New Jersey counties, Kelly said. The limit was dropped to 85 percent in Atlantic and Cape May counties where the real estate market is comparatively strong.

... Wachovia has not cut limits on existing equity lines but it has tightened underwriting criteria for new lines, said spokeswoman Fran Durst. Changes include “requiring income verification in some cases and increasing [credit] scores,’’ she said.

Executives at Valley National Bank and Kearny Federal Savings Bank say they have made no recent changes to their home-equity lending standards because they didn’t make high-loan-to-value loans in the first place.

Gerald Lipkin, CEO of Wayne-based Valley National, said, “We would never advance more than 75 or 80 percent, including the first mortgage.’’ Lipkin told investors in a recent conference that Valley has a home equity portfolio of more than 14,500 loans and at the end of the first quarter only 16 of them had payments that were late more than 30 days.

Bank after bank is tightening their standards. There were sound lenders like Valley National that never bought into the risky loan business - 75-80% is a very conservative lending practice. With the low number of 30 day late payments it sounds like the prudent decision making worked.

And let's just remember why people need their equity lines -

Phyllis Salowe-Kaye, executive director of consumer watchdog and non-profit debt counselor New Jersey Citizen Action, said some New Jersey homeowners are feeling the pinch and have come to her organization to complain.

“There are people looking to use home equity lines, and they find they have no equity in some areas,’’ she said.

Home equity lines are often used for making home repairs or to pay off high-interest credit-card debt. Some homeowners use them to pay for college tuition, weddings, cars or vacations. Borrowers sign over their homes as collateral for the loans, which generally have lower interest rates than credit cards.

While there may be some compassion for those using it for college tuition - something that should pay back and could affect the next generation. Losing the equity lines that were going to pay for weddings, cars and vacations are not going to gain much sympathy. A government bailout or bank write-off to fund a luxury cruise, a hummer or a sit-down wedding at the West Orange Manor just seems to unsettling. Great if you can afford these things, but complaining that you can't mortgage your house at 110% to be able to live your dream life is just not right.

Thursday, May 15, 2008

A Whole New Breed of Speculators

Flipping the mortgage instead of flipping the house! This article from Bloomberg discusses ways in which the housing slump can recover and the people who are involved. Very interesting information from a group we seldom hear much about. There are two intriguing figures in the article - first the new type of flipper who is buying the house pennies on the dollar, the second is people who helped to create the current problems (i.e. Countrywide) who are now trying to profit from it. First the new flipper -

[Angel] Gutierrez buys bad mortgages a dozen at a time for a fraction of their face value from lenders overwhelmed by the highest number of defaults in 23 years.

... ``You buy the mortgage for pennies on the dollar, carry the big stick, tell the homeowner how it's going to be, then double your money very easily,'' Gutierrez said.

... The homeowner was $365,000 under water after buying the house with no money down in June 2005, according to a spreadsheet listing about 30 loans for sale by a national mortgage servicer that Gutierrez referred to in his truck. If Gutierrez bought the note for 20 cents on the dollar, or $73,000, he could probably get the owner to leave by giving her $5,000 for moving expenses, then sell the home for about $150,000, well below even the neighborhood's declining market value, he said. That would leave him a profit of about $70,000.

... Gutierrez said he'll probably offer the homeowner enough cash to pay for a mover and a couple of months in a rented apartment because, he said, many of them want to get out but don't have the money.

``I'm considered a bottom feeder,'' Gutierrez said. ``That's the way bankers see me. They only want the best loans, the loans that are paying. That's nice, but there's no money in it.''

... At a one-story, L-shaped stucco house in Imperial Beach with four-foot-tall rose bushes and an American flag hanging from the garage, 62-year-old Armida Leos answered the door. Her 73-year-old husband, Gilberto, a former U.S. Border Patrol officer, had to quit retirement and get a job as a security guard when their monthly mortgage payments jumped to $3,200 from $2,400, she said.

``I feel really bad for my husband because he worked his heart out to get us into this house and now we're losing it,'' Leos said.

Gutierrez's spreadsheet said the Leos family owed $455,000 on their mortgage. Leos said she and her husband spent $50,000 fixing up the house when they moved in three years ago. They had just received notice from San Diego County that their property tax was being reduced because the house had been assessed for $193,000.

Back in his pickup truck, Gutierrez said he was prepared to offer Leos and her husband $5,000 to move out. He made note of the town's falling home prices and how the house didn't seem to be that big.

Interesting story about a guy who saw a need and had the funds to fill the void. While he may be a "bottom feeder" he is helping resolve some of the problems. You may not like his business (like a repoman) but he did not cause the problems just trying to clean it up.

PennyMac is headed by Stanford Kurland, former president of Countrywide Financial Corp., the largest U.S. home lender and mortgage servicer. Kurland was the one-time heir apparent to Countrywide CEO Angelo Mozilo.

The new company will avoid foreclosing on borrowers, said Mark Suter, PennyMac's chief portfolio strategy officer. Aside from the social cost of foreclosure -- vacant homes are eyesores and magnets for vandals, and they can bring down home values in the area -- Suter said it was more expensive to take over ownership of a home than it was to get a borrower to start paying the mortgage again.

``We don't want to provide a Band-Aid that will fall off,'' Suter said in an interview. ``We want to create permanent solutions to borrowers to stay in their homes.''

If Gutierrez is considered a bottom feeder, how would one classify Kurland? He was the head of what many people consider the epicenter of the housing bubble. Pushing bad loans that were helping to drive up prices. Kurland was with Countrywide from 1979 to 2006 - he was Angelo Mozillo's deputy. With all the news reports surrounding the FBI investigating Countrywide, (see here, here and here) but Kurland probably was not involved with any of those shenanigans, right? Instead Kurland has decided to profit from the other side of the bubble. After 27 years of selling loans now he is making money buying them back. Who is the real bottom feeder in this article?

Update from Marketwatch -
A federal judge in Los Angeles has ruled that besieged mortgage lender Countrywide Financial Corp.must face a shareholder lawsuit against 14 current and former top executives and board members that alleges the company engaged in risky lending practices that led to its collapse this fall. "It defies reason, given the entirety of the allegations, that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels," wrote Judge Mariana Pfaelzer of Federal District Court in Los Angeles.

Which 14 current and former executives - I am unable to find list of all 14 plaintiffs anywhere. Anyone know please post in comments. Thanks!

Wednesday, May 14, 2008

NJ - Bad, but not as bad as others

Update - According to a Freddie Mac report released today (see graph below), the first quarter housing prices in New Jersey declined 5.7%. This would support the Zillow report and contradict the NAR report that New Jersey is doing better than most states. However looking at the wording by the NAR - the median home price might have been up but the year-over-year prices mean home prices could have still declined.

While things are not great in New Jersey, they are much better than in other places of the country. This article in the Star-Ledger focuses on how New Jersey house prices are doing better than most. A lot of positive comments are given in the article, but the data that backs up the claims are not there. Lets take a look -

... In New Jersey, the housing market continued to fare better than the nation as a whole.

Home prices in the Garden State rose in a number of areas, including the Atlantic City region, where the median sales price increased 4.8 percent in the first quarter, to $277,400, and the Trenton-Ewing market, where the median price rose 1.6 percent, to $288,200. The median is the price where half the homes sold for more and half for less.

These numbers directly contradict the numbers put out by Zillow last week. Either Zillow or the National Association of Realtors (NAR) is putting out bogus data to skew the numbers. Clearly from the following Zillow map, the Atlantic City region fell significantly during the first quarter -

While there were a few areas that had decreases of less than 2%, there does not appear any increases - and more significantly taken as an aggregate the average could not possibly be a rise of 4.8%.

And in stark contrast to the rest of the country, New Jersey was one of only three states where the volume of existing home sales actually rose in the first quarter compared with a year earlier.

... However, in New Jersey, the sales volume rose 4 percent. The other two states that posted increases in home sales for the quarter were Alaska and Illinois.

This is another data set that would be interesting to evaluate.

... In New Jersey, existing home prices in the Newark-Union area, which includes Essex, Hunterdon, Morris, Sussex and Union counties, fell 3.4 percent, to $409,300. In the New York-northern New Jersey area, the median price fell 3.9 percent, to $445,400. And in the Edison area, which includes Middlesex, Monmouth, Ocean and Somerset counties, the median home price fell 0.6 percent, to $361,200.

But even in those parts of the state where prices fell, the declines were modest compared with most of the rest of the country.
Unfortunately information is not provided for Bergen, Hudson and Passaic counties. These highly populated areas would have to have significant increases to offset the declines in Essex, Morris, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Somerset, Sussex and Union Counties. Ten out of 21 counties showing losses, but overall the state is prices rose? Interesting!


More home equity write-downs today in the L.A. Times. The article today is about Bank of America issuing a warning that HELOC and home equity loan losses will be worse than earlier predicted. The line of credit is basically turning into a Home Equity Line of Loss -

Bank of America Corp. warned Tuesday that its losses on home-equity loans would be worse than it predicted just three weeks ago, adding to evidence that more consumers are falling behind on debts.

... At an investor conference in New York, Liam McGee, Bank of America's president of global consumer and small-business banking, said customers were feeling "significant economic pressure" as deflating home prices left little equity for consumers to borrow against.

He predicted that losses on the bank's home-equity loans would top the 2%-to-2.5% range projected last month.
It is vague what the 2.5% is - is it the percent of all loans or it is the amount of dollars of all loans. Either way that is not a good sign, and it will probably get much worse before it gets better. When the first mortgage is being paid, recourse for the HELOC and home equity loans are significantly more difficult.

In another sign of financial strain, McGee said, more people are using credit and debit cards to pay for necessities.

Card purchases of items such as fuel, food and utilities grew 13% in the first quarter, while spending on retail, travel and entertainment rose 0.5%, the Charlotte, N.C.-based bank said.
I do not understand why using a debit card would be a sign of financial strain - after all for most accounts you have to have the money in the account to cover the charges. Unless they are going into the overdraft protection which has costly fees.

The trends at the country's largest credit card issuer support the view of economists who say the U.S. is teetering on the edge of a recession as people struggle with job losses and high gasoline prices.
High gas prices, high food prices, and now those emergency equity funds people were using as safety nets have evaporated. Things are going to get tight - and losses will be felt across the board. While technically the US may be teetering on recession, for many people they are already there and have been for some time. With day after day of record foreclosures, record credit levels, record housing value declines, and record negative savings rates not seen since the Depression, for many people the discussion is if we are teetering on something worse than a recession.

Tuesday, May 13, 2008

Rent Vs. Own

The Orlando Sentinel regarding the shift from owning a home to renting. The focus of the article is on Florida. When in it is read along side an article from The Record regarding that NJ renters are safe from foreclosure, renters appear in a strong and smart position. First key parts from the Orlando article

In some major metro areas, the cost of homeownership has gotten so high, and the spread between monthly outlay for renting vs. buying so great, that renting makes more sense and the momentum is in that direction, a new study shows.

... In the Los Angeles metro area ... monthly homeownership costs average $3,485 -- roughly double the three-bedroom rental average of $1,746.

Rentals are about $1,000 a month less than home costs in the Washington, D.C., area; in San Francisco, they're about $2,000 a month less. Orlando's spread is 23 percent, but in some other markets homeownership costs are "out of line with rent, . . . outpacing rental costs by as much as 300 percent."

... Homes in 34 of the nation's 100 largest metro areas are expected to lose equity during the next four years, making rentals a more appealing option for many on a purely economic basis, the center's researchers said. The center, a longtime advocate for government intervention in private markets, concluded that policies supporting affordable rental housing should be part of any solution to the housing crisis, along with "policies that keep owners in their homes, possibly through some form of government-guaranteed mortgage."

In many areas of the country there is a clear financial advantage to renting. But then we hear all of the stories about renters making their payments but the homes owners fall into foreclosure. Next thing the sheriff shows up at the renters door and the renter has little time to vacate the premises and find a new place to live. The article from The Record explains how that scenario will not be happening in New Jersey.

While nationwide, according to the National Low Income Housing Coalition, millions of homeowners and renters are in jeopardy of losing their homes, it's a different story in New Jersey.

... "This is an issue well set in the law. The tenants have a right to stay," Pascale said, describing New Jersey's landlord/tenant laws as among the best in the nation and a victory for the 50,000-member New Jersey Tenants Organization.

... In contrast to New Jersey's relative security for tenants, Danna Fischer, legislative director of the National Low Income Housing Coalition, said in most of the country, "the lease is terminated when there's foreclosure and the tenant is out of luck.

She agreed that New Jersey is one of the few states to preserve the lease through foreclosure but there is talk of national reform.

... Tenants should consider legal advice and turning to a non-profit like LSNJ if their income is low, he said. They should continue to pay rent the same as before unless a court order tells them otherwise. Neglecting to pay rent can be grounds for eviction. Sometimes it's tricky to know whom to pay the rent to while ownership is changing. If the tenant is unable to resolve the question, they could arrange to pay into escrow.

There is a housing term bitter renter - "originally a term used by housing bulls to disparage bearish non-homedebtors. Has since been co-opted by bears and is now used ironically. Technical definition: Someone who pays a homedebtor for the right to live in his home, at a huge discount and with no downside risk of falling property prices, rising property taxes or maintenance nightmares."

In New Jersey the lucky Bitter Renter does not have to risk falling property prices, rising property taxes, maintenance costs and being out of a place to live when foreclosure strikes. They are also most likely saving a bundle and will not have those sleepless nights after watching their equity disappear. Being a Jersey Bitter Renter is actually pretty safe and smart - plus they do not have all the HELOC debt the home owners have. No underwater issues for the renter either. But renters are not completely safe, for the few ways for new owners to evict read the Record article.

Monday, May 12, 2008

The Truth About Walking Away

There was a good article about walking away from the Los Angeles Times called In mortgage market, "walkaway" homeowners maybe urban myth. The first thing cleared up is that walking away means that one can afford (regardless of resets or recasts) to keep their home and have decided to view an underwater home as an investment. There is some discussions pondering if the myth is being propagated by the lending industry to make people more cynical of homeowners while giving sympathy to the bankers. Lets take a look some if the key parts of the article -

Bankers and housing market analysts are warning of a chilling new trend in the mortgage world: Homeowners voluntarily defaulting on their loans even though they can actually afford to make the payments.
These are wiggle words - many of the stories about people leaving their homes are ones that can not afford their mortgages after the reset or recast. They also can not afford to refinance the loan due to either being underwater or having to pay the prepayment penalties. For example if a current mortgage of $800 but know next month when it resets to $1400 they will be unable to pay.

It's a way of saying that Americans are beginning to apply a cold financial calculation to home ownership: When a home's value has fallen below what is owed on its mortgage, they feel it makes no sense to keep up the payments.
This may be true but that does not mean they are abandoning their properties to buy or rent a cheaper one. Though this is also the trickle down of "it's just business" that so many of us deal with in our everyday life.

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce numbers figures.
Just because someone says it does not make it true. Banks and lenders claim walking away is occurring in significant numbers, but not one can offer proof. No hard numbers, no names, no addresses, but it does take the blame off of the lenders mistakes.

But [Bank of America spokesman Terry Francisco] said the bank did not have "firm figures" on how many homeowners were unnecessarily defaulting on their mortgages
This is the key word - unnecessarily default - can pay and can continue to pay at current and future rates. If they can not they are not walking away even if they are allowing the foreclosure process earlier than it inevitably would.

"How would you know what someone's true ability to pay would be?" asked Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania. "I'm not sure you could even come up with a definition."
This is where the water gets very murky. Underwaters can not refinance. Underwaters can only sell for a loss - either to them or to the lender. Owner-occupants who took 100% financing would likely have little or no savings. Almost everywhere in the U.S. those who put little or nothing down are currently underwater. These owners would most likely be one or two paychecks away from being in financial devastation. With skyrocketing food and gas prices choices are being made, people are making cuts right and left.

... Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis.

"So many of the loans made were irresponsible -- for the borrowers and for the lenders," said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County. "Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the sub-prime meltdown as much as possible on their borrowers."

It is generally agreed that the real culprit in the meltdown is the proliferation of exotic mortgages that hit borrowers -- many with paltry down payments and therefore almost no equity in the home -- with huge payment shocks in the early years of the loan. The new payments are often raised to levels that the borrowers could never have afforded but expected to escape via a refinancing or a sale of the house into a rising market.
These cases are not walking away in the sense that they could ever afford their homes. The lenders were greedy thinking that the assets would continue to rise so even if they were stuck with a property it would be worth more than the original loan. They were acting as the flip-side of the speculators. Both parties were in a position where they felt they could not lose - home values only go up, it is a solid investment, by the time the ink is dry the properties value would be more than the purchase price. Why else would a lender allow 110-120% of the properties equity be borrowed if they did not expect to have at least that as a return.

"Who do you see walking? They're people whose rate is about to reset and they see no way out," Marks said. "People who have a fixed-rate mortgage that was initially affordable and continues to be affordable don't walk away from their home, even when it's underwater. They are always willing to withstand the ups and downs of the housing market if their payments remain affordable."
The fixed mortgages owners are the cases that would be significant if they walked away. Another question - How people will ever know if one can or can not afford the mortgage? There are many cases of fixed mortgages to face foreclosures. Due to divorce, job loss, illness and death there will always be financially stable people who will face foreclosure.

On another note, even if someone claims to walkaway that does not mean they really did. There are other financial obligations people have - it is hard to know the real situation people are in. Unless they have to show all of their financials to a bankruptcy judge or other third party one will really never know if anyone leaving a property actually has the means to pay.

Also, do not forget all of the cash-out refinances and HELOCs that were being taken out to pay the first mortgage. There are people who are using the Ponzi scheme to get by and the do not even realize it yet. There is a whole group of people that may not be recent buyers but can not afford their properties in their current financial conditions.