Trying for Resubordination

One big problem for many trying to refinance is that HELOC and HELs will not resubordinate. If there is no resubordination there can be no refinancing. This is a big problem for those looking to lower their rates. Instead of having the extra cash, the second line makes the budget that much tighter. The LA Times has an question-answer section that addresses just this issue. The post is titled Keep after your home equity line of credit lender when refinancing your mortgage. It seems that with enough pressing you can do the seemingly impossible - get the lender to resubordinate! Let's take a look -

Dear Liz: I'm in a potentially bad situation with my home equity line of credit. I'm trying to refinance my primary mortgage and would save nearly $150 a month. But the HELOC lender is dragging its feet on agreeing to a subordination. If the lender doesn't agree, I lose the deal. I'm wondering why the lender does not believe it to be in its interest to help when I am trying to improve my financial situation. Can you give me some insight into the line of thinking here?

Answer: Unfortunately, many would-be refinancers are in your uncomfortable position. They have a second mortgage, such as a home equity line of credit, on their property. These loans are known as "seconds" because the lender is in second position to be paid off when the home is sold, after the primary lender has been paid.

For a refinance to proceed, these HELOC lenders have to agree once again to be subordinated into second position. Some lenders balk because they don't believe their borrowers have sufficient equity to cover both loans (even though, as you note, a lower payment on the first mortgage could make it more likely that the borrower could make payments on the second).

But a bigger problem seems to be lack of staff and lack of priority. Lenders are so busy trying to meet the demand for refinancing that other concerns, including subordination, often fall to the bottom of their to-do list.

That means you have to be extremely vigilant if you don't want your refinance deal to fall apart. Call your new lender and your HELOC lender every few days to track the progress of your subordination. If there are problems or missing paperwork, promptly address those issues.

If your rate lock is within two to three weeks of expiring and your subordination still hasn't been approved, call your HELOC lender and politely ask that your request be given top priority.

If you can't get through to the subordination department's main line, ask the phone reps if there is a fax number or e-mail address you can use. If all else fails, take your problem to the bank's chief executive. You'll find the name and address online.

Too bad we did not know this a few months back! We wonder if this really works, or if they just drag things out long enough so your rates expire. And with the rising rates this can be a race against time...

People Like Bubbles

During the last two decades bubbles became the norm. We learned not to just live with bubbles, but expect and like them. The bubble became normal and comfortable. When one bubble popped we just turned to a new bubble. When the tech bubble exploded we propped up a housing bubble. And what euphoria the bubble brought. We were rich and could afford to live in luxury - the fact that it was borrowed and not affordable was secondary. In this article in MSNBC titled Uh-Oh, Here We Go Again? discusses the bubble ideology - the good and the bad. Let's take a look -

There's been a lot of talk about how lax lending standards helped blow up the housing bubble. Talk about short memories and logic disconnects, though; apparently Massachusetts Congressman Barney Frank and New York Representative Anthony Weiner are trying to pressure Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to lighten up a little and relax condo lending practices. Um … I think we've seen this disaster flick before.

...

When the dot-com bubble popped with few Internet start-up survivors, a mild recession followed. The questionable answer was low interest rates and that brand-new inflating bubble to replace the old one, which certainly helped with that whole "mild" part (although you might call that instead a temporary fix).

Flash forward, and people were using their homes as ATMs and gorging on debt like home equity lines of credit and wallets bulging with credit cards from the likes of Visa (NYSE: V), MasterCard (NYSE: MA), and their banking partners, and this helped pump up our entire economy (and government tax revenues and stocks) artificially. Everyone from Starbucks (Nasdaq: SBUX) to Toll Brothers to banks like Bank of America (NYSE: BAC) (and its acquisitions Countrywide and Merrill) all bubbled up, too. And of course, many corporations -- a high-profile example might be Sirius XM (Nasdaq: SIRI) -- also gorged on debt in so-called good times, which as we can see, all probably seemed reasonable when everyone was doing it … until the party stopped.

Our economy needs to correct and our culture needs to get past the speculative, artificial, bubble-hungry mindset that we've relied on for too long, where easy credit gave too many people just enough rope to hang themselves with.

...

Hold on to your hats, folks. This news sounds like a red flag indicating that a lot more mistakes could be made that could put us right back on the path to future disaster, making the same mistakes again while calling them the solutions. Free market policies may frighten a lot of people, but politicians' meddling into the economy complete with short-term "fixes" to charm voters and the public are really bad medicine for what ails us.

When the bubble became the norm, the norm appears to inflate a new bubble. Push condo loans. Push reverse mortgages. Get that bubble money flowing again. Just hope there will be a new bubble to inflate in the future...

Wealth, Housing and Spending

When the value of housing stock shot up anyone who owned property felt wealthy. People's net worth doubled over a few years for people who bought early in the bubble. And the lenders were reminding you that your equity was your money and you knew how to use it best. Why let it just sit there when you could use it and become even wealthier. The Wall Street Journal has had some recent analysis of the housing bubble onto spending. Today's contribution is from the University of Chicago, Booth School titled Housing Bubble Fueled Consumer Spending. Let's take a look at their findings -

The painful process of household de-leveraging follows a historically unprecedented rise in household debt. From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.

...

Findings in our research suggest the exact opposite: the rise in house prices from 2002 to 2006 was a main driver of economic growth during this time period, and the subsequent collapse of house prices is likely a main contributor to the historic consumption decline over the past year.

...

[In our survey], we find striking results: from 2002 to 2006, homeowners borrowed $0.25 to $0.30 for every $1 increase in their home equity. Our microeconomic estimates suggest a large macroeconomic impact: withdrawals of home equity by households accounted for 2.3% of GDP each year from 2002 to 2006. Figure II illustrates the sharp increase in household leverage for homeowners living in inelastic cities.

A concern with our interpretation is that there are inherently different economic conditions in inelastic versus elastic housing supply cities that may have been responsible for the borrowing patterns we observe. However, several facts suggest that this is not a valid concern. First, inelastic cities do not experience a stronger income growth shock (i.e., a larger shock to their “permanent income”) during the housing boom. Second, the increase in debt among homeowners in high house price growth areas is concentrated in mortgage and home equity related debt.

Third, renters in inelastic areas did not experience a larger growth in their total debt. Finally, the effect of house prices on homeowner borrowing is isolated to homeowners with low credit scores and high credit card utilization rates. These “credit-constrained” households respond aggressively to house price growth, whereas the highest credit quality borrowers do not respond at all.

Our results demonstrate that homeowners in high house price areas borrowed heavily against the rise in home equity from 2002 to 2006. We also provide evidence that real outlays were a likely use of borrowed funds. Money withdrawn from home equity was not used to buy new homes, buy investment properties, or invest in financial assets. In fact, homeowners did not even use home equity withdrawals to pay down expensive credit card debt! These facts suggest that consumption and home improvement were the most likely use of borrowed funds, which is consistent with Federal Reserve survey evidence suggesting home equity extraction is used for real outlays.

And the survey says that people used their homes as ATMs to finance a lifestyle that they could not otherwise afford. Did we really know how to spend our money best? It seems not...

Another HELOC Is Filed

Last week we featured the Kimball case, where a California small business owner had her HELOC line closed - with the bank (WAMU, JP Morgan Chase) claiming that the property value declined, but an on-site appraisal revealed the property was 1.5 times the banks value. When her HELOC was arbitrarily closed down, she claims that it damaged her business.


Well, we know have word that there is a new case coming before the courts. This time the suing party had the lender shut their line down due to changes in income. The Schulken's (the party suing) states that their has been no change to their income so their line was arbitrarily shut down. This is another case involving a small business owner, who relied on their equity to run their business. When the line was closed the business suffered. This article at the PR News Channel titled JPMorgan Chase and WAMU Face More Lawsuits Over Home Loan Recalls. Let's take a look -

The suit alleges that Chase and WAMU had no reasonable basis to conclude that their borrowers’ finances had in fact declined and that the banks broke their written promises to provide customers with two weeks' notice to substantiate their incomes before taking such action.

The suit was brought on behalf of Jeffrey and Jenifer Schulken who allege that their HELOC account was suspended due to a supposed inability to pay the loan. But the couple – who run their own small business – continued to earn the same amount of money and never missed a payment.

Although federal regulations permit account suspensions when a customer’s financial circumstances adversely changes, such action requires both a material change in a borrower’s financial situation and the creditor’s reasonable belief that the borrower will not be able to repay the HELOC account as agreed.

The lawsuit alleges that Chase and WAMU had no such basis here.

“The Schulkens did everything right. They work hard, pay their bills, and have always honored their relationship with Chase/WAMU,” says attorney Jay Edelson, whose law firm, KamberEdelson LLC, represents the Schulkens. “What the banks did to them, and countless others, is simply not right.”

...

The second lawsuit, filed this week by Sherman Oaks attorney David Parisi, is brought on behalf of Garden Grove resident Michael Walsh. Mr. Walsh alleges Chase and WAMU reduced his credit limit after claiming his home had significantly declined in value. In addition to challenging the banks’ use of a faulty AVM, the Walsh case further takes issue with the banks' practice of freezing HELOC accounts based on lower declines in value than those permitted under the federal Truth in Lending Act.

We saw this coming over a year ago. The big question is how long this will drag out. But contracts were signed and agreements made. The lenders can not void the contracts just because of changes in the current economic environment. If there are problems with the contracts that is one thing, but just cancelling the contract because it was a stupid contract to make 5 years ago will not fly.

We will be watching for more lawsuits coming. Don't be surprised if this happens in all 50 states...

(h/t Steven for the link)

The State of the Nation's Housing Reviewed

When will the housing bust reach bottom? How far down will the prices fall? Will we have any equity left when all this happens? Good questions that even our best and our brightest at Harvard are pondering. TIME Magazine brings us a good synopsis of Harvard University's Joint Center for Housing Studies The State of the Nation's Housing 2009. The entire paper is 44 pages, so far all we have read is this abbreviated version. So let's take a look - .

Highlight Reel:

• On the danger of using home equity to pay off non-home debt: "A recent Federal Reserve report estimates that of the trillions of dollars in real home equity cashed out between 2001 and 2007, homeowners used $874 billion to pay off non-mortgage debt—in effect rolling consumer debt into their home loans. Unlike consumer debt, mortgage debt cannot be discharged through personal bankruptcy."

• On the generation that could help: "[T]he echo-boom generation is replacing the far smaller baby-bust generation in the young-adult age group. Indeed, the echo boomers are entering their peak household formation years of 25-44 with more than 5 million more members than the baby boomers had in the 1970s. The echo boomers will help keep demand strong for the next 10 years and beyond, bolstering the markets for rentals and starter homes."

• On how housing challenges affect the overall economy: "[H]ome equity fell by $2.5 trillion in real terms in 2008 and nearly $5.9 trillion (or 43 percent) from the 2005 level. The loss of housing wealth caused consumers to curtail cash-out refinances and pull back on spending, knocking an additional 0.9 percentage point off economic growth last year, according to Moody's Economy.com."

• On why incomes are looking paltry: "Real median household incomes in all age groups under 55 have not increased since 2000. In fact, for the first time in at least 40 years, there is a chance that the real median household income for these age groups will be lower at the end of the decade than at the start."

The Lowdown:

If the numbers and news about home prices, unemployment, foreclosures and the sub-prime mortgage crisis have blurred your vision and made your ears bleed over the past year, this report will help boil it all down to what's essential — and it'll also throw in some graphic elements if you're more of a visual learner. But don't expect any groundbreaking information. Since the center is research-based, much of what it has published in the "State of the Nation's Housing" has been reported or analyzed before. The report does, however, offer some interesting insights into how the so-called "echo-boomer" generation could play a vital role in boosting the housing market. But like many economy- and housing-related projections, these figures are just forecasts. If anyone really knew when the housing market will bottom out or reach its peak, there would be no reason to speculate.

Will the echo boom save the housing crisis and bring us back to prosperity? If not, who or what will? This is actually an annual report. Here is a link to the full report. We will take a look and if there is anything substantial we will report back.

A Reverse Mortgage to Save a Business

If you can not get a HELOC for your business and are over 62 why not try a reverse mortgage. That apparently is a new school for funds. Hopefully it will not catch on. It reminds us of that old saying - if yo find yourself in a hole, stop digging. But taking a reverse mortgage out to fund a business sounds more like if you find yourself in a hole, dig faster. A hole one will never get out of is pretty much what this sounds like. And when they decide to stop digging they will be trapped for good.

The article that brings us this lovely story - The Charlotte Observer's Hope, worries over reverse mortgages - also reminds us about the independent counseling regarding reverse mortgages. We would love to find out more about this. How much counseling, how long, what is discussed, does the homeowner just have to show up and sit through some spiel, or do that actually have to process the information and answer questions? Are all the trainings the same - some required format - or can the interested party just show they know something and finish the program. If any reader has been through this counseling send us a short note about what happened, thanks. Now let's get into the story -

[C]ritics say [reverse] mortgages, though just a niche of the larger industry, are a ticking time bomb and have some parallels to subprime mortgages: They are complex and hard to comprehend, and they may be useful for a small number of sophisticated borrowers who understand the risks but dangerous for those who don't.

Doris Simmons, 69, of Indian Trail, says she carefully considered the downsides of a reverse mortgage and decided it was her best option when the recession started to hurt her business.

She's heard all the objections, like the critics who say you can usually get more money by selling your house. “Not in today's economy,” she replies, and she doesn't really want to move anyway. Her house has been in the family for 50 years and brings memories of her children.

Does Ms. Simmons realize that her Reverse Mortgage is based on the same value as the selling price would be. It is not like her house will be worth more taking out a reverse equity rather than selling it...

...

Last year, Simmons fell behind on her house payments, which were about $550 a month. Though she'd bought the house years ago, she still had a payment because she'd taken out a home-equity loan in the late 1990s for business improvements.

She heard about reverse mortgages from a Bank of America representative who was helping with the home-equity loan. She'd also heard about them on TV and was skeptical, but met with a housing counselor anyway and eventually decided it was the best option. It's been a double gain: It eliminated her house payment, and gave her extra income to catch up on bills.

The reverse mortgage hasn't solved all her problems. She still worries about when traffic will pick up again at Old Timers.

“It saved me for the time being,” Simmons said. “Now I've got to worry about saving my business.”

Reading stories like this seems like 2004 all over again. Lenders pushing loans that give them hefty profits. People thinking they understand the sophisticated loans when very few probably really do. People financially in a hole, digging deeper.

We left it out here, but in the article we have Meg Burns, director of the FHA's office of single-family program development proclaiming the virtues of reverse mortgages since now seniors can bring their grand kids out for ice creams. Yeah, you can not afford a few ice cream cones without a reverse mortgage but can understand the complexities of it after a few hours of independent counseling? Pretty scary times coming for RM holders...

The Luxury of Plywood in Randolph

Is this the upgrade? Or a foreclosure special? Boy the neighbors must love this - how to drive the neighborhood properties down with one visit to Home Depot. Maybe we can get some cinder blocks for the car next door and really enhance the areas value.

We have not done an example in a while - thought one was due. And what better way to make a comeback then with example that illustrates everything that was wrong with the housing bubble. Renting from the bank through no money down and using a piggy back loan - check. Serial refinancing to cash out an accumulated equity - check. Using more and more exotic loans - starting with a fixed 30, moving to an ARM with a balloon payment and ending up Interest Only ARM - check kind. This homeowner never got the to the Option ARM, foreclosure happened first. But, unlike previous examples this time we are left with a plywood door - wonder what the interior looks like. Well, let's take a look at today's example -

Here is the property -

Front of the property complete with a brand new plywood entrance! All the luxuries

Here is the property info -

Status: Active County: Morris Year Built: 1951 3 total bedroom(s) 2 total bath(s) 2 total full bath(s)

7 total rooms Style: CapeCod Basement Basement is Finished, Walkout 2 car garage Attached parking Heating features: Radiators - Steam,Oil

Exterior construction: Vinyl Siding Roofing: Asphalt Shingle Approximate lot is 75X150 Approximately 0.26 acre(s) Lot size is less than 1/2 acre Utilities present: Septic, Well Water, Electric Service

Here are the financials -

• The property was purchased in January 2006 for $335,000.

• The original mortgage at time of purchase was for $251,250 with Lancaster Mortgage Bankers.

• On the same day a second mortgage was opened for $83,750 also with Lancaster Mortgage Bankers.

• In July 2006 the property was refinanced with cash out for $380,000 using an ARM with a balloon payment with Long Beach Mortgage.

• In February 2007 the property was refinanced again with a cash-out for $391,000 using an Interest Only ARM with American Wholesale Lender.

• The foreclosure process started in March 2008 with the filing of a Lis Pendens.

• The property is currently an REO listed with a realtor for $307,900.

• The property taxes for 2008 were $5314.17.
  

The perfect bubble buyer - no money down AKA renting from the bank. Then we have the wonderful piggy back loans to remove that unwanted PMI surcharge. Oh the bubble was grand! Within 6 months of purchasing the property $45,000 was extracted through a refinance with a cash out. Did the money go to fix up the property or did it go other places?

Where ever the money went it disappeared fast - since 7 months later another cash-out refi took place, this time extracting another $11,000. With this loan the owner realized that paying into the principal was just too expensive so they opted for an interest only payment. Now that is really just renting from the bank - no money invested, no equity building up other than through natural market forces (which happened to start going in the opposite direction at this time).

Within just over two years the owner refinanced 3 times, extracted $56,000 of equity of out the property and then lost the property. Not bad to live in a house for a couple of years while generating an income of approximately $28,000 of income per year in the process.

The property owner probably made about 9 payments until the mortgage (rent money) was delinquent and a lis pendens was filed, which ended up in foreclosure. Now the property is for sale for $83,100 then the last refi and $27,100 less than the 2006 purchase price. Adding in the standard realtor's commission and the lender will lose at least $101,574 if the property sells for the full purchase price. Plus all of the other costs, which are numerous.

For those interested in purchasing today's plywood special, if they are able to put 20% down and received a 30-year fixed at today's Bankrate rate for Randolph, NJ averaging 5.875% the monthly payments would be $1563.55. Adding in the property taxes and the monthly payments would be about $2006.40 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 the GoodMortgage.com that includes the PMI charges and the new rate, a potential new buyer is only able to put down 5% or $15,395. The monthly mortgage payment would be $1730.28, plus a PMI of $190.13, and the taxes of $442.85 totaling $2363.26. And for a buyer who puts only 3% down - the mortgage would be $1766.70, PMI now $258.84 the taxes stay at $442.85 for a total monthly payment of $2468.39. Plus utilities and insurance of course.

Note - Our summer schedule is very unpredictable right now, so we will post these when we can. Enjoy them when they come!

Some Interesting Alternatives to a Reverse Mortgage

Finally some more articles warning about the equity loss involved with a reverse mortgage. We see this as basically taking a gamble against the future. Option ARM takers gambled that housing prices always went up and the accumulation of deferred interest would be less then the increase in the value of the home. Whether they were aware of the gamble or not is another story - but that was the big gamble with the Option ARMs. And we are almost on the verge of an epic wave of Option ARM foreclosures.


So the new product to gamble one's life savings is being pushed - the Reverse Mortgage. This article at Nurido.at (who is this - they seem to be everywhere?) titled A Reverse Mortgage Is A Costly Option To Use Your Home Equity sums up some of the problems and provides some alternatives. Let's take a look -

Unless your home is continually appreciating at a good clip, it won’t take long until there’s little of no equity left as a legacy when you die or move out. This is what makes reverse mortgages so costly to you and you’re loved ones.

If leaving a legacy is not an issue and you’ve the health to live on your own for 10 or more years, then a reverse mortgage may be a reasonable option for you. But if you want to leave a legacy, consider alternative ways to access the value of you home for income. Here are a few:

Renting a portion of you home: If your home has extra bedrooms you may want to rent a room out for the income it can bring you. You may even consider borrowing a little for creating an in-law apartment for renting. This allows you to remain in your house yet use it to create some income. You may find local programs that allow you to borrow cheaply for the renovation needed.

Sell Your Home to Your children: Your children can pay you a monthly payment toward ownership of your house. You could arrange that you’d have a right to live in it as long as you live. What better way to have your cake and eat it too - leaving all that equity to your children for the payments made to you.

Sell Your Home And Pay for an In-law at your child’s house: Here, you’ll have to move out of your home, but you get to live with your children, increase the value of their home, and have money from your home sale that you can live on -and leave as a legacy.

Sell and Buy-down: Again, you have to move out of your home, but if you buy down to a condo much better adapted to your age and needs, your extra equity from you home sale can perhaps supply sufficient income for you to live on. You may want to buy a life annuity with it too.

Because basically after all the fees involved with a reverse mortgage there may be nothing left after 10 years or so.

The selling point (from lender/broker) is the same with HELOCs during the bubble - it is your money and you are smart enough to use it wisely. Until we found that people were using HELOCs like ATMs - paying for vacations, eating out, the latest in entertainment and fashion, etc., etc.

How many people taking reverse mortgages will end up in the same bought as the HELOCers? Extracting all the equity early and left with nothing down the road...

Americans reducing debt

Here is a big story that Americans are reducing debt. We wonder about the hows and the whys. Are Americans reducing debt because their home equity line has been cut-off? Their credit cards closed or reduced? Perhaps the fact that lenders are reducing the amount they are willing to lend out a part of it. During the bubble their were rumors of children and pets receiving credit card offers. Now people have to fight to get any credit. And monitoring one's credit score is a part-time job. This Gallop Poll titled Americans Deleveraging: One in Three Has Reduced Debt forgets to mention that almost one in for is increasing their debt. Let's take a look at the report -

Gallup Poll trends show Americans continuing to cut back on debt. In a May 29 survey, 31% of Americans say they have decreased their total outstanding debt over the past six months -- essentially the same as the percentages who said this in April (32%) and March (34%). Only 23% of consumers increased their debt in May, also not much different from March and April.

Many Americans Say Now Is a Bad Time to Borrow

Over the past three months, almost half of Americans have consistently indicated that now is a "bad time" to borrow, including May's 46% "bad time" reading. At the same time, the 19% in May who say now is a "good time" to borrow is typical of such sentiment since March. While many on Wall Street are talking about a thaw in credit-market conditions, those on Main Street do not seem to perceive this.

Many Worried About Making Their Monthly Payments

The percentage of Americans saying they are worried about keeping up with their monthly payments over the next six months reached 25% in May -- up from 20% a month ago and 23% in March.

The survey has an error of ±3 percentage points - so the debt reduction could be as low as 28% with the debt increased as much as 26% - perhaps not that great of a difference. It would also be interesting to know where the debt reduction was taking place - in super bubble states or equally across the country. And did the debt levels reduce among people who lost income (either lost their job totally or still employed but with substantially less income).

The report also notes that while there may be green shoots on Wall Street the concern about keeping up with payments indicates that nothing has sprouted yet on Main Street. It also warns about the greet shoots turning brown - yes, it really does note that! Sounds like pretty good analysis to us.

One last point - we wonder how this would look as compared with historical data. During the bubble what did the numbers look like? And how did they look pre-bubble?

Where is the Recession At?

Everyday we seem to hear about the green shoots. Shouts that the recovery is here. The recession is over. The recession is over. Then some hard numbers come out and everyone stops to ponder where exactly we are on the road to recovery. Are we past the turning point? Or is this just a lull and everyone is getting very comfortable? One argument often made is that since there has been no real fundamental changes to the banking system that we are not on the road to out of the recession. This week US News gives us an article titled 4 Ways to Tell Whether A Real Recovery Has Begun. Let's take a look -

The danger of hyping a technical recovery is that it will arrive, with much fanfare—but fail to make ordinary consumers feel better off. Many economists, for example, are predicting that the recession will officially end by this summer or fall. The only problem is that when a technical recovery begins, a lot of companies fail to get the memo. They don't play along; they keep payrolls lean and maybe even continuing to lay off workers. So to guard against false optimism, here's how to tell when a real recovery is finally kicking into gear:

Unemployment improves. The single best indicator of the health of the economy is the job market. People who have lost their job, or worry that they might, obviously hoard their money and don't spend. That spells doom for an economy driven by consumer spending, as ours is. But once it's clear that jobs are coming back, consumers are more likely to relax and open their wallets.

...

Housing prices stabilize. This has become a mantra by now: For the economy to get healthy, housing prices must stop falling. Problem is, the houses haven't been listening.

Housing matters for two reasons: It represents a big chunk of the economy, and it's the largest single repository of Americans' household wealth. With prices falling, buyers are scarce, since nobody wants to buy an expensive good today if it's going to be worth less tomorrow. With few buyers, all the other economic activity that swirls around real estate—remodeling, appliance and furniture sales, relocation services—is depressed. Homeowners are worse off, too, because the value of one of their vital assets is eroding.

...

Household wealth increases. The housing bust and the volatile stock market have hammered the traditional investment tools that most Americans use, causing epic declines in the wealth of Americans. Since 2006, household net worth has declined by about $12 trillion, which equates to about $107,000 of lost wealth for each of America's 112 million households. That's partly because of the 40 percent plunge in the stock market since October 2007 and partly because of the steep declines in real estate values.

...

President Obama stops fudging on the economy. There's still a lot that could go wrong, and Obama knows it. Yet part of the president's job is to reassure skittish Americans, even as his economic lieutenants are fighting battles in the war room. That's why Obama has been making half-hearted pronouncements, like saying that the economy shows "some return to normalcy" and that "we expect there'll be some stabilization of the economy." Virtually all of Obama's remarks on the economy contain modifiers and future tense and a not-quite-there-yet quality, since he'll blow his own credibility if he tries to convince Americans that they're better off than they actually are. When Obama starts hedging less, be happy. That will signal better days. Finally.

Well - there we have it. And by these 4 signs - unemployment, housing value stabilization, personal savings, and political posturing - we still have a long way to go. Sounds like a few more years. Maybe by that time lending institutions will have made fundamental changes to take care of that measurement as well.

Credit Scores and your HELOC

While we really do not like the control that the credit scores have over people's lives. It is like mysterious black box that can affect almost every aspect of people's lives. The credit scores can affect how much you pay for everything, influence the home purchase or rental, even getting a job.

We have, in the past, hoped for some type of regulation for the credit score industry. Since different lenders can supply different standards for the same activity. Or people can have their credit score dinged through absolutely none of their own doing. And do not even get us started on the complexities of trying to fix something that is wrong with a credit score - it can easily become a full time job.

Now we see that you have to play HELOC games so as not to ding your credit score. Open your HELOC for 3 times the amount you plan to use or watch your credit score get hit. In this article titled Treat delicately before tapping HELOC - it could damage your credit from the Orlando Sentinel we see the complexities involved. Let's take a look -

I have heard from some of my sources who work for credit card companies that the federal government is requiring lenders and creditors to have cash on hand equal to, in some cases, 40 to 50 percent of the credit that has been extended in the form of available credit on a credit card, or a home equity line of credit (HELOC).

...

For example, if you have a credit card that you haven't used in 12 months, the lender may close it or reduce the amount of total available credit. We're hearing from thousands of Americans who have had their home equity lines of credit reduced or closed. Not only does this make it difficult to access the credit you've so carefully preserved, but it will also tarnish your credit score.

...

If you don't take money out of your credit line, you may be one of those who ends up having the credit limit cut and later regret that you didn't take the money out when you could. But taking a sizable amount of money without the means to pay back the funds can put you in a precarious situation.

Let's think about how this would play out: If you tap 80 to 90 percent of your line of credit, you will hurt your credit score at least a little. But if your credit line is cut substantially, that too might hurt your credit score, as you'll have less available credit.

Optimally, you'd never tap more than 25 to 30 percent of a line of credit ... Anything more than that could lower your score a little, depending on other factors in your credit history. But since you might actually need the cash, it's better to take it now rather than want it later and not be able to get it.

The credit score is a messy area - and it is probably getting messier with the economic downturn. It is in desperate need of standards and regulation. Having access credit but not using it could harm your credit. Use your credit - but get the amount available reduced also harms your credit score. Not having enough credit activity or history also affects your credit score. It all seems so counter intuitive. But that is the way credit scoring works.

Reverse Mortgage as Last Choice

When their are no other options on the table perhaps a reverse mortgage may work. But for many people this option will take all future options off the table. Reverse mortgages are just another option to drain equity. With the continued downward spiral in home values their may be no equity for homeowners if and when they decide to sell. We many several people who see their properties as their retirement nest eggs. But since reverse mortgages can let healthy 62 year-olds extract a large portion of their equity now it can easily cause trouble down the road. Over at CBS News in an article titled Reverse Mortgages" "Loan of Last Resort" their is a warning of trouble that reverse mortgages may cause. Let's take a look -

It's a last resort for many Americans who are strapped for cash, but reverse mortgages are a way to make ends meet for an increasing number of homeowners.

...

[Early Show financial contributor Vera Gibbons] said about 10,000 reverse mortgages are being done each month, because homeowners need the cash.

"They've lost a lot of money in the stock market," she said. "...They need the cash infusion."

Gibbons said people who can't get a loan or refinance due to the credit crunch are finding their way around it with a reverse mortgage, which have no income requirements.

...

Gibbons said many seniors are funding their retirement with a reverse mortgage because they need the cash infusion.

"This is a loan of last resort," Gibbons said. "People have exhausted the options, and can't rent the house or sell it or downsize...so they're doing this."

Have people really exhausted all their other options? Just like we did with HELOCs and HELs? Or are they taking the easy, short-sighted, dead end road to financial misery. Kind of like Option ARM holders. Looks good initially but their will be problems down the road. Very messy, very complex with a brand new set of problems.

There are warnings that reverse mortgages will cause a wave of financial problems and hardships in the future. We agree. Money will be lost. People who think they are hurting financially now probably will get hit much harder in the future.

The article also notes the maintenance requirements on the properties. But if there is no money left who will be for the maintenance. And what level of maintenance. Will most of these properties be fixer-uppers or tear-downers in the future? With little to no money for upkeep left, probably.

Let the HELOC Lawsuits Commence

We have been waiting and waiting for the HELOC lawsuits to begin. Homeowners throughout the country have seen their lines closed off due to changes in the economic landscape. The big problem has been that many HELOC were closed early just to have them get off the lends books. But now Chase and WAMU are facing a class action brought by an angry homeowner who had her line cut indiscriminately. The homeowner was one of the many who used her HELOC to help run her business. So when the HELOC was arbitrarily shut down her business was in trouble. But knowing she still had equity in her property (which many do) she has fought back. From this post over at Trading Markets titled Chase and WAMU Illegally Froze, Reduced Home Euqity Credit Lines Lawsuit Claims briefly tells the homeowners saga. And also provides the info for others that need to join. Let's take a look -

Despite recent assurances

by CEOs that banks are using the $700 billion in taxpayer TARP funds to lend money to cash-strapped home and business owners, Washington Mutual Bank (WAMU) and its new parent, JPMorgan Chase (Chase) (NYSE:JPM), are not only failing to live to their promises, they are squeezing consumers by freezing or reducing their home equity lines of credit, according to a federal class action lawsuit filed today. The suit alleges that WAMU, which is now operated as a division of Chase, has been systematically reducing and freezing customers home equity credit lines. According to the suit, filed in the Southern District of California, the banks used flawed automated valuation models (AVMs) to intentionally understate home values so they could create a pretext for freezing its customers HELOC accounts. The lawsuit is brought on behalf of Michell Kimball, a small businesswoman in Escondido, California. Kimball first learned that Chase had frozen her WAMU credit line when a check she had drawn on the account was dishonored. Chases actions threatened her home and the viability of her business. According to Kimball: Because I didnt have access to my credit line, I was unable to pay my suppliers. I was able to negotiate extensions from them, but if not, Im not sure what would have happened. The lawsuit alleges that when Kimball contacted customer service, Chase claimed that an AVM showed Ms. Kimballs home had lost a significant amount of its available equity. The bank refused to provide information to support that assessment. A later appraisal told a different story: It showed that the home was actually worth more than 1.5 times Chases AVM estimate. After Kimballs lawyers intervened, Chase restored her credit line, but did not reimburse her for her losses. The lawsuit seeks class action treatment for Chase and WAMUs actions in the reductions, alleging that Chase and WAMU have intentionally used inaccurate formulas to produce low-ball home valuations as a false justification for freezing thousands of such credit lines. Although federal law mandates that a significant drop in value must first occur and requires that banks act with a sound factual basis in each case, the lawsuit claims that these banks are doing whatever they can to reduce HELOC credit limits or suspend the lines altogether even if it means, in some instances, ignoring the law. The message to former WAMU customers and others is clear: Chase is coming after your home equity credit line, said attorney Jay Edelson, whose firm, KamberEdelson, LLC, previously filed a similar lawsuit against CitiBank. When banks take billions of dollars in taxpayer money, they have an extra duty to follow both the letter and the spirit of the law. We believe that congressional hearings should commence immediately, Edelson explained. Edelson is joined on the suit by KamberEdelson attorneys Michael McMorrow, Steven Lezell and Alan Himmelfarb.

To download a copy of the lawsuit, please visit http://www.prnewschannel.com/pdf/Kimball_Complaint.pdf. About Jay Edelson: Edelson (http://www.kamberedelson.com/Edelson.html) has a reputation for bringing, and winning, high profile class action lawsuits. Just last year, Edelson settled a nationwide case involving lead painted Thomas the Tank & Friends Wooden Railway childrens toys that was valued at over $30 million. Edelsons firm also was lead counsel in the lawsuits coming out of the 2008 contaminated pet food recall, which resulted in a settlement of over $24 million. Edelson testified before the U.S. Senate in connection with that case.

We expect these to follow throughout the country. Many homeowners with equity and without risky mortgages have been penalized. One big problem with the bubble is that the external damage to honest homeowners that have played by the book all along.

Hat tip to Steven for linking us to the info!

Good News For Renters

Our forgotten foreclosure victims just received some new rights. A national law regarding evictions for renters in foreclosure properties. No longer will tenants have to vacate immediately - tenants with leases will have 90 days after the lease expires and tenants without leases will have 90 days. A huge, huge victory for renters everywhere. People will not be told to vacate immediately. Honest rent paying citizens will not have their live thrown into chaos due to a bad landlord. This article from The Record titled New Law Shields Renters In Foreclosure Cases has the details. Let's take a look -

Buried in a housing law signed last week by President Obama are protections that will help thousands of renters stay in their homes — at least for a while — after their landlord has been foreclosed on.

The law allows tenants to remain in their foreclosed rentals through the end of their lease and then 90 days after that before being forced to vacate by the lender. Renters without leases will have 90 days, a significant improvement over what most received before: almost no notice at all.

"Until this law was enacted, there had been no national protections for any of these households," said Linda Couch, deputy director at the National Low Income Housing Coalition. "This gives renters time to adjust their lives."

...

The National Low Income Housing Coalition estimates 40 percent of foreclosed properties in the country have renters and the new law could aid tens of thousands of renters.

Before, many renters booted out of foreclosed homes would have to find emergency shelter with family or friends because they have little savings to cover moving costs, first month’s rent and a security deposit at another apartment. In the worst cases, some families are forced into shelters for temporary housing.

...

While [ Francis Creighton, vice president of the Mortgage Bankers Association] said renters are "blameless" in these situations, honoring their leases could disrupt a foreclosure sale as new owners try to move in. Other times, lenders have no idea renters live in the properties, Creighton said, because the landlords claimed the property was their primary residence, not a rental, to qualify for a lower mortgage rate.

One point not mentioned in the article is that the prior to the new law renters would lose all their money - their deposit, their last months rent and the rest of the months rent they had already paid. Perhaps they could try to sue after they re-organized their lives. Getting two days notice to move for most people would be impossible and unbelievable stressful. Many of these renters had no idea what was coming.

In the past there were two contracts involved - one for the renter (sometimes written and sometimes verbal) and the other for the mortgage. The mortgage contract voided the rental agreement everywhere but Jersey and D.C. Now it is the law of the land! Good news for renters everywhere!

NJ Foreclosures Drop

Why? Well the article in The Record titled N.J. bucks national trend with drop in foreclosures is not exactly clear. Was the drop due to modifications? Due to refinancing at lower terms? Could short sales be on the rise? Perhaps we will not know but let's take a look at the article -

While national foreclosure filings are on the rise, New Jersey filings dropped 41 percent in May from a year ago, RealtyTrac said Wednesday.

The cause for the decline is not entirely clear, and it may not point to any long-term trends, analysts said.

One explanation may be that troubled homeowners are seeking help in modifying their loans before they end up in foreclosure, according to Phyllis Salowe-Kaye, head of New Jersey Citizen Action, which counsels homeowners. The non-profit is continuing to see a high demand for foreclosure counseling, she said.

Another possibility: With mortgage rates dipping below 5 percent last month, more homeowners in distress may have been able to avoid foreclosure by refinancing out of troubled mortgages, said E. Robert Levy, head of the Mortgage Bankers Association of New Jersey.

...

In Bergen County, one in every 1,239 households received some foreclosure filing during the month; in Passaic County, the number was one in every 589.

Nationally, foreclosures were up almost 18 percent from a year ago, RealtyTrac said.

Well at least we have some good news today.

Recasts and Foreclosures

Over at Calculated Risk there is a great post regarding the upcoming wave of foreclosure due to option arm recasts. Just the posts title is shocking - Option ARMs: Paying $98 a month on a $350 Thousand Mortgage! Lets take a look at the post -

From Bloomberg: Option ARMs Threaten U.S. Housing Rebound as 2011 Resets Peak

Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

Her payments started at 3/8 of 1 percent, or less than $100 a month ... The 73-year-old widow may see it jump to $3,500 a month in two years ... She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.

[CR Note: the 145% recast level is much higher than normal. This is now a GMAC loan]
...
About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

[CR Note: recast, not reset. This article uses the two terms interchangeably]
...
“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

And compare these two comments:

“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” [Cameron Pannabecker, the owner of Cal-Pro Mortgage] said. “The consumer had a product pushed on them that they had no hope of understanding.”
...
“The problem is, real estate values went down,” [Peter Paul of Paul Financial, the loan orginator] said.

We always compare these to reverse mortgages. They are both complex and new financial instruments where the vast majority of owners will not understand the details and get in trouble down the road. This is going to be a big mess since in the meantime the mortgages are increasing the property values are plummeting. We will see a wave of walkaways and foreclosures in the next few years.

Reverse Mortgages Are Increasing

Due to the falling 401Ks and IRAs more and more people are looking to supplement their retirement savings through Reverse Mortgages. While in the short term this may be a good idea in the long term we really wonder. Many areas are still over-valued and other areas may take years and years and years to get anywhere close to bubble peak prices. But that has not stopped the push for reverse mortgages. They are getting more popular than ever. Here is a chart from the Wall Street Journal illustrating that in the first 4 months of 2009 there have been more than half last years total -



And the projections are that these numbers will continue to keep rising at steady rates. But just as with Option ARMs - that these are sophisticated tools for the knowledgeable financial planners - they are being used by ordinary people with no real finance background or understanding of the complexities involved. But a short training, seminar, lecture on the Reverse Mortgages is supposed to remedy all those issues. Let's look at the current status of Reverse Mortgages in this Wall Street Journal article titled Seniors Drawn To Mortgages That Give Back -

In March and April, the number of reverse mortgages backed by the government jumped nearly 20% from the same period last year. In April alone, the government insured 11,660 reverse mortgages, the highest monthly total since the government-backed program began in 1990. By contrast, the number of new home-equity loans, which similarly allow homeowners to tap the equity in their homes, fell around 70% in the first quarter from the prior-year period, according to Inside Mortgage Finance.

More seniors are turning to reverse mortgages to supplement their retirement savings, which in some cases have been decimated by stock-market losses. At the same time, more seniors now qualify for a reverse mortgage since Congress in February raised the maximum home value that seniors can borrow against to $625,500 from $417,000. The bill also capped reverse-mortgage origination fees at 2% on the first $200,000 and 1% on any amount over that, with fees not to exceed $6,000. Other upfront costs include an insurance premium and closing costs.

...

For lenders, the risk is that when it is time to sell the home, it will be worth less than the amount lent. As housing prices have plummeted, concern has grown that losses from these loans have mounted. Nearly all private offerings of reverse mortgages have disappeared, leaving the Federal Housing Administration as the only game in town. The FHA doesn't make any loans, but it insures lenders against any losses on federally-insured loans, called Home Equity Conversion Mortgages.

...

While reverse mortgages are more popular than ever, more borrowers are finding that their homes are worth much less than they believed, and they may be unable to qualify. Around one-third of borrowers who might have closed reverse mortgages two years ago no longer have enough equity in their homes to qualify, says Jeff Lewis, chairman of Generation Mortgage Co., an Atlanta brokerage. Around 85% of his reverse-mortgage customers are retiring their existing mortgages.

...

Another reason for the growing demand: A tough housing market has made it harder for seniors to sell their homes and downsize. Brokers also say seniors are increasingly using reverse mortgages to pay off loans that have reset to higher payments. "There's definitely an increased cognizance of its value as...a bailout option," says Peter Bell, president of the National Reverse Mortgage Lenders Association.

The WSJ articles reads as if the government is supplementing seniors who can not afford their lifestyles. The government is covering the reverse mortgage industry for those who have lost retirement funds due to the stock market collapse. Or worse, the government is covering for some that made bad decisions on their original mortgage.

Think about the long term - if all the equity is pulled out their will be no updating on these properties. Many of these properties, that are not already, will become fixer-uppers. Rather than encouraging more home and people to invest their equity into something affordable they are spending their equity and staying someplace that is not affordable. There are stories about reverse mortgages turning homes into prisons. Owners have no more equity so can not afford to relocate. Something that was supposed to provide security can easily become a trap.

More numbers need to be generated - like how many people do not follow through with their RM after the economic lesson - we guess very, very few. Most are given the hard sell by that point to just finish the transaction.

Short term gains for long term losses. Rather than giving back Reverse Mortgages seem more like taking from the future.

Undwerwater Businesses

Last year we reported the tie between home equity lines and the financing of small businesses here. Even in good times financing was hard for small businesses to procure. So the norm became to use your property to fund your business. To this crowd HELOCs became a major source of funding. Not enough cash to make payroll, use your HELOC. Need to invest in new equipment, your home equity could cover it. It really was the lifeline for many start-ups. But between the innovative financings that were unsustainable and the ever falling amount of equity available many small businesses will be unable to endure.


How bad can things get - the Los Angeles Times article titled Some owners who used home to buoy finances are sinking - is predicting job losses of about 2.1 million due to the housing bust, and that is just for California. Just imagine the national toll that this will take. Let's take a look at how everything is so interconnected -

Even in the best of times, bank financing has not been easy to find for owners of start-ups, who instead typically rely on "the three Fs -- family, friends and fools," as Alton W. Do of the Oakland Business Development Corp. puts it.


No wonder, then, that using home equity credit lines and cash-out refinancings for business purposes was widespread during the good times. After all, 95% of small-business owners also own their own homes, according to a survey late last year by the National Federation of Independent Business.


To get cash for business expenses, one-third of California small-business owners took out exotic, high-risk products, such as those that required little proof of income or allowed borrowers to pay so little that their loan balances rose, said accounting Professor Samuel D. Bornstein of Kean University of Union, N.J.


Bornstein, who has studied the issue extensively, predicts the business owners, many now far underwater on their loans, could shed 2.1 million jobs in the state over the next four years, creating even more problems than the initial wave of subprime mortgages.

...

"Many of them came to us and said, 'We cannot do any more deliveries because every trip out we lose money.' Many of these people, when they bought a truck, used their home equity or an equity loan outright to buy the truck," Sokhom said. "Now when the business goes sour, they cannot pay the mortgage also."

...

The National Federation of Independent Business survey found that of the small-business operators who owned homes, 26% had mortgaged the residences to provide capital for the business. Answering a separate question, more than 10% said they had pledged their homes as collateral to buy other business assets.

If these numbers are even close to predictions we are in for a world of hurt. The housing bubble did more than just provide people with granite counters - it also funded numerous enterprises. With the loss of equity, businesses will go under making the owners and employees unable to make their mortgages. Which will cause more foreclosures. And the spiral downward can continue.


Meanwhile, we routinely hear about the second wave - will it come from job losses or Option ARMs. Perhaps the analogy of wave/tsunami is wrong. Perhaps it should be an earthquake. Ones where the aftershocks reach a much high magnitude than the original quake. They can destroy the whole foundation.


Being a Jersey girl I have never experienced an earthquake, but hearing from other East Coasters they are supposed to be one of the most disorienting events one can encounter. Seems a lot like the current economic crisis. One aftershock after another. Each one more debilitating than the last. Since the foundation was ruined from the earlier shock the devastation is even more severe as time progresses. And we have a group of people yelling that everything is over and things have returned to normal, only to be hit by another aftershock.

There Is Life Without A HELOC

Last week we heard about the backlash to the recession - called frugal fatigue. The theory is that people have a strong desire to go shopping that has been suppressed due to the current economic crisis. The economy has improved enough for all those people to release their inner shoppers that have been pent up and repressed for the last year or so. Since much of that shopping urge was placated by HELOCs, when they are closed off our shopping habits have to follow. The house is no longer an ATM. However, contrary to the usual stories about what a traumatic hardship losing your HELOC is - there are actually people who do not mind. This interesting post at UPI.com titled Recession diary: Squeezing that buffalo portrays looking at the positives of losing your HELOC. Let's take a look -

How low can I go? Since we discovered we lost our home equity credit line in March, anything I would consider buying must qualify as a necessity.

The inability to afford anything else is liberating. We went to the local mall to get two freebies in stores on opposite ends of the complex. Along the way, I peered into shop windows as though I were in a museum. I found myself regarding the merchandise with detached interest rather than desire. I didn't feel tempted or deprived.

It was the first nice Sunday this spring and the outdoor mall was crowded. I suddenly noticed very few people were carrying shopping bags. The fountains, benches, tables, statuary and meticulously manicured tulip gardens were replete with relaxing patrons, and the climbing dragon was swarming with kids. I realized the lovely mall has become the poor's Chicago Botanic Garden.

I'm indifferent about ever again vacationing or dining in a restaurant. I care only that, if any of our children live out of town, we can drive there and sleep in their home -- even if only on the floor.

I'm cooking more than previously, using recipes neglected for years, finding new treasures in my cookbook library, and devising my own concoctions. Vegetarian cookery is tasty, nutritious and economical. Fred and our younger daughter, home from college for the summer, are most appreciative.

Cooking more. Learning to enjoy what they have rather than what they do not really need. It almost sounds as if losing the HELOC was liberating. After dealing with the cultural shock of not being able to purchase anything at anytime it sounds as if this HELOC loss was liberating.

It is understandable that retailers and others in sales are hoping for frugal fatigue. But after the bubble - that was more than just a housing bubble but also a buying spree - perhaps HELOC closures will morph into a new approach. Not a decade of excess but a decade of buying only what you need.

Frugal Fatigue

After a huge bubble when people bought everything and anything they could we had a backlash. Great Depression cooking recipes. Gardening. Reducing and reusing due to finances, feeling better because it is green. Frugal being super cool. But the marketeers were not selling products. So now we are told that a big wave of consumerism is coming - just in time for going back to school season. We are entering the age of frugal fatigue. We may not be spending on money on luxuries just yet, but replacing necessities - clothes, appliances, vehicles, etc. Things we need but put off after the big recession hit. Or that is at least how this story from the USA Today titled When demand releases, it may be shop 'til you drop time. Let's take a look -

While the recession has put the brakes on recreational spending, it has also caused many consumers to put off major purchases — such as a new car or washing machine — until the economy rebounds.

Those postponed purchases represent a phenomenon known as "pent-up demand," which is often the key to emerging from an economic downturn.

...

David Wyss, chief economist at Standard & Poor's, says there's no question that consumers have been putting off purchases of big-ticket items. But he doesn't expect to see the kind of spending bender that marked the end of the last recession in 2002.

...

As people realize how good it feels to shake some of that "frugal fatigue," the holiday season should get a boost that extends into spring, which Cohen predicts will see the biggest retail sales increase.

...

Still, gone are the days when people would turn to their home-equity lines to upgrade their stoves and refrigerators. Along with credit, shoppers need confidence the economy will come back.

"Our fingers are crossed," says Sears Home Appliances President Doug Moore. "We'll see whether customers jump back in."

Keep are fingers crossed that people are able to upgrade and make purchases that they need. Not necessarily buy everything under the sun and charge it to the house. There are many good aspects to the frugal is cool ideology, it would be a shame to discard it so fast.

June Housing Fair

For those that need help with their mortgages or modifications, there is another housing fair coming up. Unfortunately it is only for 3 hours during the middle of a Thursday, and down in Trenton. Hopefully they will schedule several ones at various times and days throughout the state so people do not have to lose a days pay just to find out they are not qualified or to receive promises that will not be fulfilled. But for those interested, this post from my New Jersey Central has information about the fair. Let's take a look (and ignore the headline, which has the wrong month) -

Government agencies, non-profits and banks will take part in the New Jersey State Library sponsored Get Help! With Housing Fair on Thursday, June 25, from 11 a.m. to 2 p.m. at the Capitol Complex Plaza, next to the State Library on West State Street.

Residents will be able to get their questions answered about refinancing, avoiding foreclosure, homeowner rights, new benefits for first-time home buyers.Participating organizations include the state Dept. of Banking and Insurance; Housing and Mortgage Finance Agency; Administrative Office of the Courts Foreclosure Mediation Program; Legal Services of NJ; Mercer County Housing and Community Development Office; and TD Bank.

That first time buyer push is going strong. Perhaps it should be called "how to lose 10% of your investment in 1 year - but we will credit you up to $8000 to make up for your loss" program. Oh, too wordy, maybe just the "first-time knife-catcher credit." Since that really what it is.

More Broken Promises

Hope Now seemed to be a bust. Now we have an new housing plan. This one will modify mortgages using many of the same lenders that brought us on the brink in the first place. We have heard that there is little to no write-downs. The push for refinancing - the source of many fees - seems to be the lenders biggest push. But where does that leave the people in trouble. Foreclosures up. People still underwater. Loans spread out or having delinquent payments added on the back end. The taxpayers are losing. The homeowners are losing. The government is losing. The only winner with the latest housing plan seems to be the lenders (and perhaps the few new government hires that run the program). This article from the New York Times titled Promised Help is Elusive For Some Homeowners gives a perfect example. Let's take a look -

[W]hen Eileen Ulery called her mortgage company — Countrywide, now part of Bank of America — the bank did not offer to alter her mortgage. Rather, the bank tried to sell her a new loan with a slightly lower monthly payment while asking her to pay $13,000 toward the principal and a fresh $5,000 in fees.

....

Through many months of wrangling over the fate of the financial system, with hundreds of billions of taxpayer dollars dispensed on bailouts, distressed homeowners have waited for their own rescue amid talk that it was finally on the way. Modifications of so-called subprime and Alt-A mortgages — those made to people with tarnished credit — actually fell by 11 percent in May from April, according to research by Alan M. White at Valparaiso University School of Law.

...

Far from being one of those who used easy-money loans to speculate on homes proliferating across the desert soil of greater Phoenix, she has lived in the same modest, stucco-sided condo in suburban Mesa for a dozen years. She bought the two-bedroom home in 1997 for $77,500.

...

Like tens of millions of other American homeowners, she added to her mortgage balance as the value of her condo swelled, at one point exceeding $200,000. She refinanced to pay off some credit cards and settle into a 30-year, fixed-rate loan. Later, she took out a home equity line of credit to buy a new Hyundai. She refinanced again in 2007, borrowing $20,000, mostly for a new roof.

...

Ms. Ulery is among that unhappy cohort — her house is worth about $122,000, and she owes $143,000 — but walking away is not for her.

...

To which she poses her own question: What sort of deal is it for the American taxpayer? As she sees it, the same banks that generated the mortgage crisis are now getting public money to fix it, while doing little more than seeking new fees.

“I don’t think the government gets it,” she said. “These are the same people you couldn’t trust before.”

Perfect closing line! It does seem to be the same way looking from this direction in Jersey as well. Is this another housing plan going bust?

Foreclosures and Unemployment

How much will Obama's housing plan change? With property values continuing to decline and lenders reluctant to make any substantial write-downs to existing owners how much will the program really help. The number of underwaters seems to be increasing at record rates. Underwaters combined with rising unemployment levels are a fast track to rising foreclosures. While no income did not seem to matter during the bubble, now it is vital. When jobs are harder to come by they are more necessary then ever. Recently we profiled the one requirement for a modification - employment. An opinion piece in the New York Times titled Foreclosures: No End in Sight discusses the impact of high unemployment rates have on foreclosures. Let's take a look -

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.

The plan offers up to $75 billion in incentives to lenders to reduce loan payments for troubled borrowers. Since it went into effect in March, some 100,000 homeowners have been offered a modification, according to the Treasury Department, though a tally is not yet available on how many offers have been accepted.

That’s a slow start given the administration’s goal of preventing up to four million foreclosures. It is even more worrisome when one considers the size of the problem and the speed at which it is spreading. The Mortgage Bankers Association reported last week that in the first three months of the year, about 5.4 million mortgages were delinquent or in some stage of foreclosure.

...

One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.

...

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

There are a couple of incredibly important points - that foreclosures affect more than just the property owners. Foreclosures affect the entire neighborhood. Your neighbors foreclosure brings down your property value.


Advocating to reduce the principal on underwater properties will be a big fight. There are many people who are underwater due to putting no money down or utilizing any equity they had. Also, some of the biggest bubbles - and highest underwaters levels are concentrated in a few states. There is a big moral writing down the debt for people who made bad decisions while those who were prudent get little more than a stabilized property value.