NJ HELOC Heaven

Banks Make More $$ Not Modifying Mortgages

2009-07-30T14:20:00.002-04:00

Just when we thought we understood what was going on we find that banks are taking advantage of their investors. Well, they do not call them banksters for nothing. There is a great article titled Mortgage servicers perverse incentives from Reuters Blog that illustrates how lenders make money by not negotiating. This bundle comes from the investors. Let's take a look -

Last month, I wondered whether banks’ seeming inability to effectively modify mortgages was a function of “greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.”

It turns out that the answer is yes, it is — and the NYT’s Peter Goodman has chapter and verse:

Many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

In a sidebar, Goodman examines the case of a mortgage servicer, Countrywide, which refused to let Alfred Crawford sell his house for $620,000 in settlement of mortgage debts exceeding $800,000. The latest offer on the house is now just $465,000, and still no short-sale is being allowed.

In the meantime, Countrywide is paying itself lots of fees — fees which will ultimately come out of the pockets of the investors who bought the mortgage-backed bonds which Crawford’s loan was bundled into. The minute that Countrywide allows the house to be sold, that fee income dries up.

The claim is that lenders are looking out for investors. But if you read the whole post you will see that the lenders are really just looking out for themselves. That is why short sales do not work out. That is why foreclosures seem to lag on and on. The lenders are able to extract every penny out of the situation as possible. How is the housing plan going to compete with that?

Bake Sales for Mortgages

2009-07-23T09:22:00.002-04:00

We have heard it all now. A bake sale for raising the mortgage money. We are just surprised no one has thought of it first. Or maybe they did and did not know how to generate publicity for it. But we do think that $40 for an apple cake is a bit expensive. Maybe it is just us. But it raised enough for a local Teaneck woman to save her property. In this Associated Press article titled NJ woman's bake sale helps make mortgage payment gives us the details. Let's take a look -

New Jersey woman's bake sale has helped her forestall foreclosure.

Angela Logan raised the $2,559.54 due Sunday under a federal program to help homeowners in financial trouble.

The divorced mother of three sons in Teaneck wanted to sell 100 "mortgage apple cakes" at $40 each. But as of Tuesday, she had more than 500 orders, including one from Hong Kong.
...

Logan tells The Record of Bergen County she won't stop baking until people stop ordering.

It sounds like she may have next months mortgage payment as well. Now lets see a review of the cakes...

Sub Primers in Charge of Mortgage Mods

2009-07-21T11:04:00.002-04:00

Since the sub prime mortgage market has died the formers employees need to do something. So what better than starting mortgage mod companies to try to work out the loans that they sold a few years ago. Who knew the loans better, right? They already know the lenders that they sold the loans to as well. Plus they are making money in the process. So it must be a win-win situation, at least for the ex sub prime employees. For those that bought the loans a few years ago it sounds more like a lose-lose situation. They are paying the mods money to still lose their house anyways. And what are the new mod employees doing to help the poor folks facing foreclosure? Why laughing at them! That is what just happened in California according to this New York Times article titled Subprime Brokers Back as Dubious Loan Fixers. Let's take a look -

By Mr. Soussana’s own account, his customers fared less happily. He specialized in the exotic mortgages that have proved most prone to sliding into foreclosure, leaving many now scrambling to save their homes.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.”

Mr. Soussana’s partners at FedMod, as the company is known, were also products of the formerly lucrative world of high-risk lending. The managing partner, Nabile Anz, known as Bill, previously co-owned Mortgage Link, a California subprime lender, now defunct, that once sold $30 million worth of loans a month.

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FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

And of course there is a Mozilo involved - Angelo Mozilo's nephew.

This company figured out how to work the system the best ways possible. Get a lawyer in charge so they could charge up front fees. Once they got the money they did little else - even pay their employees!

The article is long but it does a great job of portraying the build-up and downfall of the company. Definitely worth the read. And worth remembering not to pay someone, anyone, up front to modify your mortgage!

Foreclosure Summary

2009-07-17T09:21:00.002-04:00

We knew that yesterday's numbers were bad, overall. But reading a summary of the numbers makes things seem even worse. This New York Times article titled Foreclosures Rise puts thing into perspective. Let's take a look -

One in 84 American housing units received at least one foreclosure filing in the first half of the year, according to RealtyTrac, the online marketplace for foreclosure properties.

Altogether, that makes for a total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — reported on 1,528,364 American properties in the first six months of 2009. Compared to the same period last year, the number of total foreclosed properties rose nearly 15 percent.

No green shoots in this direction. And not for some time to come. Almost 2 million homes in distress. With unemployment numbers still rising. And since there is a lag time from when people stop paying their mortgage to when the default notices start this will continue to rise for some time.

Gloomy indeed!

Foreclosures Down in NJ but Up Nationally

2009-07-16T08:56:00.003-04:00

Another round of foreclosure numbers are out. A sign of good news for New Jersey but nationally the news remains grim. First let's take a look at the national numbers from MSNBC's article titled Foreclosures up 15 percent in the first half of 2009 -

The number of U.S. households on the verge of losing their homes soared by nearly 15 percent in the first half of the year as more people lost their jobs and were unable to pay their monthly mortgage bills.

The mushrooming foreclosure crisis affected more than 1.5 million homes in the first six months of the year, according to a report released Thursday by foreclosure listing service RealtyTrac Inc.

The data show that, despite the Obama administration’s plan to encourage the lending industry to prevent foreclosures by handing out $50 billion in subsidies, the nation’s housing woes continue to spread. Experts don’t expect foreclosures to peak until the middle of next year.

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More than 336,000 households received at least one foreclosure-related notice in June, according to the foreclosure listing firm’s report. That works out to one in every 380 U.S. homes.

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On a state-by-state basis, Nevada had the nation’s highest foreclosure rate in the first half of the year, with more than 6 percent of all households receiving a filing. Arizona was No. 2, followed by Florida, California and Utah. Rounding out the top 10 were Georgia, Michigan, Illinois, Idaho and Colorado.

Those are some grim numbers. That coupled with the projections that foreclosure will not peak for another year is very ugly economic news.

Now on to one sign of good news locally; a Star-Ledger article titled New Jersey foreclosure rate falling. Let's take a look at how the Garden State is fairing -

Initial foreclosure filings on New Jersey homes have fallen through the first half of 2009, and government programs are getting some of the credit.

Foreclosure activity has dropped up to 30 percent across the first half of the year compared with the same period the previous year, according to data being released today by RealtyTrac, a private company that monitors foreclosure data. The company watches activity across a number of stages of the foreclosure process.

Initial foreclosure filings in the first five months of the year fell nearly 20 percent, according to the New Jersey Judiciary, although May data was not complete.

...

Still, industry watchers think the state's foreclosure rate is falling for a number of reasons: New Jersey was not as exposed to the plague of subprime mortgages as other states, Trenton and industry groups have been pushing foreclosure prevention programs and home prices have not fallen as much here as in other areas of the country.
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There are mixed opinions about whether the numbers will stay lower than last year or whether foreclosures will come back up.

"It's hard to tell at this point what's going to happen," said James Silkensen, the co-president of the New Jersey Bankers Association. "We're certainly hopeful it will be a continuing downward slide."

One interesting part of the article not above is that the state's foreclosure counseling programs are reporting that they are as busy as ever. Perhaps that is a good thing - people are aware and proactive. Fighting to keep their property or at least not lose it to foreclosure is much better than the walkaways or people feeling so beat down by the system they are apathetic.

Mixed Messages

2009-07-14T12:19:00.003-04:00

Citizens get such mixed messages. Do not get in debt. But spend, spend spend. Consumers need to spend to get us out of the recession. But you need to save for a rainy day. And you need to have enough to get by, pay your full monthly mortgage payment and a little more. These mixed messages thrust on us can be very confusing. So we get some good news that consumers are now saving - but this is also bad news since it means consumers are not spending, huh. So says this article from Brookings Institute titled Economic Fears Lead to a Surge in Household Saving. Let's take a look -

For many years, economists and other experts have bemoaned American consumers’ unwillingness to save. Now Americans are saving once again, and observers worry that too much saving translates directly into too little consumer demand. Was consumer saving too low in the past and, if so, why? Is it now too high?

The personal saving rate has soared in recent months. As a percentage of disposable income, the 6.9% rate recorded in May was the highest rate in over 15 years. According to the national income and product accounts, personal saving in 2007, the last year before the start of the recession, was $57 billion. In the January-March 2009 calendar quarter, the annual rate of personal saving was $464 billion, an eight-fold increase. In May 2009, the rate of personal saving rose still further, reaching an annual rate of $769 billion, nearly fourteen times the annual saving rate in 2007.

It may seem puzzling that personal saving would soar at a time of surging unemployment and falling wages and profits. U.S. consumers are worried, however, that their private incomes could fall still further in the future. Even Americans who hold secure jobs have experienced a dizzying drop in wealth over the past 18 months. Since reaching a peak in 2007, household net worth fell almost $14 trillion, a drop of more than one-fifth. The huge loss in wealth has induced many consumers, including those with secure incomes, to cut back on buying in order to bring their consumption back into line with their long-term ability to spend.

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In the second half of the 1990s and much of the current decade the ratio of U.S. household wealth to household income was rising in spite of the fact that households were saving very little of their incomes. If capital gains on your home and in your stock market portfolio are doing so much of the heavy lifting, why should you make any consumption sacrifice to add to your savings? Asset price deflation turned capital gains into huge capital losses over the past 18 months. Households now need to save in order to rebuild their wealth holdings.

A second contributor to low household saving in the past two decades was a series of innovations in consumer and mortgage lending. The wider dissemination of credit cards made it easier for households to borrow without any collateral. Innovations in mortgage finance made it easier for people with poor credit records to buy a home and for people with good credit histories to borrow on their home equity. These innovations relaxed borrowing constraints that once limited households’ ability to obtain loans when they were temporarily short of funds. Households saw less reason to accumulate or maintain a stash of liquid savings for emergencies. But the financial crisis has cut off many households’ access to credit. If they want to protect themselves against future financial emergencies, households must accumulate precautionary savings. In a future emergency they may not be able to rely on credit cards or home loans to tide them over.

If your house value was increasing by double digits every year why save. Many of us felt rich just owning a house. While that wealth that we felt was just an illusion the debts we owed were real. And now, to many of us, they are painful. But the big problem is this push to live within our means but spend every penny we have. But since on a personal level saving is good - on a national level this level of saving is not so good. Our advice is to worry about the personal levels only...

NJ Mortgage Mod Scams

2009-07-13T12:45:00.003-04:00

Getting into trouble with your mortgage is bad enough, but then getting ripped off in the process of trying to straighten it out is even worse. We hear story after story of people falling for scams. Yesterday in The Record, in an article titled Lending nothing but woe, they try to help people steer clear from some of the more common scams. This article is helpful due to the focus on NJ specific issues. Let's take a look -

[I]t’s not even legal under New Jersey law to charge for loan modification work.

State and federal regulators have cracked down, saying these companies often:

Falsely suggest they are linked to the Hope Now Alliance, a federally sponsored program of free mortgage counseling by non-profit agencies.
Charge fees to help clients modify their loans.
Fail to get mortgages modified, as promised.
Refuse to give clients refunds.

Any request for payment is a big red flag.
"I try to tell people: Do not pay anybody," said Shirley Robertson, a housing counselor with the Paterson Task Force.
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Under state law, only non-profit social service and credit counseling agencies can serve as "debt adjusters."

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According to the FTC, homeowners struggling with their mortgages should avoid any company that:

Guarantees to stop the foreclosure process, no matter what the homeowner’s circumstances.
Instructs homeowners not to contact their lender, lawyer or credit or housing counselor.
Collects a fee before providing any services.
Accepts payment only by cashier’s check or wire transfer.
Encourages homeowners to lease their home so they can buy it back over time.
Tells homeowners to make mortgage payments directly to the company, rather than the lender.
Tells them to transfer the property deed or title to the company.
Offers to fill out paperwork for them.
Pressures homeowners to sign paperwork they haven’t had a chance to read thoroughly.

Pretty clear and straight forward advice. Hopefully this will get out there enough so that the people in need can get hold of it. Unfortunately it was in the Real Estate section - the section people often read when looking for properties but not really the go to place when you want to hold onto your current property. Maybe a front page type of story would get the info to the right people.

July's Loan Mod Meeting

2009-07-11T07:18:00.000-04:00

So we now that the new housing plan is working about as good as the old housing plan (Hope Now) which means that it is not working. So a meeting will be convened on July 28 where Treasurer Geithner and HUD secretary Donovan will discuss (read force) the top 25 mortgage lenders to adopt modify mortgages. This article from the New York Times titled From Treasury To Banks, an Ultimatum on Mortgage Relief discusses some of the details. Let's take a look -

... Thursday night when I was shown a letter that the administration had just sent out calling for yet another big meeting at Treasury with yet another sector of the financial industry. Signed by Treasury Secretary Timothy Geithner and Shaun Donovan, the housing and urban development secretary, the letter demanded that representatives from the top 25 mortgage servicers assemble in Washington on July 28. It is likely to be every bit as painful for them as that Paulson meeting last October was for the bank C.E.O.’s.

The subject of the meeting is going to be loan modifications. Specifically, the government is going to be asking — in none-too-friendly fashion — why the nation’s big servicers aren’t doing more to modify loans for homeowners who are in danger of defaulting on their mortgages. Back in the spring, after all, they all signed onto the administration’s new Making Home Affordable program, which uses a series of incentives — not the least of which is $1,000 to the servicers for every mortgage they modify — to help keep people in their homes and prevent foreclosures.
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So far, however, the results have been disheartening. As of July 6, according to some internal Treasury data I was given a peek at, a total of 131,030 mortgages had been modified under the program, on a three-month trial basis (the Obama program calls for three-month trials before the new loan terms are locked in). That may sound good — but it’s a drop in the bucket compared with those 3.5 million potential foreclosures this year.
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Many institutions also are reluctant to do large-scale mortgage modifications because they will hurt the balance sheets. After all, if a loan is modified, the bank has to take a write-down on the portion of the loan it is swallowing. If lots of loans are modified, that means a lot of write-downs.
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Sure, foreclosure ultimately costs the bank more money than a modification would. But foreclosures these days take a long time — as much as 18 months in some states. And all that time the banks can keep the loans on their books at inflated values. Daniel Alpert, the managing partner of Westwood Capital, calls this practice “extend and pretend.” In fact, he said, he has been hearing that banks aren’t even willing to conduct so-called short sales anymore. Those are sales where the borrower asks the bank to sell the house for whatever it can get, and the bank in turn lets the borrower walk away from the loss that results from the sale.

Will anything really change? Or will foreclosure keep rising or will lenders try to re-write the loans. We can not see many ways the government can force this onto the lenders. So it is really just a wait and see...

Not Making Payments

2009-07-08T08:40:00.003-04:00

Apparently the number of HELOC that have payment delinquencies is increasing. With rising unemployment rates we can expect this number to continue climbing. And with allowing HELOCs just for having some equity in the home, as during the bubble, there were many people who could never really afford their lines in the first place.

More delinquencies also means more loss and write-off for the banks. The big question is what are the lenders breaking point. They already have government funds propping them up - but will that be enough? Probably not for some. So let's take a look at this Washington Post article titled Delinquencies On Home-Equity Loans, Credit Cards Hit Historic Levels -

Delinquencies on home-equity loans and credit card payments hit record highs in the first quarter of this year, according to data released today by the American Bankers Association.

Home-equity loans were one of the major culprits of the current crisis. To recap: Cheap credit caused a housing boom in the first part of this century. Skyrocketing home values led homeowners to take out home-equity loans -- essentially, treating their homes like ATMs -- to buy consumer products. Then, when home values started flattening then falling, it all collapsed, debt upon debt.

According to the American Bankers Association, delinquencies on home-equity loans climbed to 3.52 percent from 3.03 percent in the fourth quarter of 2008, with late payments on the loans jumping to a record 1.89 percent.
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This is even worse news: It means people are living off their credit cards with 28 percent interest rates now that their home-equity loans have run out.

This is why smart people are skeptical that the U.S. is in a real recovery. Many believe there's more bad news to come until unemployment starts dropping and home prices stabilize.

Things are interconnected - if people are not working they can not pay their bills - including HELOCs. We wonder were the new historic highs will be. Close to 5%? Maybe more?

Reverse Mortgages By The Numbers

2009-07-07T08:36:00.005-04:00

We have always felt that Reverse Mortgages were another type of gambling with the future. Especially when the homeowner is young, well young for taking the RM, say in their 60s. Who knows what the future will hold and how long they will live. Through the RM program we are encouraging seniors to take all their savings now and pay a hefty price for doing it. Sure it will be great if their short term needs are met or they live even better than before, but what is the cost. Finally we found someone who ran some of the numbers in this article from The Northern Star titled Reverse Mortgages Come With Danger. Yes this is from an Australian paper, it appears not many in the US actually acknowledge the problems with reverse mortgages. Let's take a look -

The idea behind reverse mortgages is that older homeowners can cash out part of their home's value, with the funds received either as a lump sum, a series of cash payments or a combination of both. The money can be spent however the homeowner chooses, be it to buy a new car, take a holiday or simply meet living expenses.

...

A strong point of appeal with reverse mortgages is that no repayments are required until you sell the property or die. However, interest is charged from day one, so it doesn't take very long for the overall debt to escalate, potentially outpacing the increase in your home's value.

To see just how quickly the debt can snowball, let's say that a retiree aged 65 takes out a reverse mortgage, receiving an initial lump sum of $50,000 at the start of the loan, with a further $500 a month paid for the first five years. By the time the homeowner is in his or her mid-80s, the debt plus interest will have grown to $400,000.

The mounting debt may alarm family members, but it should also concern our homeowner.

That is because around 50pc of both men and women currently aged 65 have a 50pc chance of living to their mid-80s.

What is going to happen to the 80 year olds with no equity left? Their savings depleted so they can buy their grandchildren ice creams? Which is what some are suggesting -

Meg Burns, director of the FHA's office of single-family program development, said she's heard only positive feedback.

“One of the things you hear all the time is how this program made a really big difference in their lifestyle, just in little things, like now they can take their grandchildren to get ice cream,” Burns said.

How great will that work out in the end? Sure it feels good now but if it costing seniors their savings and really costing about double due to all the fees and interest how good will that really taste?

We are also wondering about the clause to keep up the property. How is the homeowner going to keep up the property in their 80s when they have no equity for maintenance? And how are we going to evict people whose houses are in disrepair but their Reverse Mortgage requires the house and property to be maintained? If these are not maintained properly the value will decline. The problem is already messy, and the strong push for Reverse Mortgages will make things even messier.

Renters Market

2009-07-06T09:53:00.005-04:00

More good news for renters - it's a renters market. There is a glut of apartments in Jersey and many landlords are willing to negotiate in order to rent their space. While some parts have not changed, people still need first months rent and a hefty deposit. Also going in with knowledge of a credit score is a good start. But for other things like rent price and terms landlords are willing to negotiate. Things like lowering the monthly rent, allowing pets and throwing in other perks are apparently taking place. This article from The Record titled It's a renters market; so shop around describes the current action in the rental world. Let's take a look -

A recent survey by Rent.com, an online rentals search site, found a number of signs that the recession is affecting the apartment market, including:

* A larger percentage of tenants searching for two- and three-bedroom apartments — apparently a sign that people are living with roommates or relatives to cut housing costs.

* A larger percentage of tenants using search terms like "bad credit apartments" or "no credit-check apartments," apparently because their credit records are not as clean as they'd like.

* Visits to more Internet apartment sites, apparently because tenants now have a larger inventory of apartments to choose from.

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Apartment vacancies are up, for several reasons. For one thing, there's a larger supply of properties because of building, especially near the Hudson River, during the housing boom. In addition, many homeowners who have failed to sell their homes are renting them out instead.

At the same time, rising unemployment rates mean fewer people are looking for apartments. For example, recent college grads struggling to find work are now more likely to live with their parents than to get places of their own, as they might in a healthier economy.

We wonder if the larger units are due to roommates or families living together. If a family can not buy a house they will be looking at the bigger apartments. We wonder if anyone tracks the rental units - who is renting for how much.

Expanding the Obama Housing Plan

2009-07-02T16:51:00.003-04:00

Since the housing market is still falling, there is hope that expanding the plan will slow the pace of foreclosures. It may help some. But the big problem now is the ripple affect from unemployment levels. In addition, for all the controversy about the original housing plan, it had very little impact. This article in the US News titled Obama's Housing Rescue Expands: 6 Things to Know describes the loosing of some of the rules. Lets take a look at the first five -

1. Fannie/Freddie only: Despite the higher loan-to-value ceiling, the original framework of the program remains in tact. For example, only borrowers with loans owned or guaranteed by government-controlled housing finance giants Fannie Mae or Freddie Mac can participate. At the same time, borrowers need to be current on their mortgage to qualify.

2. Falling prices, less equity: The expansion of the qualification parameters comes as the real estate market continues to erode. Home prices in 20 major metropolitan areas fell by more than 18 percent in April from a year earlier, according the Case-Shiller home price index. Among other things, sliding home prices suck equity out of homes. Because of plunging values, more than a fifth of American homeowners were considered "underwater"—meaning they owe more on their mortgages than the property is worth—in the first quarter of this year, according to Zillow. This evaporation of home equity threw sand in the gears of the administration's refinancing initiative. That's because the original terms of the program precluded borrowers with mortgages exceeding 105 percent of their home's value from participating. But by expanding the loan-to-value cap to 125 percent, even borrowers who are significantly underwater will be eligible to refinance through Uncle Sam.

3. Efforts so far: When it rolled out the initiative earlier this year, the Obama administration said the refinancing program could reach up to 5 million homeowners. But in its release yesterday, HUD acknowledged that only "tens of thousands" of refinancings have occurred so far.

4. Expanded reach: The new standards could make up to 2 million additional borrowers eligible to refinance through the program, according to the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac. "This program could assist many homeowners who otherwise would have difficulty refinancing due to declining house prices," FHFA Director James Lockhart said yesterday.

5. Mortgage rate hurdle: But not all of those 2 million additional borrowers will end up refinancing. Some won't meet other program requirements, such as being current on their loan. But it's the recent upward trend in mortgage rates that represents perhaps the biggest threat to the program's success. Refinancing applications surged last fall and winter, after the federal government engineered mortgage rates of below 5 percent. But as bond traders became rattled by sharp increases in government spending, they sent yields on 10-year treasury notes—which fixed mortgage rates typically tack—skyward in recent months. As a result, mortgage rates surged, hitting 5.81 percent on June 11, according to HSH.com.

We are surprised that the housing plan has made such a small impact. But just like Hope Now really did not make much of an impact. Sometimes it seems like nothing will stop the downward spiral other than hitting the actual bottom.

Protecting Consumers Against Lenders

2009-07-01T08:50:00.002-04:00

The Obama administration is looking to start a regulating agency protecting Americans regarding various financial instruments such as home loans, pay day loans, credit card fees as well as others. If it does half of what it promises we are off to a good start. Which means the lending industry is trying to kill the agency upon proposal. When your income is based on excessive fees there is little incentive to reduce them. And since the bubble burst we are seeing new and interesting ways to add the excessive fees to consumers. The new agency is described in this New York Times article titled Banks Balk at Agency Meant to Aid Consumers. Let's take a look -

The Obama administration fired an opening shot on Tuesday, sending Congress a detailed, 150-page proposal for an agency that would set new standards for ordinary mortgages, restrict or prohibit risky loans, investigate financial institutions and enforce new laws aimed at protecting credit card customers.
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The industry’s heated reaction presages an intense lobbying battle that is already beginning. Opponents include JPMorgan Chase and Wells Fargo as well as thousands of regional and local banks that have close ties to lawmakers in every part of the country. But the opposition could also include countless mortgage lenders and independent mortgage brokers.
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“We know the optics are bad,” said Scott Talbott, vice president for government affairs for the Financial Services Roundtable, a trade association in Washington. “If you are against a consumer regulatory agency, then everybody will say you’re against consumer regulation.”
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It would give the new agency marching orders to set standards for traditional mortgages, and the agency would have the authority to demand that lenders offer those kinds of loans or give consumers the chance to opt out of riskier products.
It would also give the new agency the power to restrict or prohibit mortgages that come with hidden fees and steep penalties for borrowers who pay the loan off early. It would also be empowered to interpret and enforce the new credit card law that Congress passed last month, aimed at restricting banks from arbitrarily raising interest rates.
It would also have examiners, much like existing bank regulatory agencies, who would have the authority to go into specific institutions, issue subpoenas and scrutinize their practices, demand changes and seek penalties.

While some may argue against any new regulations - we would argue that any industry that is powerful enough to take the country requires some oversight.

Hopefully the proposal does not get watered down.

Trying for Resubordination

2009-06-29T11:18:00.003-04:00

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

2009-06-26T12:07:00.005-04:00

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.

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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.
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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

2009-06-25T09:03:00.004-04:00

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.

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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.

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[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

2009-06-24T10:38:00.004-04:00

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.”

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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

2009-06-23T09:47:00.003-04:00

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

2009-06-22T07:59:00.005-04:00

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...

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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

2009-06-21T11:12:00.001-04:00

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

2009-06-19T08:39:00.005-04:00

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

2009-06-18T09:15:00.004-04:00

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?

2009-06-17T07:52:00.004-04:00

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.
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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.
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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.

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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

2009-06-16T11:53:00.000-04:00

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

2009-06-16T08:53:00.003-04:00

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

2009-06-15T07:03:00.006-04:00

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

2009-06-12T08:40:00.001-04:00

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

2009-06-11T13:32:00.002-04:00

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

2009-06-11T13:11:00.003-04:00

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

2009-06-10T08:17:00.006-04:00

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

2009-06-09T07:45:00.003-04:00

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

2009-06-08T07:46:00.005-04:00

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

2009-06-05T10:00:00.006-04:00

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

2009-06-04T10:46:00.002-04:00

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

2009-06-03T09:21:00.002-04:00

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

2009-06-02T09:24:00.002-04:00

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.

Foreclosure Renovations

2009-05-30T11:19:00.003-04:00

Will foreclosures spur home improvements? That is the hope of many who involved with the home improvement industry. The hope is that the sales of foreclosure will spur the demand long enough for the rest of the market to start back up. It does sound like there is a valid point. Many foreclosures have been so badly damaged or just fall into a state of disrepair by being abandoned for so long that some improvements may need to be made just to make the properties habitable. From this article in the Atlanta Journal Constitution titled Spending on home repairs declines details the hope of the home improvement field. Let's take a look -

A report by analysts at Fitch Ratings puts a fine point on what Atlanta-based Home Depot has been saying for several quarters: Home improvement spending is down for the second year in row.

And it’s expected to decline again this year.

In 2008, sales of home improvement products were $290.5 billion, down 4.5 percent from the previous year. The figures are from the Home Improvement Research Institute.

...

Despite the negative housing trends, the Fitch report said contractors are getting more calls for estimates. Homeowners are looking for affordable, eco-friendly repairs, such as replacing windows and siding.

Homes bought in foreclosure may also present a silver lining.

“Home improvement spending may benefit from banks or new owners renovating these properties,” the report said, though the spending spurt could be temporary.

Apparently Memorial Day weekend brought in some good numbers, finally. Since consumer confidence is also improving people may be spending again. However the devil will be in the details - what are they spending on. Like gardens to save of food expenses??? Or other small improvements to save on utility expenses.

Perhaps we are leaving the penny wise, pound foolish ideology that the housing bubble brought with it. But we really believe Top Ramen does taste better off granite counters. Because it tastes pretty bad eating our laminates!

Interest Rates Are Rising

2009-05-29T08:28:00.002-04:00

One of the few brightspots during recent times was the low interest rates. These once in a lifetime rates spurred a refinancing boom - giving many people extra money every month and generating income for brokers, lenders, appraisers and everyone else tied to refinancing. It also helped the ARM holders - keeping affordable payments rather than rising ones. However those times are fading away. If you did not lock into a rate by early May you just may be out of luck. If governmental forces can drive rates back down they will - or at least try very hard to - but chances are that boom has also busted. From this article in Bloomberg titled Bernanke Bid To Lift Housing Scuttled By Rising Rates, Defaults. We discussed the defaults earlier, now lest look at the rising rates -

Federal Reserve Chairman Ben S. Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling. Mortgage rates are almost back to where they were in March before the 30-year rate fell to a record and sparked a refinancing boom. Mortgage delinquencies rose to a record 9.12 percent of U.S. home loans and house prices dropped the most on record in the first quarter, industry reports show.

“Housing is not going to be the engine to get us out of this recession,” said Robert Eisenbeis, chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc., and former research director at the Federal Reserve Bank in Atlanta. “They’ve squeezed a lemon and now they’re trying to squeeze some more, but you can only get so much juice out of a lemon.”

Rates are rising as President Barack Obama is trying to spur a housing recovery. Obama has pledged to spend $275 billion to help keep as many as 9 million Americans in their homes and stem the rise of foreclosures. His measures also include a tax break of as much as $8,000 for first-time homebuyers that wouldn’t require repayment.
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Freddie Mac estimates 73 percent of the projected $2.7 trillion of mortgage originations in 2009 will be for refinancing. In 2005, when the annual rate of home sales peaked, 48 percent of the $3.3 trillion in mortgages were refinancings, according to Freddie Mac. Refinancing originations may rise 145 percent to $1.87 trillion this year, according to a Mortgage Bankers Association estimate, the first increase in four years.
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Treasury yields are rising as the U.S. government sells debt and investors anticipate more supply of government securities being sold to fund federal spending. That in turn is helping push mortgage rates higher.

Part of the problem for some wanting to refinance was the barriers of being underwater or having a second mortgage that would not resubordinate. People who could have saved substantially were left out of the refinance rush. Now with the rates inching upward they will be less inclined to rush out. It will also cause problems for the ARMs resets.

Over 6 Million Homeowners in Trouble

2009-05-28T12:03:00.004-04:00

Over 6 million homes are late on their mortgages! If 12% of the homeowners with mortgages are late on their mortgages and there are approximately 50,762,000 million mortgages than approximately 6,091,440 homeowners are delinquent! Lets take a look at the mortgage chart -

From this article from the New York Times titled 12 Pct. Are Behind on Mortgage or in Foreclosure we see the housing crisis anywhere but near the bottom. Let's take a look -

A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.

The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

Trouble behind and trouble ahead. Do you really believe things will turn by the end of the year? Maybe the declines will just slow down a bit...

Is the Housing Market Thawing Yet?

2009-05-28T10:00:00.004-04:00

While properties are still not selling the numbers appear to be picking up a bit. With the values still declining there is a group of buyers willing to jump in a take a chance that the market is beginning to stabilize a bit. However we know that there is still another group still very wary that the prices still have a long way to decline. Apparently while the declines are siginficant they are still well above 2004 numbers. From this article in the Star Ledger titled New Jersey home sales show strength in April it seems that the best is being cherry-picked for the headline. Let's take a look -

The number of homes sold in the Northeast climbed 11.6 percent in April, the fastest pace in six months, although slower than last year's pace, according to data released yesterday from a real estate group.

Buyers started snapping up homes sold by owners in trouble, but the pace was still 10.6 percent slower than last year, according to the National Association of Realtors. Nationwide, the pace was more stable. Sales rose 2.9 percent over March and fell 3.5 percent compared with last year.

Also yesterday, government-released data showed New Jersey home sale prices fell in the first quarter this year 6.32 percent since the first quarter of 2008 and .75 percent over the fourth quarter of 2008. Still, home sale prices are 16.73 percent higher than they were five years ago.

...

Analysts predict New Jersey home prices will continue to fall at a rate of about 1 percent a month for the next few months, at least. Although the sales pace has increased, the number of homes for sale will continue to fluctuate and could even grow as foreclosures increase and homeowners step off the sidelines and brave the market.

There are always people who braved the market (maybe they were just not paying attention) after all there were still buyers last year! Braved the market seems to be a nice wording for those who really just knife-catching. Knowingly buying in a down market really does not make much sense. We are surprised that anyone is jumping in the market now with the expected further declines. But with this trend and predictions of market bottom perhaps the summer months will see some inclines - and not just of foreclosures.

... Or may not!

NJ Prices Still Falling

2009-05-27T08:13:00.004-04:00

How much longer and further will home values in NJ continue to decline? We just underwent one of the most significant declines - 11.8% in March year over year. And the general consensus is that there is still more to go. That is where the consensus stops. Some are predicting that the decline is slowing and the market will turn soon. Others are not so optimistic - with the continuing Wall Street fallout and unemployment increases the market forces just do not show signs of positive changes. The Star Ledger breaks it down in an article titled N.J. home prices haven't hit bottom yet. Let's take a look -

The logic is depressingly simple. People lose their jobs, can't pay their mortgages and their homes go into foreclosure. Those houses are sold, usually at a loss. It's a cycle that is tugging New Jersey and New York-area home prices down at a record pace -- nearly 12 percent in March compared with last year, according to data released yesterday.

The New York-area market, including 14 New Jersey counties, saw an 11.8 percent price drop in March, a pace that has quickened over the past few months, according to the Standard & Poor's/Case-Shiller index.

"There is no turnaround in the market at this point," said Maureen Maitland, S&P vice president for index services.

Prices here still have further to fall, experts say, at a rate of about 1 percent a month.
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Prices are expected to fall further as more people lose their jobs and homes, hitting a bottom sometime in the second half of the year, said Jeffrey Otteau, head of Otteau Valuation Group, which studies New Jersey real estate data.

Hitting bottom within the next six months sound great - but is it realistic. And by the predictions that would be another 6% or so decline. Still pretty significant drop from the peak of the bubble.

Well hopefully the predictions are correct, the bubble prices will remain just a memory for many - other than those still saddled with excessive debt or significantly damaged credit.

Housing Market Still In Trouble

2009-05-26T09:17:00.003-04:00

We often hear that we are at or near bottom. The housing market will turn around soon. Sometimes it seems that the foreclosure levels has slowed somewhat - but most declines are due to the temporary moratoriums that just put off the inevitable. There are still many issues in the housing market that have not worked themselves through yet - yes the subprime bust is mostly over, and the ARMs issues will be resolved up until the interest rates rise again. But, as this article from the San Francisco Chronicle titled Signs of more trouble ahead for the housing market, there are still many more issues that have yet to be resolved. Let's take a look issues that are still unresolved (aside from the rising unemployment, lack of buyers, moving-up, tighter lending restrictions, and house values still in the decline mode) -

-- Foreclosure moratoriums end. Major lenders temporarily halted foreclosures late last year and early this year in anticipation of President Obama's housing rescue plan. In addition, California enacted a new law this fall that slowed down foreclosures. That means the foreclosure rate was artificially depressed over the past several months. The moratoriums have now expired.

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-- Shadow inventory. Banks appear to be sitting on a vast inventory of homes that they have repossessed but not yet listed for sale. As previously reported in The Chronicle, this shadow foreclosure inventory could number in the hundreds of thousands nationwide. In addition, observers say banks appear to be deliberately delaying foreclosures, for example, not yet sending notices of default to homeowners who are months behind on their mortgages. All those properties eventually will have to hit the market, and, like all foreclosures, are likely to sell at cut-rate prices, driving down home values.

-- Walk-away underwater homeowners. The number of people who owe more than their home is worth continues to rise. Almost 22 percent of all mortgage holders were underwater by March, according to real estate site Zillow.com. That's spurring a phenomenon of "walk-away" homeowners - people who choose foreclosure because they don't want to pay off an upside-down asset.
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-- Loan modification shortfalls. Modifying borrower's mortgages to make them more affordable is a cornerstone of foreclosure prevention. But to date, most such efforts have simply deferred foreclosure, rather than providing a permanent fix. An authoritative study by the Comptroller of the Currency found that more than half of modified loans end up delinquent again within months. However, the study was done before the Obama administration's mortgage mod plan came into play. The jury is still out on how effective it will be at preventing foreclosures.

-- Option ARM, Alt-A time bombs. Two categories of loans used for higher-end homes are emerging as the next trouble spots, as foreclosure contagion spreads beyond subprime. Delinquencies are rising for Alt-A loans given to people with good credit who could not document their income. Meanwhile, millions of option ARMs, or adjustable rate mortgages in which borrowers can choose to start off making minimum payments that don't even cover the interest, are expected to start resetting next summer. At reset, borrowers suddenly must make sharply higher payments, which can trigger foreclosures.
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-- High end taking a hit. Until recently, most of the market activity and price drops have been among lower-cost homes. Homes under $350,000 have had the most severe price drops, while those above $750,000 have remained relatively stable. That appears to be changing, as foreclosure woes spread to the upper end. The difficulty of getting "jumbo" loans to buy pricey houses has exacerbated the situation to the point where unsold inventories of high-end homes are swelling.

In other words we still have a long, long way to go. Things first have to stabilize on their own - not with the foreclosure moratoriums or banks not bothering with foreclosure. We are getting closer to the Option ARM foreclosure wave. Hopefully the impact will not be as bad as the subprime foreclosure wave, but we doubt that...

Update to December Example

2009-05-24T14:47:00.002-04:00

Today with the holiday and warm weather we will just doing an update of an example post from December. The property finally sold - but the owner took a very heavy loss. Let's revisit a snippet of the post -

Here is the property -

Front of the house.

Here are the financials -

The property was purchased for $675,332.32 in September 2004 directly from the builder.

The original mortgage at time of purchase was for $440,000 using an ARM with K Hovnanian American Mortgage.

A Lis Pendens was filed against the property in December 2006.

After an apparent divorce one of the owners was deeded the property in July 2007.

On the same day as the new deed a new mortgage was taken for $500,000 using a balloon payment with Nationstar Mortgage.

A private mortgage with a 2-year term (which looks to be interest free) with an apparent family member was also taken in July 2007.

The property is currently for sale with a realtor for $625,000.

A property with a messy history.

Well, the property finally sold - for $550,000. It looks like through a realtor. So the homeowner lost $158,332.32 on the property - as well as suffered credit damage from the Lis Pendens and whatever separation took place during ownership. Probably glad to be rid of the place and move on - just a shame that there was so much suffering on so many levels in order to leave the property.

Good luck to the old owner on their new ventures. And hopefully the new owner's time will be work out better...

Savings and Debt

2009-05-23T10:34:00.005-04:00

One quarter of homeowners do have no savings. We would imagine that when the non-homeowners are factored in the savings level is even lower. And we really wonder of the three-quarters that claim to have savings have enough to carry them over for any substantial time period. Probably very few. Homeowner savings and some other interesting statistics are covered in an article from The Albany Business Review titled Survey: 25% of homeowners have no savings. Let's take a look -

Twenty-five percent of U.S. homeowners have no savings to cover their living expenses if they lose their job, according to a survey by Wells Fargo & Co.

The quarterly survey discovered that to cut costs, homeowners are taking extreme actions; 34 percent say they have had family members or friends move in with them in the past year.

It also says 42 percent of the respondents are spending less on their children in the weak economy.

Of those who have debt other than a mortgage, 43 percent say they think about their debt every day. And 24 percent think about it at least once a week.

Because of their debt, 36 percent say they’re cutting back on expenditures such as dining out and buying clothes.

Interesting information. Notice that those cutting back are due to debt. We wonder if you added the number of people who are cutting back out of fear for their jobs - probably brings that 36% up significantly higher. Then add in the number of people who have had their credit cut and just do not have the means to have additional expenditures. Since we all know that there are many who will spend that credit regardless of the debt piled up.

Neither the money nor the incentive to spend it there. And it looks like neither one will be there for some time to come.

HomeSaver not Saving Homes

2009-05-22T13:37:00.003-04:00

Loan modifications only work if people can pay the mortgages. Earlier this week we profiled a list of mortgage modification types that had one common requirement - the home owner needed an job/income/employment. Without that there is virtually no way that the modifications can work. Even with that there is a good chance the mod may not work. Housing Wire profiles a 70% failure rate of Fannie Mae's HomeSaver Advance program. While HomeSaver is not a loan mod program, it is a one to avoid foreclosure due to temporary economic problems. Let's take a look -

Fannie first launched the HomeSaver Advance (HSA) program in February ‘08 as a solution for borrowers experiencing temporary hardship. It allows servicers to offer unsecured, personal loans so delinquent borrowers can keep up on payments until the temporary hardship — unemployment, sickness, etc. — passes and borrowers can resume regular payments.

“This loan can offer these borrowers another alternative, and help prevent a temporary setback from becoming a foreclosure,” a Fannie executive in the single-family credit risk management division said in a media statement announcing the program.

But as mortgage performance deteriorated through ‘08, Fannie’s conservator, FHFA, noticed an alarming trend among the mortgages participating in the advance program.

“HSA is showing high redefault rates on the early offerings,” FHFA director James Lockhart noted in a Congressional report this week. “Performance on the February through April offerings shows a redefault [or recidivism] rate of almost 70%, which calls into question the program’s assumptions that borrowers have the capacity to make payments going forward.”

With the ever increasing unemployment rate even the best mods are doomed to fail at high rates.

Deals on Contractors?

2009-05-21T09:54:00.003-04:00

Getting great deals on contractors is a big, recent story. With so many people unable to spend money on projects the one's who do seem to have their choice about who to go to. At least that is the story. Once it was hard even getting contractors to give quote - now people are getting several. Picking and choosing the contractors for the work they want done - and contractors eager to take any job so they do not have to layoff more employees. This is the latest story from USA Today in an article titled Those willing to spend can find great remodeling deals. Interesting article. Our favorite part is where the contractor fit his price to the amount of the home equity loan the client was able to get - very, very interesting. Well, let's take a look at the article -

That's driven savings for those who renovate. Despite some signs of a bottoming in the housing market, contractors coast to coast say they're bidding jobs for less than they would have two years ago. Lower costs for material, such as lumber, help. But mostly, contractors are paying less for labor, or they're cutting their profits.

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Nationwide, the home improvement market is expected to shrink 12% this year to $217 billion for owner-occupied properties. That's after a 10% decline last year, says Harvard University's Joint Center for Housing Studies.

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Craig Durosko, president of 50-employee SunDesign Remodeling Specialists in Burke, Va., had one client who needed to borrow $125,000 for a remodeling job. He could only get $100,000 because the house didn't appraise high enough. Sun Design tweaked the client's payment schedule so that the job could be done as planned.

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New Jersey-based landscape architect Chris Cipriano, of Cipriano Landscape Design, says he recently bid on a pool job. The previous contractor was hired to put in a 700-square-foot pool but made it 550 square feet, Cipriano says.

Cipriano does landscaping and pools. Competition for jobs has led some landscapers to claim that they also do pools, "even if they've never built one," he says.

Pretty interesting article about remodeling. That was a favorite expense in the HELOC crowd. The ATM could allow for master suites, additions, constant remodeling of kitchens, etc. etc.

It would be really interesting if the article had more of a geographical spin on it - since nationally some areas are basically in a depression while others are just feeling a pinch.

New Appraisal Rule

2009-05-20T10:43:00.002-04:00

On May 1st there was a big change to the appraisal requirements for a mortgage sold to Fannie Mae or Freddie Mac. No longer can appraisers be hired by mortgage brokers - now the appraisers must be hired by the lenders. This definitely will cut down on some fraud issues, but it will also put up new barriers. Making the next several months a little more difficult as the changes are adopted. We did not even know about the change until we read a WSJ article titled A Battle Plan For Refinancing Your Mortgage. Let's take a look -

On May 1, a new Home Valuation Code of Conduct took effect, which is intended to keep mortgage brokers and others from influencing appraisal values. As a result, only lenders, not mortgage salesmen, may hire and pay appraisers, often using middlemen known as appraisal management companies.

The process is too new to know what the impact will be, but some mortgage lenders and brokers fret that national appraisal management companies may not know much about their areas. "We're getting calls from Indiana about a co-op on 17th Street," says Melissa Cohn, president of Manhattan Mortgage Co. in New York, one of the nation's largest mortgage originators.

If you're worried about what your home will be valued at, see if a friendly real-estate agent will provide you with recent similar sales in your neighborhood. Otherwise, you may have to fork over an appraisal fee -- $350 to $500, depending on where you live -- to find out if you have enough equity, even if you don't qualify for the loan.

An accurate appraisal is very important in regards to home equity and refinancing issues. In order to negotiate you need to bring some equity to the table. The more the better.

But meanwhile there is a big concern that the new rule will drive up the cost of an appraisal while driving down the accuracy. Are these complaints valid? Guess we have to wait and see.

Types of Mortgage Mods

2009-05-19T10:07:00.005-04:00

One big method used to thwart oncoming foreclosures is through mortgage modifications. Modifications are being pushed both on state and federal levels. Hoping that modifications tailored to the individuals issues and income can either forestall or entirely prevent another foreclosure. Whether you agree with this or not it definitely a political priority, and therefore a policy that is being pushed at all levels of government. We found an interesting post this morning over at Chicago 77 titled The Ugly Truth About Loan Modifications from Brad Walbrun, who is a mortgage consultant in the Chicago area. The post provides a lot of information (take a look) , but we will take a look at his description of the 4 modification types -

Tack it on the back A common one is for people who are behind in their mortgage payments right now, to take the past due and put it on the end of the loan. Let’s say somebody has a $200,000 mortgage, and is behind three payments at $1500 each. If there was a temporary reason the homeowner got behind, like a job loss, and now they are making income again, the bank can put the past due at the end of the loan and give the homeowner a fresh start.

Recasting If somebody had an adjustable rate mortgage (ARM) that went up after 2, 3, or 5 years, and the payment jumped up, the lender can “re-cast” the ARM for a longer period to keep the payment the same. Let’s say somebody had 5.5% on an ARM, and on the adjustment date it went up to 7.5%. Depending on the loan size, the difference can be hundreds of dollars monthly. This can obviously cause some hardship for the homeowner, especially if they are making less now than before, like much of the country is experiencing. What the bank might do in this case is either “fix” the rate for another 2 or 3 years so the payment stays the same, or just convert it into a fixed rate at the same rate. These types of modifications are almost always contingent on the homeowner having good payment history prior to the adjustment.

Debt forgiveness A third type is debt forgiveness or principal reduction. This is common in short sale scenarios. Let’s say somebody owned a house that was once valued at $300,000. They had 90% LTV financing for a loan amount of $270,000. And now they have to sell the house because of job relocation or because their income level has changed and they need to downsize. But the problem is that the house that was once worth $300,000 can now sell for only $240,000 (a 20% drop from peak value is not uncommon these days). The bank knows that if they have to foreclose on the house, it would sell at auction for much less than the $240,000, so they agree to accept a smaller payoff because it is a smaller loss. Short sales are also common for somebody facing foreclosure for the same reason-the bank is taking the lesser of two evils. If a $300,000 house goes into auction, it may sell for $170,000 or $200,000, but if the homeowner sells it, it will go for much higher, and the bank will save thousands in principal and legal fees.

Payment or rate reduction One last type is payment reduction or rate reduction. Again, if somebody is struggling, but the lender believes they could stay current with a lower rate or smaller payment, they might agree to it because it is the lesser of two evils. They are making less on the loan, but it beats foreclosure. If somebody is making less income now, the bank may agree to lower the payments to help the homeowner stay current. Another way to lower the payment is to stretch out the note for 40 or 50 years. Many banks will do this in lieu of lowering the interest rate because then they can lower the payments to help the homeowner and still make the same interest. In a settlement with the State of Illinois, mortgage giant Countrywide had to re-cast all of its stated loans that their retail branches originated to do the new payments on full documentation, and give homeowners payments they could actually afford. There were people who got 2 or 3% over 40 or 50 years because of this.

Notice the one big catch in all the modifications (where people stay in their homes) - the homeowners have to be working. Whether they were out of a job temporarily or are just making less now they all require current employment. That is a big catch for many folks with the rising unemployment rates. The only one available for those currently unemployed is for a short sale. Yes it is not a foreclosure, and hopefully the homeowner will not feel the same credit pain with their short sale as with a foreclosure. But lenders are becoming more and more willing to do short sales. Perhaps we will see those numbers rising to something substantial.

Meanwhile, we have RealtyTrac that lets us know foreclosure numbers, but is anyone gathering any short sales data? Not that we know of yet...

New Reverse Mortgage Issues

2009-05-18T13:21:00.000-04:00

Not that we do not already have a long list of potential problems with reverse mortgages - now we get word that new changes will make more problems. But maybe these new changes will be a deterrent of sorts. Ever changing interests rates and closing points are bound to scare many people away. Perhaps this will turn out to be a good problem. In an article in The Record titled Reverse mortgage: declining reliability we get a glimpse of the new changes and the effects they are already having. Let's take a look -

Reverse mortgages are becoming more popular, in part because retiree stock accounts have lost so much value. Federal data show a record 11,261 reverse mortgages were made in March, up from 9,086 the month before. The National Reverse Mortgage Lenders Association expects the number to grow to about 150,000 this year, up 30 percent over last year.

Last month — and without any real warning — Fannie Mae made changes that allow for higher margins for reverse mortgage lenders. Simply put, margins are the interest rate spreads a lender makes on the loan. So, the higher the margin, the higher the interest rate the borrower pays.

Worse still, under the new rules the margin — typically 2 to 3.5 percentage points — can change from the time a borrower submits an application and the loan is funded, which can be up to 120 days.

The borrower signs a disclosure form from the lender projecting the maximum amount of money the borrower may receive. But with rates that can change, the seniors will not really know how much they can borrow until closing, or days before. That makes the disclosure form practically useless, Smaldone said.
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But within the industry, fears are mounting that the higher margins are turning the reverse mortgage industry into the more traditional loan market, creating heavy competition that could lead to over-lending and introduce more predatory lenders.

Is this a bug or feature? And the sudden changes that caught the lending industry off-guard? There is definitely more to this than meets the eye.

Housing Bubbles Popping In Dover

2009-05-17T10:50:00.000-04:00

Rarely do we get to see the bubble inflate and pop all in one property. Housing values that almost tripled during the bubble with eager buyers constantly popping up along the way. Values that we can see now were so off from the real values. Earlier in the week we illustrated this housing chart -

The chart illustrates how inflated the housing values were during the bubble. At the time we had no idea we would be illustrating an example property that illustrated the chart perfectly. For today's example first we will look at the latest owners follies than the rise and fall of a property value in Dover. Let's get to today's example property -

Here is the property -

The front of the "Single Family House" with two doors and visitor.

The show ready kitchen.
(Well at least we know there is a Dunkin Donuts nearby - but so does most of North Jersey).

Here is the property info -

Status: Active
County: Morris
Year Built: 1900
4 total bedroom(s)
2 total bath(s)
2 total full bath(s)

7 total rooms
Style: Colonial
Basement
Basement is Finished
1 car garage
Parking features: Detached Garage
Heating features: Baseboard - Hotwater,Gas-Natural

Exterior construction: Aluminum Siding
Roofing: Asphalt Shingle
Pets allowed
Approximate lot is 50X100
Approximately 0.11 acre(s)
Lot size is less than 1/2 acre

Here are the financials -

The property was purchased in June 2007 for $395,000.

The mortgage at time of purchase was for $395,000 using an ARM from Lehman Brothers Bank.

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

A notice of settlement took place in March 2009 with a foreclosure specialist private real estate investment firm with locations in Hoboken and Little Falls.

Tax rates for 2008 were $4340.98.

The property is currently for sale with a realtor for $199,000.

The property was 100% financed - no money down, no piggy back loans. Just 100% financing while the bubble was popping. The property owner was trying to own the property - see the standard ARM without a teaser or an Option ARM.

The property was bought at a peak price that the property will not see again for at least a decade. A few things we do not understand - what happens to the mortgage after the "notice of settlement." With the realtor fees added in the total loss for the property will be $207,940. We know the real estate investment firm is making some type of profit on the property so the loss will be even larger. Who is taking the loss? How is this legal?

For those interest in purchasing the property, if they are able to put 20% down and received a 30-year fixed at today's Bankrate rate of 4.98% the monthly payments would be $852.68. Adding in the property taxes and the monthly payments would be about $1214.43 per month - plus utilities and insurance.

For the other interested in parties that are unable to put even close to 20% down lets look at some other numbers. Using our favorite new calculator that includes the PMI charges and the new rate, a potential new buyer is only able to put down 5% or $9950. The monthly mortgage payment would be $1012.55, plus a PMI of $122.88, and the taxes of $361.75 totaling $1497.18. And for a buyer who puts only 3% down - the mortgage would be $1033.87, PMI now $167.29 the taxes stay the same for a total monthly payment of $1562.91. Plus utilities and insurance of course.

If the is a two family or has a rental unit that might take off a big chunk of the mortgage, making the living space smaller but much more affordable.

Something very interesting about this property that we do not often see is the rise and fall of the prices during the bubble. This property has had 4 owners since 2000 here are the sales dates the the prices -

Purchased in February 2000 for $140,000.

Purchased in March 2003 for $195,000.

Purchased in October 2006 for $301,600.

Purchased in June 2007 for $395,000.

Selling in May 2009 for $199,000.

The property more than doubling in price from 2003 to 2006 is one thing. But the more unbelievable part is the more than 23% property increase in 8 months - 8 months when mortgage companies were shuttering and property values were starting to decline. This was well past peak. Unless significant improvements were made to the property this does not seem realistic at all.

More Short Sales

2009-05-16T10:48:00.001-04:00

One big wonder with the number of foreclosure was the slow pace many lenders negotiated with. There are stories about people waiting for weeks or months just to hear that their offer was turned down. While many buyers prefer a short sale to a foreclosure - for numerous reasons - the lenders made the process very difficult. Finally lenders have looked at the numbers and realized that short sales make a lot of sense. In this article from the New York Times titled Lenders More Open To Short Sales we get a glimpse of the new rationalization. Hopefully the second part of this is changing the ding of the credit score to just a small blemish. Let's take a look at the article -

ONE avenue for escaping foreclosure may be getting a little easier to navigate: the so-called short sale, through which distressed owners sell their homes for less than the mortgage amount and are forgiven the remaining loan balance.

...
But mortgage executives say they are now working more cooperatively on short sales, and proposed changes in the industry could increase the number of these transactions.

“Without a doubt, lenders are more willing to work through short sales,” said Andre L. Mitchell, the executive vice president of the Lynx Mortgage Bank in Westbury, N.Y. “In this marketplace if the lenders can negotiate in any way to get rid of a bad loan, they’re going to do it.”

The Treasury Department said last week that it would increase incentives for lenders to work out short sales when borrowers fail to keep pace with their loan payments. The department did not release details about those incentives.

...
Banks encourage short sales because they lose less money on such transactions than they do in foreclosures, where they must sometimes carry the house for months before selling it.

Hopefully this really works out nearly as good as the article portrays. An increase in short sales and a reduction in foreclosure would be a good thing. There appear to be two big roadblocks - second mortgages and large differences between the current liens and the potential selling prices. If the difference between the home price and the purchase price is less than 10% is likely but bigger differences (which is what is happening in the really hard hit areas) the lenders are still not negotiating as much.

The Great Disappearing Equity

2009-05-15T10:38:00.003-04:00

From our last post we can see that equity has been vanishing in our region. The house we thought was worth $500,000 (and some of paid that much for it) is now worth maybe $400,000. So when we saw a depiction of our wealth disappearing we had to post it -

No, no, no, not that one this one -

Our mortgage debt is increasing while our equity is disappearing. It is not magic - rather market manipulation and economic carelessness. Here is the post from Business Insider titled Our Vanishing Home Equity. Let's take a look at the post -

Everyone knows that U.S. house prices have fallen almost 30% from the peak. What is less well known is that Americans' equity in those houses--the part that American homeowners actually own--has fallen much further. Why? Because, despite all the foreclosures and write-offs, our total mortgage debt has only dropped slightly from its peak.

When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater.

For most consumers, one's house is one's biggest source of wealth. Economists have demonstrated that a loss of wealth leads to cuts in spending--from psychology and necessity. A 50%+ drop in home equity is one whopping-big loss of wealth. And it will have a lasting impact on consumer spending.

Even after prices stabilize things will not improve. This will take crisis will take a long time to recover as we can see from this chart -

We still have a long way to go...

Home Prices Plunge

2009-05-14T10:45:00.004-04:00

Watching your money slip away is never a good feeling. Neither is watching the value of your property. A decline of almost 13 percent for the region means more underwaters, more HELOC closures, and most likely more foreclosures. From this article from The Record titled Home prices plunge 12.8 percent we can see values are hurting. Let's take a look -

Home prices dropped 12.8 percent in the New York metropolitan area — which includes North Jersey — in the first quarter of 2009 from the same period a year ago, the National Association of Realtors said Tuesday.

The median price of an existing single-family home in the area that includes Bergen, Passaic and Hudson counties fell to $429,900, down from $492,800 a year earlier, the NAR said.

The volume of home sales in New Jersey plummeted 18.7 percent from the first quarter of 2008. Sales of single-family homes, condos and coops were running at a seasonally adjusted annual rate of 93,400 in the first quarter of 2009 — about half the 180,000-plus annual sales during the housing boom in 2004 and 2005.

Nationally, home prices declined 13.8 percent, to a median of $169,000. That's almost 24 percent below the median price at the national market's peak in 2006. In the New York metro area, prices are down around 20 percent after peaking in 2007 at a median of around $540,000.
...
And many potential buyers believe that if they wait, prices may fall further. That view is supported by some real estate experts, including Jeffrey Otteau, an East Brunswick appraiser who tracks the housing market statewide. He predicts that prices will drop a total of about 9 percent during 2009. Denis said she thinks prices may dip another 5 percent this year.

The article notes that even though prices are more affordable for new buyers there are many factors keeping them out of the market. First the rising unemployment levels are keeping potential buyers out. Second is the stricter requirements for mortgages. A pulse is no longer the mitigating factor for a mortgage - lenders are making people prove they can repay them (crazy huh). Third is that some will prefer to wait until after the market hits bottom. Of course - why buy when there is a good chance it will be worth significantly less by the time of closing. There really is not much incentives for new buyers to jump into the current market. A tax credit won't be much comfort when watching your property value decline.

National Foreclosures Rise - NJ Foreclosures Dip

2009-05-14T10:32:00.003-04:00

Perhaps this is a sign that the foreclosure mediation program is working. Or perhaps we are just behind the curve. Either way it gives us a glimmer of light at the end of the recession. From The Record we get an article titled April foreclosure filings dip in N.J. Let's take a look -

Nationally, foreclosures rose 32 percent from a year ago, as one in every 374 households received a foreclosure filing in April.

...

After several states and mortgage companies put moratoriums on foreclosure actions several months ago, activity has begun to pick up again, said James J. Saccacio, chief executive officer of RealtyTrac, a California company that follows the foreclosure market.

In New Jersey, foreclosure filings were down 3.5 percent from April 2008. One in every 695 households received some sort of foreclosure filing last month — ranging from a notice that the homeowner is late on a mortgage payment all the way up to sale at sheriff's auction.

Passaic County had the state's highest rate of foreclosure, with one of every 461 households receiving a foreclosure filing during the month.

Bergen was 15th in the state, with one of every 892 households receiving a filing; Hudson County was 18th (one in 1,023) and Morris County was 20th (one in 1,215).

The article notes that the expiration of teaser rates are one huge reason for the new wave of foreclosures. We know that option arms will be a big problem in the next few years. Remember these loans were given at the peak. And many homeowners could not afford to pay more than the teaser rate. Now their loans have increased but the value of the properties are lower. Either we will see a huge wave of short sales (ha ha) or a huge wave of foreclosures.

Destressed Property Training

2009-05-13T08:50:00.004-04:00

Came across a press release this morning signifying the importance of working with someone with Certified Distressed Property Expert training. And this is not just any training it is prestigious training! First let's take a look at this press release titled Berkeley Heights NJ Realtor Earns Prestigious CDPE Designation to Help Homeowners Avoid Foreclosure -

James Mulcahy Earns Prestigious Designation to Help Homeowners in Danger of Foreclosure.

James Mulcahy of The RE/Max Classic Group in Berkeley Heights NJ has earned the prestigious Certified Distressed Property Expert (CDPE) designation, having completed extensive training in foreclosure avoidance and short sales. This is invaluable expertise to offer at a time when the area is ravaged by “distressed” homes in the foreclosure process.

Short sales allow the cash-strapped seller to repay the mortgage at the price that the home sells for, even though it is lower than what is owed on the property. With plummeting property values, this can save many people from foreclosure and even bankruptcy. More and more lenders are willing to consider short sales because they are much less costly than foreclosures.

In the NJ/NY Metro area, more than 11% of homes are in danger of foreclosing. It is happening in all price ranges. Local experts say that even high-priced homes are not immune.

“This CDPE designation has been invaluable as I work with sellers and lenders on complicated short sales,” said Mulcahy. “It is so rewarding to be able to help sellers save their homes from foreclosure.”

First - how does he help? He directs homeowners to do short sales instead! He does not help them stay in their homes. Does not help them with their credit. It's so rewarding getting commission.

So what exactly makes this prestigious training? A two-day seminar in King of Prussia, PA and $599 and you too could have this prestigious CDPE training. Or better yet, partake in the distance learning program. Can training get any more extensive than that? Of course not! The probably did not even break for lunches! We are exhausted just thinking about. And what does this training provide? THIS -

Background:
Entering the Distressed Property Market
Foreclosure
Short Sales Explained
Short Sale Process
Selling Against and Working with Investors
Building your Business
Putting It All Together
Along with the course, you receive the following bonuses:
The 175 Page CDPE© Field Manual to guide you through an deal you have.
CDPE© Checklists - of exactly what to do in each situation (right down to don't forget your business cards) ($299 value)
CDPE© Forms - each document you need to get your from the listing appointment to the closing table. ($99 value)
CDPE© Flow Charts ($99 value) - of each foreclosure situation so you can quickly see exactly what you need to do.
A complete sample short sale package that you walk out with and can reference forever. ($99 value)
A CDPE Resources Disk so you can reprint the forms and checklists as many times as you need. ($129 Value)
Use of the CDPE© Logo and Designation. (Priceless!)

Priceless and Prestigius!

Note - we think its great that people get extra training to understand their profession - but the press release is too much! Probably be in the local, free Berkeley Heights paper next week!

The Home Tending Trend

2009-05-12T08:10:00.004-04:00

A new trend apparently on the west coast is home tending. People with nice things living in vacant, for sale homes. The deal is the temporary occupants must furnish the property and have it show ready. For that they get a very reasonable monthly payment - up until the house sells. It is a free service to the sellers. Here is a clip from CBS Evening News with their story titled The Homeless Help Homeowners -

Watch CBS Videos Online

The organization running the program is Designer Home Tending. We would imagine after the national exposure there will be a flood of applicants. And the screening for such a program is probably difficult. Interesting that in the video clip the mother acts like it is her home - but the single musician seems to acknowledge what a good, temporary deal he has.

Here is a snippet from the accompanying article titled A Unique Solution To The Housing Crisis. Let's take a look -

CBS News correspondent Bill Whitaker reports that when real estate agent Cathy Cardenas saw so many vacant houses for sale or in foreclosure and so many people unable to afford a house in these hard times, she thought, why not put them together?

...

She screens people down on their luck, un- or under- employed, and places them in houses for sale by owners who've had to relocate. In Salt Lake City, Autumn Marler and her family now reside in a 4,000 square-foot house they couldn't otherwise afford.

Says Marler, "My husband lost his job recently and we lost our home for foreclosure. And basically I pay a very small amount of rent to live in a nice house and to furnish it with my things."

Cardenas says in today's cluttered market, empty houses just aren't selling well. That lived-in look has a competitive advantage.

...

The service is absolutely free to home sellers. The home tenders pay a nominal fee, from $500 to $1,000 a month depending on the city, plus utilities. They have to be tidy and prepared to move if the house sells.
...

In two years, Cardenas has gone from a start-up to more than 500 clients, and she's found doing good is good business.

We like the fact that the program allows for very low rents and reduces the number of vacant houses.

Services like this will probably spring up in more places.

Recession Renovations

2009-05-11T08:37:00.003-04:00

People are still interested in improving and upgrading their properties - even if these tough times. But spending $50,000 grand and up for a new kitchen is bubble era thinking. Much easier is refacing the cabinets and having a new counter installed. Much cheaper and may look just as fresh. Apparently even liquid stainless steel to turn those white or black (or almond) appliances into trendy stainless is a very big thing. The change in renovation mindsets is illustrated in this Wall Street Journal article titled Major Home Remodeling Gives Way To Modest Upgrades. Perhaps no HELOCing needed for the new kitchen? Well let's take a look at the article -

Home-improvement spending is expected to decline 12% in 2009, according to Harvard University's Joint Center for Housing Studies. Lower financing costs may be starting to stabilize the downturn in existing home sales, but "they have not been enough to offset rising unemployment and falling consumer confidence and encourage homeowners to undertake major home improvement projects," said Kermit Baker, director of the Remodeling Futures Program at the Joint Center, in a news release.

It's much different than the days when home-equity lending was plentiful. Before doing anything, people are carefully considering how they should spend their money.

In the days of easy credit, "there was a feeling of 'we can't go wrong, let's just get started,'" said Bill Judson, an architect with HartmanBaldwin Design/Build, based in Claremont, Calif. "Now, it's harder to get money, in terms of credit, and homeowners are taking it a little slower and educating themselves a little more."

...
Nationally, the volume of countertop project requests rose 39% in the first quarter of 2009, compared with the first quarter of 2008, while major kitchen remodels are down 19%, according to ServiceMagic's most-recent Home Remodeling and Repair Index/Survey. The data comes from the company's service requests; the site received 4.2 million requests from homeowners in 2008. Service requests for bathroom remodels were down 10% in the first quarter of this year, according to the report.

At the recent Kitchen/Bath Industry Show, affordable remodeling products included liquid stainless steel to refinish appliances and do-it-yourself backsplashes, Sweet said.

Liquid stainless steel and the return of the staycation. People opting for affordable countertops instead of granite. Perhaps they would prefer real food over Top Ramen as well? Guess when your property does not pay you decisions have to be made much more carefully.

Second Home Shore Foreclosures

2009-05-10T16:53:00.004-04:00

Busy with the nice weather and holiday - so no example posting today. But we will look at an article from the Press of Atlantic City titled Data show many shore foreclosures on second homes. Of course it is much easier to let go of that investment or vacation house rather than your primary home. When the investments seemed like the only way was up you had many people invest who did not have the means. But like everything else during the bubble the answer was just to sell the property if one got into trouble. We now can see that strategy does not work forever. Now the answer seems to be for those into trouble just foreclosure or walkaway. Sure your credit will be hurt but so many people are in the same situation that some of the stamina has gone. So let's take a look at the article -

Anecdotal evidence suggests second homes make up a significant part of the foreclosures along the shore, where barrier islands are mostly covered with housing that's not occupied year-round.

In a way, a foreclosure on second home is less distressing, since it usually means someone well-off is losing an investment, vacation or retirement property, rather than someone losing their primary residence. But there was no way to put a number on how many foreclosures might be in that non-primary market.

...

Sure enough, RealtyTrac's figures show an unusually large percentage of owner-absent properties among shore homes with a foreclosure filing.

In Atlantic and Cape May counties, 36 percent of properties in foreclosure last month were owned by people living elsewhere.
...
31 percent, and Ocean County, with 20 percent, fit the national pattern of about 30 percent of owners of foreclosed homes living elsewhere, RealtyTrac said.

Given the dominance of second homes, and the paucity of year-round rentals, my guess is that one-fifth to one-third of the foreclosures in Atlantic and Cape May counties are second homes.

The author is correct that while the foreclosures are bad it is not as bad as primary residence properties. It will be interesting to see how short-term summer rentals are affected by these foreclosures. Long-term renters have rights - but what will happen to weekly and monthly renters? There will definitely be some drama unfolding down at the shore this summer...

The Short Sale Kid

2009-05-09T10:44:00.002-04:00

There will always be someone who is able to figure out how to make a profit - even in the most troubling times. Apparently the "short sale kid" AKA Nathan Jurewicz has a program that buys properties as a short sale from a potential foreclosure victim and is able to sell them the same day for a profit. Some lenders, the JP Morgan, will not sell under these programs, but enough seem to be doing it to supposedly make the short sale kid a very wealthy individual. In an article titled 'Short Sale Kid' tries to outsmart mortgage firms from the Syracuse Post-Standard gives a detailed account of the kid and his program. Let's look at a snippet -

He buys properties in foreclosure at low-ball prices from banks, then flips them the same day for big profit-as many as 10 a month. Jurewicz says he, and the followers of his system, fill a need in a down market, but others in the industry question his booming business. They say:

Banks are losing out on thousands of dollars on each sale at a time when the industry is receiving billions in taxpayer bailouts.
Many distressed homeowners are unaware lenders could someday require them to pay the difference between the original mortgage and the selling price. The low-ball offer could leave them on the hook later to pay the lender the higher difference.
A large segment of the home-buying market could be excluded. Under Jurewicz's system, cash is preferred and potential buyers with FHA loans are avoided.

Jurewicz's system is a national brand called Short Sales Riches. In June, he teamed up with real estate broker Chris McLaughlin, a lawyer and owner of four Keller Williams' realty offices in the Tampa Bay region. They developed a program that includes DVDs, a book and mentoring program that's enticing agents and investors nationwide to cash in on the housing bust.

He gets exclusive contracts to buy the properties and is able to wait until the lender agrees to the price. Once that agreement is final he sells the property for a hefty profit. The article states his system brings him in more than $100,000 per month. And apparently there have been several lawyers that say the program is legal.

Reverse Mortgage Costs

2009-05-08T08:39:00.003-04:00

We are very leery about reverse mortgages. Planning ahead for ones future is already complicated enough - but putting future roadblocks up for shorter terms gains does not seem very logical or well thought out. We have often felt that the only ones who do well with Reverse Mortgages are the lenders and brokers. In a USA Today article titled Reverse mortgages can be costly as seniors cash in on equity describes just how little the homeowners actually receive. Before looking at the article let's take a look at some of an example of what the homeowner actually receives -

Example: A 75-year-old woman owns a home valued at $250,000. She qualifies for an HECM credit line of $135,484, with a 7% interest rate. At closing, she withdraws only $67,742 of the loan. Assuming that the interest rate stays the same and that she remains in the home for 12 years and doesn't take any other loan withdrawals, this is the cost of her reverse mortgage:

Total amount borrowed	$67,742

Loan costs

Upfront costs	$12,000

Total mortgage insurance premiums	$7,933

Total monthly servicing fees	$5,040

Total monthly interest charges	$111,056

Total loan costs	$136,029

Total loan amount owed	$203,771

While it is no surprise that the lenders are doing well - this illustrates how well - the lender receives 2/3 of the total amount owed. Our worry about what happens when the example woman turns 87 and needs to live in a more assistive environment but may be close to destitute thanks to the Reverse Mortgage.

Now onto the article -

When faced with dwindling savings and mounting debt, elderly homeowners often consider a reverse mortgage for a cash infusion or to wipe out a monthly home mortgage payment. These days, some seniors also are using them to help stave off home foreclosure.

...
You must pay a one-time fee for the paperwork and processing of your loan. But last year, the government reduced such origination fees.

Before the change, homeowners paid a 2% fee on the loans. Now they pay 2% on the first $200,000 and 1% on any amount over that, with the fee capped at $6,000.

...
"If I were a consumer, I would focus more on the interest rate," says Meg Burns, director of the Federal Housing Administration Single Family Program Development. "That's an expense that is paid out over the long term of the loan, and it's a place where the product could be costly."

...

"It is just one part of a retirement strategy," says Brent Neiser, director of Strategic Programs and Alliances for NEFE. "It has its own set of cost and issues. And it should be one of the last options for supplementing your retirement paycheck."

We hear some of the same promises for Reverse Mortgages that we did for HELOCs. Using your property for trips, presents, etc. does not many any more sense than for big screen TVs or granite counter tops. But then again Top Ramen does taste better off a granite counter - or maybe not...

HELOC Lockdowns Still Surprising in NJ

2009-05-07T11:15:00.004-04:00

We have been running stories for over a year now of homeowners having their HELOCs suspended or closed down. Yet the news media still finds people who are shocked, yes shocked, that this is happening. Perhaps a year ago this was an interesting news story - but now, still? Evidently for one of our fellow Jerseyians this is still a big news story - enough to make the news. In an article and video (sorry not embeddable - following the link) from Philadelphia CBS 3 report titled 3 On Your Side: Home Equity Loans we were about the local story. Let's take a look -

Joanne LoBuono bought her New Jersey home as a fixer upper. And for the past decade, she's been paying for the repairs with a home equity line of credit.

She met with a banker last month to check on her account.

"She went to look at my line of credit and couldn't open it. She kept saying , 'gee, this is strange, it's blocked," said LoBuono.

The bank had taken away her line of credit.

Her home value is now not worth enough to secure the loan, so the bank cut her off.

Since the mortgage meltdown, banks are re-evaluating their home loans. In Joanne's case, it came as a complete surprise.

She received the letter from the bank informing her a week after finding out. But do people really believe that banks will give notice before closing off the access? That would not make any sense - most people would take everything they had and put it somewhere else if they knew their lines were going to be closed.

There are many on-line sources where people can see the estimated current estimated value of their property. Take a minute over at RealtyTrac's Home Value page and see how much your area has declined. Then you will not be surprised when you receive that letter in the mail...

Underwaters Continue to Rise

2009-05-06T07:55:00.004-04:00

The big question seems to be just how many homeowners are underwater - or owe more on their mortgage than their property is worth. Those who are underwater can not refinance (well perhaps with the new housing plan they can try very hard to negotiate with their lender). If and when they do sell it will have to be either a short sale or they will need to bring a check to closing. Needless to say these barriers usually put owners on the faster track to foreclosure. A new report came out from Zillow that has some astounding numbers. In the article from CNN Money titled More homeowners underwater we can see how bad things just may be. Let's take a look -

The real estate Web site Zillow.com reported that 21.8% of all U.S. homes, representing more than 21 million residences, were in a "negative equity" or "underwater" position after prices dropped more than 14% nationally in the year ended March 31.

"A combination of falling prices and low down payments has left many borrowers underwater," said Stan Humphries, Zillow's vice president in charge of data and analytics. "In some markets, more than half of all homes are in negative equity."

Those markets include Las Vegas, where a whopping 67.2% of homeowners would have to bring cash to the table if they sold their homes. Other markets are Stockton, Calif., where 51.1% of homes are underwater, and Modesto, Calif., where 50.8% of homes are in that position.

"That's really important, because homeowners in negative equity have fewer options if they take financial shocks such as divorce, job loss or medical bills, making foreclosure more likely," said Humphries.

...
Moody's Economy.com chief economist Mark Zandi estimated that 14.8 million were underwater at the end of March.

And the sad part - Zillow believes their numbers are conservative and may actually be higher due to the factoring of HELOCs and HELs. And this 21.8% is of all homes - not just properties with mortgages.

It would be interesting to find the number of homes that are underwater due to extracting equity rather than purchasing at or close to peak. Wonder if those numbers will ever come about...

Housing Fair Tonight

2009-05-05T10:00:00.003-04:00

Reliable housing information is always important. Whether the information is for foreclosure issues or rentals. Tonight in Newark there will be a "housing fair." Hopefully attendance will be high. Let's take a look at the information from this article titled Newark hosts housing fair from the Star Ledger -

North Ward Councilman Anibal Ramos Jr., Councilman-At-Large Carlos M. Gonzalez and Essex County Executive Joseph N. DiVincenzo will sponsor the annual Newark Housing Assistance Fair for residents today at 6 p.m. at the Lady of Good Counsel Church, 654 Summer Ave.

The program is designed to offer information to homeowners and residents from housing counseling agencies. Representatives will provide assistance with finding affordable housing and emergency rental assistance. Participating organizations include La Casa de Don Pedro and the Essex County - Division Council for Supporting Housing.

Participants will also receive information about options available to avoid foreclosure through the New Jersey Foreclosure Mediation Program, which provides housing counselors, lawyers, and mediators to homeowners facing foreclosure. Information will also be offered on how to avoid foreclosure scams.

If any readers go shoot us over and email and let us know how it was.

Down and Out in Bergen

2009-05-04T08:29:00.005-04:00

Front page on Sunday's record - not the RE section but the paper - is an article on foreclosures hitting our wealthier North Jersey suburbs. Due to savings and retirement plans many homeowners are able to push of the foreclosure notices by several months. But then the money runs dry and even the seemingly well to do get the Lis Pendens. Foreclosures are happening even in the most pristine towns. (Unfortunately Brigadoon is not one of the townships listed...) The article is titled Even affluent towns see rise in foreclosures. Let's take a look -

Home foreclosure actions nearly tripled in North Jersey's wealthier communities last year, as housing distress continued to spread beyond the modest neighborhoods that have been the most afflicted.

In a sign of how rising unemployment, especially in the finance sector, has hit higher-income residents, towns from Englewood Cliffs to Saddle River to Wyckoff saw large percentage increases in the number of homeowners facing possible loss of their property — although the numbers remain small.

An analysis of 2008 foreclosure activity by The Record revealed that lenders were at various stages of retaking nearly 370 homes in upper-income towns, where the typical single-family home sold for more than $620,000 in 2007. That was up 177 percent from about 130 cases in 2007 — at a time when foreclosure activity overall throughout Bergen and Passaic counties doubled. And rising jobless numbers means foreclosures are likely to increase in the months to come.

To be sure, the majority of foreclosure actions took place in lower-priced areas, where job losses and other setbacks can quickly lead to a crisis for homeowners who live paycheck to paycheck. Nearly three-quarters of the 8,900 North Jersey foreclosure filings in 2008 came in Paterson, Passaic, Hackensack and other communities where the typical home sells for less than $400,000.

...
By year's end, one in 108 homes in high-end towns faced possible foreclosure, compared with one in 300 during 2007.

They also provided this foreclosure chart to show how bad some areas have been hit in Bergen and Passaic -

On the front page but not online is the foreclosure numbers for the following towns-

Allendale 2007: 7 Foreclosures 2008: 16 Increase 129%
Closter 2007: 28 2008: 55 Increase 206%
Demarest 2007:6 2008: 24 Increase 300%
Englewood Cliffs 2007: 2 2008: 13 Increase 550%
Franklin Lakes 2007: 19 2008: 39 Increase 105%
Ridgewood 2007: 19 2008: 48 Increase 153%
Saddle River (and Upper Saddle River) 2007: 15 2008: 60 Increase 300%
Wyckoff 2007: 9 2008: 23 Increase 153%
Wayne 2007: 131 2008 237 Increase 87%

As the reverberations from the Wall Street job cuts increase these numbers are bound to increase - which will also continue to push home values down. We need a follow-up report on the changes in home values. And perhaps the local underwaters.

One other interesting note - usually an article like this has lots of snark comments - as of this posting there are none, zip, zero. Where are the usual commenters?

Flip Flopping in Chatham

2009-05-03T14:44:00.005-04:00

During the peak of the bubble almost anyone was a successful flipper. House prices were going up so fast that just purchasing the house and a few months added money into the investors pockets. Improvements and updating were paying off for even the most incompetent investors. And those that knew what they were doing made off really well. Money was everywhere and it seemed crazy not to be a part of it.

The unlucky flippers were the ones that jumped in at the end of the bubble - not realizing that they were at the end of the bubble. Paying top dollar for a property and making expensive improvements have not been making people rich - they are just leaving holes in the investor's pockets. Between the slow housing market and buyers not willing to pay for over-priced or unnecessary improvements many flips are now flops. Which brings us to today's featured example.

Here is the property -

The front of the property.

The stainless steel kitchen.

The informal great room.

Here is the property info -

Recently renovated colonial in sought after Wickham Woods. Spacious rooms, wonderful Family and Great rooms, 2 tier decking and level open yard. Great for entertaining.

Property Features

Status: Active
County: Morris
Subdivision: Wickham Woods
Year Built: 1971
4 total bedroom(s)
2.5 total bath(s)
2 total full bath(s)
1 total half bath(s)
12 total rooms
Style: Colonial
Master bedroom
Living room
Dining room
Family room
Kitchen

Basement
Laundry room
Bathroom(s) on main floor
Master bedroom is 17x13,Includes: Full Bath, Walk-In Closet
Living room is 20x13
Dining room is 15x13,Formal Dining Room
Family room is 20x14
Kitchen is 16x14
Basement is Finished
Hardwood floors
Fireplace(s)
Fireplace features: Living Room
Spa/hot tub(s)
2 car garage
Attached parking

Parking features: Built-In Garage
Heating features: 1 Unit,Gas Water Heater,Gas-Natural
Forced air heat
Central air conditioning
Cooling features: 1 Unit
Exterior construction: Vinyl Siding
Roofing: Asphalt Shingle, Wood Shingle
Pets allowed
Lot features: Level Lot, Open Lot
Approximately 0.52 acre(s)
Lot size is between 1/2 and 1 acre

Here are the financials -

The property was purchased in February 2007 for $1,190,000.

The original mortgage at time of purchase was for $850,000 with an adjustable/fixed ARM with CitiMortgage.

A HELOC was opened February 2009 for $145,000 with PNC Bank.

The property is currently for sale with a realtor for $1,175,000.

The current year's property taxes are $17,078.21.

The property was purchased just as the bubble was popping. The new owner invested at a most unfortunate time in the cycle. For each day the renovations went on the house's value was declining. A long-term renovation (this appears to have taken over 2 years) that may have paid off well during the boom years now is taking an expensive toll.

We do not know how costly the renovations were but just adding property taxes and the lower purchase price and the realtor pay this investor will lose at least $115,500 off of this investment - plus every penny put in the renovations. And on a property like this one would assume the renovations would have been expensive.

Update - It was just brought to our attention that what shows us as a realtor is a flat-rate listing service - costing about $500 not the 5 or 6 percent realtor fees. This owner is trying to save as much as possible - so the corrected loss will be approximately $45,500 plus renovations.

For those interest in purchasing the property, if they are able to put 20% down and received a 30-year fixed at today's Bankrate rate of 4.92% the monthly payments would be $5000.26. Adding in the property taxes and the monthly payments would be about $6423.44 per month - plus utilities and insurance.

For the other interested in parties that are unable to put even close to 20% down lets look at some other numbers. Using our favorite new calculator that includes the PMI charges and the new rate, a potential new buyer is only able to put down 5% or $58,740. The monthly mortgage payment would be $5937.81, plus a PMI of $725.56, and the taxes of $1423.18 totaling $8086.55. And for a buyer who puts only 3% down - the mortgage would be $6062.82, PMI now $987.78 the taxes stay at $1423.18 for a total monthly payment of $8473.78. Plus utilities and insurance of course.

Resubordination Issues

2009-05-02T09:48:00.002-04:00

Many people have both a first mortgage and a HEL, HELOC or piggyback loan. This large group is running into problems when they decide to refinance to a lower rate. But the lenders are refusing to resubordinate the loans thereby making the refinance issues harder. In the Washington Post today an article titled Getting Around a Lender Who Won't Subordinate outlines the issues very succinctly. The information supplied is in reply to a letter from a homeowner who has a $417,000 first loan that they want to refinance, a $77,000 second mortgage and who put down 10% at time of purchase. Let's take a look -

The line of credit is a second deed of trust (mortgage). That means that it was recorded in second place behind your first mortgage. If you pay off the first mortgage with your refinance money, the credit line moves up to first-place position.

No lender will refinance your main home loan and accept second place. Accordingly, many credit line lenders will agree to file a document among the land records that states that they agree to accept second place behind the new lender. That document is called a subordination agreement.

There is no legal reason why any credit line lender must agree to subordinate. In fact, many such lenders have started to either restrict the amount of money that can be tapped from their loans or have canceled them outright. Why? Because as the equity in your home decreases, their security becomes threatened.

...

Have you or your refinance lender talked to that lender? Have they given you any valid reason why they do not want to subordinate?

Talk with your proposed new lender. Ask whether they make credit line loans. If so, you can refinance, get a new first mortgage as well as a new line of credit, and pay off the old lender.

Of course they would like their line paid off and closed out. In this current economic environment it only makes sense. It would be interesting to see some statistics on this rather than just the anecdotal stories we come across.

AG Stops 2 Foreclosure Fraud Companies

2009-05-01T09:43:00.004-04:00

The big warning lately has been to watch out for companies that claim they will help with foreclosure but end up leaving the victims in worse shape. New Jersey's Attorney General has filed charges against two Union County companies that appear to have taken advantage of their clients misfortunes. The companies are Property Solutions of NJ and PSRE Holding Company. In this article from The Jersey Journal titled State A.G. Says Loan Creeps Stole Homes we get a sense of what the company was doing. Let's take a look -

An 84-year-old Bayonne woman is among the victims of two Union City companies that promised to help homeowners facing foreclosure save their homes, officials say.

But instead of saving people's homes, the companies purchased the houses at deep discounts, saddled the owners-turned-tenants with even bigger monthly payments, and in a number of cases, including that of the Bayonne woman, evicted the previous owners, officials say.

...
The defendants typically approached people shortly before or during the grace period just after the scheduled sheriff's sale of the victims' properties, officials said. They convinced the residents to sell their homes to them for the amount they owed the bank, rather than what is generally a far greater sum arrived at in the auction, officials said.

The defendants offered to help save the victim's home by paying the balance of the homeowner's delinquent mortgage and then entering into a sale/leaseback agreement with the victim, officials said. But the monthly lease payments were often far higher than the mortgage payments the homeowner couldn't make in the first place and they were typically required to buy the home back within 90 days at a far higher price than the defendants' paid, officials said.

In the end, many victims either vacated or were evicted by the defendants, even if they made their payments, officials said.

At best with some of these scams people are paying thousands of dollars for useless services - at worst they are lose their properties, their savings and take a huge hit to their credit. Which is what sounds like happened to the 84 year-old victim. These victims are already vulnerable. Hopefully this deters others from taking advantage from an already bad situation and it will also alert potential marks about what to be on the watch for. Remember the warning signs - paying someone up front or signing over your property.

Short Sales and Promissory Notes

2009-04-30T08:56:00.002-04:00

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

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

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

...

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

...

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

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

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

Housing Plan and Second Mortgages

2009-04-29T07:59:00.006-04:00

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

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

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

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

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

...

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

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

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

The goal of the plan is to plug a hole in the administration’s original program, which offered subsidies to lenders who agreed to modify the primary or first mortgages of homeowners who had fallen delinquent or were in danger of doing so.
...
Under the new program, which officials said would not get under way for at least several weeks, participating mortgage lenders would agree in advance to automatically reduce the interest rates and possibly the outstanding loan amounts for a second mortgage as soon as the first mortgage had been modified.

Lenders would be required to lower the interest rate to just 1 percent for any second mortgage in which the borrower was repaying principal as well as interest. On interest-only loans, the lender would have to reduce the rate to 2 percent. If the lender on the first mortgage agreed to forgive some of the principal loan amount, the second-tier lender would have to forgive the same share of its loan as well.
...
It remains unclear whether mortgage companies will be attracted to the new offer. The second-tier lenders would be making much deeper concessions to borrowers than the first-tier lenders.

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

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

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

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

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

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

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

Second Mortgage Incentives

2009-04-28T07:32:00.002-04:00

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

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

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

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

...

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

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

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

Do It Yourself in NJ

2009-04-27T06:53:00.002-04:00

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

The Home Improvement Research Institute, an industry trade group, conducts surveys of 13,000 homeowners nationwide per month. In February, respondents said they expected work done by a contractor at their home to account for about 60 percent of the total cost of pending projects. That's down 4.5 percent from the same time last year. Overall, the group projects a 6.4 percent decrease in money spent on home improvement in 2009 compared with 2008.
...
Rick Kadien, owner of Home Hardware in Waldwick, said he recalled a frequent customer who he knew had always hired landscapers for garden and lawn work. Not long ago, the guy came in and bought a leaf blower.

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

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

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

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

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

Option ARM and Underwater In Dover

2009-04-26T09:41:00.002-04:00

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

Here is the property -

The Front of the House.

The non-updated kitchen.

A bedroom with Hard Wood Floors and Crown Molding.

The back yard with a large driveway.

Here is the property info -

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

Here are the financials -

The property was purchased just as the housing bubble in December 2005 for $370,800.

The first mortgage at time of purchase was made using the wonderful Option Arm with First Magnus was for $296,640.

At the same time a second mortgage (AKA piggyback mortgage) was also made with First Magnus for $74,160.

The property is currently for sale with a realtor for $265,000.

The property taxes were $5556.62 for 2008.

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

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

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

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

Mortgage Brokers Are Working

2009-04-25T11:00:00.002-04:00

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

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

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

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

Now, some lenders that were forced to lay off personnel in the past year are looking to add staff to cope with the increased volume.
...
Jim Linnane, Wells Fargo & Co.’s northeast division manager for retail lending, said refinancing application rates are three to four times normal levels. In 2008, purchases and refinancings were split evenly; now the ratio is 25 percent purchases to 75 percent refinancings.

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

Equity and the Small Business Owner

2009-04-24T07:58:00.006-04:00

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

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

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

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

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

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

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

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

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

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

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

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

2009-04-23T08:49:00.003-04:00

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

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

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

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

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

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

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

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

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

Foreclosure Stats

2009-04-22T08:10:00.003-04:00

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

• 32 percent experience a job loss

• 25 percent experience a health crisis

• 85 percent have already missed one mortgage payment

• 50 percent have already missed two payments

• 43 percent of American households spend more than they earn

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

And a little more from the article itself -

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

...

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

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

Walking Away From More Than Just A House

2009-04-21T07:48:00.005-04:00

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

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

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

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

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

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

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

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

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

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

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

Discount Fees with No Discount

2009-04-20T07:41:00.004-04:00

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

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

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

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

...

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

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

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

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

Leaving Behind Lake Hopatcong *Update Below

2009-04-19T10:56:00.002-04:00

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

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

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

Here is the property -

The front of the home.

The kitchen, with a little left behind.

The forgotten plants and decor from the family room.

A beautiful desk left behind in the office.

Matching wood furniture left in the bedroom.

The saddest trash out - where is the baby sleeping now?

Here is the property info -

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

Here are the financials -

The property was purchased in May 2003 for $332,000.

The original mortgage at time of purchase was for $265,600 using a 30-year fixed with Fleet National Bank.

In September 2003 a HELOC was opened for $35,000 with Fleet National Bank.

The following May the original HELOC was closed and a new one for $57,700 was opened again with Fleet.

In June 2005 the previous HELOC was closed down and a new one was opened again, this time for $103,300 with Fleet of course.

In May 2006 the HELOC line was closed and re-opened again, this time for $153,000 this time with Bank of America.

The foreclosure process started with a Lis Pendens filed in May 2007 for the original mortgage with Fleet.

15 days later another Lis Pendens was filed for the last HELOC with Bank of America.

The property is currently listed as an REO for sale a through a realtor for $259,900.

The property taxes for 2008 were $7,385.54.

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

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

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

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

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

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

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

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

What a difference a larger downpayment can make.

HELOCs Past and Present

2009-04-18T09:45:00.000-04:00

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

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

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

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

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

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

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

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

Option ARM Foreclosures Delayed

2009-04-17T09:41:00.007-04:00

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

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

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

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

...

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

And the homeowners who are holding option ARMs when the wave of resets hits won't face as big a shock because interest rates have fallen, adds Fratantoni. "Interest rates have come down to the point where the resets that are going to occur are going to be a bit of a non-event," he says. "Very few borrowers will experience the recast." But Nicholas Chavarela, managing attorney for Orange (Calif.)-based America's Law Group, which represents borrowers negotiating modifications, says banks remain reluctant to reduce principal for underwater borrowers.
...
Under the plan, taxpayers and participating lenders would share the cost of cutting borrowers' debt-to-income ratio to 31%. Loans terms could be extended to 40 years and interest rates dropped to as low as 2%. But option ARM borrowers would likely have to pay more each month, even with a modification, because they'd suddenly be required to pay both interest and principal. "The Obama plan needs to be built upon," Chavarela said.

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

...

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

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

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

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

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

Foreclosures Up in NJ

2009-04-16T09:48:00.004-04:00

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

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

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

It won't end soon, economists say. They predict the unemployment rate will continue to increase throughout the year, meaning more people will not be able to make mortgage payments and, in turn, face foreclosure.
...
Foreclosures in the state rose 1.96 percent since March 2008. Quarterly data reflected the banks' moratoria. Foreclosures in the first quarter fell nearly 30 percent since the fourth quarter of 2008 and fell 10.7 percent over the first quarter of 2009, according to RealtyTrac, which lists foreclosures.

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

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

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

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

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

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

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

New NJ Foreclosure Numbers

2009-04-15T14:35:00.000-04:00

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

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

Key Report Findings

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

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

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

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

The full New Jersey Q1 2009 Foreclosure Report can be downloaded at http://www.propertyshark.com/mason/BlogCenter/marketreports.html.

Obviously there are some serious problems in Passaic - looks like they are coming from Paterson.

Reverse Mortgage Now Poverty Prevention Programs

2009-04-15T12:02:00.001-04:00

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

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

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

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

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

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

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

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

Tranforming Debt into Theft

2009-04-15T09:43:00.003-04:00

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

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

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

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

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

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

...

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

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

NJ HELOC Heaven

Banks Make More $$ Not Modifying Mortgages

Bake Sales for Mortgages

Sub Primers in Charge of Mortgage Mods

Foreclosure Summary

Foreclosures Down in NJ but Up Nationally

Mixed Messages

NJ Mortgage Mod Scams

July's Loan Mod Meeting

Not Making Payments

Reverse Mortgages By The Numbers

Renters Market

Expanding the Obama Housing Plan

Protecting Consumers Against Lenders

Trying for Resubordination

People Like Bubbles

Wealth, Housing and Spending

Another HELOC Is Filed

The State of the Nation's Housing Reviewed

A Reverse Mortgage to Save a Business

The Luxury of Plywood in Randolph

Some Interesting Alternatives to a Reverse Mortgage

Americans reducing debt

Where is the Recession At?

Credit Scores and your HELOC

Reverse Mortgage as Last Choice

Let the HELOC Lawsuits Commence

Good News For Renters

NJ Foreclosures Drop

Recasts and Foreclosures

Reverse Mortgages Are Increasing

Undwerwater Businesses

There Is Life Without A HELOC

Frugal Fatigue

June Housing Fair

More Broken Promises

Foreclosures and Unemployment

Foreclosure Renovations

Interest Rates Are Rising

Over 6 Million Homeowners in Trouble

Is the Housing Market Thawing Yet?

NJ Prices Still Falling

Housing Market Still In Trouble

Update to December Example

Savings and Debt

HomeSaver not Saving Homes

Deals on Contractors?

New Appraisal Rule

Types of Mortgage Mods

New Reverse Mortgage Issues

Housing Bubbles Popping In Dover

More Short Sales

The Great Disappearing Equity

Home Prices Plunge

National Foreclosures Rise - NJ Foreclosures Dip

Destressed Property Training

The Home Tending Trend

Recession Renovations

Second Home Shore Foreclosures

The Short Sale Kid

Reverse Mortgage Costs

HELOC Lockdowns Still Surprising in NJ

Underwaters Continue to Rise

Housing Fair Tonight

Down and Out in Bergen

Flip Flopping in Chatham

Property Features

Resubordination Issues

AG Stops 2 Foreclosure Fraud Companies

Short Sales and Promissory Notes

Housing Plan and Second Mortgages

Second Mortgage Incentives

Do It Yourself in NJ

Option ARM and Underwater In Dover

Property Features

Single Family Property

Mortgage Brokers Are Working

Equity and the Small Business Owner

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

Foreclosure Stats