Coming to a Theater Near You - Warning on Foreclosure Scams

Courtesy of the Federal Reserve.

Lets watch -






It is not scheduled to play in New Jersey, although this should be played everywhere. From the accompanying Wall Street Journal article titled Fed Features: Ads At Movies Warn Against Scams that discusses this public awareness campaign. Lets take a look -

Intended to extend the reach of consumer warnings on the Fed's Web site, the ads will run in 14 cities with high-foreclosure housing markets and an outbreak of scam artists charging for guidance that is free from nonprofits working with the government.

The 30-second segment, built around text and an audio voiceover, features still photos of individuals and families. The opening line: "Are you facing foreclosure?" And the finale: "It shouldn't hurt to get help!" The closing shot guides viewers to foreclosure tips and other housing-related information on the central bank's Web site.

"People who are facing foreclosure are stressed enough," said Sandra Braunstein, director of the Fed's Division of Consumer and Community Affairs. "The last thing you need to do in a situation like that is put out a couple thousand dollars. There are people out there who can help and do not charge."

The Fed's initial ads will run before movie previews for a week starting April 9 in theaters across seven states -- Arizona, California, Georgia, Florida, Michigan, Nevada, Ohio -- that have been hit hard by foreclosures. The project, produced by the firm National CineMedia, will cost the Fed $9,000 for production and placement in movie theaters. "Everyone goes to the movies at some point," Ms. Braunstein said. "The more attention we can put on this, the more consumers can protect themselves from scam artists."

As the U.S. government pours hundreds of billions of dollars into housing rescues, state and federal agencies have struggled to stop predators from targeting homeowners. Complaints have poured in to state attorneys general from homeowners in dire straits with their mortgages who are paying thousands of dollars to people who promise to arrange government aid to keep their homes.

This may alert people to avoid paying thousands of dollars for worthless services. And getting some type of verified mortgage and financial help. Instead of going to the glossiest and slickest foreclosure scam artist people can learn about going to non-profits that can really help them.

While we are hopeful this helps people we do not agree with the quote that everyone goes to the movies at some point. We think this may to be too much of selected audience to really get the outcomes needed -

Over all, it said, the portion of the American population that attended movies on a weekly basis dropped from around 65 percent in 1930 to about 10 percent in the 1960s, and pretty much stayed there.

With money tighter than ever does the Fed really believe that people are going to spend what little they have on a movie. Especially people facing foreclosure? We like the reaching out but really question the using movies to reach the designated audience...

Hope Now Numbers

We have made fun of Hope Now in the past. However they do appear to be chugging along and making some progress for mortgage modifications. We know there is incentives all over for lenders to reduce foreclosures, any any little bit that actually stabilizes the markets is good. However, prolonging the inevitable is not so good.

So lets get to the numbers put out by Hope Now on the work they are doing. This article titled Foreclosures increase despite lender aid from the Business Journal sounds like a press release, but lets take a look anyways -

In February, nearly 250,000 homeowners received either mortgage modifications or repayment plans from their lenders, according to Hope Now, a coalition of lenders, investors and community advocacy groups put together to combat the foreclosure plague.

About 134,000 of those workouts were mortgage modifications, which typically involve lowering the loan interest rates, lengthening the mortgage terms or reducing the principal owed to make loans more affordable. Modifications are considered more comprehensive and effective than repayment plans, which simply tack the late payments on to the end of the loan and don’t reduce payments.

Despite that aid, the number of foreclosures started rose from 217,000 in January to 243,000 in February, according to Hope Now. Banks repossessed about 87,000 homes during February, a 28 percent jump from 68,000 in January. Since the mortgage meltdown began in July 2007, nearly 1.4 million homes have been lost.

The modifications must be sustainable, and with the increases in unemployment levels they do not seem as likely to stay. With lenders going back to stricter lending practices and more people underwater, therefore unable to get mortgages, it will be quite a while for the housing bust to hit bottom.

Lenders Walking Away

When a property is worth less than the costs of foreclosure there is little incentive for foreclosure on a property. We have seen in parts of the country where properties are almost worthless. If a second-hand beat up car is worth more than a property why would a lender foreclose on them. Why would the lender want to foreclose and deal with the property taxes on a deteriorating property.

The funny part of lenders walking away is they are using the same excuses as the mortgagees who fight foreclosures use - who actually owns the loans. Since many of the foreclosures were bundled, sliced and diced it is hard to know who the actual owner is. While the servicer may trigger foreclosures when the payments are not made, the actual note holder is the one who will own the property when all is said and done. And not being able to track down the owner is the latest excuse not to take back virtually worthless properties. Sad but true according to this New York Times article titled Banks Starting To Walk Away On Foreclosures. Lets take a look -

City officials and housing advocates here [in South Bend] and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

...
In Buffalo, where officials said the problem had reached “epidemic” proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.

...
“Oftentimes when the foreclosure starts out, it’s a viable property,” [Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country] said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”

The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure.

...
“The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can,” [Guy Cecala, publisher of Inside Mortgage Finance] said. “It’s just a sign of the times that things are so bad no one wants to take possession of the property.”

Another huge problem on the landscape of the housing bubble! Hopefully this will not be happening in a city near us.

The article notes in some cases the houses become so worthless that they are scheduled to be demolished by the city - and the "owner" or mortgagee that was never foreclosed is stuck with the bill. Sad, sad stories. Sad, sad state of the housing situation.

Losing with an ARM in Jefferson

During the housing bubble some strange things occurred. Lenders would lender owners more than 100% of the value of their property. Mortgages for 125% of the property value were common. Now that the bubble has popped and home values are plummeting many are lucky if they can get a mortgage for just 80% of the property value.

The lending practices have changed so dramatically that sometimes it does not even seem that these practices could have ever existed. Until we hear about another person in trouble, losing their property to foreclosure since they can not afford their house or refinance their property with a new, more affordable mortgage.

Speaking of affordable mortgages, that was another bubble phenomenon - the Option ARMs (AKA pick-a-payment loans) or the neg am loans that would give the original appearance of affordability then - bang - the reset or recast occurred and the house would inevitably find themselves in foreclosure. Which is just what happened to our home owners today - a mortgage for well over the property value, ending in foreclosure. Lets take a look -

Here is the property -



Here is the property info -

Status: Active County: Morris Year Built: 1984 4 total bedroom(s) 3 total bath(s) 3 total full bath(s) 10 total rooms Style: Colonial Master bedroom Living room Dining room

Family room Kitchen Office Basement Laundry room Bathroom(s) on main floor Master bedroom is 21x12 Living room is 20x12 Dining room is 14x12,Formal Dining Room Family room is 20x14 Kitchen is 27x12 Basement is Partially Finished, Full

2 car garage Parking features: Built-In Garage, Loft Storage Heating features: Baseboard - Hotwater,Oil Exterior construction: Aluminum Siding Roofing: Asphalt Shingle Waterfront property Approximate lot is 130X150-129X115 Lot features: Lake Front, Lake On Lot Approximately 0.45 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 March 2005 for $489,000.

• The original mortgage at time of purchase was for $389,600 using an ARM with Ivy Mortgage.

• At the time of purchase a piggy back (or secondary mortgage) for $97,400 using a balloon payment also with Ivy Mortgage.

• A new second mortgage opened the following June for $98,961.41 with Fleet National Bank.

• The property was refinanced for $517,500 using an ARM with New Century Mortgage in May 2006.
  

• In November 2007 the foreclosure process started with the filing of a Lis Pendens.

• The property is currently an REO listed with a realtor for $395,900.

• The real estate taxes for 2008 were $9141.98.
  

At time of purchase the property owner put a hefty $2,000 down payment which equated to about 0.4% of the purchase price. That was due to the original mortgage that was just under 80% of the purchase price and the piggyback mortgage which accounted for the rest.

That little bit of equity was not going to last, since just 3 months after purchase a HEL, which after the original $2 grand was pulled out another $96,961.41 was extracted. Funny, even during the peak of the bubble house prices were not increasing by 20% within 3 months, but some things did not matter.

When the property was refinanced again for $517,500 the rest of the mortgages were eventually paid off. The first two right away and the third a bit later. But in the end the owner extracted only $28,500 during the ownership of the property. However the loss, due to deflating housing values was much larger. If the property sells for the full asking price and the realtor receives their standard fees the lender stands to lose $146,200. A substantial loss on a modest property.

For those interested in purchasing the property, purchasing at full price with 20% down would have a monthly payment for a 5.03% fixed 30-year (today's BankRate rate) would have a monthly payment of $1706.03. Add in the property taxes and the monthly payments are $2467.86. May be worth it depending on the lake views and flooding issues.

Selling Reverse Mortgages

Funny thing about reverse mortgages. They are harder to get when needed more. With 401ks downgraded to 201ks and 101ks people are looking to supplement their retirements with something else. And while we do not like reverse mortgages - the demand is still rising. Unfortunately while the demand is increasing those qualifying are decreasing. One solution found in the following article from the Orlando Sentinel titled Reverse mortgages a lifesaver for some, but beware of shady lenders is to sell the reverse mortgages yourself. Lets take a look -

More than 112,000 [Reverse Mortgages] were sold in 2008, up nearly 50 percent from 2006, the trade group reported. Orlando now ranks seventh nationwide in reverse-mortgage sales, with more than 3,500 in 2008, according to federal regulators.

...
At its best, a reverse mortgage offers people 62 and older a sweet source of cash as a monthly payout, line of credit or lump sum. The money is tax-free, and the loan doesn't have to be paid until borrowers die or sell their home. Most reverse loans are also federally insured, which protects the payout even if the lender goes under.

But at their worst, reverse mortgages may come with confusing terms, high-pressure sales tactics and expensive fees. Such practices have tainted reverse mortgages in the past, as some lenders were accused of trying to manipulate older homeowners into squandering their home equity.

...
Don Mulcahy says his finances have run a lot smoother since he put his mortgage in reverse a few years back.


The 68-year-old former telephone salesman from Orlando used the proceeds to pay off his regular mortgage and save almost $1,000 a month. He liked the idea so much he started selling reverse mortgages himself.

...
"Unfortunately, we find a lot of seniors coming to us now in need of getting a reverse mortgage because otherwise they're looking at personal bankruptcy," [Richard Schram, an executive with the Consumer Credit Counseling Service of Central Florida]said. "If they don't have their home paid for, they're trying to get out from under the monthly mortgage payments to avoid insolvency, save their homes and have money to pay other bills."

That is one of our big fears. People use what little equity they have left now and get into even more trouble in the future. Extracting all, or what little, equity one has left to pay off the now will be very short-sighted in the long run. We are living longer and to have a growing group of aged individuals in their 80's and 90's virtually destitute is a scary future. We understand that their will be some people who will understand the complexities and may have funds or families to fall back on if the future becomes bleak.

But to take virtually all of your savings now when one may have another 20 to 30 years of retirement left does not sound like good judgment in any way. This may be one of the saddest and scariest parts of the housing bust - the future of our seniors.

Storms and Earthquakes

The first thing we try to do is stay out of harm's way. We try to protect ourselves from financial problems. Most of the time we think we are making prudent decisions, only to have crisis occur around. In this current financial storm many people have had their quality of life deteriorate through no fault of their own. Houses worth only half of their purchase value. Medical bills forcing everything else to collapse. 401ks losing more than half of their value. The things we had set up to protect ourselves are too damaged to do any good.

And even worse is having your whole life shaken up through no fault or doing of our own. In some cases the financial world had changed faster than some could keep up with. Other cases involve people chasing down dreams and being left in nightmares. Even those who are doing the right thing are anxious and nervous. An article in USA Today titled 'Perfect storm' puts all types in financial peril illustrates many of these examples, and more. Lets take a look -

With every furlough, layoff or stock market drop, Americans of all ages and backgrounds are seeing their incomes dwindle, bills pile up and financial options disappear.

The number who are suffering has increased by 3 million the past year, according to a recent Gallup-Healthways survey. Some 37% of us said we were worried about money last week. Last year, 3.2 million consumers contacted the National Foundation for Credit Counseling, up from 2.2 million in 2007 and 1.4 million in 2006.

...

The personal stories illustrate how unemployment, health problems, shrinking retirement savings, unaffordable mortgages and other financial stressors lead to unprecedented challenges, worry and consequences. Recent history has shown periods when one area of concern consumed a family — a lost job for six weeks, for example — but nothing like this. And while people once could piece together solutions to recover financially or prevent outright financial ruin, fewer options exist today.

...

Whether you're in a financial crisis depends on your debt problem, says Steve Bucci, president of the Money Management International Financial Education Foundation, a non-profit organization. If you are less than 90 days late on a credit card bill, that's not a crisis. But if you are 90 days late on your mortgage, that's an earthquake, and if you are one month late on your car loan you might lose the car, Bucci says.

...

The elderly have been harder hit than most. Personal bankruptcy filings among those 65 and older jumped 150% from 1991 through 2007, according to a study released last year by AARP. Although they have been known as the most frugal savers, today, many of them are deep in debt and without a safety net.

Howard Zynkian, 89, filed for Chapter 13 bankruptcy more than a year ago to help him save his home. Unlike Chapter 7 bankruptcy, which allows people to have most unsecured debts discharged, Chapter 13 sets up a plan for the filer to repay most debts over several years.

But Zynkian, who lives in El Cajon, Calif., refinanced his home five years ago and didn't understand that he was getting into a risky, alternative mortgage. After his monthly mortgage payment had jumped from $1,500 to $2,700, he was facing foreclosure.

The article is chock full of story after story of people in financial peril. We know these are tough times, but to read the stories really can put things into perspective. It also helps those of us who are worried but not on the edge get a better perspective of our own situation. And while all the stories are sad, the one we chose about the 89 year old man who did not understand his mortgage or his financial situation. We imagine after this publication the Reverse Mortgage industry will be at his door helping him plan for his financial future. trying to extract the little he has left...

Credit Games

Things we know - those with lower credit scores pay higher interest rates. Using up more of your available credit lowers ones credit scores, which will then bump up interest rates. Lowering available credit makes your current used credit larger in relation to available credit which can bump up your score. See, all that has to be done is lower available credit, which may lower credit ratings below that magical 750 threshold to raise interest rates. It basically looks like anything (or nothing) one tries to do - other than keep make keeping up with their credit score a full time job - will negatively impact one's credit score. This article from the News Tribune titled Banks' shifting credit terms can hurt your score explains it all. Let's take a look -

As the worldwide credit crunch has hit home in the form of reduced credit-card limits and home-equity lines, not all of this curbing is fair. In many cases, you may be targeted by zip code or other invisible criteria.

It’s not hard to get steamed about their spurious practices. Card issuers can legally raise or lower your limits and terms at any time. Most cardholders don’t know how to fight back and get better terms.

If banks clip your credit limit, it can hurt your chance to borrow at the best rates, especially if your record is spotty or you are a small business.

The chill is reaching consumers as banks are expected to cut credit lines by some $2.7 trillion, according to Meredith Whitney, a well-known Wall Street banking analyst. Some $2 trillion out of $5 trillion available may be “removed from the system by the end of 2009.”

...
The bottom line in personal credit is to maintain the highest credit score possible. While there are several scoring systems, the best known is the FICO program. Unfortunately, the details of how credit bureaus calculate scores, mostly determined by Fair Isaac Corp.’s system, are a trade secret.

Generally, any FICO score of more than 750 translates into the lowest finance rates on everything from cars to mortgages. But a good credit rating means some maintenance on your part, and some of the advice is counterintuitive.

For many it is a lose-lose situation. With the tightening of credit goes the lowering of credit scores. With the lowering of credit scores goes the tightening of credit. Pay more and get less. Our whole system seems to run on FICO - yet everything they do are trade secrets. One company that is not accountable has a lot of power over our lives...

Affordable Housing

Once in a while in all of the muck that we sort through everyday there is a nice story. Instead of bulldozing and shutting down areas of a city, Trenton officials were able to rehabilitate a section of theirs. Using a Homeownership Zone and over a decade of due diligence a area Canal Banks was able to revitalize in such a way that the current foreclosure crisis has not had a big impact on the community.

If the story from the Christian Science Monitor titled NJ city: surprising leader in affordable housing is even half true we would like to congratulate those involved a great success. Lets take a look at this glimmer of hope in the current housing wreckage -

The Canal Banks transformation was a long time coming. For the past 12 years, this section of Trenton has been ground zero for one of the most ambitious federal affordable housing programs in decades. The experiment is just now coming to completion here, reviving debate over what it will take to revitalize troubled neighborhoods at a time when cities have been chastened by job losses and skyrocketing foreclosures.

The idea to rescue Canal Banks and 10 other unstable areas nationwide relies on an idea – homeownership – that now might seem almost quaint, if not misguided. The Homeownership Zone (HOZ) demonstration program, launched in 1996 by the US Department of Housing and Urban Development, has tried to turn entire neighborhoods around by flooding small, poverty-stricken areas with hundreds of new homes to be purchased by working-class, mostly first-time home buyers.

And it's an effort that seems to be working. Only a small handful of homes have gone into foreclosure – the result, administrators say, of extensive, mandatory pre-and postmortgage counseling that steered homeowners away from adjustable-rate loans.

"The intent was really to remake these neighborhoods, to give them some sort of identity," says John Kromer, a senior consultant at the Fels Institute of Government at the University of Pennsylvania and Philadelphia's former director of housing. "It was very ambitious.... It really was a radical departure from what had been done before."

...
"I think it's one of the more intelligent things HUD has done in its history," says Alan Mallach, a senior fellow at the Brookings Institution and Trenton's director of Housing and Economic Development at the time of the HOZ launch. "Homeownership is not a panacea, it's not for everyone, and doing it wrong can create more harm than good. But the fact is, it can be a valuable tool to stabilize and strengthen neighborhoods."

There are certain aspects of this story that were forgotten during the bubble. First, home ownership is not for everyone, nor should it be. There are numerous people where owning their own homes is more detrimental. Under normal housing periods it takes several years to recoup the initial investment. Second is the mortgage counseling involved with buying a property. Issues with ARMs are much more complex than many people originally thought. If they were as simple as they sounded the ARM resetting would not have been such a big mortgage mess. The solution of does not seem to be working out that well. Even the government program has restrictions.

With all the complaints and negatives written about affordable housing issues, it is great to see one that working so successfully.

Refinance Time

Mortgage brokers are very busy this year - with so many people refinancing. The unbelievable low rates have spurred many people to jump onto the refinance bandwagon. Why not when you can save over $100 or $200 or more per month . In a Reuters article titled US mortgage applications jump; rates at record low shows how busy things are now. Lets take a look -

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 32.2 percent to 1,159.4 for the week ended March 20. Refinancing accounted for 78.5 percent of all applications.

...
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.63 percent, down 0.26 percentage point from the previous week, reaching a record low, the MBA said. It has been conducting the weekly survey since 1990.

...
The Fed's purchases are part of its ongoing efforts to reduce mortgage rates to stimulate borrowing and boost the U.S. housing market, currently in the throes of the worst downturn since the Great Depression.

However, so far, the low rates have had only a moderate impact on demand for loans to buy homes.

Mortgage brokers may be busy - but it has not been from changes in the housing market. The drive is for people who already own homes to save more of their money. This is definitely part of a stimulus policy. These savings on mortgage payments is putting money back into people's pocket so they can use it on other things.

Now the big questions are how cheaply one can refinance (we have seen free and $499 refinancings up to almost $10,000) and how low the rates can go.

HELOC Class Action Lawsuit Info

One of our readers referred us to Class Action Connect. An organizaiton that is working on bring plaintiffs and lawyers together for HELOC Class Action lawsuits. We are not endorsing this in any way, but we do think it is something that may be of interest to many of our readers. This is the info from their website -

If Your Bank or Mortgage Lender Froze, Suspended or Reduced Your Home Equity Line Of Credit or HELOC Loan, Contact A Class Action Attorney!

A team of class action attorneys has launched an investigation into the lending practices of certain banks and mortgage lenders that may have improperly frozen, suspended or reduced their customers' home equity lines of credit or HELOC loans by prohibiting further draws or advances and/or reducing the credit limit on the HELOC accounts.

The lenders are being investigated for freezing, suspending or reducing home equity lines of credit or HELOC loans by lowering the outstanding credit limits on the HELOC accounts based on an alleged general decline of housing and real estate prices in the borrowers' general geographic location, typically without warning or notice, and without assessing the value of the underlying collateral that secures each affected HELOC credit line and demonstrating that a specific property, house or home had declined significantly below the dwelling’s appraised value.”

As a result of having the credit limit on their home equity lines of credit or HELOC loans reduced, many HELOC customers may have incurred non-sufficient or not-sufficient funds fees ("NSF fees"), bounced check fees, early termination fees, appraisal fees, replacement HELOC closing costs for getting a new home equity line of credit or HELOC loan, excessive annual account fees and may have suffered, among other things, from a lowered credit rating and/or increase in the cost of credit.

If you had a home equity line of credit or HELOC loan and your bank or mortgage lender froze, suspended or reduced your line of credit because of a purported decline in home prices in your general area, you may be entitled to relief.

If any readers decide to work with this organization, good luck, and please let us know the details.

Unfinished Projects

Even in the last downturn in the late 80s and early 90s there were unfinished construction projects. Some of them real eyesores. Some Bergenites may remember an apartment complex on Bergen Boulevard right next to the A&P. On the top of the ridge, the unfinished project could be seen for miles and miles. For close to a decade it stood, surrounded by a mesh fence, blocking views, obstructing sidewalks, and a constant reminder of the over built 80s. The building was finished - not soon enough for Ridgefield, Cliffside Park and Fairview residents that could never escape its existence. Looking around there it always was - for close to a decade - an unfinished, ugly empty shell, slowly deteriorating.


As the saying goes - "the more things change the more they stay the same." So is the case with this decades unfinished projects. Unfinished properties again the eyesore of the neighborhood. Bringing down property values. And constantly reminding residents of the previous housing bubble. In this article from The Record titled Economy puts crimp in home construction discusses a Clifton project that is only half complete, and destined to stay that way for some time. Lets take a look -

Peter and Denise Panayoti moved to a new condo in Clifton in August 2006, happy to leave behind the work of maintaining their nine-room house in Wallington. They watched as construction crews worked on other buildings in the 55-and-older luxury complex, called Royal Club at Winthrop Court.

But in a sign of the housing market's deep distress, developer Stratland Homes halted construction last summer, with only four of the planned nine buildings completed. Two buildings were left partly built; two more, while closer to completion, are all but empty. The sales office is shuttered and the developer's phone number has been disconnected.

The developer "just abandoned it," said Peter Panayoti, a 74-year-old retired engineer whose condo overlooks an unfinished building. "I guess there's no money to finish it."

...
Even in the worst housing downturn in decades, the sight of a large building left half-done is rare in North Jersey. Many builders have finished their projects and cut prices, if necessary, to draw buyers. In other cases, builders have delayed starting construction.


...
[T]he 55-and-over market is one of the most troubled in the state, according to East Brunswick appraiser Jeffrey Otteau, who tracks real estate around New Jersey. Towns have been much quicker to approve these developments than other projects, because they bring in tax revenues without adding the cost of educating schoolchildren. As a result, said Otteau, there is a glut of these age-restricted homes on the market. Moreover, he said, many older New Jerseyans would prefer to retire to Florida or another low-cost state, rather than buy in a New Jersey 55-and-over complex.


...
[Matthew Trella, who is head of the condo association and a Clifton lawyer] looks forward to having the banks take control of the unfinished buildings, because he expects they will be able to put some money into completing the project.

Well, at least they finished the pool and clubhouse. Some complex stopped construction before those were finished.

Meanwhile, Trella may be too busy to pay attention if he thinks that the bank foreclosing the project will be a positive for the completion. More than likely it will just prolong the project. Banks are not developers. And they many, many foreclosures to deal with so an uncompleted housing project with numerous restrictions attached and a group of residents that have blocked other proposals does not exactly look like a great pick-up.

More than likely the project will flounder in its current state for years and years. Just like the apartment complex on Bergen Blvd. did. The only people thinking about the project will be the townspeople who are not getting the taxes and have to look at the eyesore everyday. Until there are buyers there will not be construction. And that is still a long time away. So our advice to the residents of The Royal Club is to get used to looking at unfinished projects.

Which Bottom Will We Hit First?

There are two bottoms to the housing crisis - the bottom for prices and the bottom for sales (in number of sales). Each month we hope that we have reached bottom, and the next months number roll in showing us an even lower bottom. In some areas of the country the only reason the number of sales has bounced back up from bottom is due to the record number of foreclosures at bargain basement prices. But hey, they increase on set of numbers. In an article from The Record titled Where's the bottom? shows how much things have fallen. First lets take a look at the chart they put together of current median prices in municipalities that had at least 30 sales in the 4th quarter of 2008 -

	Highest-ever median	Quarter	4th quarter 2008 median	Percent change
Bergen
Englewood	$425,000	3rd, 2006	$364,000	-14
Fort Lee	$599,500	4th, 2005	$453,000	-24
Hackensack	$345,000	2nd, 2006	$307,500	-11
Mahwah	$494,000	4th, 2006	$379,000	-23
Paramus	$635,000	2nd, 2007	$606,000	-5
Ridgewood	$791,000	3rd, 2006	$631,000	-20
Passaic
Clifton	$400,000	2nd, 2006	$320,000	-20
Wanaque	$371,500	3rd, 2005	$325,900	-12
West Milford	$331,000	4th, 2005	$300,000	-9

Pretty mixed results - big hits in Fort Lee, Clifton, Mahwah and Ridgewood, but just moderate declines in Paramus and West Milford.

Now lets take a look at the accompanying article -

Mounting economic woes worsened conditions in North Jersey's stumbling housing market at the end of 2008, sending prices down another 8 percent and the number of sales down to levels not seen in nearly 20 years.

Amid a deepening recession and a banking crisis that squeezed the flow of mortgage money, the median price for a single-family home in Bergen and Passaic counties slipped to $390,000 in the fourth quarter, from $425,000 in the same period of 2007.

...

An analysis by The Record of data obtained from county and state agencies found that:

* The median price for single-family homes in Bergen County sank from $455,000 in the fourth quarter of 2007 to $425,000 in the fourth quarter of 2008. In Passaic County, the decline was steeper, from a median of $370,000 to $335,000.

* Since the all-time peaks of $495,000 in Bergen County and $390,000 in Passaic County, medians in the two counties both are down 14 percent. While substantial, those drops are nowhere near the dips of 30 percent or more felt in other parts of the country.

* An estimated 1,600 to 1,700 homes sold in Bergen and Passaic counties from October through December. That is down nearly two-thirds since the all-time fourth-quarter high of 4,713 in 2004 and the first time since 1990 that fewer than 2,000 homes sold in any fourth-quarter period. The Record used past years' trends to reach this estimate; the available data did not include all sales through the end of 2008 because of a lag in deed recordings.

* The downturn not only cut into potential profits for people who bought before the real estate boom of the 2000s, but it forced losses onto sellers who bought when prices were at their highest. Among the 185 homes that sold during the peak of the real estate boom and sold again in 2008, two-thirds lost value.

...

"Is it turning around tomorrow? No. But will it turn around? Absolutely," said Karen Lampiasi, manager of Coldwell Banker Residential Brokerage in Mahwah. "When it will happen is hard for anybody to predict."

The Coldwell Banker may be right that is will someday turn around, but where the numbers end is as important question for many of us as well as the when. How low can the number of sales go down before things turn around? How much below peak prices before the prices bottom out? In some parts of the country areas have are less than 50% of peak price. We have seen a local foreclosure sell for 80% off peak price. Those foreclosures are helping drive down prices in other areas of the country, but they are helping the number of sales increase. Perhaps that is not the model we should look to follow.

Sunday Example

We are having trouble accessing the Morris County website that holds the mortgage information we need to finish the post, we will post when we have access to it.

Sorry about the delays.

Sunday Morning News

Late "example" posting today due to prior commitments. Our apologies.

Actual Foreclosures Down in NJ

Earlier in the month ReatlyTrac showed that foreclosures numbers were down in New Jersey (see here). Those findings are confirmed with Property Shark's findings. First lets take a look at the Star Ledger article titled N.J. home foreclosures slowed in February, report says -

The report said 601 new foreclosures were scheduled for auction during February, down from 783 foreclosures scheduled for auction in the state in January and 793 in 2008. Bill Staniford, PropertyShark chief executive, said the company gathers its information from public records that show when a property enters into foreclosure.

This report is for the properties that actually go into foreclosure - not just the papers that have Lis Pendens - the papers that are filed when someone does not pay their mortgage for 3 months. The Lis Pendens usually starts the foreclosure process, but many of the properties can be renegotiated and do not wind up in foreclosure.


Now lets take a look at the NJBiz article titled Report: NJ foreclsoures declined in February -

Bill Staniford, PropertyShark chief executive, said the company gathers its information from public records that show when a property enters into foreclosure.

While the total number of foreclosures declined for the state, urban areas were fared poorest, the report found.

“Areas that have lower economic status are going to get hit worse,” Staniford said. Essex County had the highest number of new foreclosures up for auction last month; cities with the most new foreclosures included Newark, with 37; Paterson, with 29; and 24 for both Trenton and Elizabeth.

Staniford said White House policies are convincing banks to ease their stance on foreclosures to negotiate more with homeowners, but “my belief is the government action is prolonging the problem, rather than solving the problem.”

If the economy does not turn around as hoped and substantial layoffs continue, Staniford said there is little more the government can do. “If someone loses their job and becomes incapable of paying their mortgage, they are going to have to sell or go into foreclosure,” he said.

And here is the accompanying graph illustrating the state's monthly foreclosure rate -

While it is good news overall, the report highlights that more has to be done to stabilize the state's urban areas. We have seen some sales that seem unfathomable - houses priced so much more than they ever should have (even at peak prices). But at least things seem to be stabilizing.

Also, it is too bad the charts start in 2008. Since there are always some foreclosures due to deaths, job losses, divorce, and medical issues it would be interesting to put the 601 numbers into historical perspective.

Realtor Math and Logic

We are very leery about taking financial advice from realtors. And often, we are proven correct. Realtors are good at selling properties. Bu the financial advice from realtors should be limited to what the monthly payments will be. So when the nationally known realtor Barbara Corcoran advises that buying a more expensive house will put money in one's pocket we find ourselves scratching our heads. From the Real Estate Channel's Q & A with Barbara Corcoran we get the following -

Q1 - My husband and I have our house on the market in South Florida. We want to buy a larger home and take advantage of the lower house prices. Is it a good idea to take that loss now and be able to buy a larger home, or should we wait until prices come up so we make money on the sale of our house but have to pay a higher price to buy a home?


A - You're in a perfect position to make some money here, and making money in real estate doesn't happen much these days. If you unload your smaller house at a steep discount, let's say 30%, you'll be able to buy a larger house at the same 30% discount. And as the price will be considerably higher on your new house, the same 30% discount puts more money in your pocket!

See the house prices are discounted - like a sale. Not like the 30% off peak price may still fall, and prices that will take decades to rebound. No. It is a discounted, sale, price. Buy the bigger property now and save yourself some money! Keep the money in your pocket! (Funny that it sounds alot like the home equity logic about equity is using your own money.)

So let put some money into these percentages and discounts to see how we save. First, suppose the current house appraised at peak for $500,000 - they possibly could sell it for $350,000. And second, the house they are interested in had a peak price of $750,000 - now "discounted" to $525,000. Since we do not know what is owed on the current house it is hard to say, but it sounds like they will not lose money selling at the current price of $350,000. So the next house will put them approximately $175,000 more in debt - but that extra debt is putting money in their pocket. (Funny, but it sounds like the realtors handling the transaction will be the only ones having any real money flowing in their pockets.)

In the midst of The Great Recession it is a great idea to go further into debt because a more expensive property. Florida has been hit really hard with the recession. Lets take a look at how out of historical whack the housing bubble has been (since buying a more expensive house is just a temporary discount) -



Or this other one that puts from the Wiki housing bubble page that puts the home prices perspective in relation with population -


It is evident that this 30% or an adjustment is not a discount. It is merely putting housing prices back to their true values. So telling the potential buyer to jump in the market (during the recession) to get a bargain and that this supposed discount "puts more money in your pocket!" (complete with an exclamation point to emphasis the savings!!!) only works that that special math we call "real estate math!"

If Ms. Corcoran advised Q1 that if their incomes were recession proof and stable, and if they are able to sell their properties first they it may be a good time to move up, that would be one story. But advising someone to buy a bigger, more expensive property because it will put money in their pockets does not really make any sense - even during the bubble. But it does show us realtor math and logic at its finest!

Update - This map (also from the Wiki link above) shows just how much Florida prices rose during the bubble -

American's Economic Confidence Declines

Shocking news that in the midst of a recession, now referred as The Great Recession people are not as confident about their economic stability as they used to be! Could the banking crisis, the soaring unemployment levels and ever-rising foreclosure numbers really make people worry about their financial stability? It may take a poll to validate it, but it really is something we already knew. Why else would Depression Era Cooking be all the rage? Well, lets take a look at this CNN article titled Poll: Americans fear losing their quality of life to see the what the public-at-large feels -

Thirty-nine percent of people questioned in a CNN/Opinion Research Corporation survey released Thursday morning say they're very confident they'll be able to maintain their standard of living over the next year. That's down 6 points from last year.

Half of all homeowners with a mortgage say they are very confident that they can continue to meet their mortgage payments, but that is also down, by 8 points, since last year. Americans' confidence in their ability to pay other debts, such as credit cards and car loans, has also dropped in the past year.

...
"As the nation's economy has gotten worse, Americans' confidence in their own economic prospects has slipped, and it is lowest when it comes to long-term goals such as saving for college or retirement," said CNN Polling Director Keating Holland. "The public is fairly confident on personal matters such as paying off mortgages or other debts and on maintaining their standard of living, but the last year has seen a worrisome erosion of confidence."

The polls show a decline in keeping the current (read housing bubble) standard of living, keeping up with the mortgage payments and well as other debts.

Long term goals are even worse. Maybe referring to 401Ks and 201Ks is helping to erode that confidence. Also the fear of opening quarterly retirement statements that appear to be in continuous free-fall is also helping to erode that long-term comfort.

Debt Advice

It is good to see that not every bank only see profit from debt. On the other side of the country, one bank see its long term viability of people having money and savings. They offer a free service to customers called Debt Savvy where they help people cut their expenses, live within their means, and save money. The bank realizes it can make a profit off of savings, rather than just debt. This innovative financial planning is discussed in the Bellingham (WA) Herald in an article titled Take Control of Your Finances. Lets take a look -

My No. 1 piece of financial advice in this economy is to take control of your finances: Examine your spending. Pay down your debt, however slowly. Set realistic financial goals. Take calculated risks.

...

When home values and stocks were on the rise and unemployment was low, customers didn't have time to shore up their personal balance sheets between trips to the mall. Banks were focused on refinancing mortgages and opening home-equity lines of credit. Some financial planners - shudder to think - were advising clients to cash out home equity to invest in the stock market.

(Remember when that equity was your money and you could invest it better than having it sit in the house? Some do.)

...

Thrivent Financial Bank, for example, recently trained all of its employees to be so-called "debt guides" for the bank's Debt Savvy program. The concept, tested in February 2008 and begun bankwide this year, is to analyze whether customers are in the right loans for their current situations.

Debt Savvy, which is free and available to the public, begins with a quiz. Thrivent's debt guides analyze the responses and make personalized recommendations. Guides explain how stretching out a loan to get the lowest payment will result in more money paid over time. They steer people with little willpower away from lines of credit toward loans with set terms.

...

Wells Fargo's Debt Pay Down Solution, begun in December, is a program with a three-pronged strategy. First, customers consolidate debt through a personal loan. Then they look for ways to spend less using the online tool, My Spending Report with Budget Watch. If the online tool finds extra cash lying around, the customer is urged to apply it to the loan's principal.

...

There is one place where getting out of debt is in vogue in every economic cycle. I'm talking about the financial counseling agencies whose business is to show clients the way out of hock. The good counselors out there aren't pushing pricey debt management plans. They're pushing realistic budgets.

This is a good article with good financial planning and management advice. Pay off your debts. Examine and reduce your spending. All simple techniques that do not take a lot of skill - but some personal analysis and reflection that did not occur during the bubble. Since money is not so free flowing to come our way, it is good to realize how it flows away from us. There are alot of little areas that can be cut without much impact.

The Obama Housing Plan and Second Mortgages

This topic is a huge issue since most of the guidelines are for the first mortgages with the encouragement of lenders to extinguish the second liens. Since many of the same lenders have both first and second liens it is in their best interest to get the most money they can through modifications and refinancings.

The system is a mess, some might even claim its broken. But cleaning things up can be even messier. From this article in BusinessWeek titled New Bank Powers Concern Wall Street we read about some issues involving second mortgages in the new Housing Plan. Lets take a look -

Wall Street has had about a week to assess the U.S. Treasury's new plan on loan modifications. Most institutional investors—the pension managers, mutual funds, and hedge fund players who financed the housing market by buying securities tied to mortgages—have been fixated on what is now commonly called a "cram-down." That's when a bankruptcy judge has the power to usurp a bank's authority to modify mortgages. If the interest or principal on mortgages are modified, that means the investors who bought the mortgage paper in the secondary market see less income from their investments.

...

But underlying the proposed changes is a radical disruption of contract law that some observers believe threatens to destabilize the markets for years to come. "I think it's a problem precedent for the government and for the abrogation of contract law," says economist and market strategist Edward Yardeni, president of Yardeni Research, an independent investment consultant. "Contracts are sacred in a capitalistic society, and if you start having the government intervene and break contracts, what do we have left? It's a real turn-off to the private sector to provide capital where it's needed, which is necessary for the long-term health of our markets and our economy. The government has managed to create chaos of our credit markets."

...

The four (Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase) held $347 billion of residential revolving lines of credit, or 52% of all such loans held by Federal Deposit Insurance Corp.-insured institutions, says Laurie Goodman, a structured finance analyst at Amherst Securities, a New York firm that analyzes and trades mortgage portfolios for institutional investors.

...

The government's plan could allow loans in a first-lien position to be modified, leaving loans in a second-lien position untouched. As a result, Goodman worries that these institutions, which also own servicing rights on the first liens, have the opportunity to abuse their power and modify even good loans where borrowers are making payments. She says the banks have "huge incentives" to collect restructuring fees and thereby increase the value of their servicing business to the detriment of other stakeholders, among other things.

...

A Treasury Dept. official, who would speak only on condition of anonymity since he was not authorized to speak on the record, said the government is not trying to undermine contracts between investors and loan servicers. "Our program explicitly, right up on top, says you need to service to these guidelines unless there is a prohibition in the contracts. We certainly want this to be a market-based solution in terms of keeping…as many as 3 million to 4 million homeowners in their homes," he said. The Treasury recognizes that "second liens do create challenges" and is working on new rules governing the second liens, he added.

The 4 banks argument is that if the property does not get modified or refinanced the owner could easily end up with a short sale or in foreclosure, thereby forfeiting the second liens holders to their income.

But even for us non-banking experts it obviously is a messier area. And what did we learn, that if your HELOC or HEL is held by one of the big 4 banks listed above the extinguishing of the second mortgage will be more likely to occur. Either the government is going to just issues rules and mandates about second mortgages which will lead to quick solutions that may make many unhappy. Or they will spend time working with various lenders to try to appease the investment and contract issues thereby prolonging the issuance of the detailed guidelines.

Once again, it all comes down to who your lender is.

Obama's Housing Plan Complexities

Is the housing plan that complex? Or are these the same people that did not bother to read or understand the ARMs and Pick-A-Payment mortgages they signed? An article in The Record titled Pulling housing out of its slump tries to simplify different parts of the plan. Lets take a look -

The [new $8,000 first-time home buyer tax] credit is one of a recent flurry of government actions aimed at jump-starting the housing market and stemming the foreclosure tide. And while the tax credit is great news for people like the Kinnes, other initiatives aren't so popular, or so clearly understood.


Housing counselors and mortgage brokers in New Jersey are fielding a barrage of inquiries from people hoping to get in on the new Obama plan for mortgage refinancing or modification.

"We're overwhelmed with calls," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, the state's largest HUD-certified counseling program. "Everybody thinks they qualify for everything. Very few people understand that, in the Obama plan, certain parts are for people current on their mortgage. Certain parts are for people whose mortgages are through Fannie Mae and Freddie Mac. We're spending hours just doing triage."

...
The refinancing part of the Making Home Affordable program is aimed at helping people in their primary residence who are current in their mortgage payments but who have been unable to refinance to a better rate because their equity evaporated as home prices have dropped.

The program applies only to mortgages backed by the government-supported mortgage giants Fannie Mae and Freddie Mac, and only to mortgages that are between 80 percent and 105 percent of the home's current value. So if you are seriously "underwater" – your mortgage is more than 5 percent greater than current home value – this program won't help you.

...
The $75 million-plus federal mortgage modification program aims to bring down payments on struggling homeowners' primary mortgages to no more than 31 percent of their income.


...
One woman who's been fighting foreclosure on her Bergen County home and who asked not to be named said she is confused by the new federal housing programs.


...
The federal loan modification and refinancing programs are expected to help keep a mass of people in their homes and potentially protect neighborhoods from the blight of vacant and vandalized homes. But what about jump-starting the housing market?

The Record sums up the three parts with a handy chart just below the picture here. The first part is for new homeowners. The second part is non-delinquent home owners whose Freddie and Fannie mortgages are either underwater or close to it that they can not refinance. The last part is for delinquent mortgage payers who have a financial possibility to stay in their home.

Of course all of the programs have income limits, mortgage limits, etc. If one is confused by the actual program that is one thing. If they are still confused after reading The Record's chart perhaps home owning is too complex. It's not rocket science but it is a bit harder than coloring within the lines.

Winning and Losing In Long Valley

We often think of losing money with the real estate crisis. We see some losers - people who put money down on their property, their property price subsequently bottomed out and they lost or must sell the property for a loss. Most often, even though the lenders are vilified here and other places, they take the brunt of the loss.

Then we do see winners. The Homer type that spends the money and sticks the house with the bill. Rarely do we see big winners - people who may have taken more than a half a million from their property. People who bought at the peak and still extracted every possible penny from the property that they could. Do you think over $500,000 is worth a hit to your credit score? Probably.

In today's featured example we see a big winner - the former homeowner. And we see some big losers - the lenders who inadvertently gave the homeowner more than $500,000. And all this happened in Long Valley during the bubble. Lets take a look -

Here is the property -
Here is the property info -

Single Family Property Status: Active County: Morris Year Built: 1965 3 total bedroom(s) 2 total bath(s) 2 total full bath(s) 6 total rooms Style: Ranch Master bedroom

Living room Kitchen Basement Bathroom(s) on main floor Bedroom(s) on main floor Master bedroom is 16x11 Living room is 23x15 Dining room is 15x11 Kitchen is 20x11

Basement is Partially Finished 2 car garage Attached parking Heating features: 1 Unit, Baseboard - Hotwater,Oil Exterior construction: Stone, Wood Roofing: Asphalt Shingle Approximately 2.46 acre(s) Lot size is between 2 and 5 acres Utilities present: Septic, Well Water, Electric Service

Here are the financials -

• The property was purchased in March 2005 for $410,000.

• The original mortgage at time of purchase was with an ARM for $369,000 with Long Beach Mortgage.

• In November 2005 the property was (re?)financed with cash-out for $499,500 using an ARM with Countrywide Mortgage.
  

• The foreclosure process started when a Lis Pendens was filed against the Long Beach Mortgage in August 2007.

• Meanwhile in December 2007 Countrywide Mortgage filed a Lis Pendens for a delinquency on their mortgage.

• The property, currently an REO is listed with a realtor for $299,900.

• The 2008 property taxes were $7712.54.
  

When the property was purchased a 10% down payment was made on the property. That was $41,000 which is a significant down payment even after the bubble. An ARM was taken but this was still at the time where those who took ARMS were viewed as fiscally prudent since the monthly payments were significantly lower than a fixed 30 year. Besides, at this point in time one could always refinance.

The following November, a mere 8 months later the property was mortgaged again. This time for an additional $89,500 on top of the purchase price. While it looks like the mortgage should have been a ReFi cash-out, the first mortgage was not paid off or closed down. So this new mortgage turned into a second mortgage.

At that point the house that was purchased for $410,000 the outstanding mortgages for the property amounted to $868,500. In the 8 months of home ownership the property had generated $458,500 for the owner. For the entire ownership period, the property generated approximately $183,400 per year for each year. That is an excellent second income, let alone first income! And remember this is a just a modest property in Long Valley.

Just 21 months after the second mortgage was opened the foreclosure process started for the first mortgage. So most likely 18 months after extracting that $458,500 the mortgage payments stopped. Then just 4 months later the second mortgage started foreclosure on the property as well.

Now the property is for sale with a realtor. If the property sells for full asking price, with the realtor receiving the standard commission, the lenders will lose about $586,594 on this property. Losing almost twice as much as the current sales price. Wow that is a huge loss for any lender to take.

Lets take a look at the monthly carrying costs for those looking to purchase this property. If the future owner buys the property for full asking price with 20% down payment $59,980, with today's 5.12% BankRate for a fixed 30 year mortgage the monthly payments would be $1305.60. Add in the real estate taxes and the monthly payment increases to $1948.31 plus insurance and utilities. Well, at least you are living on the lake.

Underwater Retirements

What happens to the group of homeowners were planning to use their home to fund their retirements. Forget 401ks, IRAs or CDs. Home investment and equity was seen as a sure thing to fund ones golden years. Now many of these potential equity retirees are finding themselves underwater. The golden years are looking a lot less golden for many people, especially a large group of boomers. In an article from the New York Times titled Baby Boomers Underwater illustrates how bad the financial future looks for some. Lets take a look -

The Center for Economic and Policy Research in Washington, which released the report last month, estimated that 30 percent of homeowners aged 45 to 54 were in this predicament, known as being “under water.” (About 15 percent of older baby boomers, 55 to 64, fell into that category as well.)

So, if these people were forced to sell their homes now, they would have to bring cash to the closing.

...

Another factor that has led to a decline in personal wealth is what the report calls “the near zero level of savings nationally” from 2004 to 2009.

“As a result of the bubble-inflated values of their homes, tens of millions of families opted not to save during what would typically be their peak saving years,” the report said.

...

Mr. Baker said he suspected that fewer baby boomer homeowners were under water in the New York metropolitan region than in other parts of the country, particularly areas where prices have fallen sharply, like Florida, Arizona and Rust Belt states like Michigan and Ohio. But he said that because of the financial industry’s persistent woes, owners in the New York area could see more significant declines in home prices this year.

Indeed, many areas in the region are already suffering. According to a report this month by Integrated Asset Services, a Denver-based real estate consulting firm, prices in Fairfield County, Conn., have dropped 42 percent since their peak in 2006, while prices in Passaic County, N.J., have dropped 26 percent.

Hard times may get even harder. This could easily reduce spending for years as a large group of the population is worried about their future.

Welcome To The "Poor Effect" Era

Everyday we are seeing our wealth decline. 401Ks are now referred to as 201Ks. Personal savings have been steadily increasing. People are holding onto their money rather then spending. So many people are more worried about keeping their home and/or their job, keeping up with the Joneses is the least of the concerns. We have left the era of the "Wealth Effect" and entered the "Poor Effect." And what a change it has been. This article from the Minneapolis-St. Paul Star Tribune titled Household net: Worth-less Feeling describes how things have changed. Lets take a look -

Most of us have been feeling poorer. On Thursday, the Federal Reserve released numbers to support the sentiment. At the end of 2008, Americans' net worth fell $11.2 trillion, or 18 percent from 2007, to $51.5 trillion; $5.1 trillion of that decline was felt in the fourth quarter alone.

Net worth soared from 2003 through the third quarter of 2007 as stocks and real estate hit record highs. But the Fed's numbers show that net worth -- which measures the difference between a household's real estate and financial assets and its liabilities -- has been on the decline for six quarters in a row and puts Americans' total wealth back to 2004 levels, when net worth was $51.8 trillion.

Overall, the data confirm that the "wealth effect," the tendency for people to spend more money as their asset values rise, is over.

...

There are bright spots: After years of next to no savings, Americans are fluffing up their cash cushions again.

Taking on less debt, we are weary of the consequences. During the Great Housing Bubble the "wealth effect" became so great and there seemed to be very few consequences. Remember the times when people would used their HELOCs to pay the mortgage? Remember the time you could afford anything you needed through a refinance? Remember the time when flippers were glamorized on TV? Most of these are memories now (unless you can catch Montelongo reruns, but that itself is another story.)

Although we did not want it we are now in the "poor effect" era where even those who can afford things are choosing not to. This new era will be characterized with the coolness of frugality and depression era cooking shows. How things have changed!

HELOCs Are Causing Housing Plan Problems

Could our beloved HELOCs be causing problems with Obama's Housing Plans? Sure looks that way. We were looking through rose-colored glasses forgetting that this HELOC thing was actually a second mortgage. Yes another mortgage. The marketers did such a good job making HELOCs and HELs different to consumers.

And with mortgages come complex contractual obligations. Yesterday we looked at the hold-ups due to resubordination issues. Today we find another problem - mortgage investors. From this article in the Wall Street Journal titled Mortgage Investors Call for Change in Rescue Plan we see new problems emerging -

Investors who hold billions of dollars of residential mortgage-backed securities are pressing the Obama administration to make changes in its housing rescue plan.

Participation by these investors will help determine the success of President Barack Obama's $75 billion plan to reduce foreclosures and help stabilize the housing market. But many investors are critical of features of the program and have been meeting with Treasury officials in an effort to influence parts of the plan, such as how it treats second mortgages.

Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.

"Investors are given rights through the contracts in the securities, and we expect those rights to be honored," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.

...

Administration officials say they are trying to address the concerns of investors and others as they work out details of the program. The range of investors in mortgage-backed securities includes hedge funds, insurance companies and pension funds.

Another snag to the road to foreclosure reduction. Sometimes trying to clean up messes can make things even messier...

HELOC Resubordination

It all comes down to resubordination. HELOCs and HELs the red headed step child of the mortgage industry are now in control of so many people's destiny. The second lien holders are blocking people's ability to refinance all around the country. It is all about the lenders willing to subordinate. In mortgage terminology resubordination means you leave an existing subordinate (ie. second and third mortgages) mortgage in place and refinance only the existing first mortgage. (That was from the Mortgage Insiders Mortgage University).

After the Obama Housing Plan was revealed we looked at the proposal to extinguish second mortgages. But other these were proposals, not mandates. If the lender agrees to resubordinate than the refinancing can go ahead as is. If they will not, as is common occurrence of late, you will have to include the second mortgage in the refinance. And with falling home values and stricter lender practices this has turned into a giant roadblock for many people.

It appears to be the issue du jour. First we will look at the financial institutional aspect to resubordination in an article from Bloomberg titled Bank of America, JPMorgan Face Mortgage Conflicts. Lets take a look -

[Bank of America Corp. and JP Morgan Chase & Co.] along with Wells Fargo & Co. and Citigroup Inc., the top four U.S. first-mortgage servicers, will face conflicts because they own $441 billion of second-lien home equity lines and loans along with overseeing $6.1 trillion of home loans, mostly for other investors or guarantors, Amherst’s Laurie Goodman and Roger Ashworth wrote in a report yesterday.

...
The conflict is just one of several for servicers created by the plan intended to stem the U.S. housing slump, according to the New York-based analysts. These conflicts may harm mortgage- bond investors. By locking borrowers into lower payments they’ll be unlikely to give up soon, the companies also can boost the value of some of their servicing contracts sevenfold by extending their expected durations, they said in a report last week.

“Clearly, with housing values continuing to decline in many areas, a performing first lien likely will benefit both the first-lien and second-lien holders” because foreclosures or short sales often occur without modifications and those often wipe out second loans, Rick Simon, a spokesman for Charlotte, North Carolina-based Bank of America, wrote in an e-mail.

...
The Obama plan, which offers “fairly clear-cut guidelines” on what should be done with first mortgages, “does nothing to benefit the second lien beyond attempting to provide a framework that allows the first lien to perform and get paid, perhaps allowing the second-lien holder to get paid at some time in the future,” he added.

...
Other issues related to home-equity loans, also called second mortgages, may also impair the modification plan. The congressionally appointed panel overseeing the U.S.’s $700 billion financial-company bailout, led by Harvard Law Professor Elizabeth Warren, said in a March 6 report that one of the plan’s flaws was that it didn’t “more fully address the contributory role of second mortgages in the foreclosure process, both as it affects affordability and as it increases the amount of negative equity.”

The Treasury Department says on its Web site that, “while eligible loan modifications will not require any participation by second-lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance.”

That is the business side of resubordination. Now lets look at an article from the WFTS ABCNews located in Tampa Florida titled Want to Refinance? Not so fast, many are learning. Lets take a look -

Home equity lenders are throwing roadblocks in front of their clients who want to refinance their primary mortgages. In some cases, they delay refinances for a month or more. In other cases, they block homeowners from refinancing altogether -- all because of something called "resubordination."


...
A bank's refusal to resubordinate can be costly to the homeowner. Caleb Shaffer has two mortgages on his duplex in Oakland, Calif. Both loans are with SunTrust. A credit union offered to refinance the primary mortgage at a lower rate, saving roughly $250 to $300 a month. Shaffer says he couldn't go through with the refinance because SunTrust refused to resubordinate the second mortgage. SunTrust has received $5 billion in TARP funds from the federal government, or $34.13 for every working American.

Shaffer says he was told that he could refinance with SunTrust, but not with another lender. "They're saying their policy is they don't subordinate unless it's within the family of SunTrust," he says.

SunTrust offered to combine his two mortgages and refinance them into one loan. But if the loans were combined, he would end up with a higher-rate jumbo mortgage with much higher monthly payments. The point of getting two mortgages, of $500,000 and $100,000, was to avoid getting a jumbo loan with its higher rate.

...

You would think that a home equity lender would welcome a refinance of a primary mortgage if the refi results in a lower monthly payment. But from the equity lender's perspective, the optimal outcome would be for the borrower to pay off the equity loan and close the account. "They probably figure if they play hardball, they'll get paid off," says Matt Hackett, underwriting manager for Equity Now, a mortgage bank headquartered in Manhattan.

Jeff Lazerson, president of MortgageGrader.com, an online brokerage based in Southern California, says equity lenders want borrowers to close their accounts, "because then they can get the cash back that was in the account, and their balance sheets look better."

So obviously lenders want the HELOC and HELs closed - but paid off not extinguished. Just like Homer learned, the house does not get stuck with the HELOC - you do. And it can get you in trouble as well.

Foreclosure Hits The Simpsons

How did we miss this? On this past Sunday's episode of The Simpsons they lost their house due to equity extraction and an ARM resetting. To watch the episode click here (Warning this is the whole episode and may require a special plug in). The episode has it all - ARM resetting to unthinkable numbers, HELOC equity extracted - taking your money and sticking the house with the bill,a foreclosure auction, renters becoming homeless. Here is a write-up from TV ING titled The Simpsons: "No Loan Again, Naturally" Review. Lets take a look -

As the evening ended, Lenny asked Homer how he afforded such a lavish party every year. Homer explained that he had a magical thing called a home equity loan, so "the house gets stuck with the bill." This, of course, is not how that works, and Homer's adjustable rate mortgage was about to reset. Unable to pay the new monthly rate, the house went into foreclosure and was auctioned by the bank. It's hard to find comedy in a situation like this, especially with this being such a common occurrence in today's market.

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Instead of losing their home, Ned bought it and let the Simpsons live as his tenants. As their landlord, Ned felt obligated to make home repairs and Homer and Marge took full advantage. But when Homer became dissatisfied with the way Ned was performing, he went to the local media to try and expose Ned has an evil, uncaring landlord.

Here is another review from the SFGate titled On The Block - Foreclosure Follies. Lets take a look -

Last night's Simpsons episode, in which Homer and Marge lose their house to foreclosure, reminded me that there are plenty of other foreclosure stories in the news at the intersection of sad and weird.


Homer's explanation of how he lost the house provides cautionary words for our time: "It's a secret thing called a home equity loan. I get all this cash...and the house gets stuck with the bills!" Later he tells his mortgage broker, "When you gave me that money, you said I wouldn't have to repay it 'til the future. This isn't the future. It's the lousy, stinking now!"

Pretty good episode illustrating all the issues of the current crisis - even a forced out Countryfine CEO that is stuck with a measly $50 million severance package.

Judging from the reviews it may not be the best episode - but it is a classic, snapshot of the times one.