Foreclosure Victim - Tenant Must Leave in 36 Hours

New Jersey tenants are some of the luckiest in the country when it comes to foreclosure issues. If they are paying their rent they can stay on the property even after its been foreclosed. The lenders may not know the Jersey's laws, but the renters should. Some lenders in New Jersey may not realize that they can not give tenants a 36-hour eviction notice, unfortunately other state's residents are not so lucky.


Imagine getting a day and a half notice that you have to pack up and leave a 4000 square foot house (or even a small 1500 square foot house) all while finding a new place to go. Some rental victims do not know they are being evicted until they receive the short notice to vacate the property. In the case of the story from MSNBC titled Evicted Tenant Shares Lessons the victim knew the property was in trouble and fought to stay in the home, but many others are not so lucky. Lets take a look at the article -

The single mother of a 12-year-old boy envisioned this day was coming. But it doesn't make getting evicted any easier.

"I have to load the contents of a 4,000-square-foot home in 36 hours," said [Susan] Hair, surrounded by a lot less mess than one would expect during the height of a move.

Hair was one of the first tenants locally to discover she'd been paying rent each month, while her landlord was not paying the mortgage.

...

For Hair, the PGA National golf front home should've been a dream come true. She rented through a property management company, but wasn't told the house was already moving toward foreclosure.

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Hair saw the property ownership get bounced around, yet no one paid the mortgage. Next she received a credit card in the mail for the new homeowner who somehow got a home equity loan on the property even though it was in foreclosure.

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After the bank took over, Hair said she tried to pay the rent directly to the financial institution but it wouldn't accept her money. She said she even paid an attorney to negotiate with the bank to let her stay. That didn't work either.

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Hair wants other tenants to know she got 36 hours to move, not 30 days. She wants other renters to know that they need to be careful.

There is an accompanying video to this report, but it is not embeddable to check it out here.

Hopefully someone other than us are documenting what is really happening throughout the country to renters. The woman in this story was supposed to get 30 days notice, instead she got just 1-1/2 days. Renters are one over-looked population of this foreclosure crisis. And considering that almost 1 out of 3 people are renters it should be a bigger story.

HELOC Suspensions Still Surprise People

It still makes news that lenders are closing down HELOCs. There are legal rules when the lines can be locked down such as when values decline more than 50% of the appraised property. It is unfortunate that in some areas of the country this is the case. But down in Florida a news channel found another HELOC consumer with a frozen credit line that was shocked to find the news. In this clip from WPTV.com titled Home equity line worries we can hear the story. Lets take a look -




Here is some text from the accompanying article -

Business isn’t keeping the pace. Mark Martin still thought he had his future sewn up with home equity line of credit.


Mark, says "I was counting on it as a safety net."


Mark runs the embroidery business “Sewlutions.” Most of his business comes from Starbucks franchises. There are fewer orders. He was counting on his equity line to make-up the difference.


He says he always pays his bills on time and has good credit. He was shocked when he received a letter saying his home equity line was suspended.


"Never occurred to me that was even an option,” says Mark. "I feel like the banks are getting are getting billions of dollars in tarp funds to supposedly make credit actually available."

...

Losing an equity line of credit or having it reduced is happening to a lot of people. Dr. Boisjoly [Dean of the College of Business and Management at Lynn University] stresses home equity lines are based on the value of a home when the credit is given. He cautions about reapplying. Your home will likely be reappraised for much less and that could have the bank saying pay-up on your mortgage.

A few things to note in this article. The bubble philosophy that home equity is your savings and safety net that one should have access to. Another bubble aspect of using home equity as a source of funds for business. Because of the ease of obtaining funds small business owners often turned toward their houses to fund ventures. We warned about the problems this could cause throughout the country last April here. Remember that during the bubble loans were commonly based on what the asset was worth not someones ability to pay.

The last thing to note is that this owner is still in bubble mentality. While he is aware of the tarp funds he is not aware of the massive closing down of HELOCs that have been going on during the last year throughout the entire country - see here, here, and here.

The Fall of Home Sales and Prices Continues

It looks like the fall to the bottom is further than we, a collective we, had originally thought. And the speed of the fall - both of home prices and home sales - here in the Northeast is increasing significantly. Does this mean we are closer to bottom? Or just still in the middle of the decline with a long way to go? This article from the Star-Ledger titled Northeast home sales show steepest drop outlines how bad things are in this region. Lets take a look -

January home sales in the Northeast plummeted nearly 25 percent over the past year, far outpacing the rest of the country, according to a report released yesterday by the National Association of Realtors.

Prices fell 14.7 percent over the same month the previous year, the report said. About 35,000 homes were sold last month in the Northeast, a region that spreads from New Jersey and Pennsylvania up through Maine, for a median price of $228,000. That means half of homes sold for more and half sold for less.

When adjusted for changes in seasonal buying patterns, sales in the Northeast in January fell 14.7 percent over December.

...

About 45 percent of all homes sold nationally were sold in foreclosure or through a short sale, in which sellers and mortgage lenders avoid foreclosure by accepting less for the house than the balance of the mortgage, the Realtors' group estimated.

The Passaic metro area, the only area with available local statistics, closely mimicked the Northeast corridor. Sales in Passaic dropped 23.4 percent and prices fell 16 percent to a median of $287,000, according to the Associated Press-Re/Max Monthly Housing Report, also released yesterday.

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"The pain that we see, in terms of declining prices and sales, is going to continue for some time," [Joseph Seneca, an economist with Rutgers University] said. "Prices may be very attractive now, but they may be even more attractive three, four months from now. The expectation of further declines will keep people on the sidelines."

It looks like its time to write-off any hopes for 2009 already. With almost half of the properties sold being from foreclosures or short sales people a big group of buyers are limiting their sights to bargain fire-sale prices. It would be interesting to know who these buyers are - owners that are looking to occupy the property or another group of speculators looking to buy houses now that they are cheap.

In the West where the number of sales of have substantially increased it is mostly due to the plummeting prices. That is not necessarily the home price sale we would like to see on the east coast.

Finally if anyone knows what towns the Passaic metro area encompasses the please pass that info along. Thanks.

A House for a Buck - In America?

Houses for a dollar? Real houses made of bricks and wood? A house with a roof? With real property underneath? In the United States? Not a current where the per capita is a couple hundred dollars? Can it be true that houses selling for less than $1000 in the once great city of Detroit? Prices for properties between $1 and $1,000 do not seem possible anywhere in the United States in 2009. Our reaction to this video from CBS News titled Buy A Home For A Dollar was disbelief. Take a look -


Watch CBS Videos Online

Shocking! In 2009 properties, real properties, for one dollar? Could this be true? Not in the motor city? So we took a stroll over to Realtor.com and found 187 houses in Detroit listed under $1000! With 4 of those listed for only $1! Yes that is $1.00!!!

Sure most are boarded up. And it looks like almost all are bank owned. And who knows what the neighborhood and the properties look like now if lenders can not dump them for any real amount of money. But that is still 187 properties with domiciles for sale today, February 25, 2009, for less than $1000 in a major city in United States of America!

Motor city is hurting, severely. Lets hope the old adage "as GM goes, so goes the nation" is no longer true. For if it is, we fear, we are definitely in midst of Depression 2.0 after hearing this story...

Note - We were already contacted by a fellow Garden Stater interested in our opinion about buying up some of these properties and and becoming a landlord. We can not endorse buying sight unseen properties over the internet. We then questioned about whether they knew about rent and tenant laws for Detroit - the answer was no. We also questioned who was responsible for back taxes - this easily can turn out to be the new owner. So while it may be exciting to pick up cheap properties, there could still be disaster ahead. We have already lived through this once - office workers with no experience in real estate issues becoming landlords and speculators on properties half a country away. It did not work out well during the bubble and we would be shocked if it worked now, even for a buck a property. Remember another old adage - "if it looks too good to be true, it probably is."

Foreclosure Prevention School

So they were giving a free seminar on avoiding home foreclosure and only one dozen people showed up! Pretty sad that only 12 people in Northern New Jersey were willing to trade 3 hours of your lives to hopefully prevent foreclosure.

A group in Bergen County is offering a seminar on how to work with a lender and find a certified counselor to prevent foreclosure and evaluate the options. There was just a meeting and only about a dozen people, yes only about 12 people, showed up. Hopefully the March 21st seminar will bring out more people to help them. From this article in The Record titled Tips to avoid foreclosure offered it sounds like a good place to get some answers and solutions. Lets take a look at the article -

Government programs and increased flexibly among lenders are making it easier for troubled borrowers to keep their homes, fair housing advocates told a small crowd that gathered today for tips about how to avoid foreclosure.


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Borrowers also can take advantage of a state program created last month to connect them with mediators who will work on their behalf, [David Whritenour, a representative with the Fair Housing Council of Northern New Jersey] said.

But despite the help that’s available, a fear of foreclosure and bankruptcy is deterring many from seeking assistance, he said.

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Homeowners who need help should first seek the assistance of a counselor who is certified by the U.S. Department of Housing and Urban Development, Whritenour said.

Solicitations received in the mail or seen on television should be viewed skeptically, he said. While some offers are legitimate, others are scams designed by predatory lenders only interested in making a quick buck for themselves, he said.

Counselors working in a homeowner’s best interest can persuade lenders to reduce interest rates, fix variable rates, extend repayment terms or, in rare cases, reduce the amount owed, he said.

For those that need such a seminar, which is free, the March one will be held from 9 a.m. to noon. Make sure to register, call the Bergen County Homeownership Center at (201) 336-7200.

The program sounds like a good primer for those who are calling or working with the foreclosure mediation program. If the group is small enough people problems can be discussed directly. The next meeting is well after the March 4th details of Obama's plan is released so the various speakers should be able to provide answers in context to the current state and national programs.

According to RealyTrac there were 5,005 homes in New Jersey in some state of the foreclosure process and yet only 12 people showed up??? The foreclosure prevention hotline gets thousands of calls and yet only 12 people showed up??? Maybe they should offer the course in Passaic where the foreclosure rate is 1 in 428 or Essex with a rate of 1 in 460. Those two counties combined would have a potential pool of 1,075 homeowners who may need such a program. But word needs to get out to have more than 12 people show up. This seems like something that would have a standing room only crowd - there must be a breakdown in getting the word out...

Housing Bubble Pain in Mount Olive

During the bubble people often paid much more than houses were really worth. The prices were inflated and the bubble intoxication persuaded people to pay much more than the real value. After a few years of double digit increases lenders forgot that home prices do not increase perpetually. Post bubble we can see that house prices do not just stagnate like in late 80's they can actually fall.

After the bubble burst people found that they had bought houses they could not afford. Took out equity that they did not have or could never pay back. And lenders were stuck with much bigger loans than the property would ever be worth. The wealth illusion of the bubble was gone. People lost, and are still losing, unaffordable properties. Lenders are writing off hundreds of thousands of dollars per property. Financial pain that will be felt for a long, long time took the bubble's place.

Today's featured property fits all of these descriptions - an owner bought too much house, extracted everything they could, and the lender is forced to write off over a hundred thousand after foreclosing on the property. All the bad aspects of the bubble rolled into one featured property found in Mount Olive. Lets take a look -

Here is the property -



Here is the property info -

Status: Active County: Morris Year Built: 1953 4 total bedroom(s) 2.5 total bath(s) 2 total full bath(s) 1 total half bath(s) 9 total rooms Style: Colonial Master bedroom Living room Dining room Family room

Kitchen Den Basement Laundry room Master bedroom is 20x17,Includes: Walk-In Closet Living room is 15x14 Dining room is 14x10,Formal Dining Room Family room is 19x11 Kitchen is 16x15 Den is 18x09 Basement is Partial, Unfinished Hardwood floors Fireplace(s) Fireplace features: Family Room, Wood Burning

2 car garage Attached parking Parking features: Oversize Garage Heating features: 1 Unit, Baseboard - Hotwater,Oil Central air conditioning Cooling features: 1 Unit, Ceiling Fan Exterior construction: Vinyl Siding Roofing: Asphalt Shingle Pets allowed Lot features: Open Lot Corner lot Approximately 0.27 acre(s) Lot size is less than 1/2 acre Utilities present: Public Sewer, Public Water, Electric Service

Here are the financials -

• The property was purchased in July 2005 for $405,000.

• The original mortgage at the time of purchase was for $359,000 with a 30 year fixed with Well Fargo.

• On the same day of purchase in July 2005 a HELOC was opened also with Wells Fargo for $11,000.

• In October of 2005 another HELOC was opened for $86,500 with Wachovia.

• The foreclosure process started in August 2007 with the filing of a Lis Pendens.

• The property is currently an REO and listed with a realtor for $370,000.

• The taxes for 2008 were $9,734.11.

The property was purchased at the peak of the bubble with what looks like over 11% down payment of $46,000. If the HELOC taken the same day was actually a piggyback loan the down payment would have been $35,000 or about 8.6% down. Notice that the amount taken at the time of purchase, $370,000, is the same as the current sale price.

After just three months the owners went elsewhere (Wachovia) to possibly extract all the equity from the down payment as well as any new accumulated in the property plus another $51,500. If all the HELOC was extracted in the two years of ownership before the foreclosure process started the property was paying the owner about $25,750 in equity, housing ATM, or second income. Not a bad second income. Actually since it was Wells that filed the foreclosure papers and Wells purchased Wachovia, and subsequently their loans, Wells may have been paying this owner over $25,000 per year to own the property.

Now the property is for sale with a realtor, if it sells for full asking price and the realtor receives their standard commission Wells stands to lose approximately $108,700 on this loan.

For those looking to pick up this property, paying full price with 20% down and today's Bankrate 5.26% with a fixed 30-year loan the payments with taxes would be about $2,447.54 per month. But future owners need to remember that the bubble has popped and the property will not be paying future owners any second income, let alone over $25,000 a year.

Foreclosure Bailout Issues

People have seem to have bailout amnesia. People are angry about the state of what is going on. People are angry seeing their 401Ks and IRAs worth less than 1/4 to 1/2 as it was last year. People are angry that their home prices seem to be in perpetual free-fall. People are angry that their pay is stagnant and their jobs may be in jeopardy. People are angry that the housing bubble party is over and the hangover is much worse than most anticipated. So to find people angry about the foreclosure program is not hard.

Angry over the entire situation may not be the same as anger at the program. Dislike of the program may not mean that you do not want it to work. Disliking the situation one is in is not synonymous with not liking the current plan, or any plan. There is a group of people who want to do nothing and let the system sort itself out without any intervention. If that is ones feelings and it is consistent that is one thing - like Ron Paul's position. But if people are voicing anger at the plan are they angry at the situation the United States finds ourselves in or are they angry at the particulars? Or are people just so angry at the current situation they can not distinguish between the causes. Many of the voices just focus on the anger, not the reasons why. This brings us to an article from MSNBC titled Bailout for homeowners stirs up strong feelings which lets people vent. Lets take a look -

"I feel like I'm doing the right thing paying my mortgage, and now apparently I have to pay my neighbor's mortgage, too. People are really angry," said Kim Sansom Guymon, a stay-at-home mom who bought a three-bedroom home with her husband in suburban Seattle in 2001 and has watched it drop $150,000 in value since last summer.

Rescuing distressed homeowners does not sit well with Robert Bechler, either. Still, the 37-year-old flooring contractor said he sees little choice.

"If they don't bail those people out, it's just going to get worse. It's a necessary evil, I suppose," said Bechler, who with his fiancee just bought a house in Cape Coral, Florida, for $92,000 after waiting years for prices to fall.

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O.B. Brock of Charleston, West Virginia, opposes bailing out people who got in over their heads and the banks that helped them.

"It's just rewarding crooks," said 38-year-old single mother, who said she turned down a bank's $100,000 mortgage offer five years ago because she knew she couldn't afford it.

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"I could sit back and say, 'Hey, I'm not getting anything and that's not fair.' But I've been fortunate enough that I don't need a bailout," [Debra Rodriguez, of Tucson]said.

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"Does it reward bad behavior? Absolutely, it does. But no more than the banks who offered these loans rewarding themselves for their own bad behavior," said [Chris Grande of suburban Dayton, Ohio], 26.

No one wants to pay someone else's mortgage. Just as no one wants to see their home value continuously fall. People are angry at the entire housing and economic deterioration. Finding ourselves in the middle of one of the worse recessions in decades, perhaps the worst economic crisis since the Great Depression is making everyone angry. But being angry at the situation is different from being angry with the plan - and from the article we can not tell what the strong feelings in the article are derived from.

What Are The Details

A big part of the Obama foreclosure relief plan was unveiled a few days ago. Unfortunately the guidelines are not coming out until March 4th. The guidelines will help determine eligibility and also allow for a more thorough review of the plan. The Boston Globe discussed some of the issues concerned homeowners are waiting to hear about in an article titled Homeowners anxious for details. Lets take a look -

Obama's three-part plan unveiled this week has sparked hope - but also many questions - for millions of homeowners nationwide who are trying to save their homes or gain access to attractive lower interest rates.

The Obama administration plans to issue guidelines March 4 when the program starts. Included in the plan is a change in lending rules to help as many as 5 million homeowners refinance, $75 billion to help up to 4 million homeowners most at risk of foreclosure, and a pledge of $200 billion to mortgage giants Fannie Mae and Freddie Mac to help keep mortgage rates low.

While the plan is the most aggressive yet to attack the housing crisis, many people on the front lines remain skeptical. They've witnessed a series of highly touted plans that have done little to stop the downward plunge in housing prices and the wave of foreclosures that has left neighborhoods with vacant and boarded-up buildings. More than 950 foreclosures were recorded in Massachusetts in January alone - a 22 percent increase from the same month in 2008, according to data released yesterday by Warren Group, a real estate data firm.

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The program requires that the owner of a second lien agree to the deal, but many lenders already have balked at similar requests.

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For the most troubled borrowers - most at risk of losing their homes - Obama has set aside $75 billion to give incentives to mortgage servicers to negotiate more affordable loans, and money to borrowers to keep current on those loans. To encourage such loan modifications, the Treasury Department will issue guidelines for lenders and require those accepting federal bank bailout funds to implement those guidelines.

Terry Moore, a managing director for the consulting firm Accenture, said the incentives will be helpful in spurring more loan modifications. But he said many servicers are under equipped and understaffed and face a myriad of challenges to helping troubled borrowers.

When the program starts there will be numerous issues that will have to be worked out and resolved to have any real impact. Between new buyers with piggybacks and older homeowners that HELOCed all of their equity the number of second liens will be troublesome.

Another point that we have discussed is that the lenders have not adapted to the new requirements of renegotiating existing loans. There already was a process in place for those that defaulted on their loans - foreclosure. Lenders were set up to make money not figure out how to lose the least amount. The new mind frame has to be adopted by the lenders to make an impact.

Hopefully March 4th brings about a good plan that will stabilize the housing market....

Foreclosure Plan Reactions

Even more prevalent than articles about the foreclosure plan are the reactions to it. First we will take a look at our favorite bloggers. From Calculated Risk's post Comments on Housing Plan -

[ Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices] is fine, although it is kind of like winning the lottery. If a loan was sold to Fannie or Freddie (or guaranteed by them), then the homeowner has the ability to refinance with a higher LTV - but if the lender decided to keep the loan (not guaranteed by Fannie or Freddie) or sold the loan to Wall Street to be securitized (not by Fannie/Freddie), then the homeowner is not included.


This program is fine for Fannie and Freddie - they are lowering their default risk. And this is obvious good for the borrower. The new maximum LTV will be 105%, so this will help some homeowners who are "underwater". This is for refinancing only.

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For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.


This is not so good. The Obama administration doesn't understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key

[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.


Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

We totally agree with Calculated Risk. Out take on the program was exactly the same. Probably anyone who took a Pick-A-Payment and did not or could not pay anything other than the lowest payment should be left out of the program. Also anyone who received 100% financing or more should also be left out. This group was speculative whether that was their intent or not.

Now onto Mish's Global Economic Forum post titled Obama commits $275 Billion to Slow Foreclosures -

I do not buy this "acted responsibly" nonsense. If a person took out a loan greater than 38% of their income they most assuredly did not act responsibly.


Furthermore, the Obama plan increases the size of Fannie and Freddie, rewards servicers for no reason, giving them an incentive actually to waste taxpayer money, and rewards those who acted irresponsibly. Is this a good thing?


Addendum:
One question I have was not answered by either article. I am very concerned for the borrower's sake about loan modifications turning non-recourse loans into recourse loans.


How many people will become unwitting interest slaves for the rest of their lives by signing up for one of these "loan modifications"? That is likely to happen if non-recourse loans become recourse loans.

Wow - a twofer! We agree with Mish that those who are paying too high of a percentage of their income should be left out of the program. We recommended that anything higher than 45% should be left out of the program. Perhaps some of these people were making large incomes during the bubble days - like brokers, realtors, builders and contractors - but those incomes are also inflated due to the bubble.

Now onto an article from the Philadelphia Inquirer in an article titled Industry reaction to Obama plan lukewarm -

"Doing nothing is not an option," said Philadelphia economist Kevin Gillen. "But doing anything and everything isn't necessarily better than doing nothing."

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"We can all debate the fairness of this, but ultimately, we have to stabilize the housing market, and this is one part of the process," said [TD Bank N.A. chief economist Joel L.] Naroff, who is based in Cherry Hill.

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[Philadelphia mortgage broker Fred] Glick cannot see incentivizing bad behavior by riding to the rescue of the people who caused the problems: bankers who made bad loans, and borrowers who borrowed more than they could afford.

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If the program targets homeowners whose mortgages now exceed the value of their houses - referred to as "under water" - "then simply let Fannie Mae and Freddie Mac refinance these loans without requiring an appraisal," Glick said.

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[Bruce M. Sattin, a Lawrenceville, N.J., lawyer, said] a positive step Obama's willingness to change the law to permit bankruptcy judges to modify home loans.

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Economist Gillen maintains that both mortgages and the homes that securitize them must be marked to market, meaning "that the values of both need to drop, but not by too much."

Second, the government needs to distinguish between deserving households and undeserving households, not just between flippers and primary buyers.

That is the big issue - that the people whose lenders sold their mortgages to Freddie and Fannie will have an advantage over those whose lenders held their mortgages or sold them to someone else. There are alot of areas where fairness is completely out of the picture. Perhaps that is the best part of the "do nothing" option is that fairness is applied equally to all! But the do nothing option will bring alot of negatives with it that would be much more detrimental than the do nothing option.

Now onto the politicians responses which the USA compiled in a sidebar titled Reactions To Obama's Housing Rescue Plan -

"This plan will start to rebuild the communities hurt by foreclosures because we all have a stake in curing this epidemic."
-- Senate Majority Leader Harry Reid, D-Nev.

"The Obama Administration gets it foreclosure prevention not only provides relief to middle class families struggling to make ends meet, but also is critical to getting our economy back on track."
-- Sen. Chris Dodd, D-Conn., chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

"The President's plan appears to help those who least need it, and doesn't help those that do."
-- Sen. Richard Shelby, R-Ala., the top Republican on the Senate Committee on Banking, Housing, and Urban Affairs.

"I applaud the president for his commitment to help keep American families in their homes. However, I strongly urge him to ensure that borrowers and lenders who made bad decisions are not rewarded at the expense of the more than 90% of working-class American families that are still making their mortgage payments without government assistance."
-- Rep. Spencer Bachus, R-Ala., the top Republican on the House Financial Services Committee.

Shocking - D's support the plan and the R's do not. But good for Rep. Bachus to support keeping people in their homes and warn about helping people that should not be helped.

As we pointed out in previous posts - there will always be some level of foreclosures due to job losses, death, medical issues, etc. However the epidemic foreclosure wave due to bad lending practices are beyond the normal scope and unfortunately they are also hurting the 90% who are paying the mortgages. Plus do not forget the forgotten victims of foreclosure - renters.

Obama's Foreclosure Plan

Yesterday The President outlined his new foreclosure prevention program. First lets take a look at the plan from the USA Today's article titled $75B anti-foreclosure plan is a "chance to rebuild," Obama says. Here is a snippet -

President Obama added the nation's housing foreclosure crisis to his economic recovery agenda Wednesday with a $75 billion plan to help up to 9 million troubled homeowners stay in their homes.

The program is tailored so up to 4 million homeowners can reduce their mortgage payment so it is no more than 31% of their income. As many as 5 million more facing foreclosure or who owe more on their mortgages than their homes are worth would have a chance to refinance, as long as their mortgage is not excessively higher than their home is worth.

The plan "will give millions of families resigned to financial ruin a chance to rebuild," Obama said before a packed high school auditorium in a state that's been racked by the housing crisis. But the president said the plan won't help every distressed homeowner. "All of us must learn to live within our means again."

Fannie Mae and Freddie Mac, the two mortgage giants, could receive an additional $100 billion each from the government. As a result, the plan's cost could be as much as $275 billion.

Homeowners whose total monthly debt payment is more than 55% of their income would have to go to credit counseling to get help from the plan.

Housing Secretary Shaun Donovan said help would not be available to homeowners whose mortgages are more than 50% above what their homes are worth because lenders would probably not approve new financing for people so far underwater.

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Obama said it "focuses on rescuing families who have played by the rules and acted responsibly," rather than speculators, home flippers and people who bought far more than they could afford.

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The plan earmarks $75 billion, mostly from financial rescue funds already approved by Congress. Lenders would be responsible for lowering interest rates so a borrower's monthly payment is no more than 38% of their income. The government would then help pay for the costs of reducing a borrower's loan payment so it becomes 31% of income.

The two interesting things we would point out from this article is that those who hare spending more than 55% of their income will never afford their houses. There should be some cut-off point. Perhaps 45% but definitely nothing above 50%. If you bought a property having to spend more than 50% of your income on housing you were basically a speculator of sorts and should not be allowed to be part of the program.

The second part is that if properties that have lost half of their value are not included in the program places like Nevada, Arizona, Florida and California will continue having problems. If the remaining residents can not get a reprieve due to the falling prices some areas in these states will be literal ghost towns.

In our next post we will look at some reactions to the plan.

The Reverse Mortgage Bite

Due to the current mortgage situation reverse mortgages are being pushed, hard. There appears to be a lucrative market with the shrinking 401Ks and IRAs, so taking money out of one's property is appears to be one easy way to keep up a current lifestyle. And what better way than a reverse mortgage.

Proponents of reverse mortgages discuss the federal insured programs - which of course does not cover all of them - and the counseling required. They argue that these are sophisticated customers who understand and want the product. Anyone who states otherwise does not understand Reverse Mortgages. The current target for this group is Consumer Reports with the article titled Hard-sell reverse mortgages. Lets take a look -

[A] reverse mortgage should be a last resort. When homeowners use it to splurge on travel or pay off credit cards, they lose an important safety net that might be needed for an emergency. Lenders, though, are promoting a wide range of uses for reverse-mortgage cash. Financial Freedom Senior Funding Corp. of Irvine, Calif., suggests using the money for "special things you've always wanted to do, such as travel or hobbies."

...

The dangers are outlined in a lawsuit filed against Financial Freedom. The suit claims that the company advised its business partners to encourage seniors to take out as much money as possible in reverse mortgages so that the fees and interest paid to lenders would be maximized.

The complaint goes on to say that Financial Freedom encouraged and trained partners, some of whom were insurance agents, to sell insurance products to seniors with the money gained from the reverse mortgage. In turn, Financial Freedom would obtain additional interest on the extra money borrowed.

The plaintiff, Betty Adcock, 80, says she was persuaded to replace her home equity line of credit with a reverse mortgage. Her daughter, Carol Anthony, had already helped her establish a $150,000 no-fee home equity line for emergency expenses. During the first three years, Adcock had borrowed about $19,000. But her daughter said at a December 2007 Senate committee hearing that "in place of the no-fee home equity loan, she now had a reverse mortgage that charged 18 closing fees." The fees totaled a staggering $16,791.23, Anthony said. The salesman, according to the suit, advised Adcock to choose a reverse mortgage payment option that required her to take out $1,002.88 monthly, increasing the amount of interest she would have to pay. The suit claims that the reverse mortgage required that Adcock immediately make home repairs of about $5,500 and pay Financial Freedom for monitoring whether the repairs were done. On the date the loan closed, she owed $56,741.59.

With the help of her daughter, Adcock paid off the reverse mortgage six months later at a final cost of $71,942. Financial Freedom denies the allegations.

Wow that is a hit. Over $56 grand just to close the loan. For a total cost of almost $72,000 to hold the loan for 6 months. But remember the reverse mortgage was a good thing. It helped her in some way.

Mortgage Industry Implosion

One favorite response regarding the mortgage industry implosion is the who could have known attitude. Everything was working perfectly. The industry started giving loans on assets not for what could be repaid. The industry started giving loans where people could have several options, one being to pay only a portion of the interest. The industry stopped requiring people to prove the money they had or they made - a good credit score was enough. Why would anyone ever envision anything wrong with these business models?

The Feb. 15th episode of 60 Minutes provides a great story about the fact that people did know in their story titled World Of Trouble. People did know that there was something wrong with the bubble business practices but they were dismissed or ignored. The money coming in was more important than using good business practices. From the video below it shows that the better the business practice the less money one would make. The story focused on World Savings that was bought by Wachovia (Wachovia now folded into Wells Fargo). Lets take a look at the story -

Watch CBS Videos Online

For those that can not watch here are some snippets from the accompanying article -

But Paul Bishop says he watched the bank famous for quality begin to emphasize quantity. World relied on outside mortgage brokers to bring in 60 percent of its customers. The more loans that were approved, the more the brokers, and World Savings, made in fees.

...
By 2005, 38% of World's clients had subprime credit scores. And customers were shown fliers that told them their income would not be checked by the bank.

"So I don't really need to know what you make. I don't need proof. You tell me you make $200,000 a year? You make $200,000 a year," Bishop said.

...
"When one lender dropped standards, another lender felt that they had to do the same," [Bob Simpson, whose company, IMARC, investigates failed mortgages] told Pelley.

Simpson says World and other lenders were in a ruinous competition for customers. "There are people inside of every institution that have been screaming for years about these terrible loans. Don't fund these. These are horrible loans. And they were routinely ignored inside of their own institutions."

Asked why they were ignored, Simpson said, "Because there's no money in common sense. There's no money in stopping a loan. There's only a payday when that loan closes."

The short term closing was the only part of the loan that mattered during the bubble. Whether the loan was viable was of least importance. As long as housing prices continued to have double digit gains year after year no one would get stuck with over priced houses or bad loans. But values did not only stop increasing, they went down. Business practices that made no sense but were highly profitable brought giant companies and industry leaders down in one fell swoop.

As in many cases the best line of the story is left for last -

"We have talked to some former executives of the bank who tell us that they listened to your complaints, they investigated your complaints, and they found that there was nothing to them," Pelley told Bishop.

"Are they employed today?" Bishop asked.

"No," Pelley said.

"Surprise. They lost their job. The bank went bust. They took down the fourth largest bank in the country with them. But there was no problem," Bishop replied.

Classic. Hopefully some governmental agency hires Bishop to help sort out the issues. He has the background and the insight to help straighten some of the issues out.

Serial Refiancing in Mount Olive Turns Homeowner into Homedebtor

This is the definition of the serial refinancer - a homedebtor relying on mortgage refinancing to maintain artificially low debt service payments or fuel a lifestyle of consumption. If you took cash out perpetually it was to fuel an unaffordable lifestyle. If you refinance to get lower rates or terms (with no money out) you are probably one of the few that were not buying into the bubble's equity fun.

One problem with the serial refinancer was that is was easy to go from a homeowner into a homedebtor. A homedebtor is a homeowner who is overextended with a mortgage they cannot afford often due to their own desires for more home or more spending money. Some homedebtors bought a house beyond their means and usually used a Option ARM AKA Pick-A-Payment AKA Suicide Loan to obtain their dream property. Other homedebtors had their properties within reach of realistically owning their property but chose to withdraw all equity and then some.

Any available funds the property could provide was spent with the owners constantly refinancing to withdraw any new equity that was available. If only $10,000 was available they would extract it, if $100,000 plus was available that would be gone immediately. Which brings us to today's featured property about a homeowner become a homedebtor using their property as an ATM and withdrawing, withdrawing, withdrawing. Lets take a look -

Here is the property -

The front of the house.

The living room or family room.

The master bedroom.

Here is the property info -

Status: Active County: Morris Year Built: 1948 4 total bedroom(s) 3 total bath(s) 3 total full bath(s) 10 total rooms Style: Colonial Master bedroom Living room Dining room

Family room Kitchen Den Office Basement Bathroom(s) on main floor Master bedroom is 18x14,Includes: Full Bath, Walk-In Closet Living room is 16x12 Dining room is 14x11,Formal Dining Room Kitchen is 12x09 Basement is Full, Unfinished, Walkout Parking space(s): 2

Heating features: 1 Unit, Baseboard - Hotwater, Multi-Zone,Oil Water Heater, Water Heater From Furnace,Oil Cooling features: 1 Unit, Ceiling Fan Exterior construction: Vinyl Siding Roofing: Asphalt Shingle Pets allowed Approximate lot is 50X125 Lot features: Level Lot, Open Lot Approximately 0.14 acre(s) Lot size is less than 1/2 acre Utilities present: Cable TV Available, Public Sewer, Public Water, Electric Service High School: MT.Olive HS

Here are the financials -

• The property was purchased for $113,000 in April 2000.

• The first mortgage at the time of purchase was for $112,075 with Huntington Mortgage.

• The property owner took Refi with cash out the following October of 2000 for $144,576.58 with Household Financial Corp.

• One the same day as the Refi a HELOC was opened for $10,000 also with Household Financial Corp.

• In July 2002 the property underwent another Cash-Out ReFi, this time for $180,000 using an ARM with Long Beach Mortgage Co.

• Another Cash-Out Refi occurred in April 2004 for $200,000 also with an ARM from Alliance Mortgage Banking Corp.

• The following July of 2004 the property was refinanced again for $210,500 with Fleet National Bank.

• A Home Equity Loan for $25,000 was obtained in September 2004 with Domestic Bank.

• In January 2006 another ReFi with Cash-Out was taken for $388,000 using an ARM with First Interstate Financial Corp.

• The next May (2006) the property owners obtained another Cash-Out ReFi for $429,300 using an ARM with Balloon mortgage with WMC Mortgage.

• A HELOC was obtained for $20,000 in August 2007 through American General Financial Services.

• The foreclosure process started in August 2008 with the filing of a Les Pendens for the WMC mortgage.

• The property is currently for sale through a realtor for $299,000.

• Taxes for the 2008 were $6,397.12.
  

The owner may be our record for the most mortgages in the shortest amount of time. During 9 years of ownership they signed 10 different mortgages against their property, averaging more than once per year.

When the house was purchased at what was the beginning of the bubble, the homeowner put down a hefty $925 to purchase the property which was about 0.8% of the purchase price. After just 6 months of ownership the first venture into Refinancing with Cash-Out was utilized taking all of the original investment of $925 out of the property plus another $31,576.58 with the option of taking another $10,000. After another 9 months and another ReFi with Cash-Out and the equity withdrawal was $67,000.

That money must have lasted for some time since it was not for another 21 months until the next Cash-Out ReFi took place extracting another $20,000 totalling $87,000 withdrawn from the property so far. Probably before the ink was dry and just 3 months later another Cash-Out ReFi occurred withdrawing another $10,500 for a total withdrawal of $97,500 on top of the original down payment withdrawal. And another 2 months later a HEL withdrew another $25,000 for a total withdrawal of $122,500.

The HEL must have lasted for some time since the next equity withdrawal did not occur for another 17 months. But this Cash-Out ReFi was a hefty one adding another $152,500 for a total withdrawal at this point of $275,000. And 5 months after that a Cash-Out ReFi was taken yet again extracting another $41,300 for a total equity withdrawal of $316,300. Obviously that was not sufficient since 15 months later a HELOC for another $20,000 was taken. If this HELOC was utilized the homeowners, actually they were home debtors at this point, had withdrawn a total of $363,300 in less the 9 years of ownership. (Side note - somehow we do not think this money was spent on landscaping or furniture.)

The property provided the home debtor with a second income of approximately $40,000 per year. However that second income was not enough to pay the mortgage since the foreclosure process started a year after the last HELOC was opened.

Now that the house is for sale with a realtor someone, with the foreclosure and withdrawal history it is obviously the lender, will be losing about $168,240 on this property. That loss is based on the property selling for full asking price while the realtor receives the standard commission. That is a huge loss on the property.

Perhaps an interested party wants to partake in the luxury this property can provide. With a 20% down payment of $59,800 and a fixed 30 year rate at today's Bankrate average of 5.26% the monthly payment for the property would be $1,322.35 plus a tax payment of about $533 and your payments would be $1,855.44. Of course, this is before insurance and utilities.

HELOC Class Action Lawsuits

The lenders knew they would coming. We knew they were coming. First a class-action lawsuit against JP Morgan Chase for arbitrarily freezing HELOCs and now against AmTrust. In an article from MSNBC titled Lawsuit Challenges Bank's Decision To Cut Home Equity Credit outlines another class action suit in the works. Lets take a look -

A newly filed lawsuit will now challenge a Cleveland bank's decision to cut home equity lines of credit, reported chief investigator Duane Pohlman.

AmTrust suspended credit to countless homeowners, citing a drop in home values across the area.

...
At the center of the lawsuit is a critical question: Can a bank freeze off equity lines of credit without ever re-appraising your property?

Don Saunders, a Bedford city councilman, tapped his home equity line of credit to remodel his kitchen.

...
Cleveland-based AmTrust Bank sent a letter telling Saunders his equity line was suspended because of a decline in home values across the entire area.

But Saunders said he's made major improvements to his house and said his home value has actually gone up.

Of course the lender would not comment on the pending lawsuit. But the article includes the website for the suit - www.landskronerlaw.com - perhaps more people will join as word spreads.

Most lenders have done the cost-benefit analysis and are betting the money saved on freezing the HELOCs is more than the lawsuits would cost. Not everyone that has the line arbitrarily shut down will partake in the lawsuit. But many of these cases are strong so it will be interesting to see how these play out.

Mortgage Modification Scams

During the bubble the housing market has become infested with scams. Well it probably always was a bit but it became very easy and lucrative during the good years. And with - between appraisers, realtors, mortgage brokers, and buyers the whole system s toxic. Now CBS has a video illustrating that even the mortgage modification and foreclosure rescue consultants are crooked. Lets take a look -


Watch CBS Videos Online


This is just one, but there we will hear about as the foreclosures and modifications continue to rise. And here are some snippets from the text version of the report titled Scams Rampant In Foreclosure Fraud Hotbed. Lets take a look -

Victims plead for help with operators at a government call center in Florida, a hotbed of foreclosure fraud.


"It's probably increased 20 to 30 percent over the last two or three months," said Scott Palmer, who works in the Florida Attorney General's office and oversees the call center.


Palmer says the growing number of scams target homeowners hoping to reduce their payments or avoid losing their homes, Keteyian reports.


...
That opened the door last year to companies like Outreach Housing of Fort Lauderdale, Fla., which made more than $2 million last year promising mortgage relief.

...
For homeowners the pitch went like this: They would pay Outreach Housing an upfront fee of about $1,200. They would then stop paying their lender and instead pay Outreach every month an amount equal to two-thirds of their monthly mortgage.

...
According to a lawsuit filed by Florida Attorney General Bill McCollum, Outreach Housing was engaged in a "systematic pattern" of "fraudulent," "unfair" and "deceptive" practices, leaving behind at least 600 victims.

This is taking place in Florida where the laws and requirements are well behind the criminal activity. But scams like this will be popping up other places. Be on the look-out.

NJ Foreclosures Dip

Big news on the front page of today's Record Business section - Housing picture brighten just a bit. The headlines are just as good as the sub-head Dip in foreclosures follow federal efforts. Guess this had nothing to do with the foreclosure moratorium both on the federal and state levels. Since modifications are not being done in any significant numbers and job losses are mounting where else would such a dip come from? Lets take a look at the article and find out how they explain things -

The number of New Jersey homes in some stage of foreclosure dropped more than 2 percent in January over a year ago, according to a California company that tracks foreclosures nationwide.

RealtyTrac Inc. of Irvine, Calif., said one in every 699 New Jersey homes is in some sort of foreclosure.

January's slight drop in foreclosures comes after a year in which foreclosure filings doubled to 62,500 properties.

Foreclosures rose about 180 percent in Bergen and Passaic counties in 2008. Nationwide, the number of foreclosures fell 10 percent from December but was still up 18 percent in January compared with January 2008.

James J. Saccacio, RealtyTrac's chief executive officer, attributed the 10 percent decrease in January from December to "extensive" lender and governmental foreclosure efforts — particularly a moratorium on all foreclosure sales by Fannie Mae and Freddie Mac that extended through January — and similar efforts by Florida.

...
The Associated Press reported Wednesday that John Reich, director of the federal Office of Thrift Supervision, urged 800 thrift institutions to suspend foreclosures while President Obama's top economic advisers develop plans to keep borrowers in their homes.

So they are from the moratorium rather than any real changes or improvements. Suspending foreclosures only helps in that the lenders do not have more property on their books. It really only adds to the problems in the big picture - while lenders may not have the properties on their books they are not receiving their money either, which is after all how they make money and stay in business. Well, at least when we are not giving them our tax money.

The big question is if this moratorium will forestall the problem long enough for the stimulus stabilization to take affect or will everything just collapse eventually? Will it work???

Homeowners Views On Housing

With the huge loss of home values it it interesting to see how homeowners have actaully accepted these declines. The OC Register gives us a great table of a Zillow survey in an article titled Homeowners coming to grips with values. Lets take a look -

See chart below for regional comparisons for the Northeast, Midwest, South and West. (In the “home value misperception index” categories, the lower the value number, the closer to reality the perception. An index of zero would mean perceptions were in line with actual values.)

Homeowner perception	U.S.	N’east	Midwest	South	West
My Home’s Value Has Decreased	57%	58%	58%	47%	70%
My Home’s Value Has Stayed the Same	18%	20%	20%	20%	11%
My Home’s Value Has Increased	25%	23%	22%	33%	19%
Actual Percent of Homes that Decreased	76%	71%	73%	70%	90%
Actual Percent of Homes that Stayed the Same (+/-1%)	4%	6%	5%	5%	2%
Actual Percent of Homes that Increased	20%	24%	22%	25%	9%
Q4 Home Value Misperception Index	10	3	5	14	13
Q3 Home Value Misperception Index	16	20	15	13	13
Q2 Home Value Misperception Index	32	29	31	36	23
My Home’s Value Will Decrease	30%	30%	30%	26%	37%
My Home’s Value Will Stay the Same	43%	43%	46%	45%	38%
My Home’s Value Will Increase	27%	27%	24%	29%	25%

At least we are slowing having our perception get closer to the reality. Oh, here is the Zillow page. And the closing paragraph from the article shows we are fighting reality every step of the way -

Said [Stan Humphries, Zillow’s vice president of data and analytics] : “A curious optimism for homeowners when asked about the future – most seem to believe we’ve hit a bottom and the worst has passed. …Unfortunately, the data tells another story. With year-over-year home value losses continuing to accelerate, most areas of the country will see housing values get worse before they begin to stabilize.”

Flipping Foreclosures

The deals one can get at a foreclosure auction are amazing. Sure the house is a bit beat by the time it ends on the final auction block, but it is only a fraction of what the house was worth at peak.

During the bubble flippers, of the fix and flip persuasion, were buying outdated homes, modernizing them, then reselling for a hefty profit. Cable channels are filled with "reality" shows featuring this technique on becoming wealthy - for example Flip This House and Flip That House. But as the housing bubble deflated some were getting stuck with homes that could not have their investments recouped.

But foreclosure auctions can bring really cheap houses, that may need work but are still a bargain for this group of flippers. In the Star Ledger article titled As market stalls, home auctions lure interested buyers enlightens us about what the flippers are doing now. Lets take a look -

John Williams drove home from work in late January and noticed a bright yellow billboard on Route 280, announcing 125 foreclosed, bank-owned homes in North and Central New Jersey were days away from being auctioned to the highest bidder.

...
For example, a 1,750-square-foot home that made the list of properties to be auctioned by Hudson & Marshall, located on Sussex Avenue in Newark, sold to its last owner for $310,000 in 2006. That was before the market bottomed out, said real estate agent Gregory Panayoti.

Panayoti listed the pale green, 70-year-old home for $125,000, after the property was foreclosed, and a bank took ownership in April. Two families renting apartments in the home moved out about a month later. The home was then broken into twice, and its copper was stolen. The last asking price, Panayoti said, before the property was set to go on the auction block, was $65,000.

By then, the kitchen and bathrooms had been gutted, and the roof was leaking. Panayoti didn't expect the price to go any lower. "At some point the price of dirt kicks in," he said, referring to the value of the land.

...
Williams, who attended the Hudson & Marshall auction in Newark, said the crowd there was a lot larger than ones he had seen at other sales.

With three children he hopes to put through college, Williams, of Roselle, said he decided to take the risk of bidding, which required a nonrefundable $5,000 deposit. The auction house was to receive 5 percent of the $68,000 bid he placed on the three-bedroom property.

He must still add a kitchen and make cosmetic repairs to convert the home into a rental so that it delivers a return on his investment. Otherwise, he'll get stuck with the property, just as the bank was.

"I don't see that happening," he said. "Not with the price I got for it."

The house is almost 80% off the peak price! That is an amazing decline and loss of money for just three years. Makes one wonder what the real value at peak was. We know that houses were often inflated in shady deals, was this one. Or was the real value in 2006 $310,000 and now only $68,000? It is now worth 22% of the what is once was.

Next question will be the return on investment. Can Williams, who works for Verizon, can complete the repairs and turn the property around in time to actually make a profit? The property is in Newark, which is getting decimated with foreclosures, driving down the cities real estate values.

The holding costs, turn-around expenses and interest on the purchase will be significant, slowly adding up. We saw many flippers in 2005 and 2006 that sat on their properties too long and now are losing money. While on TV these deals always sound like win-win opportunities - real life does not always work so well.

Mortgage Counselors

Our previous post showed that approximately 25% of calls to the New Jersey Mortgage Modification hotline have been referred to mortgage counselors. Who are these counselors and what are they doing? Well, The Record brings up a glimpse at some of the work that they do in an article titled Up to bat in the foreclosure game. Lets take a look -

[Michael Esposito of Elmwood Park] and his wife, Marta, were in danger of losing their two-family home until Judy Brzuskiewicz, a counselor at the non-profit New Jersey Citizen Action, got their lender to accept $7,500 to wipe out a $65,000 second mortgage.

...

Counselors like Brzuskiewicz are stepping up to bat a lot these days, as a wave of foreclosure actions hit homeowners who put their houses on the line and piled up debt during the housing boom.

...

In the best scenario, the loan counselor can renegotiate the mortgage to obtain a lower interest rate or even have some of the principal payments forgiven or added to the end of the mortgage payback period.

But in more than half of cases, the housing counselors can’t help the homeowners keep their homes, [Citizen Action head Phyllis] Salowe-Kaye said. The houses end up being turned over to the lender or sold to cover the mortgage debt — sometimes in a short sale, for less than is owed to the lender. Many end up in foreclosure.

...

Many of [counselor Michael Thurston's] clients, he said, have lost their jobs or are underemployed. Those are difficult cases, because simply asking for a lower interest rate or restructured mortgage usually isn’t enough.

"If you’re unemployed, regardless of what your interest rate is or whether it’s an adjustable-rate mortgage, you can’t pay it," Thurston said.

First, if you are unemployed at the time of the modification it is basically a non-starter. You are automatically lumped with the majority who are not going to keep their homes.

Second, even working with a counselor there is more than a 50% chance that you will still be leaving your property - whether through short sale or foreclosure. And remember what the FICO worker said - depending on how a short sale is reported it could do as much credit score damage as an actual foreclosure!

Lastly, reader beachdude provides a good source and summary of what a mortgage modification means -

A Mortgage Modification is a process whereby a home owner's mortgage is modified and both the lender and homeowner are bound by the new terms of that mortgage.

Most common mortgage modification options are listed below:

• lowering the mortgage interest rate
• reducing the mortgage principal balance
• fixing adjustable interest rates within the mortgage
• increasing the loan term throughout the mortgage
• forgiveness of payment defaults and fees
• or any combination of the above

But be very careful - here are some results from the National Association of Consumer Bankruptcy Attorneys statement -

• When loan modifications are written, fewer than one in 10 of them result in a reduced principal loan balance.

• More than half of loan modifications roll unpaid interest and fees into larger, more drawn-out debt on the back end of the mortgage.

• Only 35 percent of mortgage modifications reduce monthly payment burdens for homeowners.

• A full 45 percent of loan modifications are packaged with increased payments.

And a list of mortgage modification non-starters -

• Unemployed
• Multiple Property Owners
• Piggyback Loans
• Lenders still not set up for Modifications
• Lenders fear lawsuits from Investors

Not on the list but also many time HELOCs can become a roadblock to modifications as well. If you have one or more of the above do not expect to get help from a credit counselor...

Mortgage Modification Update

We have been following New Jersey's mortgage modification program since it was announced. We often complained about the programs limited hours and staff levels. Now we read that the staff levels are up - so someone is hiring in this economy! Newsday has an article titled NJ hires help for unemployment, mortgage hot line. The article also gives us a glimpse at how the program is working. Lets take a look -

The economy has been in a recession since December 2007, a downturn marked by plunging home prices, the most severe financial crisis since the Great Depression, and 2.6 million job cuts last year.


...
New Jersey's foreclosure hot line has also had a hard time keeping up with the phones and has hired a handful of new temporary workers.


The free line opened Jan. 5 to connect homeowners with certified housing counselors in a bid to help people keep their homes. Within the first week, it received more than 12,000 calls.


Of the 12,000 that called, nearly 1,000 have been contacted by the hot line operators and nearly a quarter of those have been referred to mortgage counselors, according to Dawn Miller, who oversees the hot line.


Average wait times run 15 to 20 minutes, she said.


The easiest way to file a claim is online, Smith and Miller said.


"We've created an interactive Web site for people who can't stay on the phone and hang on," Miller said.

But remember that the website does not appear to be encrypted. Is that better than waiting for 15-20 minutes to talk to someone?

And lets take a look at the numbers - 12,000 calls with only 1,000 being contacted by hot line operators. So do we read this as 11,000 did not qualify for the program in some way? And of the 1,000 contacted 250 people have been referred to counselors. We imagine that 250 will get whittled down even more. If only 250 have been even qualified for services the program does not seem to be worth the funds.

Or is the wording confusing and there were 12,000 calls and another 1,000 website submissions. With 1/4 of the calls being referred to counselors this would be about 3,250. A much better number than the first glimpse.

Hopefully more information will filter out so we can see how the program is really working. Are we throwing good money after bad, again? Or are we preventing a huge wave of foreclosures?

A Housing Horror Story In Boonton

Unfortunately, on the edge of GD2 we can see that the housing bubble was like an a economic fairy tale. Money did not grow on trees, in this version it came from the houses. We could afford anything we wanted. Our economic standing was based on our assets - not our liabilities or our ability to pay. And our wealth just continued to increase by a double digit percent every year.

During the bubble things everyone wanted to be in the fairy tale and have a happy ending. House prices were rising so fast that a whole group of people who were planning to eventually buy jumped in early. With property values having double digit annual increases how could this not be a happy ending. Often afraid they would get priced out of the market totally, they paid too much and received to little. Now they are reeling from the consequences from that decision.

Thanks to Greenspan ARMs were still viewed as wonderful tools to help homeowners save money while getting their dream house. Our collective dismissal possibly rising interest rates in the future made these tools seem wonderful tools to help people acquire everything they needed. And if in the future one realized that they could not afford their property - they could just turn around and sell it for a decent profit.

Unfortunately life is not a fairy tale. And right now a happy ending seems no where in site. The economy is more like a horror flick than a Disney movie. Right when we start thinking the economy is turning around and we have the situation under control - the evil darkness of excessive debt rises again. And like horror films, the sequels keep getting worse and gorier!

The amounts that are lost are staggering. And when the bulk of the loss is taken by the homeowners we get squeamish. Which brings us to the horror of a huge loss in today's example. Lets take a look -

Here is the property -

The front of the house.

The stainless and granite kitchen.

The formal living room.

Here is the property info -

Enjoy this retreat!

Spacious Master Suite with private bath and double closet space. Guest Suite also w/ private bath and door directly to the exterior for added privacy. Home features total of 4 bedroom and 4 baths. Gorgeous kitchen with modern and elegant cabinetry with granite counter tops. Family room, seating room, finished basement with bar are just some of the numerous features to mention. Contact us to schedule a private viewing.

Here are the financials -

• The property was purchased in February 2005 for $750,000.

• The first mortgage taken at the time of purchase was for $600,000 using an ARM with Bank United.

• Also on the day of purchase, a second mortgage, commonly called a piggyback loan, was taken for $74,500 with National City Bank.

• The property is currently for sale with a realtor for $579,000. Note the house was listed since June, 2008.

• The foreclosure process started with a Lis Pendens filed in October 2008.

• The taxes for 2009 are $11,927.59.

The property was purchased at the peak of the bubble. With the original mortgage and the piggyback, the owner put down just a tad over 10% - which was a hefty $75,500. The owner did not try to cash out. No HELOCs or ReFis or other equity withdrawals.

The homeowner decided to sell the property just three years later. Probably the high cost of ownership was part of the incentive to sell, since 5 months into the listing the property started the foreclosure process. That indicates non-payment for at least 60 days.

Now the house is listed for $579,000 which is a whopping $171,000 below the peak price - almost 23% of peak price. But since the property is listed through a realtor the amount lost will be even larger. With the standard commission, the property will be costing the buyer - or if a short sale has been negotiated the lender - $205,740 during the 4 years of ownership. That is a loss of $51,435 per year! Some happy ending!!!

Now for those who are looking to buy the property, what would the current carrying costs be. First we will assume the house will sell for the current asking rate. Then the new owner were to put a 20% down payment of $115,800. With today's current Bankrate of 5.42% for a 30 year fixed, the monthly P&I payment would be $2,606.80. Adding in the taxes and your monthly payment will be $3,600.77 for this property to become your own fairy tale palace.

Hopefully the offer will come soon to make the current homeowners financial horror story come to an end!