Foreclosures Down in NJ but Up Nationally

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.

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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

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...

Not Making Payments

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

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.

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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.

Protecting Consumers Against Lenders

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

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

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

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

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

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

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

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

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

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

People Like Bubbles

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

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

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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

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...

A Reverse Mortgage to Save a Business

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

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

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

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

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

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

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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...

Some Interesting Alternatives to a Reverse Mortgage

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


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

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

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

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

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

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

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

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

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

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

Americans reducing debt

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

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

Many Americans Say Now Is a Bad Time to Borrow

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

Many Worried About Making Their Monthly Payments

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

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

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

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

Credit Scores and your HELOC

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

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

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

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

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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.

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

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

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

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

Reverse Mortgage as Last Choice

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

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

...

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

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

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

...

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

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

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

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

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

Reverse Mortgages Are Increasing

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



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

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

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

...

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

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

...

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

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

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

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

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

Undwerwater Businesses

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


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

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


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


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


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

...

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

...

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

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


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


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

There Is Life Without A HELOC

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

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

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

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

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

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

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

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

Frugal Fatigue

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

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

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

...

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

...

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

...

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

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

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

The Great Disappearing Equity

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...

Second Home Shore Foreclosures

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...

Reverse Mortgage Costs

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...