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Posts Tagged ‘housing crisis’

Loan Modifications, touted as one solution to the housing crisis, haven’t lived up to their promise. For one thing, they seem quite difficult to get. A cbsnews article suggests this is because of potential problems with the banks’ balance sheet causing by lurking bad home equity loans. The theory goes, if the banks recognized the true value of these loans, the writedowns to their balance sheets would be in the billions, causing losses and a possible need to increase the amount of regulatory capital they have on hand. For those of you that have been following the financial crisis, you’ll know there has been efforts to force the banks to increase the amount of cash they have to offset the amount of money they have lent out in loans. This is what is meant by regulatory capital.

The article shows a Reuters image I’ve captured here.

Bank exposure to unsecured home equity loans

Bank exposure to unsecured home equity loans

This raised some questions in my mind.

  • Why is this impacting requested loan modifications where there is no second lien present? I can understand the reluctance to modify the second lien so that it loses most of it’s value, but I don’t think this explain the many loan modifications that are not getting through as there is no second lien or home equity loan.
  • What the heck is a “unsecured home equity loan”? A home equity loan by definition is secured by real estate. Otherwise it is just a personal loan. So I did some research. Apparently, a home equity loan becomes “unsecured” when the there is no equity to support it (it’s an underwater loan). If this is the explanation I think the “40% writedown” may be too conservative. In distress situations, the second lien is usually wiped out almost completely.
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The Obama administration has not been happy with the lenders’ effort to help property owners in the housing crisis. For the more than 6.5 million property owners currently late on their mortgage only 170,000 loan modifications have been completed.

Under increasing government pressure, Bank Of America launched a new program to erase as much as 30% off the principal in underwater home loans. The program should be available sometime in May, and before you ask, yes it is only available to homeowners with principal residences.

The enhancements to the National Homeownership Retention Program (as they call it) are coming soon according to their web site.

Bank of America has not been my favorite bank, but I am cheered to see a major bank lead the way towards measures that must be taken. Both property owners and the banks are going to have to compromise and meet somewhere in the middle for us to get out of this mess.

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Troubled homeowners who have gone through a foreclosure or a short sale may have a lurking problem that could cause them problems years down the road. Even though you think you may have put a bad chapter in your life behind you, the lender can still come after you with a deficiency judgment.

A deficiency judgment is when the lender sues you for the difference between the loan amount and the amount they (the lender) realized when the house was sold. Whether it was through a short sale or sold as a bank owned property may not matter.

Yahoo finance published an article that illustrates the problem with several examples. In one, a borrower even signed a document at a short sale closing that gave the lender permission to come after him.

If you are in a short sale, make sure you get agreement (in writing) that the lender will not pursue a deficiency judgment against you. If you have lost a house through foreclosure, whether the lender can come after you will depend on the state the house was in.

If you are in a recourse state, the lender can pursue a deficiency judgment against you. Per The New Republic blog, the non recourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin. However, even iin these states, a lender may have recourse with second liens and refinanced loans. Regardless, consulting an attorney is needed for advice on your specific situation.

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Strategic defaults are on the rise. The number of “strategic defaults” doubled from 2007 and 2008 (588,000 in 2008) and now comprise more than a quarter of mortgage defaults. I’ve also seen both 16% and 17% quoted.

So what is a strategic default? A strategic default is when a homeowner (presumably includes investors) walks away from his mortgage payment when he or she is still fully able to pay.

Strategic defaulters get special scorn for their actions. Never mind that it would take fully 60 years, in one example, to recoup their losses, you are a deadbeat for walking away according to Henry Paulson (even though it’s a “good business decision” in other arenas).

I wanted a more precise definition of is considered a strategic default, while I’m sure there are situations where it is perfectly clear that the borrower could afford the mortgage, it’s not always a black and white scenario. What if you could scrape together the money every month but it required a second job to do so? If you decided that after a year of insane workweeks you couldn’t keep it up, would you fall into the “strategically defaulting” camp?

Per studies done by Experian and Oliver Wyman people who strategically default have a different profile than the classic borrower in trouble. Borrowers who are strategic defaulters will typically have a high credit score and suddenly default on the mortgage without warning, but on no other debts. Compare this to the typical pattern of financial distress on multiple debts, where the mortgage payment is the last thing that a borrower will give up paying on. Strategic defaulters are typically concentrated in the negative equity markets and often have large mortgage balances.

The exact criteria that Experian-Wyman used to mine 24 million credit histories to find the 588,000 strategic defaults in 2008, is the following: “We define such borrowers as those who rolled straight from current to 180+ [days past due], while staying current on all their non-real estate debt obligations, 6 months after they first went 60 [days past due] on their mortgage.” With this definition, my “second job” scenario I outlined above, would be considered in scope.

The recommendation is to not offer these borrowers loan modifications. I guess the option of offering to reduce the principal balance still appears to be a foreign concept to the lenders.

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What do you do when a property you bought for 5.4 billion is now only worth 1.8 billion? Why you give it back to the lender of course.

Several people who track the commercial real estate market have warned of a coming wave of commercial property defaults that might make the current residential real estate problems look like peanuts. Adding credibility to this claim, Tishman Ventures recently defaulted on Stuyesvant Town & Peter Cooper Village in Manhattan and returned the property to its lenders in a deed-in-lieu arrangement.

With a loan more than double the property value, the action by Tishman makes financial sense. They are not the only ones giving property back to the banks, recently several towers in San Francisco bought by Morgan Stanley at the peak, were returned to the lender. Note the quote in the article: “This isn’t a default or foreclosure situation,” …. “We are going to give them the properties to get out of the loan obligation.”

The Huffington Post, a popular blog, contrasts the Stuyvesant situation with a borrower who is underwater on a mobile home. Entitled “Tishman Speyer Walked Away From Its Stuyvesant Town, Peter Cooper Village Mortgage. Why Can’t You?”, one has to wonder at the double standard here.

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Aren’t you glad 2009 is over?  So many foreclosures, 10% unemployment, so many houses underwater.   2010 has to be better right?    Some realtors and economists are predicting better times for real estate in 2010.  I really want to believe them.  I really do.  But what about the coming mortgage loan resets that will start about mid 2010?

As many know we just went through a period of massive defaults on subprime loans. When housing prices stopped going up and people starting losing jobs, many of those loans became worthless.  However we are still facing another period of possibly the same thing.  Many ARM (adjustable rate mortgages) are due to reset in 2010 with the peak in 2011.

Here’s a picture from a report from the imf (international monetary fund).

Mortgage ARM Loan Resets

Mortgage Rate Resets

So far the banks have not been very accommodating to borrowers.   Troubled borrowers have reported it is difficult to convert the temporary modifications from the government’s Housing programs to permanent programs.  Only 9% of mortgages have been modified. And adjusting the principal value … which is what is really needed here .. forget it, they would rather foreclose.

So unless the banks take proactive action with the this coming wave of Option ARM and Alt-A mortgage resets, housing isn’t out of the words yet.

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Smart Money just released an article on the 5 real estate markets expecting to fare best in 2010.  Predicted to be the best is Tacoma, WA up a predicted whopping 2.44%.  The rest of the 5 come under 1%.  Well that’s certainly going to make up for the staggering downturn of the last couple of years (yes that last sentence was sarcasm).

Hinted at in the article is trouble that might be caused by a coming big wave of adjustable mortgages adjusting to much higher payments.  I’ve seen many blogs and articles warning that we are not done yet with the damage caused by ARMs, where the loan value keeps increasing and the home value keeps sinking.   While activity has picked up in many real estate markets, it seems primarily driven by the $8K tax credit and the availability of cheap foreclosed homes.

We are not out of the woods yet.

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