Friday, October 31, 2008

Underwater Stats

The term "underwater" means that people owe more on their properties than they are worth or having negative equity. There are a few ways how homeowners can find themselves in this position - by putting no money down and seeing any sort of decline, putting some money down (say 5%) but seeing a larger than the original investment, and HELOCing the property so much at peak than experiencing a decline. It is barely conceivable how this first group was ever possible to exist in the first place - a big part of the problem. The middle group deserves the most sympathy in these situations - they were trying to do the right thing just got the timing wrong. Most people in the third group did the wrong thing - except the few that are underwater for medical reasons.

Today CNN bring us some underwater stats in an article titled 7.5 Million Homeowners Underwater. The first thing to point out is that they estimate there are at least 7.5 million owners underwater - however in February the New York Times estimated at least 8.8 million. With the continual decline the 8.8 would be larger now, so we wonder what the real number could be. Perhaps that 1.3 million lost, sold or renegotiated their loans. Perhaps. Well, lets take a look at the article -

The report on the growing problem of negative equity, out Friday from real estate research outfit First American CoreLogic, is actually a conservative estimate. Some reports, including one from Moody's, puts the number of underwater borrowers even higher, at as many as 12 million.

"Being underwater doesn't necessarily mean that you can't pay your bills," said [Mark Fleming, CoreLogic's chief economist], "but it's a necessary condition of default."

Borrowers who are underwater but have enough income to pay bills can keep up with their mortgages - even if they don't like paying more to live in a home than it's currently worth. On the other hand, anyone who runs into trouble paying their bills but has positive equity in their home can avoid foreclosure by either borrowing against their home, or simply selling it.

Nevada, which saw home values plunge by more than 30% during the past 12 months alone, according to the latest home price report from S&P Case-Shiller, tops the list of states with the highest numbers of underwater borrowers. A full 48% of homeowners there have negative equity. Nevada and the other so-called bubble markets saw tremendous price run-ups, and are now watching home values plummet. So even buyers who put 20% down don't stand a chance.

In many bubble markets, home prices got so high that the only way that many buyers could get a loan was by using what Fleming called "affordability products." These included adjustable rate mortgages with rates that were set artificially low for a few years, until resetting much higher, as well as mortgages that required little or no down payments.
The article also provides a list of the top ten states underwater (the bad list) -

State # of mortgages % underwater
Nevada 609,577 47.8%
Michigan 1,145,572 38.6%
Arizona 1,287,076 29.2%
Florida 4,248,470 29.2%
California 6,461,981 27.4%
Georgia 1,456,327 23.2%
Ohio 1,905,000 22%
Colorado 1,045,773 18.3%
New Hampshire 144,479 17.2%
Texas 2,721,638 16.5%

And the Bottom ten states that have underwaters (the good list) -

State # of mortgages % underwater
New York 1,554,607 4.4%
Hawaii 201,188 5.6%
Pennsylvania 1,413,181 5.7%
Montana 87,181 6.9%
Connecticut 678,766 7.4%
Alabama 238,978 7.4%
Oregon 641,820 7.5%%
Washington 1,273,659 7.6%
New Mexico 186,844 8.2%
New Jersey 1,748,179 9.3%

While it is good to see that NJ is in the bottom ten for underwaters, remember we are also number 8 in the national foreclosure activity statistics.

Thursday, October 30, 2008

An Economic House of Cards Is Falling

Bad news on top of bad news. Today we learn that the economy is shrinking due to consumer cut backs. Not that we can see how patriotic consumption through debt is really a good economic model - none the less it was one we relied upon. This article from the New York Times titled Economy Shrinks as Consumers Cut Back illustrates the current economic problems. Lets take a look -

The Commerce Department reported this morning that consumers sharply cut their spending this summer, causing the United States economy to shrink at annual rate of 0.3 percent. By almost all accounts, the economy is now in recession.

The last quarter in which consumers reduced their spending came in 1991. Since then, neither the recession of 2001 nor the slow income growth of the past seven years has kept households from increasing their consumption. They often relied on debt — in the form of home-equity loans, mortgage refinancings and credit-card loans — to continue spending.

But the housing bust, the resulting credit crunch and the deteriorating job market have forced many people to cut back. Personal consumption fell at an annual rate of 3.1 percent in the third quarter of this year, its biggest drop since 1980, when the economy was in a deep recession.

But the report nonetheless pointed to the serious problems facing the United States economy: consumer spending is falling, and no engine of growth seems likely to replace it the near future.

Consumer spending makes up a little more than two-thirds of economic activity in the United States, more than it did in past decades. The rest is a combination of business spending, government spending and the net difference between exports and imports.

The current model of our economy is propped up by consumer spending. That consumption was only possible through debt. Long term household debt is not sustainable. Like a house of cards, it has come crashing, yes crashing down. The real world pain this model will cause will be long and deep. The pain will be felt by many. Until a new, sustainable paradigm is in place the suffering will remain.

Wednesday, October 29, 2008

Housing Bust - A Man-Made Disaster

Money disappearing. Hefty government bailouts to lending institutions. Average citizens seeing the wealth decline week after week, be it in their retirement accounts or their property values. We are currently experiencing a man-made disaster. This issue is described in an article from Gannett News Service titled Expert: Foreclosures ripped through some places like hurricanes. Lets take a look -

Over nine months that ended in June, Americans collectively lost $1 trillion in home equity, estimates Christian Weller, an associate professor at the University of Massachusetts. It was the largest drop since 1974.

Many people nearing retirement had been counting on their home equity as the primary source of income.

Home foreclosures have quadrupled over the last four years from 75,597 in August 2005 to 303,879 in August of this year.

"It is comparable in some neighborhoods to being hit by a major hurricane," [Julia Gordon, policy counsel at the Center for Responsible Lending] said. "Except this was not an act of God. This was an act of man."

"Traditionally, 50 percent who go into foreclosure end up losing their homes," said Chris Varvares, president of Macroeconomic Advisors in St. Louis. "It may be the case that this time it could be a little higher."

That is a lot of economic damage. Much of it is non-repairable - at least in the short-term. The trauma from this disaster will also have long-lasting affects.

Also interesting to find that usually 50% of those that go into foreclosure end up losing their properties. Unless huge changes are made to the foreclosure process things will be devastating. Lengthening out the foreclosure timeline will not necessarily allow the homeowners to keep their properties. The big questions now are how contained we can keep the devastation.

Tuesday, October 28, 2008

Drinking the Kool Aid

When someone completely buys into an idea it is often referred to as drinking the kool aid. During the housing bubble there were a couple different flavors of kool aid - the house values only increase, the withdraw all the equity, and the ever popular debt is wealth flavor. While none of them make sense now the were very popular at the time. MarketWatch has an interesting post up titled We have met the enemy and he is us that sums up some of the most interesting excesses (kool aid flavors) from the Great Housing Bubble. Here is our 5 favorites from the bullet list -
  • If it sounds too good to be true, it probably is. Turning to homebuyers, many people bought more house than they could afford, thanks to adjustable interest rates that were expected to remain low indefinitely.
  • What goes up must come down. These people also believed that rising home prices would enable them to pull equity out of their homes, while refinancing into a fixed rate. But as we now know, nothing rises forever.
  • Home is where the heart is. Forgetting that a home is first and foremost a place to live, many people began thinking of their houses as investments and as piggy banks, and thus made decisions that they might not otherwise have made. Even to this day, some homeowners think it is wrong to owe more on their mortgage than their house is worth; that's why they walk away from it. Hello? Don't they realize that they need a place to live?
  • What, me worry? Home prices have gone up every year since the Great Depression, so it's OK for me to spend more than I earn, since all I have to do to make up the difference is to take out a home-equity loan.
  • This time it's different. There may have been bubbles in the past, but it can't happen to housing, since all real estate is local and, at any rate, people need a place to live (See Home is where the heart is, above).
Looking back it is hard to believe so many people bought into it. One that did not make the list was to jump in now (now being 2005-2006) while you still can. Prices were going to keep rising at double digit rates indefinitely. The fundamentals were strong. The economy could handle this. Besides there is global trade now so a little bump caused by the US housing down turn would not have much of an impact.

What flavors are we drinking now?

Monday, October 27, 2008

Living with Debt

In recent years there was a drastic change in personal economic thought - once upon a time debt was frowned upon. However recently debt was equated with wealth. As long as one had a new car, granite countertops and a coach bag it did not matter if one could afford it. Whether the procurement was done through debt or cash in hand was irrelevant. And due to easy access to equity it was even easier. Once people had run up their credit cards they often just threw the debt into their home equity lines.

Now that property values have plummeted people have to change their ways. Credit card debt is still increasing but the ability to convert it into equity debt has abruptly stopped. This issue is examined in this article from the Washington Post titled Banks hoards cash as credit card defaults rise. We can see that the debt problems have been continually increasing. Lets take a look -

The deterioration in consumer credit, the latest downturn to whack Americans after the housing slump and mortgage meltdown, threatens one of the linchpins of the U.S. economy. Over the past 10 years, credit card debt has gone up 75 percent as Americans' real wages and savings rate have stayed flat. That means Americans have been spending beyond their means -- and fueling economic growth with borrowed money.

Now, the housing crash, financial downturn and contracting economy have made it more difficult for Americans to settle their bills, setting off a downward spiral. As people fail to pay off their credit card bills and other loans, banks must put away money to cover expected losses. So banks lend less. Americans who tended to rely on loans to fuel their spending must cut back, readjusting their spending habits to conform with what they earn.

"Given that the savings rate has been minuscule, there's no reserves in the tank for the consumer to tap his savings to support his spending," said Scott Valentin, a financial services analyst at Arlington investment bank Friedman Billings Ramsey. But consumers have been driving about two-thirds of the U.S. economy.

A report this week from Innovest, a research firm, said banks and other credit card lenders could record nearly $100 billion in losses because of bad loans through the end of next year. Innovest said financial firms could be reaching a "tipping point" at which years of growth in credit card debt starts to decline.

Credit card debt is especially worrisome for banks because it is not backed by real assets, such as home mortgages and auto loans. But that has meant credit card issuers routinely have been more cautious.
Which brings us to the Innovest report. First lets take a look at the savings rate Vs. debt Ratio the provide-

Our debt is significantly higher than our savings. This is not viable in the long term.

Now onto an Innovest graph that illustrates the huge divergence between credit card debt and real wages.

With a such a significant gap the money has to come from somewhere. And then lets compare the previous graph with one from Calculated Risk illustrating quarterly rise and fall of equity withdrawal.

These are some pretty frightening graphs depicting just how much we have been accustomed at living well beyond our means. Just living within our means will hurt. Our debt has become a great burden that will make any recession even harder. The fact that we do not have any savings to fall back on will make things even gloomier. The next few years are going to be pretty rough.

Sunday, October 26, 2008

ReFi Fun in Wharton

Week after week in our profiled examples we see people who have lost or will lose their property. There is one common reason - the debt is too high. These examples usually either come from people who bought at peak prices at prices that they can not now afford or though bought an affordable property and took all the equity out therefor turning the investment into something they can no longer afford.

In the latter case, we often see this happen to people who continuously refinance and take all the equity out, over and over again. This group is called serial refinancers. Many times once they enjoy the lucrative lifestyle their property is giving them they keep going back for more. It is almost like trying to live two conflicting American dreams - the owner and the patriotic consumer who keeps up with the Joneses.

In today's example we are not sure where the equity withdrawal went - but we know it was utilized. So extraction helped to destroy both sets of the American Dream - no more home and no more funds to shop with. So lets take a look at the refi fun that was taking place in Wharton during the Great Housing Bubble.

Here is the property -

Here is the property info -

LEGAL 2-Family in excellent neighborhood! The least expensive multi-family in Wharton. Buyer just pulled out of the contract. This will go quick!!!

Unit 1 : 10 rooms, including living room, eat-in kitchen, dining room, 5 bedrooms, 2 extra rooms, 3 bathrooms!!!

Unit 2 is actually in the basement. It is basically a studio efficiency apartment, with eat-in kitchen and bathroom included. This needs some updating.

2-car detached garage. Parking for about 2-3 cars in driveway. Gazebo in back yard. Close to churches, businesses, hospital, Routes 46 & 80.

This house is excellent for a "mother-daughter" combo.

All the systems work in the house. Connected utilities.

Lot Size: 50x117. Taxes: $7059.

I can show the house anytime. It is vacant.

Here are the financials -
  • Purchased in January 2002 for $247,000.
  • The original mortgage in January 2002 was for $234,000 with First National Bank of Arizona.
  • In March 2003 the property was refinanced with cash out for $252,000 with Delta Funding Corp.
  • The property was refinanced with cash out again in April 2005 for $350,000 using an ARM with Ameriquest Mortgage.
  • The property was refinanced for $348,000 using an ARM with Greenpoint Mortgage.
  • A HELOC was opened on the same day of June 2006 for $36,000 with Greenpoint Mortgage.
  • The foreclosure process started with a Les Pendens filed in May 2007.
  • The property is currently for sale with a realtor for $250,000.
First thing to note is that the property is basically at its 2002 price. Wonder how far back we will go. Now back to our feature property - at the time of purchase the owner put $13,000 down - just over 5% down - which was a very respectable investment during the bubble.

Just over a year in and the owner pulled out the $13,000 plus another $5,000 on top. The small cash out must have felt good, since at the height of the bubble another $98,000 was pulled out of the property. That money went fast, since just over a year later the mortgages out on the property totaled $384,000 was taken out. A total $137,000 of equity, not counting the original down payment of $13,000, was extracted from the property. That averages to a second income of $22,8333 per year over the six years of ownership that the property provided the former owners.

Now that the property is an REO and the lender is selling it for basically the original purchase price, the hit to the property is significant. When the realtor fees are factored in the property will cost the lend a total of $149,000 - and that is if the property sells for full asking price! This is definitely a property to revisit after sale and see how big the loss will end up to be.

Saturday, October 25, 2008

Understanding the Recession

Even though we are not officially in a recession, it feels like one. Several months ago we were regularly treated to debates about if we really were in a current discussion has evolved to how deep and how long the recession will be. From various polls, the general public feels we are in the middle of the recession now. Meanwhile the economists and experts appear to be arguing when it did or will officially start and what model will be used to determine the recession's existence. This brings us to a very interesting article from NPR titled Official or Not, Consumers Sense A Recession. Lets take a look -

When it comes to the financial turmoil, "it's the worst crisis since the Great Depression," says Jeffrey Frankel, an economics professor at Harvard's Kennedy School of Government, who sits on the Business Cycle Dating Committee of the National Bureau of Economic Research, a nonprofit organization founded in 1920. The committee, which comprises several economists, is responsible for officially calling recessions. And it typically weighs in several months after the fact — once the members have had an opportunity to analyze a broad range of statistics.

Dennis Jacobe, the chief economist for Gallup, says polls it has conducted demonstrate that people have felt like they're in a recession "for a long time." He says that 80 percent to 90 percent of people believe the economy is worsening. Gallup has registered historic lows in consumer confidence and increased pessimism about the jobs market, which Jacobe says is an indicator that jobs numbers will continue to worsen.

But home equity lines of credit have dried up, leaving some dreams in the dust. What's more, the credit culture has chipped away at Americans' savings habits: Jacobe says surveys indicate that only 40 percent of the U.S. population has $10,000 or more in savings that can be easily tapped.

[John Schmitt, an economist for the Center for Economic and Policy Research] says the current recession started in December 2007, and he expects it will be "long and nasty," driven by a continued decline in house prices; he thinks prices may fall another 10 percent to 15 percent. He estimates that we might start to emerge from the recession in December 2009, but the labor market recession probably won't end until 2011, he says.

[Frankel] says that the decade of stagflation that Japan went through in the 1990s and the Great Depression in the U.S. may also have some parallels to the situation today: Both were ushered in by the crash in real estate and stock markets. "Hopefully, the difference," he says, "is we know how to handle it better this time."

People have been living off of debt for years. When property values were sky rocketing and credit was easy it was easy to get in massive debt. Selling a property or refinancing were two common methods for alleviating one's economic problems.

With a national decline in home values - the middle class vehicle for wealth and security - going on 2-3 years depending on the location it is no wonder people see decline. They see decline in their wallets. We in middle class America know our source of wealth has declined. It just took time to filter through the system.

Friday, October 24, 2008

More Bad NJ Numbers

Our previous post looked at September foreclosure rates - 1 in 453. That was a year-over-year increase of 48%. But the quarterly results are even more grim - a year-over-year increase of 95%. This article from the Times of Trenton titled Jersey foreclosure filings on the rise conveys the bad news. Lets take a look -

Foreclosure filings in New Jersey jumped 95 percent during the third quarter from the same period a year ago, as financially strapped homeowners already behind on mortgage payments defaulted on their loans or came closer to losing their homes to foreclosure.

A total of 17,893 New Jersey homeowners either got a default notice in the mail, were warned of a pending auction or had their homes seized by their lenders between July and September, according to RealtyTrac, a Irvine, Calif.-based company that tracks foreclosed properties. That was more than 3 percent higher than the second quarter.

Of the 100 top metropolitan areas listed by RealtyTrac yesterday, Newark ranked 38th, Camden ranked 39th and Edison ranked 47th.

Breaking down the foreclosure problem in New Jersey, the Newark metropolitan area, which includes Essex, Hunterdon, Morris, Sussex and Union counties, saw the number of foreclosure filings jump 90 percent in the third quarter, to 5,056. In the Edison metropolitan statistical area, which includes Middlesex, Monmouth, Ocean and Somerset counties, foreclosure filings climbed 85.8 percent in the third quarter, to 4,486.

The Camden area saw the biggest quarterly spike, with foreclosure activity spiking 264 percent, to 2,837 filings.

We are glad the state is working on the foreclosure trust. However hopefully there will aspects that try to prevent foreclosures rather than focusing on the after-affects of foreclosure a program needs to be developed that helps reduce foreclosures. While we do not discourage the rebuilding of broken communities - preventing the devastation in the first place would be preferred.

Thursday, October 23, 2008

NJ Numbers

RealtyTrac has their September numbers out and the news is not good. We have entered the top ten - shot up from 11 to 8. Bad, bad news. The Star Ledger summarizes the report in an article titled N.J. foreclosure filings rose 48 percent in September. Lets take a look -

Foreclosure filings in New Jersey rose 48 percent in September compared to a year ago, or more than twice as fast as the national average, according to the latest tracking data.

The state had 7,658 filings -- default notices, scheduled sheriff's auctions or bank repossessions -- during the month, or a rate of one for every 453 households, the real estate data firm RealtyTrac found. That's an 18 percent jump from August, and a 48 percent jump from Sept. 2007.

For the first time since the onset of the housing slump, New Jersey's foreclosure filing rate exceeds the national average, which was one in every 475 households in September, Irvine, Calif.-based RealtyTrac said. In August, the state's rate was one in 536 homes.

Newark, Camden and Edison all made the top 100 list of U.S. metropolitan areas with the highest filing rates.

The new rate of 1 in 453 tells that troubles are brewing. While not all of the filings end in foreclosure, it still is very bad news. As jobs are cuts these numbers will rise.

Here is the top ten list from RealtyTrac -
1. Nevada - 1 in 82
2. Florida - 1 in 178
3. California - 1 in 189
4. Arizona - 1 in 201
5. Georgia - 1 in 417
6. Michigan - 1 in 428
7. Ohio - 1 in 440
8. New Jersey - 1 in 453
9. Indiana - 1 in 480
10. Colorado - 1 in 482

Notice the cluster n the 5-10 range. Those six slots are going to shuffle around a lot, with the 11, 12 and 13 positions close by at 1 in 505 (Virginia), 1 in 510 (Illinois), and 1 in 516 (Utah)

Wednesday, October 22, 2008

Foreclosures to Continue

Between the Option ARMs recasting and the increasing number of job losses it looks like the foreclosure numbers will continue on their upward ascent. How many more months of breaking records do we have to look forward to? Well we have at least a year to find out! Remember there are some records that we do not want to break - and this is another one. Foreclosures have devastating consequences - on the families, on communities, and on our society. And the Mortgage Bankers Association states the numbers will continue. Just take a look at this post from Marketwatch titled Job losses could fuel foreclosure problem: MBA projects negative economic growth until mid-2009, another hit to housing. Lets take a look at the grim projections -

If 2008 was a record year for mortgages entering foreclosure, 2009 could look even worse: While home-price declines have been driving foreclosure starts recently, mounting job losses could add another layer of stress on American homeowners, the chief economist of the Mortgage Bankers Association said on Tuesday.

A recession appears to be underway, according to the MBA's annual economic forecast, which projects negative economic growth through the middle of next year. The MBA presented its forecast to reporters Tuesday at its annual convention, being held in San Francisco.

"We have been consistently setting records for new foreclosures and loans in foreclosure," Jay Brinkmann [chief economist of the MBA] said. The slowing economy could cause that trend to continue.

"We expect to see more than 2 million foreclosures this year," said Steve Preston, secretary of the U.S. Department of Housing and Urban Development. Preston addressed the industry group in a speech on Tuesday morning. For perspective: "That's roughly a third of the five and half or six million homes that are likely to be sold this year in our country."

"We receive consistent feedback from borrowers and counselors that servicers don't have the authority to help them or that loan-modification qualifications are so rigid that many people that can be helped are falling through the cracks," Preston said.
More people falling through the cracks - and with job losses the cracks are just getting bigger and bigger. As much as we do not want a Foreclosure Response Plan - it does seem like good foresight to be prepared. We are all in a position that no one wants to be in. We are breaking records that we would not like to see. This is where real leaders step up - make hard choices that will inevitably be unpopular - but it is our best interest.

Like the credit crunch - which choice was worse - investing to fix the problem or letting it takes its course? Almost all economist agreed (on both sides of the political spectrum) doing nothing was the worst possible choice. Unfortunately the same thing applies to the foreclosure problem - doing nothing is an option, and probably the worst possible option.

Tuesday, October 21, 2008

Prosecuting NJ Foreclosure Schemes

There were numerous mortgage scams that occurred during the Great Housing Bubble. Now that we have entered a massive foreclosure phase there are scams in this part as well. Right now prosecutors are trying to prevent a rise of foreclosures due to scams. People think they are getting help in trying to save their homes instead find themselves broke and out on the streets. It is even sadder when it happens to some of societies most vulnerable - one victim was both sick and elderly. At least the people who perpetrated some of the crimes are being prosecuted for their crimes. In today's Star Ledger there is an article titled State accuses firms of running predatory 'foreclosure rescue' schemes. Lets take a look -

Forty-eight New Jersey property owners have lost more than $3 million in home equity through "foreclosure rescue" schemes operated by Vest Financial and JP Global Property Management Inc., according to civil lawsuits filed by the state Attorney General's office.

The lawsuits accuse the two companies, as well as 37 mortgage loan providers, mortgage industry employees, lawyers and others of violating the state's Consumer Fraud Act and the Racketeer Influenced and Corrupt Organizations Act. The state is seeking restitution for the property owners, penalties and permanent bans to keep them offering similar schemes to others.

A second victim was a senior citizen who, following her husband's death, missed several payments on the Bergen County home where she had lived for 25 years. She went in December 2006 to Vest Financial, which told the woman she could enter into an agreement that would guarantee her the same payments each month as well as $30,000 for outstanding medical bills.

What the company never told her was that it was going to sell the property to a third party in a deal that stripped $87,000 in equity from the home -- leaving her with only $12,000 for the medical bills, according to the lawsuit. It pulled off the scheme by providing an attorney for the woman who never explained the property sale to her.

"The distressed homeowners are left in a far worse position than they were in before," the lawsuit states. "Not only must they leave their home, but they cannot even sell their homes and benefit from the equity that had accrued in their property over time."

The story sounds awful - taking advantage of a sick, recently widowed senior citizen. Could this group find a more sympathetic victim? Hopefully there will be some kind of intervention so this woman can keep her property. The housing crisis is already hard enough - adding a new level of victimization will make it even harder. Hopefully an aggressive prosecution will prevent foreclosure fraud from becoming epidemic.

Monday, October 20, 2008

What Happened To Equity Withdrawal

Back during the boom there was a constant withdrawal of equity. People did not view it as a second mortgage - they viewed it as using their money, now, the way they wanted to. Some used the funds to fix up their properties and increase the value - kind of a break-even use. Others used the money on cars, trips, clothes, and other day-to-day expenses. Owning a property was synonymous with having money. Even if you put little to no money down you could probably find a lender that would lend you the sparse negative equity you had. In the most extreme cases people were even borrowing negative equity.

Why worry, house prices only went one way so it was a win-win situation. All homeowners were rich. All homeowners had access to "their" money. Then Crash. The whole illusion was gone. People found that they really owed "their" money back to a lender. People found they had to pay back, yes that is right pay back, the funds they borrowed. This brings us to an article at Bloomberg News titled Your Personal Bailout Check Isn't in the Mail: John F. Wasik. While the article touches on several different economic and political issues, the view and reduction of equity withdrawal stands out. Lets take a look -

One of the core assumptions of a credit-based, consumer- driven economy is that spending is generally beneficial. It makes cash registers ring, sells homes, cars and appliances. Yet what happens when the middle class gets tapped out?

People have maxed out on their credit cards and their retirement funds are devastated. Millions will have to work longer and have probably taken as much money out of their homes as they can.

Home-equity extraction -- the amount of cash taken out of a property -- dipped to a 10-year low of $9.5 billion in the second quarter, according to the Federal Reserve. That compares with $224 billion during the height of the housing bubble in the first quarter of 2006.

Recently we had a post that noted "consumer patriotism." Many Americans have long viewed one of their central roles was to spend, spend, spend and shop, shop, shop. We indulged ourselves and used any means necessary to partake in our role. Now we are feeling the consequences with record foreclosures, records in negative savings, records in debt.

Sunday, October 19, 2008

Losing Your ReFi in Wharton

There were some crazy aspects to the Great Housing Bubble. Mortgage burning parties gave way to serial refinancing - usually with cash out to boot. People thought it was perfectly normal to pay off a mortgage using a HELOC. Equity withdrawal showed that one understood how to take advantage of ones money - we often forgot that we borrowed "our" money from the bank. If debt was good, more of it was better. All this was true until the bubble burst (or depending on your locale it deflated). Now those that bought into the believed all the bubble hype are in the most trouble. And the more one bought into the hype the more trouble they are in.

People who could have had a nice little equity nest egg instead cashed out every cent available. Many are left with nothing. The lucky serial cash-out refinancers are left underwater. The unlucky ones are foreclosed on. This brings us to today's example, a serial cash-out refinancer who borrowed on the house and lost. Lets take a look -

Here is the property -

Here is the property info -

  • Condo/Townhome/Coop Property
  • Status: Active
  • County: Morris
  • Year Built: 1983
  • 2 total bedroom(s)
  • 1.5 total bath(s)
  • 1 total full bath(s)
  • 1 total half bath(s)
  • 6 total rooms
  • Type: Townhouse-Interior
  • Dining room
  • Basement
  • Dining room is Formal Dining Room
  • Basement is Finished
  • Fireplace(s)
  • Fireplace features: Living Room
  • Pool features: In-Ground Pool, Outdoor Pool
  • Swimming pool(s)
  • 1 car garage
  • Attached parking
  • Heating features: Gas-Natural
  • Forced air heat
  • Central air conditioning
  • Interior features: Carpeting
  • Exterior construction: Wood Shingle
  • Roofing: Asphalt Shingle
  • Community features: Association Fee Includes: Maintenance-Exterior
  • Pets allowed
  • Approximately 0.16 acre(s)
  • Lot size is less than 1/2 acre
  • Utilities present: Public Sewer,Public Water,All Utilities Underground
  • Call agent for details on association fee info.

(Sorry about the layout - had trouble trying to fix it after cut and paste)

Here are the financials -
  • The property was purchased for $118,000 in February 1998.
  • The original mortgage in 1998 is not available on the database.
  • A HELOC was opened in August 2000 for $25,000 with Chase.
  • In February 2003 a HELOC was opened for $73,594 with Wells Fargo.
  • A second mortgage for $68,047 was taken in August 2003 with Wells Fargo.
  • The condo was refinanced in October 2004 for $236,000 with an ARM from Decision One.
  • In January 2006 the property was refinanced for $276,250 with Countrywide.
  • The foreclosure process started in May 2007 with the filing of a Lis Pendens.
  • The property is currently an REO for sale through a realtor for $257,900.
Over the course of the 10 years of ownership a total of $158,250 was extracted either through cash-our ReFis or HELOCs. That amounts to an average of $15,825 per year that the property was contributing to the owner's lifestyle. Perhaps some of the money went into the property, but since the cashing out was habitual it was probably spent on other indulgences as well.

Now that the property went into foreclosure after the last Refi the property has cost the lender $33,824 after the standard realtor fees are factored in.

If the owner had handled the property different they could have netted approximately $126,000 for the property. Instead they chose to extract all of the equity - plus some extra at market peak - out of the property. Now they do not have the any accumulated equity nor do they have the property and good credit. Foreclosures have a lot of negative consequences - and those are just some. We now can look back on bubble logic and see how dangerous serial refinancing could be to ones wallet.

Saturday, October 18, 2008

Channeling Suze

There are many reasons why Suze Orman is one of our favorite financial advisers. Her famous quote "First People, Then Money, Then Things" is a great reminder of what is really important in life. It is easy for the people to put them in reverse order. That is evident with debt causing divorce - things first and people last. Sometimes there are things that can bring people together - that can be a wise investment even in troubling times. This brings us to an article in the New York Times titled Some Purchases May Still Be Worth The Price.

Although the story is about a family making $250,000 and buying a boat that really brought the family together, some of the advice can be good for everyone on any budget. Lets take a look -

Homeowners had already been feeling poorer, and the devastating investment losses have made thrift a necessity for many people. Saving every extra dollar now seems the most sensible course of action, given predictions of rising unemployment and daily mentions of the Great Depression.

But it’s easy to forget a couple of important things. First of all, the vast majority of people in the United States are not going to lose their jobs. Second, most of us work not merely for subsistence but so we can spend money on things and experiences that bring us some form of contentment.

This is not a call to consumer patriotism, a suggestion that we all go shopping for the good of the economy. Instead, I’m merely suggesting that if you’re feeling undeserving of anything special at this particular moment, or think you should help perform some sort of collective penance for our national overspending, you may want to cut yourself some slack.

Perhaps it’s buying a better bicycle and taking daylong rides with others (or commuting to work to get in shape and save money on gas). Or it’s the fanciest paella pan or pizza stone you can find, which keeps you out of expensive restaurants and at home with friends and family who will appreciate your new skills, the free meal and the conversation.

A sports car probably doesn’t qualify here. Nor does a tummy tuck. Instead, it’s about investing money tactically in our relationships with one another, building bonds that last beyond ones to any particular employer or a house that we may no longer be able to afford.

The key to the article is figuring out what purchases will bring the people in your life together and what are frivolous. For someone who liked to go out to dinner an investment on some great cookware may be well worth the price - can save money and bring people together.

If you go back and read books from the Great Depression one of the hardest aspects was the isolation due to lack of money. People had no money for activities and/or proper clothes so they isolated themselves. The isolation pushed them into a further despair.

In her book The Invisible Scar: The Great Depression and What It Did To People, From Then Until Now, Caroline Bird documented the long-lasting cultural problems that arose from that dark period in American history. The preservation for historical purposes is important so we can learn from the past and not make the same mistakes. She wrote the book so people would not forget, so lets make sure we do not. Now is the time to embrace Caroline Bird's and Suze Orman's advice.

Friday, October 17, 2008

The Long Slump

It is interesting to read that the housing clump had just about bottomed. But then the credit crunch came and helped extend the housing slump. Now people realize that there will be more declines to come for a much longer time period than anyone wanted to originally admit. The downward spiral continues - less housing starts, less jobs. Less jobs, less potential buyers and more debts go unpaid. More debt going unpaid means more losses for lenders. More loss for lenders less money to lend. Less money to lend less housing starts. And so on, and so on. Bloomberg News has an article titled U.S. Housing Starts Probably Fell to 17-Year Low in September illustrates that the cycle will continue for some time. Here are some key parts of the article -

U.S. builders probably broke ground in September on the fewest houses in 17 years, a sign the real- estate market deteriorated even before the recent credit meltdown, economists said before a report today.

Housing starts fell 2.6 percent last month to an annual rate of 872,000, according to the median forecast in a Bloomberg News survey of 74 economists. Another report may show consumer sentiment fell in October for the first time in four months.

Builders will find it difficult to lure buyers into the market after stock prices plunged this month and banks made qualifying for a mortgage more difficult. Declines in construction are likely to continue to hurt economic growth well into 2009, extending the housing slump into a fourth year.

The biggest housing slump in a generation was showing signs of nearing a bottom when financial markets began to implode in September, leading to the government takeover of mortgage finance companies Freddie Mac and Fannie Mae, the failure of banks and a $700 billion government rescue plan this month. Recent events are likely delaying any return to stability.

Falling prices are contributing to the jump in foreclosures as Americans, trying to refinance adjustable-rate loans, find out they owe more than their homes are worth. The drop in prices also means owners can't tap home equity for extra cash, one reason behind the slowdown in consumer spending.

Everything is intertwined. It may take time for all the fallout to be understood by the masses, but it will. Money that people thought they had is gone. And jobs will disappear along with the money. The downward spiral will continue for sometime before it reaches bottom. Now the predictions are hoping for some time next year. Hopefully they are right!

Thursday, October 16, 2008

Housing Prices Still Heading South

The housing market is still in a downward spiral. As values decline equity disappears. No equity means that people are unable to refinance and unable to take out equity. As the prices fall even people who did have a down payment or had equity at one point in time do so no longer. It is like the money disappearing from the DOW - just in slower and more common terms. The future declines are discussed in this article from the New York Times titled Home Prices Seem Far From Bottom. Lets take a look -

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.


Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers.


On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.


Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.


While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.

The raise in mortgage rates will make the values drop even more. This in turn will put even more people underwater. The downward spiral continues but it appears to be on the fast track. The big question how much more will this quick descent hurt as compared to the long and slower descent of the 90s. And how long and hard the slog will be to get back on the right track.

Wednesday, October 15, 2008

Foreclosure Response Plan

One out of 536 properties in New Jersey was at some state in the foreclosure process in August. New Jersey ranked 11th in the states for foreclosure activity in August. Now NJ is receiving federal emergency funds to help neighborhoods that have been hit by the foreclosure crisis. The funds are not for stopping or hindering foreclosures, rather for helping with the properties after the foreclosure has hit. So after this community has been hit, the feds are picking up the pieces. An article in the Asbury Park Press titled NJ mapping $52M foreclosure response plan describes the issues. Lets take a look -

State officials sought and got advice from housing and community development groups Tuesday on how New Jersey should distribute $51.5 million in federal emergency funds to help neighborhoods shellshocked by the foreclosure crisis.

The state and its partnering organizations can use the federal money to buy abandoned or foreclosed homes; demolish, redevelop or rehabilitate properties; offer down payment and closing cost assistance to home buyers; and convert properties to affordable housing. All projects must benefit low- and moderate-income people.

The program will provide $3.92 billion in direct funding to all 50 states and more than 250 local cities and counties.

"This $51 million is a drop in the bucket compared to the problems we have in New Jersey," said E. Michael Taylor, director of Essex County's housing and community development division. "Our foreclosure problem in New Jersey right now is primarily an urban issue, but, by this time next year, it will be a deep suburban issue."

Aside from the state, five local governments are getting between $2 million and $3.5 million in federal funds — Bergen County, Jersey City, Newark, Paterson and Union County.
The money will not be used to keep people in their homes but to fix up foreclosed properties and find new occupants for this. Hopefully this combined with the new Foreclosure Trust Fund will impede the downward spiral of foreclosures.

As foreclosures hit an area they drive down property values in the surrounding areas, thereby increasing the foreclosure rates. People are left with negative equity (underwater) and can not refinance. And the hurdles that people need to jump through for Hope Now seem to just get higher and higher.

Tuesday, October 14, 2008

NJ Mortgage Trust Issues

The new foreclosure tax on subprime investment purchases is generating a lot of controversy. But that is true with almost every proposal that is generated right before an election. Rhetoric gets heated. Oppositions increase. The economic crisis itself is huge - adding it to an already historic election season fuels the fires on both sides.

But there is another aspect to this. One of the cold, hard numbers involved. While generating fury make feel good, it does not address the issues or numbers involved. On a individual scale it is one thing to agree with the tax or not - but looking at the numbers of people involved and the impact to our state if the numbers fall into foreclosure is very troubling. One part of this article from the South Jersey Courier Post titled Mortgage Lenders Slam Trust Fund Plan is the numbers that the state leaders are dealing with.

Before taking a look at the article - the headline focuses on mortgage lenders but not one is quoted in the article. The closest we come from hearing from an actual lender is the executive director of the Mortgage Bankers Association of New Jersey, Robert Levy. Levy states "The process being suggested is too costly and too onerous, and it could stop businesses from lending in New Jersey." And thats it! Funny that an article that is titled mortgage lenders slamming a plan that none are quoted in slamming the plan. Another point before going into the article is that the fees are not coming off the profits - they will just be added to the front end of new mortgages and coupled with other fees.

Now onto the meat of the article -

There were more than 134,000 subprime mortgages in New Jersey as of June 30, and 32.5 percent of them were in foreclosure or close to it, according to the Mortgage Bankers Association National Delinquency Survey.

The state's housing and mortgage agency estimates another 10,000 to 20,000 subprime loans will fall into these categories over the next two years if the situation continues unabated. It projects the trust fund would receive between $20 million and $40 million by 2010.

Just given the numbers we are looking at 43,550 sub prime properties in or close to the foreclosure process. With projections adding another 10,000 to 20,000 in the next two years.

In the Realty Trac foreclosure numbers for August the total number of properties in some part of the process was 6,475 and that gave NJ the national ranking of 11 and one out of 536 properties in foreclosure. If just the smaller number of 43,550 subprime properties enter the foreclosure cycle NJ would be the number one foreclosure state with one foreclosure for every 69 households. That is 1 in 69! Adding the higher number of 63,550 potential subprime foreclosures in the state and the number rises to 1 in 52 properties in foreclosure. Yes, 1 in 52! These numbers easily surpass Nevada (1 in 91) and California (1 in 130). These are devastating, Great Depression numbers we are looking at! And these numbers are just contained to the subprime borrowers - that does not include all of the rest of the foreclosures!

Foreclosure numbers of this rate would be devastating to the state and are an ominous sign of things that are headed this way. Just looking at our previous posts here and here for the impacts of foreclosures in California shows how big the impact of foreclosures at this level would be. This sounds like the credit crunch issue - doing anything is bad but doing nothing is even worse. Another round of problems we wish we were not in but not doing anything will just compound the problems.

Monday, October 13, 2008

Learning from the Great Depression

You know things are much worse than they seem when CNN Money has one of their top stories titled "Great Depression holds lessons for surviving tough economy". When the MSM is using that as a comparative and for keys to survival you know people are expecting things to get much, much worse before things get better. Lets take a look at the article -

The Great Depression meant scary times for many households as a period of economic downturn spread throughout the world. Historians trace its start to the "Black Tuesday" stock crash on October 29, 1929, and argue that the resulting global desperation set the stage for World War II.

LeBlanc said her grandparents were fortunate that they didn't have investments and could grow -- or catch -- their own food during the Depression years.

The couple would catch wild hogs, feed them corn for a year and eat them once the wild taste was out of the scavenging animals. They also took advantage of available squirrel meat, a common food in the South at that time.

The Great Depression turned many Americans into packrats who couldn't bear to part with anything of potential value. They couldn't always afford to buy what they needed.

She is confident we haven't hit another Depression and that we've learned enough lessons from the past to avoid letting things get as bad as they were before.

Saving is a habitual behavior for those who have lived through the Great Depression, says Anjanette Sanchez of Globe, Arizona. Her grandmother, Vera Vasquez, had a difficult time with the Great Depression and seemed to be scarred by it long after.

The article is chock full of people remembering the advice from family members that live through the difficult days. Unfortunately there does not seem to be any actual stories of people who were adults during that time period. What a shame. First hand accounts and comparisons would have really had an impact on the story. Talk to people in their 70s or older today and most having a frugal childhood. How many times do you hear that age group say "we were poor but did not realize we were poor." There are still many lucid people in their 90s who could remember those days very vividly and probably have some enlightening stories to share. Hopefully next time.

Sunday, October 12, 2008

Sales, Sales, Sales

Today in our featured example listing we will take a look of some of the properties we looked at over the past year that did finally sell and how much the lender was forced to write-off. Or as the new truth is we, the taxpayers will be reimbursing them for. Many of the houses featured so far are still owned by the bank. But we did find three HELOCed properties that finally found new, non-bank owners.

Back in March we featured a property in Morristown. This was one of the HELOCed properties where everything that could be extracted was.

Here is the financial history of the property -
  • The home was purchased for $335,000 in June 2004
  • The first mortgage in June 2004 was for $301,500 with an ARM from Coldwell Banker Mortgage
  • In August 2004 a mortgage of $34,962.47 (yes that number is right) Beneficial Mortgage Corp
  • A third mortgage was taken out in March 2005 for $80,000 with Irwin Mortgage Corp
  • In Sept. 2006 Coldwell Banker started the foreclosure process.
  • Currently the property is bank-owned and for sale at $299,900 - approx 10% less than the 2004 purchase price.
Well, the house finally did sell in May for $286,000. That means the lender ate $147,622 just on the loans and the realtor fees just for this property. Add in all the other foreclosure costs and the lender lost easily in the $175,000 area.

Now onto one of our May property features from Randolph. This property was another owner that took all the equity out of the property.

Here is a look at the history of the financials -
  • The property was purchased June 2003 for $322,500.
  • The first mortgage in June 2003 was for $258,000 and taken with Sullivan Financial Services.
  • A second mortgage also in June 2003 was taken for $48,375 also with Sullivan Financial Services.
  • Home Equity loan was taken August 2004 for $47,000 with Morristown Federal Credit.
  • The property is currently for sale with realtor for $385,000.
The property did sell in July for $365,000. The total loss for the lender only ended up being $10,275 for the mortgage losses and realtor fees. Not that bad as compared to most.

Our final property that we reviewed is from Pequannock. This was another HELOCed property where all the available funds were extracted and the lender took a loss. Another final success story where the property was finally sold.

And now lets review the financials -
  • The property was purchased in Jan. 2002 for $209,000.
  • The original mortgage in Jan. 2002 was for $188,100 with Washington Mutual.
  • The property was refinanced with cash-out in July 2003 for a new mortgage of $215,000 with First Magnus Financial Corp.
  • It was refinanced again in October 2004 for $217,000 with Commerce Bank.
  • A HELOC was opened in November 2004 for $43,000 with Citibank.
  • The foreclosure process started Jan 2007.
  • The property is currently for sale with a realtor, listed at $279,900.
Well, the property finally sold for in August for $240,000. The lender ended up losing $34,400 from the sale when the original mortgages and realtor fees are covered.

So just with these three sales the lenders lost a total of $192,297 from just the original mortgages and the realtor fees. This does not include the other foreclosure costs that the lenders also incurred. Remember these costs will be made up with job cuts and increased taxes. The money is lost has a much greater impact than at first glance.

Saturday, October 11, 2008

Fighting the HELOC Shutdown

Lenders are trying to reign in HELOCs. Closing down lines completely and abruptly are constant stories. In this article from KABC Television in Los Angeles regarding how to get help if a equity line is cut. The story starts out with a woman named Frances, a realtor not making any commission that is filing for bankruptcy since her HELOC is frozen. Take a look -

Frances is just one of millions of homeowners all across the country, and all across income levels, who has seen her home values drop and slice into her home equity. Greg McBride is a senior financial analyst with He says this new policy by lenders and banks is happening everywhere.

"You may have had a line of credit approved for $100,000, back when you actually had $100,000 of equity in the home. Due to falling home prices, you no longer have that $100,000 in available credit. Therefore, the lender certainly doesn't want to be on the hook for it," said McBride.

James Burns is an attorney who usually handles loan modifications, but he's now doing more business with people having HELOC problems. He says a lot of decisions made by banks don't make sense.

"There's no definition on what's a significant decline. And, that's the term. And only the fed has said that's about 50 percent ... and most people aren't 50 percent," said Burns. "So, I think there's a lot of argument there."

Both James and Greg say homeowners with good credit can fight back.

"A lot of times it's just picking up the phone and requesting to have it reinstated. And, what we've seen in a couple of clients' instances is that they've called and it was reinstated," said Burns.

Note - there is a video at the link about the report. If we can figure out how to embed it we will.

Imagine that - just calling and for the line back and it works. That should be the first thing that anyone does. Then one has to figure out if they want/need to fight it or just let it go. It is a good time to really think about one's situation.

Frances the realtor should be re-evaluating her life and her career options. She seems to still be under the illusion that she can bounce back and the housing market will be what it once was. Like all who work in industries in decline, now is the time for her to look to her future. She should be looking for a recession proof job rather than clinging to a dinosaur industry. They may not pay as well but they can keep a roof over ones head and feed and clothe the family.

The Great Housing Bubble has burst and we are in a ditch.

Now is the time to decide if you want to get out of the debt ditch or keep digging.

Friday, October 10, 2008

Suze Speaks, We Listen

Financial Guru Suze Orman talks about the current economic problems to Oprah. The truth is biting and she says it all so simply. We will just cut to the chase and take a look at her words -

"We have built an entire economy on lies and deceit," she says. "It's like building a home or an entire building on a sinkhole. You have a foundation, supposedly. But a little crack, if something goes wrong -- a little earthquake, a tremor -- and it starts to open, everything starts to fall down and ... that is exactly what has happened in the United States of America."

Suze says the current financial downturn started all the way at the top of banks, mortgage companies and brokerage firms.

"There was greed at the top -- serious greed," Suze says. "When you have stocks, you have individual companies that want to make money. And [CEOs] want to make more money because the more money they make, the more their compensation is, the more their stock price goes up."

These companies made money by selling investments like mortgages to people who couldn't afford them, Suze says.

"Have you all ever wondered, 'Why does Suze Orman say people first, then money, then things?'" she says. "It means if we cared about people more than we cared about money, we would not be having what happened today, because the people who run the corporations, if they had cared about all of you, they wouldn't have created loans that you couldn't afford."

A lack of regulations also contributed to the downfall -- and Suze says there weren't more rules established because they would cut into the bottom line.

"The more money the brokerage firms, the mortgage companies and all those companies made, the better the economy was. Because if they lent you money, you had money now that you could spend," she says. "When the economy looks great, everybody feels like, 'Oh, we're doing good.' The stock market goes up. When the stock market goes up, the price of shares go up. The compensation for the CEOs go up."

As things progressed, Suze says many people fell under Wall Street's spell.

"A lot of you have built your personal financial foundation on deceit and lies. You bought a home that you couldn't afford ... You spent money like it was going out of style and it wasn't your money to spend, because why? They were borrowing it," Suze says. "When you borrow money, you leverage yourself. The United States of America leveraged itself so high that when it started to come down, the whole thing now has fallen down."
Wow - the truth does hurt.

Thursday, October 9, 2008

More Lower Mortgage Rate Promises

The economy is in really, really rough shape. An international round of rate cuts headed the news cycle yesterday. Desperate for a silver lining to decrease one's anxiety with opening their 401K envelopes we are hearing about how mortgage rates will hopefully be lower. Yippee! Collectively we have lost $2 trillion but mortgage rates are lower. Yippee!

Even though most who need to can not refinance due to being underwater or have too many other credit problems to qualify rates are (hopefully) going down. Bloomberg explains the issue in this article titled Lower Mortgage Rates May Be Silver Lining in Turmoil. Lets take a look -

A nationwide survey of consumer credit rates showed 30-year fixed-rate mortgages averaged 5.8 percent yesterday, according to Rates were 6.26 percent on Aug. 29 and also July 31, in the same survey. Home-loan applications rose 2.2 percent last week, according to the Mortgage Bankers Association and purchases were at a six-year low the previous week.


Rates aren't as low as earlier in the year. The average 30- year fixed-rate mortgage was 5.5 percent in January, a three- year low. At yesterday's rate of 5.8 percent, monthly borrowing costs for each $100,000 of a loan would be about $587, up $19 from January.


With credit tightening, consumers should think twice about making any extra payments on their mortgages in the short term, said Gibran Nicholas, chairman of the CMPS Institute in Ann Arbor, Michigan, a group that certifies mortgage bankers and brokers.


Your home-equity line ``isn't guaranteed,'' Nicholas said. ``The safer thing to do is to move money to a place where you can control it.''


Major mortgage lenders including New York-based JPMorgan Chase & Co., Citigroup Inc. and Cleveland-based National City Corp. have reined in home-equity lines of credit even to customers in good standing. Banks are looking at factors outside an individual's control, such as a weakening local economy or declining area home prices.

Notice all the positive advice about increasing and/or holding your debt steady. Have any HELOC left - take it and run. Is there any safe place to put it? Maybe gold. This may be good advice for the few who will not fritter it away - but most people will burn through the money just as they did during the housing bubble.

The advice seems to be aimed for those that generate their income through processing the paperwork. This almost sounds like another edition of "consider the source". Instead of trying to reduce debt and get in a safe position the encourage in the middle of mass uncertainty (and possibly a devastating credit crunch) is to load up on debt. Yeah, that makes sense. /sarcasm

Wednesday, October 8, 2008

The Underwaters

Not surprisingly many people are underwater - owe more on their house than it is worth. A lending system that required little or no money down coupled with a significant drop in property values has caused this number to skyrocket. Of course those areas with the biggest gains are currently having some of the biggest falls. So even in places like Miami if you 20% down at the house peak you are probably underwater anyways. Not good news. The level of underwaters is profiled in this Wall Street Journal article titled Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'. Lets take a look -

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site

In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.
And the downward spiral continues. Houses worth less. No refinancing and no more equity withdrawal. Just adding to the credit crunch.

Also note the problems involved in remedying the situation. Even if you are not underwater you are feeling an enormous amount of stress right now. And the anger of helping people out who bought with nothing or took risky loans will make all those who played it safe very, very angry and resentful. The 40 million who are paying their mortgages but are not underwater can not be ignored in this whole mess. Hand-holding the underwater at the expense of the rest is going to compound problems not alleviate them.

Here is an interesting chart from the article showing the drop since the peak and the number of recent purchasers underwater. The drops in Arizona, Florida and California are huge. Those are some pretty alarming numbers. The biggest challenge is to keep those underwaters from going straight back to the bank either due to foreclosures or walking away. One final note is that the last few years of the bubble involved option-arms which almost by design puts people underwater. How many of these purchasers are that heavily underwater.

There are also some interactive maps with the original article.

Tuesday, October 7, 2008

60% See Depression Likely

That is a significant number. Remember the good old days when that 60% was seeing a recession. Now it is almost 100% accepted that we are in or heading into a recession and people are scared it could escalate into a depression. The poll by CNN Money is profiled in an article titled Poll: Almost 60% say depression 'likely'. Lets take a look -

The CNN/Opinion Research Corp. poll, which surveyed more than 1,000 Americans over the weekend, cited common measures of the economic pain of the 1930s:

  • 25% unemployment rate;
  • widespread bank failures; and
  • millions of Americans homeless and unable to feed their families.

First these are the three measures and the last two are already happening. There are widespread bank failures and people are panicking. There are millions losing their homes and many states are now trying to stop or slow the foreclosures. The only thing missing is incredibly high employment rate. So lets take a look at the poll results-

In response, 21% of those polled say that a depression is very likely and another 38% say it is somewhat likely.

The poll also found that 29% feel a depression is not very likely, while 13% believe it is not likely at all.

Now onto what the experts say -

"We've been in a recession all year and it's going to get worse," said Anirvan Banerji, director of research for the Economic Cycle Research Institute. "We're going from a relatively mild recession to a more painful recession. But we're a long, long way from a depression."

Other economists recently contacted by said that the unemployment rate could rise as high as 10% to 12% next year if the bailout does not work. While that could be roughly double the current 6.1% unemployment rate, it would be only half of the worst rate seen in the Great Depression of the 1930s.

And experts believe that the Federal Reserve and other officials made many policy mistakes during the Depression that are not likely to be repeated. In fact, the Fed at that time kept lending tight, while today's Fed is pumping hundreds of billions of dollars into the banking system to try to restart lending and spur economic activity.

"The fact that the majority of people believe we are going into a depression ensures that the recession will get worse," Banerji said.

The recession is here - how bad and how long depends a lot on how much the current and future policies work. Just because we are doing the opposite of what was done during the depression does not mean that the policies will prevent one, nor does it mean that things are inevitable. Until we fully understand the problems we will not be able to implement the correct solutions. And it sounds like many people do not think we will be able to implement the correct solutions regardless...

NJ Foreclosure Politics

So New Jersey is planning to add a new "tax" to the foreclosure process. Earlier this year we looked at the costs of foreclosure here. The total costs averaged to approximately $77,935 with approximately $50,000 of those costs being the responsibility of the lender. Here is an except for the expenses involved -

The pre-and post-foreclosure expenses that lenders incur include the following:
  • Loss on property/loan
  • Property maintenance
  • Appraisal
  • Legal fees
  • Lost revenue
  • Insurance
  • Marketing
  • Clean-up
Note that these costs to not include the depreciating value of the property which can be easily another 10-20% off the original value. Now the state looking to add another expense for the lender of $2000 per foreclosure. Lets take a look at an article from the Star Ledger titled Assembly panel approves bill to help struggling homeowners to review the proposal on the table -

The bill (A2517) would impose a $2,000 fee on every lender who begins foreclosure proceedings on certain mortgages considered subprime. The money generated -- estimated at $44 million by one supporter, Staci Berger of the Housing and Community Development Network of New Jersey -- would go into a revolving state fund. It would be used for grants to agencies such as Citizen Action to counsel homeowners facing foreclosure and make emergency loans to keep them in their homes.

The bill also would give homeowners facing foreclosure a six-month period to renegotiate the terms of their mortgage or find new financing.

"This bill is directed at the individual whose home is near foreclosure," said Assembly Majority Leader Bonnie Watson Coleman (D-Mercer), the sponsor. In that respect, she said, it differs from the $700 billion financial rescue plan passed last week by Congress to help financial institutions.

Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, warned the bill "will not help; it will harm." By making it harder to foreclose on mortgages, he said, it will discourage lenders from making them, so someone who saves for the down payment on a traditional mortgage "won't be able to get one."

While this may lower the foreclosure rate how much will it help the big picture? Will it just push back the inevitable or will it last long enough to resolve the problems? Other states have implemented similar measures to slow down and lengthen the foreclosure process but little evidence has been produced if the outcomes are any better. The economics of the situation are diametrically opposed with the loans staying the same or increasing while house values are decreasing. The current losses are rolling over into the banking and lending arenas. Will the delay stop the inevitable or just slow the bleeding?

And here is a great comment regarding the article -

Posted by ListenUpNJ on 10/06/08 at 4:39PM

The article states:

"Assemblywoman Joan Quigley (D-Hudson) voted for the bill but urged her colleagues to expand it. As written, she said, it aids homeowners who took out risky subprime mortgages but not those who lost their jobs and could not keep up their payments on traditional mortgages."

So the people living beyond their means get covered. The poor guy that lost his job gets nothing. Hopefully someone will have the brains to fix this so the guy that lost his job is included.