Thursday, April 30, 2009

Short Sales and Promissory Notes

Many people think that the solution to their housing woes is a short sale. And while they do appear to drag on and on with the bank determining if they will accept an offer, there appears to be another snag. Lenders are often requiring homeowners to sign a promissory note on all or part of the balance between what the property is selling for and the accepted purchase price. This had led some short sellers to determine that a foreclosure just might be the better option. An article in the Wall Street Journal titled A Short Sale May Not Mean You Are Home Free lays out the particulars. Let's take a look -


Some homeowners are finding that when they sell their homes for less than the outstanding mortgages -- a so-called short sale -- their mortgage companies are going after them for some or all of the difference. Mortgage companies are also sometimes taking legal action to recover unpaid amounts after a foreclosure is completed.


In a growing number of cases, holders of mortgages or home-equity loans are requiring borrowers in short sales to sign a promissory note, which is a written promise to pay back a loan or debt. Real-estate agents and attorneys say they have seen an increase in requests for promissory notes as mortgage companies look to short sales as an alternative to foreclosure.

...

Some experts say that mortgage companies may pursue leftover debt, or "deficiencies," in greater numbers as the housing market settles. Lenders are "doing everything possible to work with their borrowers and trying to bring stability back to the lending and real-estate market," says Marc Ben-Ezra, an attorney in Ft. Lauderdale, Fla., who represents mortgage companies in foreclosures. "However, the ability to get a deficiency judgment is a valuable right that I think lenders will pursue aggressively in the future as the market stabilizes."

...

Some borrowers are balking. Mack Ransom, a mortgage broker in Ashland, Ore., recently brought Countrywide Financial Corp. a short-sale offer for $279,000 -- well below the roughly $415,000 he owes on his two mortgages. Countrywide countered that it would accept a $310,000 bid, provided Mr. Ransom signed a $48,000 promissory note, he says. Mr. Ransom rejected that offer and is pursuing a different short sale.


"I would take the foreclosure and the credit hit over that," he says. A spokeswoman for Bank of America, which acquired Countrywide last year, declined to comment on a specific case, but said: "The company will ask the borrower to sign a promissory note during the short-sale process if dictated by investor guidelines."


This article has example after example of the different attempts lenders are trying to get some of their monies back. Another interesting point is that the promissory note may be buried in the contract - so it is something that should be looked out for.

Wednesday, April 29, 2009

Housing Plan and Second Mortgages

The needed part of the Obama Housing Plan foreclosure modification on second mortgages was released yesterday. Let's take a look at a few articles and their analysis on the plan. First from the Washington Post's article titled Foreclosure Prevention Plan Expanded to 2nd Mortgages -


The administration's housing plan pays lenders to help borrowers stay in their homes by modifying their mortgages to an affordable level. But, the plan as first announced in February applied only to primary mortgages. Now, lenders will be eligible for payments when they modify the terms of a second mortgage, including a home-equity line.


About 50 percent of at-risk borrowers have a second mortgage, which can make it difficult for them to afford their homes even after payments are cut on their primary mortgages. Second mortgages were popular during the housing boom for buyers who could not afford big down payments.


Under the new plan, lenders would receive $500 for modifying the second mortgage, plus $250 a year for three years if the loan remains current. The borrower would be eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to 1 percent, depending on the type of loan, with the government sharing the cost of the rate reduction.


Senior administration officials said they expect the second-mortgage program to help 1 million to 1.5 million of the up to 4 million households expected to be covered by the wider loan-modification program. The program, which will take several weeks to get running, will be paid for through bailout funds already allocated to the program, officials said.

...

The Treasury Department also is attempting to breathe new life into another government foreclosure prevention program, called Hope for Homeowners. That program, launched last year, refinances homeowners into more affordable mortgages. But lenders have balked at requirements that they cut some of the principal that borrowers owe. Only one homeowner has received a government-backed loan under the program so far.


Before getting into the new plan - only 1 homeowner was helped by Hope for Homeowners??? Now back to the current second mortgage plan - since the program is voluntary and the incentives are not that high we would be surprised if other than lenders that held both mortgages there was little movement on this front.


But let's take a look at another article to see what else we can find out. From the New York Time's article titled A New Plan to Help Modify Second Mortgages -


The goal of the plan is to plug a hole in the administration’s original program, which offered subsidies to lenders who agreed to modify the primary or first mortgages of homeowners who had fallen delinquent or were in danger of doing so.

...

Under the new program, which officials said would not get under way for at least several weeks, participating mortgage lenders would agree in advance to automatically reduce the interest rates and possibly the outstanding loan amounts for a second mortgage as soon as the first mortgage had been modified.


Lenders would be required to lower the interest rate to just 1 percent for any second mortgage in which the borrower was repaying principal as well as interest. On interest-only loans, the lender would have to reduce the rate to 2 percent. If the lender on the first mortgage agreed to forgive some of the principal loan amount, the second-tier lender would have to forgive the same share of its loan as well.

...

It remains unclear whether mortgage companies will be attracted to the new offer. The second-tier lenders would be making much deeper concessions to borrowers than the first-tier lenders.


But holders of second mortgages are already junior to holders of first mortgages. In foreclosures and distressed sales of homes that have dropped in value, many holders of second mortgages recoup little or none of their money.


Lowering the interest rate may work. But the financial incentives seem to low to really do anything.


So let's end with this Reuters article titled Q&A: U.S. Treasury's "second-lien" mortgage relief plan that gives us an example of what the plan in practice would look like -


A family that borrowed $45,000 on a second mortgage in 2006 with an 8.6 percent interest rate would see their monthly payment drop to $154.81 from $349.48 under the program for amortizing loans. With the interest rate slashed to 1 percent, their savings would be over $2,300 a year for five years.


Another family that borrowed $60,000 on an interest-only second mortgage in 2006 now at 4.4 percent would see their monthly payment drop to $100 from $220 under the program. By reducing the rate to 2 percent, this would result in an annual savings of $1,440 for five years.


An investor who agrees to extinguish a second-lien mortgage that is 120 days delinquent with $40,000 owing could get $1,200 for extinguishing the lien and relinquishing a claim on the property.


The first two examples seem feasible and realistic - the third example seems like there would be resistance. But we'll see...

Tuesday, April 28, 2009

Second Mortgage Incentives

One big snag in Obama's housing plan has been the second mortgage issue. They can complicate or completely stop a refi. A second loan that must be contended with in order to stave off foreclosure. Since the original unveiling of the housing plan this past March, this one big issue has remained problematic. Well, today plan will be released. In the Wall Street Journal's article titled Obama to Unveil Incentives for Mortgage Servicers discusses some of what will be forthcoming. Let's take a look -

The Obama administration on Tuesday will unveil a fresh set of incentives for mortgage servicers to help strapped homeowners, a senior administration official told Dow Jones Newswires.


Under a new program, the government will pay mortgage servicers $500 upfront and $250 a year for three years for successfully modifying a second mortgage, such as home equity loan.


Separately, the administration will unveil a schedule of incentives for holders of second mortgages to extinguish those liens voluntarily, the official said.

...

The issue of second mortgages has been dogging policymakers ever since the onset of the foreclosure crisis. A large share of troubled borrowers also have a second mortgage on their home, which is typically owned by a different investor than the first mortgage. Such borrowers may not be able to afford their monthly payments if only the first mortgage is modified.


The administration's effort on second mortgages is also aimed at soothing the concerns of investors, who have been crying foul over the Obama housing plan's incentives for servicers. They argue the first mortgage shouldn't be modified if the second one is left untouched. They also contend the banks that dominate mortgage servicing are conflicted because they own more than $400 billion of second mortgages. Such banks stand to gain from modifying the first mortgage because the second mortgage is more likely to be repaid once the homeowner is saved from foreclosure.


We will be waiting to see what these incentives are. The financial incentives may be worth the closing of smaller lines and shakier clients. It is really hard to understand what the incentive for those lines that have well north of $100,000. Are lenders readily going to write-off any six figure or more mortgage? Whatever happens today this will still be a very mess issue.

Monday, April 27, 2009

Do It Yourself in NJ

There are many jobs that people could have done themselves during the bubble to save money - painting, lawn-mowing, laying mulch, almost any smaller landscaping project, routine plumbing problems, and on and on. During the bubble when equity extraction was so easy and equity was growing by double digits it did not seem to make sense to do these improvements yourself. Now if most people want even the slightest improvement the solution is to do it themselves - even some of the harder and more difficult jobs. In The Record's article titled Do-it-yourself fever spreading we read about fellow Jerseyians tackling projects. Let's take a look -

The Home Improvement Research Institute, an industry trade group, conducts surveys of 13,000 homeowners nationwide per month. In February, respondents said they expected work done by a contractor at their home to account for about 60 percent of the total cost of pending projects. That's down 4.5 percent from the same time last year. Overall, the group projects a 6.4 percent decrease in money spent on home improvement in 2009 compared with 2008.

...

Rick Kadien, owner of Home Hardware in Waldwick, said he recalled a frequent customer who he knew had always hired landscapers for garden and lawn work. Not long ago, the guy came in and bought a leaf blower.

"He said they had let their landscaper go and figured he could buy the equipment once and do the spring cleaning himself," Kadien said. Overall, he said his sales are down about 7 percent. He sees homeowners doing more maintenance projects and fewer improvement jobs.

Mark Gatto, who owns Ramsey Hardware, said more customers are asking about simple jobs like a clogged sink or leaky toilet.

"We have had customers come in and say they lost a job or a bonus," Gatto said. "You figure if you have a leaky toilet you can buy $15 worth of parts and fix it yourself or pay a plumber $125."

Gatto said he's seen a particularly steep increase in sales of paint to homeowners versus contractors.


We have often felt that the maid services and landscapers will be some of the hardest hit. These are pretty routine jobs until recently were done by most homeowners. The phenomenon of having someone cut the grass in a middle class home with 50 x 100 lot does not make a lot of financial sense. An investment into a decent lawnmower would pay for itself many times over.

Sunday, April 26, 2009

Option ARM and Underwater In Dover

Dover currently has one of the highest foreclosure rates in the state. We came across a house for sale that is not in foreclosure but definitely has foreclosure potential all over it. The homeowners are extremely underwater and have an Option ARM to boot. Hopefully the owner has negotiated a short sale to leave the property with the least amount of economic and credit score harm. The Lis Pendens on this property has not been filed, but it definitely will be a contender once the loan recasts. Now the owner may be playing beat the clock - sell the property with a loss before losing it too the bank in a town filled with foreclosures. It will be a nail-bitter and one to keep an eye on. Let's take a look at today's featured example -

Here is the property -

The Front of the House.

The non-updated kitchen.

A bedroom with Hard Wood Floors and Crown Molding.

The back yard with a large driveway.

Here is the property info -

Property Features

  • Single Family Property

  • Status: Active
  • County: Morris
  • Year Built: 1957
  • 4 total bedroom(s)
  • 2 total bath(s)
  • 2 total full bath(s)
  • 7 total rooms
  • Style: CapeCod
  • Master bedroom
  • Kitchen
  • Basement
  • Bathroom(s) on main floor
  • Bedroom(s) on main floor
  • Master bedroom is 19x15
  • Living room is 16x11
  • Kitchen is 13x11
  • Basement is Finished
  • Hardwood floors
  • Fireplace(s)
  • Fireplace features: Living Room, Wood Stove-Freestanding
  • 1 car garage
  • Attached parking
  • Heating features: 1 Unit, Baseboard - Cast Iron, Multi-Zone,Gas Water Heater,Gas-Natural
  • Cooling features: House Exhaust Fan
  • Inclusions: Home Warranty
  • Exterior construction: Vinyl Siding
  • Roofing: Asphalt Shingle
  • Pets allowed
  • Approximate lot is 50X112
  • Corner lot
  • Approximately 0.13 acre(s)
  • Lot size is less than 1/2 acre
  • Utilities present: Cable TV Available, Garbage Service Included, Public Sewer, Public Water, Gas-Natural
  • Elementary School: Academy St
  • Middle School: Dover M.S.
  • High School: Dover H.S.


Here are the financials -

  • The property was purchased just as the housing bubble in December 2005 for $370,800.
  • The first mortgage at time of purchase was made using the wonderful Option Arm with First Magnus was for $296,640.
  • At the same time a second mortgage (AKA piggyback mortgage) was also made with First Magnus for $74,160.
  • The property is currently for sale with a realtor for $265,000.
  • The property taxes were $5556.62 for 2008.

This property was bought at the height of the bubble with some of the best bubble products of the time - zero percent down, a piggy back mortgage and and an Option ARM. The only thing missing to make this purchase a perfect bubble purchase would be a no doc loan - which it may be but we can not tell from the public records.

Since it was an Option ARM chances are that the loan is now bigger than at the time of purchase so our projected losses may be on the low side - as much as 10% to 25% under due to recasts levels. Now the property is selling for $105,800 less than the purchase price. We are going to guess that the current owner will not be making up the difference between purchase price and amount due on their mortgages. So whoever is holding these notes will be losing at least $121,700 if the property sells for the full asking price and the realtor receives the standard commission.

For those interest in purchasing the property, if they are able to put 20% down and received a 30-year fixed at today's Bankrate rate of 4.90% the monthly payments would be $1125.14. Adding in the property taxes and the monthly payments would be about $1588.19 per month - plus utilities and insurance.

For the other interested in parties that are unable to put even close to 20% down lets look at some other numbers. Using our new calculator that includes the PMI charges and the new rate, a potential new buyer is only able to put down 5% or $13,250. The monthly mortgage payment would be $1336.10, plus a PMI of $163.64, and the taxes of $463.05 totaling $1962.79. And for a buyer who puts only 3% down - the mortgage would be $1364.23, PMI now $222.78, the taxes stay at $463.05 for a total monthly payment of $2050.06.

Saturday, April 25, 2009

Mortgage Brokers Are Working

They may not be doing mortgages for new purchases but it sounds like the industry if very busy with refinances. You may have come across deals and discounts to refi - no or lost cost refis are everywhere. And anyone who qualifies may be losing money if they do not refi - or at least run the numbers to make sure that they will be letting such a good deal go by. An article in the Philadelphia Business Journal titled The recent spike in home refinancing is reviving jobs in mortgage lending illustrating that business generated with the record low interest rates and these low cost refi packages. Let's take a look -

Late last month, the Mortgage Bankers Association increased its forecast for national mortgage originations by $800 billion to $2.78 trillion. The organization said that 2009 could become the fourth-highest year for originations, behind only the housing boom years of 2002, 2003 and 2005. Most of that is from borrowers refinancing existing loans rather than new purchases. Mortgages on new homes are expected to decline this year to $821 million from $854 million in 2008, the MBA said.

For the week that ended April 3, the MBA said that about 78 percent of mortgage applications came from refinancings rather than purchases.

Unlike the housing boom of a couple years ago, this new growth was engineered by the government to heal the sector. The Federal Reserve last month committed to buy up to $1.2 trillion in mortgage-backed securities and $300 billion in long-term government debt, which has pushed mortgage rates to record lows.

Now, some lenders that were forced to lay off personnel in the past year are looking to add staff to cope with the increased volume.

...

Jim Linnane, Wells Fargo & Co.’s northeast division manager for retail lending, said refinancing application rates are three to four times normal levels. In 2008, purchases and refinancings were split evenly; now the ratio is 25 percent purchases to 75 percent refinancings.


Just remember that refinancing requirements are more stringent than ever. One needs equity, a high credit score and the ability to show all documents. But it is well worth the savings that many who refinance are getting.


Friday, April 24, 2009

Equity and the Small Business Owner

We knew that many business owners were using home equity to raise capital during the boom years. What we did not know was that often the capital was raised through the use of an Option ARM. Now the recasting ARMs that are severely underwater may cause the small businesses to fold while the homeowner/business owner potentially loses their property as well.

While it would be nice to blame this all on the bad decisions of bosses using your HELOC for everything became the advice of many financial planners and advisers during the bubble. Unfortunately many workers will be paying the price. First we will take a look at an article from the Sacramento Bee titled Exotic home loans could hurt business owners to see how bad things may get. Lets take a look -

Nearly 35 percent of the [California's] small-business owners used Option ARMs or other exotic home loans to finance their companies during the housing boom, according to a study released Thursday.


As those mortgages reset and monthly payments rise, scores of small businesses will be at risk along with the homes, the study concluded. The study was conducted by MerchantCircle, a Los Altos company that helps small businesses with Internet Marketing.


...

Samuel Bornstein, an accountant and business professor in New Jersey who analyzed the MerchantCircle results, said the use of exotic home loans will haunt business owners for several years. Bornstein, a professor at Kean University in Union, N.J., predicted a wave of foreclosures "that will dwarf the subprime crisis."


From the Map of Misery we know that California was the capital of the Option Arms. However the were taken throughout the country and the percent used by small business owners is unknown.


Following this up is another article about how much the small business owners are really hurting. The crutch is gone and may can not stand on their own. This article from the Wall Street Journal article titled Entrepreneurs Cut Own Pay To Stay Alive illustrates how bad things are getting. Let's take a look -

It's impossible to know just how many owners are affected. But in a sign of the breadth of the trend, 30% of 727 small-business owners and managers surveyed by American Express Co.'s small-business services division said recently that they were no longer taking a salary. That's a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years.


During past downturns, business owners might have turned to a home-equity line of credit, a personal loan or credit cards to shore up finances. But this time, real-estate values have plummeted, leaving many with less equity to tap, and bank credit is virtually nonexistent.


It's not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.


With the equity gone and credit avenues drying up things are getting tighter and tighter for many small business owners. The affects of the housing bubble and subsequent bust onto small businesses will have long-lasting compounding affects.

Thursday, April 23, 2009

Now is a Good Time to Buy a House (Ha Ha)

Yet another story about the deals people can get right now. Especially those wanting to move up tot bigger houses. And while the property you are selling may take a hit a bigger property will take a bigger hit - see that is how you are saving money. The illusion of bubble equity is what people are saving. Never mind that we may not be anywhere near the bottom yet - you are saving money from the peak prices so it HAS to be a good deal. This info comes from an MSNBC article titled Math smiles on move up buyers. Let's take a look -

After two years of married life in a 680-square-foot, one-bedroom Seattle condo, Lori and Chris Kirsten were ready to spread out in a real house with room for a home theater and a yard where the Labrador retriever they had always wanted could roam.


The Kirstens prepared to list their condo for sale and go house-hunting, banking on equity in the unit, which Lori had brought in 2003 for $130,000, to help with the transition to a larger place. Seattle’s hot real estate market had pushed the condo’s value to $215,000 or more at its peak in 2007.


But their home search lost some steam when their agent told them Western Washington real estate prices, although not in the freefall experienced elsewhere, had still declined to the point that their unit might now fetch $25,000 or $30,000 less than two years ago. When they saw condos comparable to theirs selling for as little as $170,000, “I thought, ‘I just can’t do it,’” Lori recalled.


Their mood brightened when they began shopping in the spacious neighborhoods of this suburb northeast of Seattle and found a 3,000-square-foot, four-bedroom split-level on a half-acre of towering fir trees that they wound up buying for $425,000. That’s $86,000 less than the $511,000 peak value placed on the home by real estate Web site Zillow.com, $64,000 below the original asking price of $489,000 and even well below the final asking price of $438,000.


...

“Do the math,” said agent Mark Zawideh, who has been selling homes in the suburbs west of Detroit, where prices have declined 18 percent in the last year alone. “If you’re in a $200,000 house (the median price in the area) and you lost 18 percent, that means you lost $36,000,” Zawideh said. “But if you’re moving up and buying a $500,000 house, that person just took a $90,000 loss, so you can see you’re making 54,000.”



See its a good time to buy a house if you do the math by peak price reductions. If you do the math accordingly, you are not taking on more debt rather you are making money. Since peak prices are the real prices if we do everything from peak (other than refinance and take our HELOCs) we see we are shrewd investors.


Remember only to use real estate math when buying a home - look at the money you are saving and only calculate your monthly payments - and it is a good time to buy. If you do any other type of financial planning you may find that you may not be saving money, those monthly payments are not fixed, you may not be able to afford the property.


Guess it's all just how one looks at the situation...

Wednesday, April 22, 2009

Foreclosure Stats

From Michigan's Gaylord Herald-Times we find this article titled The foreclosure crisis by the numbers that outlines some of the real issues people are facing. The article summarizes a survey of 60,000 homeowners by the Homeownership Preservation Foundation that have some pretty eye-popping numbers. Let's take a look at some of the stats -

• 32 percent experience a job loss

• 25 percent experience a health crisis

• 85 percent have already missed one mortgage payment

• 50 percent have already missed two payments

• 43 percent of American households spend more than they earn

• Most homeowners have no savings or available credit, and may have already refinanced two or three times.


And a little more from the article itself -

According to statistics published by ForeclosureHelpandHope.org, nationally 1 out of every 200 homes will be foreclosed upon, and 250,000 new families enter into foreclosure every three months. As the real estate market slows, the price of homes drops, as well as home values. One foreclosure in an area can result in as much as an additional $220,000 in reduced property value and home equity for other residents of the specific area. People with adjustable rate mortgages may find their mortgage rate adjusting higher which, coupled with a decrease in home value, all but eliminates refinancing as a viable option.

...

Surveys have also shown that 60 percent of homeowners do not fully understand the terms and details of their mortgage, nor are they aware that mortgage lenders can offer services to individuals who are having difficulties with their mortgage.



So approximately 60% of owners do not understand the their mortgages. That means approximately 30 million of the 49 million mortgages are not understood. Wonder how many of these are not the 30-year fixed loans?

Tuesday, April 21, 2009

Walking Away From More Than Just A House

Some people who are walking away from an upside mortgage and resetting ARMs are walking away from more than just a property. They can be walking away from good credit. And possibly the future that they had wanted for themselves.


Some people walk away because they can not afford the situation you are in, struggling monthly to pay the bills and have no real choice to change an impending foreclosure that is heading their way. Other people feel that they are throwing good money after bad and are under water so much that financially the hits they may take are worth it.


Just like with foreclosure, there is baggage with walking away. In the case of one Detroit Councilman it means national news and possibly throwing away his future plans. In this article titled Detroit councilman walks away from mortgage from MSNBC we see some of the issues people face. Let's take a look -

[O]ne day in December, City Councilman Kwame Kenyatta and his wife packed up their belongings, locked the doors, mailed in the keys and walked away — adding another vacant house to the thousands in a city hard hit by the nation's mortgage crisis.


...

It could damage his bid for mayor of Detroit this summer, particularly since he has been one of the city's most vocal supporters of measures to improve neighborhoods and clean up blight.


"If I'm going to follow you, you need to be a leader," said Patricia Dixon, a former neighbor of Kenyatta's. "You don't show leadership by walking away from your home in the city of Detroit. You have vandalism where they find out the houses are vacant. You have people stealing fireplaces."


...

Bought for $225,000, the home nose-dived in value to $100,000, according to Kenyatta. Its manageable $2,600-a-month mortgage soon was about to soar about $1,000.


About five months ago, the Kenyattas moved to a rented condo on the city's east side. It has three bedrooms, four baths, a whirlpool bath, finished basement and garage. The rent is less than their old mortgage. (In Detroit, City Council members are elected from the city at large, not from districts, so leaving the neighborhood does not affect Kenyatta's eligibility to serve.)


...

"If voters view being an excellent financial manager as an essential quality for the mayor, then it may cause him problems," said Lyke Thompson, director of the Center for Urban Studies at Wayne State University in Detroit. "If on the other hand, they sympathize with him because so many voters have had similar troubles, it may be less of a problem."


From the article Detroit sounds worse than we realized. In the past, we have seen houses selling for dollars in Detroit. The article mentions that unemployment is 20% there. Definitely a regional depression happening there.


Will walking away cost Kenyatta his political future? We though it would until reading the final quote by Lyke Thompson - he does have the first had knowledge of what many people in the community are facing. Tough choices. Putting his long-term future ahead of his short-term future. We will have to revisit this story this summer and see if walking away helped or hurt Kenyatta's political future. If it helps, expect to see this become more and more common.

Monday, April 20, 2009

Discount Fees with No Discount

That is a legal argument that is being used to stall, and perhaps prevent, foreclosures here in New Jersey. We came across this story, although it had been out for some time, titled Westwood lawyer's legal efforts may stop N.J. foreclosures in the Star Ledger. While the legal aspect itself is interesting, we were shocked (but should not have been) to learn that the New Jersey Mortgage Bankers Association shares an office with the New Jersey Mortgage Brokers Association. We knew that these parties were aligned, but not intertwined. But let's jump into the article -

A young Westwood attorney is pursuing a simple legal argument that, if upheld by New Jersey courts, could stop many mortgage foreclosures throughout the state.


The argument is this: If, at closing, borrowers paid a discount fee to a mortgage broker and didn't get a reduction in their mortgage interest rates, then the mortgage is invalid and cannot be foreclosed.

...

The claim might seem outlandish, maybe even arrogant, but mortgage bankers are obviously concerned. Their lobbyists have asked the Legislature to change the language in the so-called Lenders' Liability Law (LLA) because, even as the bankers concede in a brief, the wording might be interpreted to support Denbeaux's argument.

...

Any payment given to a mortgage broker beyond an application fee and discount points -- a fee that results in the reduction of the mortgage interest rate -- would be, Denbeaux argues, illegal.


If banks pay the illegal fees to mortgage brokers out of borrowers' funds then, under the Consumer Fraud Law, the transaction is void, Denbeaux says. The mortgages can be rescinded and, if there is no underlying mortgage there can be no foreclosure.


Of course the lenders are fighting this. Interesting to read about someone finding the loopholes that are in the borrowers best interest. We know that there are legal teams that scour for loopholes in the lenders best interest. Best close of the borrower loopholes ASAP.


While we do not agree with keeping people in properties they can not afford, or letting people have their mortgages wiped away from a loophole. It is good for everyone to see the sausage making that the mortgage industry really is.

Sunday, April 19, 2009

Leaving Behind Lake Hopatcong *Update Below

Last fall we embedded a devastating video about the things people leave behind after their properties are foreclosed. The lenders usually hire companies to then come in a do a trash out - in other words landfill everything the owners left behind. Some very valuable stuff ends up as garbage. And some of the former owners most valuable possessions are left behind. Take a look at the video here.

The trauma that people must be going through to leave a property with so many valuables is devastating. Things that could be yard-saled or craigslisted instead left behind. Very sad state of affairs.

Often when we featured foreclosed properties they are empty. So today when we came across a heavily HELOCed property with valuable furniture inside we knew we were seeing firsthand a local trash-out. A family so torn by losing the property that they left valuables for the bank. The realtor who posted these pictures works for the lender, so little is left to the imagination. Lets take a look -

Here is the property -


The front of the home.

The kitchen, with a little left behind.

The forgotten plants and decor from the family room.
A beautiful desk left behind in the office.
Matching wood furniture left in the bedroom.
The saddest trash out - where is the baby sleeping now?


Here is the property info -

Property Features

  • Single Family Property

  • Status: Active
  • County: Morris
  • Year Built: 1955
  • 3 total bedroom(s)
  • 2 total bath(s)
  • 2 total full bath(s)
  • 8 total rooms
  • Style: Ranch
  • Master bedroom
  • Living room
  • Dining room
  • Kitchen
  • Den
  • Basement
  • Laundry room
  • Master bedroom is 27x11,Includes: Full Bath
  • Living room is 21x11
  • Dining room is 13x11,Formal Dining Room
  • Kitchen is 13x9
  • Den is 11x10
  • Basement is Full, Unfinished, Walkout
  • Hardwood floors
  • Fireplace(s)
  • Fireplace features: Living Room, Wood Burning
  • Parking space(s): 6
  • Carport
  • Attached parking
  • Parking features: Carport-Attached
  • Heating features: Baseboard - Hotwater, Multi-Zone,Oil
  • Central air conditioning
  • Cooling features: 1 Unit
  • Exterior construction: Wood
  • Roofing: Asphalt Shingle
  • Approximate lot is 97x122
  • Lot features: Level Lot
  • Utilities present: Septic, Public Water, Electric Service

Here are the financials -

  • The property was purchased in May 2003 for $332,000.
  • The original mortgage at time of purchase was for $265,600 using a 30-year fixed with Fleet National Bank.
  • In September 2003 a HELOC was opened for $35,000 with Fleet National Bank.
  • The following May the original HELOC was closed and a new one for $57,700 was opened again with Fleet.
  • In June 2005 the previous HELOC was closed down and a new one was opened again, this time for $103,300 with Fleet of course.
  • In May 2006 the HELOC line was closed and re-opened again, this time for $153,000 this time with Bank of America.
  • The foreclosure process started with a Lis Pendens filed in May 2007 for the original mortgage with Fleet.
  • 15 days later another Lis Pendens was filed for the last HELOC with Bank of America.
  • The property is currently listed as an REO for sale a through a realtor for $259,900.
  • The property taxes for 2008 were $7,385.54.

At time of purchase the owners were able to put a 20% down payment of $66,400 for the property. This was very hefty, especially since it was during the bubble.

The opening of the first HELOC was little suprise. As we saw in our last post financial advisers were telling clients to use their equity as an emergency fund. The owners had put down such a substantial down payment having some extra funds for repairs and fixing up the place. This was very normal and ordinary at the time.

When the owners refinanced the HELOC a year after purchase the potential was to available to extract the full down payment except for $8,700. But that would be most likely extracted the next year with a new HELOC that would allow for the full down-payment to be withdrawn as well as another $36,900 of equity that may have built up over time (or through improvements?). But just another year passed and another potential $49,700 was available to be extracted. The last HELOC allowed for the full extraction of the down payment (of $66,400) plus another $86,600.

So when the foreclosure process started the lenders had lent out $418,600 for the property. Thus, bring the loss to, at least, $174,576 if the property sells for the full asking price and the realtor gets the standard commission. Plus the expenses for the trash-out and other foreclosure costs.

For those interest in purchasing the property, if they are able to put 20% down and received a 30-year fixed at today's Bankrate rate of 4.86% the monthly payments would be $1098.44. Adding in the property taxes and the monthly payments would be about $1713.90 per month - plus utilities and insurance.

Unfortunately this is probably the saddest foreclosure we have featured so far...

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

Update - Recently one of our readers noted that very few buyers can actually put down the 20%. So we found a new calculator that includes the PMI charges and the new rate. So let us suppose the potential new buyer is only able to put down 5% or $12,995. The monthly mortgage payment would be $1304.39, plus a PMI of $160.49, and the taxes of $615.46 totaling $2080.34.

Let's look at a buyer who puts only 3% down - the mortgage would be $1331.86, PMI now $218.49, the taxes stay at $615.46 for a total monthly payment of $2165.78.

What a difference a larger downpayment can make.

Saturday, April 18, 2009

HELOCs Past and Present

In the recent past HELOC were smart use of people's own money. Now things have changed dramatically. In this article from the New York Times titled Why Credit Lines Are Drying Up illustrates the changes. Lets take a look -

HOME equity lines of credit, sometimes known as Helocs, have been a popular financial tool for homeowners precisely for times like now, when it helps to have a monetary cushion in case of job loss or some other unforeseen fiscal glitch.


These lines of credit essentially replaced savings accounts as the fallback, with many financial advisers counseling homeowners to keep a $50,000 line open at all times.


But that fallback is evaporating. Lenders in the past year have made it much more difficult to qualify for home equity lines of credit, and even those who do get them will pay a much steeper price in interest — about 5 percent, in fact, which is higher than the average long-term mortgage.


During the real estate boom years, home equity lines of credit commonly carried interest rates that varied in accordance with the so-called prime rate. Those with good financial histories could expect their interest rates to float about one half of a percentage point below the prime rate.


Roughly a year ago, though, banks changed the terms of these loans — along with nearly every loan in which borrowers took equity out of their homes. As the economy and housing market declined, it made little sense for banks to lend money on an asset that was becoming less valuable by the week, and in an environment where borrowers had a diminishing ability to repay.


There have been big changes across the board. The idea of "savings" being equivalent to equity has changed. With falling home values many people's "saving" have evaporated. Now their is a push for have real savings again.


Housing is seen again as a place to live - not a retirement fund, a second income, or a safety net. What a big change from the bubble years.

Friday, April 17, 2009

Option ARM Foreclosures Delayed

The upcoming issues with the Option Arms look like problems will be delayed due to low interest rates (see here and here). Remember that the recasts are set at 110% to 125% of the principal on the loan. So properties purchased at market peak will have a huge gap between the new loan recast value and the present market value. Also, many of the owners are only paying the interest - either the teaser rate or interest only which is stemming off the recast but not lowering the principal.

The fact that these recasts have been pushed back does not mean that the foreclosures will not take place. It just means that for many homedebtors (only appropriate word for the context) the foreclosures will just be delayed. In the big picture it is probably hoped that the foreclosures will be delayed long enough for the markets to stabilize. However that does not mean that there will still be big losses coming for the lenders between the 125% recast rate and the current value.

BusinessWeek has an interesting article titled Good News: Option ARMs resets delayed. Let's take a look -

Option ARMs typically reset after five years, at which point the monthly bill increases 65% or more. About 37.5% of option ARMs originated in 2005 are still outstanding, 63% of the 2006 vintage are outstanding, and 82% of the 2007 loans remain, according to Barclays Capital (BCS). And about a third of the outstanding loans in these years are deeply delinquent.

...

The Mortgage Bankers Assn. is also estimating that the lower interest rates will delay the resets. But the group also expects that lenders will help borrowers move out of the option ARM products before they reset. Many of the investors who can't easily qualify for modifications and the borrowers beyond help have already lost their homes, says Michael Fratantoni, vice-president of single family research and policy development for the Mortgage Bankers Assn.


And the homeowners who are holding option ARMs when the wave of resets hits won't face as big a shock because interest rates have fallen, adds Fratantoni. "Interest rates have come down to the point where the resets that are going to occur are going to be a bit of a non-event," he says. "Very few borrowers will experience the recast." But Nicholas Chavarela, managing attorney for Orange (Calif.)-based America's Law Group, which represents borrowers negotiating modifications, says banks remain reluctant to reduce principal for underwater borrowers.

...

Under the plan, taxpayers and participating lenders would share the cost of cutting borrowers' debt-to-income ratio to 31%. Loans terms could be extended to 40 years and interest rates dropped to as low as 2%. But option ARM borrowers would likely have to pay more each month, even with a modification, because they'd suddenly be required to pay both interest and principal. "The Obama plan needs to be built upon," Chavarela said.


But even if they can refinance many borrowers can't afford the higher payments. Philip Tirone, president of the Mortgage Equity Group in Los Angeles, said he reached out to borrowers with option ARMs, offering to help them refinance into a fixed-rate mortgage with a low interest rate. "For them, it's all about the payments," Tirone said.

...

Keith Gumbinger, vice-president of HSH.com, a publisher of loan information in Pompton Plains, N.J., said the lower interest rates have helped to diminish the option ARM problem. But it remains unclear how many option ARMs are left to reset and how many borrowers will be able to get out of the loans before it's too late. Moreover, by the time they do reset it is unclear whether the economy will be better off. If home values and unemployment continue to weaken, it will become even harder to refinance. But the delay in resets gives some motivated borrowers time to work with lenders and negotiate a solution.


It is all about payments that they can barely afford on a loan they can not. If the homedebtors can not afford more than the teaser rate how are they going to afford interest with principal. And since lenders are not willing to take such huge losses - what will happen to what these properties that are have principals that are up to 25% more than their peak prices? If there ever was a group that was perfect candidates for walking away, these are them. They own nothing. They can not afford their property. And they are too deep in debt to probably ever make it worth while.


And here is a graph depicting the recasts, notice how it tapers off 5 years after the housing industry imploded in 2007 -



------------------------------------------------------------------
Here is an example we gave of the problem last year to understand the numbers -

For example a Merced, CA house that was purchased at $400,000 may have a mortgage that has grown to $500,000 with a real current market value of $200,000, add in the $50,000 for foreclosure costs and the lender loses $350,000. The owner could not afford the payments on a $400,000 property when the economy was strong and gas was affordable.

Thursday, April 16, 2009

Foreclosures Up in NJ

The moratorium was never going to stabilize the housing market. Mostly it would just stall the inevitable. Since the projections for New Jersey are that the housing values will not stabilize until 2012 high foreclosure rates going to be high for some time. The rising underwater rates along with increasing unemployment levels will also need to stabilize to reduce foreclosure levels. So today's report in the Star Ledger article titled N.J. foreclosures start ticking up in March does not come as too much of a surprise. Let's take a look -

Foreclosures in New Jersey jumped nearly 40 percent in March over February, according to RealtyTrac Inc., showing that banks were again taking steps to repossess homes from delinquent owners after months of holding off.


Banks had halted foreclosures as they waited for details of a federal mortgage modification plan and as they integrated new restrictions on foreclosures passed by several states.


It won't end soon, economists say. They predict the unemployment rate will continue to increase throughout the year, meaning more people will not be able to make mortgage payments and, in turn, face foreclosure.

...

Foreclosures in the state rose 1.96 percent since March 2008. Quarterly data reflected the banks' moratoria. Foreclosures in the first quarter fell nearly 30 percent since the fourth quarter of 2008 and fell 10.7 percent over the first quarter of 2009, according to RealtyTrac, which lists foreclosures.


Foreclosures will not level for some time. While lenders are tightening their requirements - now you need more than a pulse - job losses can wipe out even the most prudent borrower. The difference between mortgage and property taxes and what unemployment disperses is too big for many to maintain their properties. Here is some snippets from an accompanying article from the AP titled US foreclosures up 24 pct in 1Q -


The faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm.


In March, more than 340,000 properties were affected, up 17 percent from February and 46 percent from a year earlier.


Foreclosures "came back with a vengeance" last month and are likely to keep rising, said Rick Sharga, RealtyTrac's senior vice president for marketing.


Nearly 191,000 properties completed the foreclosure process and were repossessed by banks in the quarter. While the number was down 13 percent from the fourth quarter of last year, it is expected to rise through the summer and then possibly taper off.

...

In RealtyTrac's report, Nevada, Arizona, California and Florida had the nation's top foreclosure rates. In Nevada, one in every 27 homes received a foreclosure filing, while the number was one in every 54 in Arizona. Rounding out the top 10 were Illinois, Michigan, Georgia, Idaho, Utah and Oregon.


One in 27! That has got to be devasting for the state and the region.

Wednesday, April 15, 2009

New NJ Foreclosure Numbers

PropertyShark.com has released a press release regarding their latest stats on New Jersey's foreclosure numbers here. These are numbers from the first quarter.

While the numbers are down year-over-year they are up from the 4th quarter. But remember the foreclosure moratoriums by the State and by lenders. Moratoriums do not stop the foreclosure process they just delay things. Only a small percentage will be able to rectify the situation. Here is a snippet from the press release -

Key Report Findings

· Foreclosure auctions scheduled in New Jersey in Q1 2009 (2,293) were down 10% compared to Q1 2008 (2,560), but they have gone up 13% since Q4 2008 (2,030).

· Essex County (296) had the most New Jersey foreclosures scheduled in Q1 2009 - Essex (296), Passaic (217), Ocean (217), and Union (215) counties had the most new foreclosures in New Jersey in Q1 2009.

· Of New Jersey cities, Newark had the most new foreclosures; Dover had the highest rate of new foreclosures - There were 133 new foreclosures in Newark, followed by Paterson with 120, and Elizabeth with 71. Dover had a rate of one home scheduled for foreclosure auction for every 170 homes, followed by Paterson with one in every 373.

· Passaic County had the highest rate of foreclosures per household with one in every 755 homes scheduled for auction in Q1 2009 - Union County followed with one in every 866 homes scheduled for auction, and Ocean County had one foreclosure for every 924 homes.

The full New Jersey Q1 2009 Foreclosure Report can be downloaded at http://www.propertyshark.com/mason/BlogCenter/marketreports.html.
Obviously there are some serious problems in Passaic - looks like they are coming from Paterson.

Reverse Mortgage Now Poverty Prevention Programs

It seems that reverse mortgages is taking a new turn. During the bubble the idea of equity as a retirement plan. With the equity evaporating throughout the country and housing sales cooling everywhere a new approach was needed. Compounding that with 401Ks turning into 201Ks many people are seniors are looking to reverse mortgages to keep up the standard of living - or at least not have it deteriorate into poverty status. In an article from the LA Times titles More homeowners turning to reverse mortgages states that while reverse mortgages are surging, often they are used to stop paying traditional mortgages. Let's take a look -

Their retirement accounts flattened by the sour economy, older homeowners are increasingly turning to so-called reverse mortgages -- the sometimes expensive loans that don't require payments until the borrower sells the home or dies.

The Federal Housing Administration insured 11,261 reverse mortgages in March, a jump of 17% from the same month last year.

Experts say the loans -- which are only available to those over age 62 -- are on the rise for several reasons, including provisions in the federal stimulus package that have made them cheaper and easier to get.

Increasingly, lenders say, even well-off seniors are relying on the loans to provide monthly spending money at a time when their retirement accounts and other income may be limited.

Strapped homeowners with fairly sizable mortgages are paying off their notes and living rent-free in their homes, said Mike Branson, Chief Executive of All Reverse Mortgage Co. in Garden Grove.


...
"People are looking at [reverse mortgages] to live now, which wasn't the case that long ago," [Nancy West, a spokeswoman for the U.S. Department of Housing and Urban Development] said. "A lot of the time, they're seniors that have mortgages that they shouldn't have been put into -- and have lost their livelihoods in the process."

Using reverse mortgages to stay out of poverty is probably necessary for many people. Although we are still concerned about long-term issues involved with reverse mortgages. Since one can start borrowing at 62 and easily live another 30 years problems of poverty may not be alleviated, rather just pushed down the road. These reverse mortgages are a short-term solution to a big and growing problem.

Tranforming Debt into Theft

The radio ads by John Commuta's "transforming debt into wealth" took on a new dimension when one of the group's credit counselors allegedly stole $100,000 from a former client. We never called or looked into the program but scratch our heads when reading that it takes over $9000 to join the program. We now think we understand how it works for the group - the members get more debt and the organization gets more wealth. In an article from the Boston Herald there is an article titled John Commuta 'debt coach' charged gives us some details on the case. Let's take a look -

A Worcester [MA] woman thought she was “transforming debt into wealth,” as promised on a radio ad for John Cummuta’s get-out-of-debt programs.


What she didn’t count on was going $100,000 into debt to transfer her wealth to an alleged Utah scammer, who Secretary of State William Galvin yesterday accused of defrauding the Worcester woman after the man became her “financial coach.”


Darin Floyd Beal, 31, of Utah, was charged with defrauding the unnamed woman of $100,000 after she responded to a Cummuta radio ad in 2006.


After she paid a $9,270 charge to join a debt-to-wealth program, the woman said Beal was assigned to her as a “financial coach.”


He encouraged her to take out a $100,000 home equity loan and invest in promissory notes, promising her big returns, Galvin’s office said in a complaint.

...

But then Beal, after leaving Cummuta’s company, recommended she invest another $100,000 in promissory notes, promising her 27 percent returns, Galvin’s office said.


Paying over $9000 to save money should set off the first set of alarm bells. Getting 27% returns should also set off more than just alarms. Those numbers make Madoff look credible. Perhaps that is why the advertisements come over the radio - looking for gullible marks that are looking to get rich for nothing.


Tuesday, April 14, 2009

Financially Sophisicated

One has to be financially sophisticated to understand how one can have a mortgage payment that exceeds their monthly income. It is also necessary when understanding why ten-thousand in broker fees for a new loan is necessary. Financial sophistication can help us understand the logic of using a HELOC to pay a mortgage - and being advised to do so by your mortgage broker. It is should be a mandatory requirement for those who use option arms.


Today the Wall Street Journal brings us an article titled Older Borrowers, Out in the Cold that gives numerous examples of people hurt by the financially sophisticated among us. Let's take a look -

In 2006, Carol Couts, a 66-year-old widow in Yuba City, Calif., was living in her home, payment-free, when a mortgage broker persuaded her to refinance her no-cost mortgage for one that exceeded her monthly income by more than $400.

...

In 2007, she received numerous phone calls from a mortgage broker named Daniel Lewis. According to Mrs. Couts, he told her he was contacting seniors to warn them that banks were canceling reverse mortgages because they were unprofitable. She would have to refinance her home, he told her, or lose it. (This wasn't true; reverse mortgages generally aren't repayable until death.)


...

During the mortgage boom, brokers commonly cold-called older homeowners. "I was inundated," says Floy Mae Bryant, 84, a retired telephone operator in Visalia, Calif., who had owned her home since the early 1990s. Loan records show Mrs. Bryant refinanced six times in less than three years using multiple brokers.


Serial refinancing was common among older borrowers, legal-aid lawyers say. Brokers pitched loans with low teaser rates, explaining the homeowner could simply refinance when rates reset. Yet borrowers like Mrs. Bryant didn't understand that each refinancing added thousands of dollars in fees to their debt.


Mrs. Bryant's last refinancing was in September 2005, just a month after her previous one. A mortgage broker placed her in a Countrywide Financial Corp. "option ARM," an adjustable-rate mortgage with a monthly payment of $1,545, barely affordable on her $2,310 Social Security and pension income. To make her mortgage payments, she drew on a $39,000 home-equity line of credit that the same broker encouraged her to set up.


There was another example we left out involving a lender referred to by a church - with the Reverend being friends with the broker. Problems like this are very common. Unfortunately it is hard to sort out what was fraud and what was just carelessness. Also the fraud cases can be confusing and hard to convict.


The interesting part from the article is that fraud cases are usually prosecuted when the fraud is against the lender - not in cases where fraud is committed against the borrower.


Hopefully some of financially sophisticated products that evolved during the Great Housing Bubble will no longer be available in the future.

Monday, April 13, 2009

Debtor's Rights

Even debtors have some rights against the calls from collection agencies. When those calls turn into harassment the debtor can fight back - in court. At this time when many of us are late on bills and no longer have the luxury of HELOCing those maxed out credit cards it is good to know what avenues collections agencies are allowed to pursue. In the Houston Chronicle there is a list of barred federal practices accompanying an article titled Some debtors getting payback. Let's look at the federal barred practices first -

• Tell a neighbor, co-worker or non-spouse that you owe money.

• Call at work after you’ve told them you can’t receive such calls.

• Call before 8 a.m. or after 9 p.m.

• Call an excessive number of times.

• Continue to call after receiving written request to stop.

• Threaten violence, arrest or incarceration.

• Use profanity or harassing and abusive language.


When reading the article remember these people do owe money but were excessively harassed or threatened. Issues involved reporting personal debts to family members, excessive calls (one case involved 5 calls in 30 minutes) and threatening harm and injury to the family members. This harassment does not sounds like something that would happen from a $200 overdue Target charge - it sounds like they borrowed from Tony Soprano. Now lets take a look at the accompanying article -


Lawyers in the debt business say that as collectors get desperate in these tough times, consumers are increasingly fighting back by suing those who use illegal tactics.


...

“This is definitely increasing in popularity,” said Daniel Ciment, a Houston lawyer who once owned a collection agency and now sues debt collectors. “It’s most likely because debt collectors are hurting.”


...

“Anyone who thinks there isn’t collection abuse is an idiot,” said Manny Newburger, an Austin-based lawyer who defends debt collectors nationwide. But Newburger believes it’s a few bad actors in a legitimate industry.


...

A jury awarded an El Paso couple $11 million, though an appeal’s court cut that down to $1 million in 1998. Trying to get $2,700 owed on a VISA card bill, collectors swore at the couple, harassed them at work, said they’d put out a contract to kill one of the debtors and appeared to have called a bomb threat to a debtor’s workplace.


In another legendary Texas case, an elderly woman with anxiety disorders was awarded $15 million by a Duval County jury after being harangued about a relative’s debt and believing threats she’d be jailed so she surrendered to confused authorities.


While the article is mostly focused on Texas issues it does address the federal rights as well. If we find any New Jersey specifics we will bring them to you.

Saturday, April 11, 2009

Holiday Posting

Due to travel plans and Holiday obligations posting will be very late tomorrow.

Housing Plan Critique

In some ways the housing plan is a no-win situation - at least for the critics. Even if the program relieves some of the housing problems there will be people that should not be getting help that are able to. And of course there will be people who should qualify but for some reason do not get any. Today the Washington Post article titled Plan to Help Borrowers Is Too Narrow-Minded complains that the program is too small and too narrow in its focus. Lets take a look -




The limited scope of the program is why its cost is estimated at only $75 billion, or less than the amount required to bail out AIG. The impact will be correspondingly small.

The major limitation of the program is that it does not attack the problem of negative equity -- mortgage balances larger than the value of the homes securing the mortgages. Large and growing negative equity underlies the sharply reduced
values of mortgages and mortgage-related assets on the books of the financial institutions holding them. These reductions in asset values have eroded the capital of these institutions, which the government has had to replenish to prevent failures.

The new program is focused on the capacity of borrowers to make their monthly payments. Indeed, this is evident from the program name, Making Home Affordable. The major tool for reducing the payment is rate reduction, with balance reductions only a last resort in cases in which rate reduction and term extension can't get the payment low enough to be affordable.

...
In the minds of the program's designers, having negative equity is not an indicator of whether help is deserved. True, most negative equity has arisen from broad price declines affecting entire markets, but borrowers are not altogether blameless. They could have made larger down payments when they bought the house, and they certainly did not have to take out that second mortgage that allowed them to live (temporarily) beyond their means.

This same mindset is evident in the rule, incorporated in both programs, that only owner-occupants are eligible. Investors -- those who rent their properties rather than live there -- are not eligible. In this mindset, investors don't deserve help because they were implicated in the bubble that preceded the crash: They bought houses in the hope of turning a quick profit, and government should allow them to take their lumps without interference.

Well, lets hope the program works and perhaps eventually things can be altered or expanded. This is a probably a case where the perfect is the enemy of the good.


Friday, April 10, 2009

NJ Housing Recovery 2012

So we still have a long way to go before we recovery. And in this case recovery just means for supply to meet demand - not for prices to return to peak. That is not projected to happen for years and years. In this USA Today article titled Open house, anyone? 1 in 9 homes sit empty the numbers are startling. Let's take a look -

From Maine to Hawaii, millions of new McMansions, post-World War II bungalows, modern downtown lofts, exurban town homes and inner-city row houses sit empty. This unprecedented glut of vacant homes — one in nine homes across the USA, according to the Census Bureau — will change the real estate landscape for years.

...

More than half of foreclosures last year were filed in just 35 counties across 12 states.


After analyzing government housing data and estimates and projections by Woods & Poole Economics, an independent economic forecaster, Nelson predicts that housing markets in the West and South — regions hardest hit by foreclosures — will start to bounce back later this year and the first half of 2010. The Northeast and Midwest will have the slowest comeback — possibly beyond 2012, he says.


Nelson adds a cautionary note: "Keep in mind that 'recovery' does not mean 'happy days are here again' " but "that there is sufficient pent-up demand for new housing as to warrant new construction."


Prices won't bounce back much, at least initially. When the recovery begins, homes will be selling at the lowest prices this decade, Nelson says.


The interesting thing with the article projections (and it accompanying map) is that the areas that have been absolutely devastated will be among the first to bounce back - Arizona and California. Unfortunately for Michigan - they are not projected until 2012 or after - we wonder if there will be some areas that will never rebound.

Thursday, April 9, 2009

Celebrities in Foreclosure

We can all live like celebrities today. Since even international celebrities who make millions of dollars can mismanage their money and live well above their means. Last year we learned about Ed McMahon's troubles - which continue on. As well as Michael Jackson's Neverland Ranch saga. Or should be really surprised about has been and dlisters who are trying to keep up an unaffordable lifestyle. But today we learn that even you can be #1 in the box office and still live beyond your means - like Nicholas Cage. In this article titled Nick Cage, Michael Jackson, Lindsay Lohan and More Strapped for Cash from ABC News we learn about celebrity foreclosures and possibly short sales. Lets take a peek -

[Nicolas Cage] bought Germany's Schloss Neidstein in July 2006, has sold the castle because of the economy.


"Due to the difficult economic situation, unfortunately, I was no longer able to keep it," Cage told German celebrity weekly Bunte. "Even if Neidstein castle is no longer in my possession, it will always have a firm place in my memory."


...
In spite of the fact that Cage's latest movie, "Knowing," has brought in almost $60 million so far and was the No. 1 movie at the box office the weekend it opened, the actor can't cough up enough dough to maintain the 28-room castle, which boasts 10 bedrooms, five bathrooms and sits on a hill in the middle of 395 acres of Bavarian forest.

...

Willie Aames, former star of 1970s and '80s hit shows "Eight is Enough" and "Charles in Charge," joined the ranks of recession-hit celebrities last week, when he held a garage sale at his suburban Kansas City, Kan., home. Dozens of fans showed up Thursday to score a piece of Aames' TV memorabilia along with antiques, artwork and mounted deer heads.


Aames filed for bankruptcy last year, and his home is in foreclosure. The garage sale was his latest move to stay afloat.


The article tells us that Cage's castle probably sold for $2.3 million, unfortunately it does not tell us what he paid for it. But an older CBS News article states he paid $2.6 million and is doing some renovation. So this definitely was a money loser - just how much would be interesting.

And the Aames story of going from a TV star to hawking his junk at a garage story - is just sad.

Wednesday, April 8, 2009

Mortgage Delinquencies Up in Feb.

With the rising levels of unemployment - especially the numbers over the last few months this should not come as too much of a surprise. If you live paycheck to paycheck and the paychecks stop you are in big trouble. If all or most of your monthly income goes to pay your bills and your monthly income gets halved or more (like many NJ folks collecting unemployment) you are also in big trouble. So this Reuters article found in the Macon Daily titled Home delinquencies soar sums up the current financial state of the union. Let's take a look -


Dann Adams, president of U.S. Information Systems for Equifax Inc, reported that 7 percent of homeowners with mortgages were at least 30 days late on their loans in February, an increase of more than 50 percent from a year earlier.

He also said 39.8 percent of subprime borrowers were at least 30 days behind on their home mortgage loans, up 23.7 percent from last year.

"I'm trying to find optimism in these numbers, but I'm pretty hard pressed to do that," Adams said, despite a recent burst of relatively positive news that has fueled hope that the U.S. housing market has turned a corner.

...

But Adams said the continued increase in mortgage delinquencies revealed in his data foreshadows more foreclosures, short sales and home price declines as homeowners default and banks then repossess the homes to sell them at deep discounts.


Half-off home prices are not enough to stabilize the system. Adams is right - delinquencies now are foreclosures and short sales later. Delinquencies now can still push values down in the future. The downward spiral still has a way to go before rebound.

Tuesday, April 7, 2009

FICO Score Concerns

With the credit drying up and lenders reducing the amount available some of the FICO procedures are causing problems for even the best of consumers. While the full FICO methodology is a proprietary secret, we do know that part of the calculations are based on the amount of credit used as a percent of the consumer's available credit. So when a lender arbitrarily halves your credit card limit a ding will be left on your credit score. And since most of the universe seems to revolve around the FICO score - from auto insurance to potential employment - a couple dings from lenders could create real life problems for many people. Today we find we are not alone in our FICO concerns with this post titled Freedom From FICO over at SavingAdvice.com. Lets take a look -

One of the benefits of a life without debt is (some) freedom from the gods at FICO. Because I don’t do debt, my FICO score is not as important to me as it is to some and that takes a lot of worry out of my life. I see many people freaking out about their FICO scores because they know they will need a loan in the near future.


...

And it’s a good thing that I don’t worry about it too much. Just the other day, I got a notice from a credit card that they were lowering my limit. ... More and more credit cards are closing cards and lowering limits and even the debt free are not immune to the madness. My score will no doubt drop a few points in the coming months, and not because of actions I take. But I can live with it.


I know many people who are at their wits end because their scores are dropping through no fault of their own as credit lines are slashed and even eliminated. This practice dings the all important “utilization of debt” ratio that comprises a large part of a credit score. When you have lower credit limits and your outstanding debt creeps closer to the maximum, your score goes down. And it’s happening all over the country right now. Some people, desperate for a car loan or a home equity loan are being denied because their scores have dropped, even though they have done nothing to deserve it. It’s cause for concern if you require debt to get through life.


I don’t agree with FICO’s methods for determining a score and I don’t agree with the way a lot of insurance companies, employers, and others use the score to determine who gets what. It’s a flawed system that takes away the human element and places all the control on a computer algorithm that has no concern for you as a person, your special circumstances, or that the credit card companies jacked you around. But it’s the system that the world uses and, like it or not, they’ve managed to make it so that even those of us who don’t use debt have to concern ourselves with this score.


It does seem pretty scary how one company can have so much influence. And since the algorithms are trade secrets it can be even more worrisome. We hope they have layers and layers of securities in place - even from their own employees. One mad FICO employee doing some random havoc could ruin numerous people's lives. With great power comes great responsibility. Oh, that is not working out so well for our best and our brightest. Let's hope things are better in Minneapolis then on Wall Street.