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Posts Tagged ‘mortgage’

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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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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Short sales would appear to be the best answer to a bad situation. The borrower can’t carry the mortgage payments, the loan is more than the house is worth. With a short sale, the lender agrees to take less than the loan in exchange for a buyer that keeps the house off their hands.

Seems like a better solution all around. Short sales reportedly are not as damaging to a credit rating than foreclosure, the legal costs of a foreclosure are avoided, and the bank typically gets more money (especially when the buyer is a retail buyer) than they would through foreclosing on the property, carrying the property and paying the holding costs, and then selling it as bank owned.

However as Robert B. Jacobs writes, the best solution isn’t always what happens. In one case the lender refused to release the seller from being liable for the difference between the selling price and the loan amount. So the property went through foreclosure instead. While foreclosure laws in each state are different, apparently in the state this foreclosure occurred (probably California), the lender lost recourse to go after the borrower for the difference. The saying “cutting off your nose to spite your face” seems appropriate here.

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Here’s a statistic I bet you have heard before, one in four mortgages are underwater.  So the question is given that the house is an investment loss, do you walk away?  A  CNN Money article interviewed 5 homeowners and asked that same question.   To homeowners a house is more than a house, it’s a home, and many of them have decided to stick it out and keep the home.   One lone couple has decided to walk away, citing attempts to work with the bank for a principal reduction of $100K, and when that didn’t work letting it go to foreclosure for a $250K loss to the bank..   Hah, banks are not giving out principal reductions .. at least not that I have heard of.  Banks are playing hardball and not giving up much ground, although you would think they would work harder to avoid foreclosure.  After all, who got the bailout money?

I read through the comments, and most of the peanut gallery was upset with the lack of responsibility people are showing by walking away from their homes.    While I sympathize with the sentiment (or may I say jealousy), is it really a lack of responsibility, or just a sober and difficult financial decision?  Let’s see, I could run through all my saving and go broke or I can jettison this asset that the very bank that lends on it caused a credit crisis that caused it’s value to drop beyond all the worse case scenarios I ever considered.

I thought the commenter that professed disbelief at the 50% drop in value was cute.    I recently received an offer of $55,000 for a house that has a $186K note on it.  I should be lucky to only have a 50% drop.

 

 

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I recently viewed a real estate presentation.   The speaker was visibly perturbed by the recent decision of Fannie Mae to limit investors to 4 mortgages.  His point was that experienced investors will help the housing recovery by buying the REO/foreclosed properties and holding them.  Helping clear the inventory of bank owned properties on the market could only help the housing market. But by limiting investors to 4 mortgages, Fannie Mae was unnecessarily limiting investor activity that could help the economy.

I’m sure he was pleased by the recent announcement by Fannie Mae, that it will be updating its guidelines so that investors will be able to obtain financing if they have between five to ten mortgages not four (note that the mortgages can be with any lender, not just Fannie Mae).  Not surprisingly the criteria is more stringent than in the past, bigger down payments and a minimum credit scores of 720, but at least for those who qualify the artificial ceiling of 4 mortgages has been lifted.

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The mortgage market, particularly with the take over of Fannie Mae and Freddie Mac by the US government, continues to be in flux. If you own more than 4 properties or want to do a cash out refi: watch this mortgage market update.

Disclaimer: I am not recommending this business. However I have talked to Todd and in my opinion he is knowledgeable.

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Have you tried to finance or re-finance a property lately? It’s a different world. A reader’s question featured in the Benny Kass column wondered if the lenders would laugh in their face if they applied for a home equity line. Since all they have in equity is the down payment they made a year ago, it would be pretty tough to get a line of credit on that property. Hopefully their broker won’t laugh in their face as well.

I’ve recently talked to a mortgage broker as well. I wanted to refinance some land and I also have an ARM on a duplex that is expiring in October. I have the ARM at a great rate, 5.6% however unfortunately that kind of a rate is not available now, ARM or no ARM, for an investor. Homeowner rates are the highest they have been since September, 30 year fixed is at 6.42% and 5 year ARMS are at 5.89%. Since investor loans are at least a point more, I’m likely looking at a 7% loan which means a higher payment. So I have to decide whether to sell or absorb the higher payment. It’s a close to breakeven property.

Lenders will no longer finance land at a 80% LTV. They will only consider loans at 65% or 70% LTV for land. With the loan I currently have, it is at best 75% LTV depending on what the appraiser would say. So in that case I would have to come to the table with money.

It was not a very encouraging conversation, certainly not much in the way of options. I commented to the broker that he must have heard many stories like mine where we are stuck with negative cash flow property that is tough to refinance and that puts us in a tough spot. His answer was memorable, at least to me, “Actually, you are a success story”. Eeek, since I’m not feeling like a success story at all, I really feel for the “failures”.

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I’m going to go with the subprime bailout theme for another post…

Meet the Jones. Recently married and planning to start a family, Jim and Mary Jones bought their house almost three years ago. Jim and Mary had good incomes and easily qualified for the loan. Mary works at a bank and Jim is a customer support center manager. The down payment (20%) was a loan from Jim’s 401K.  A year ago, Mary became pregnant, however there was complications and Nancy was born premature with lots of medical issues. Nancy’s prognosis is uncertain, and Mary felt that she had no choice but to quit her job and focus on caring for Nancy. In the meantime, the customer support center was moved to India, Jim lost his job two months ago. He found work at a brokerage but it pays 2/3’s of his original salary. They also lost their health insurance. Their savings were wiped out by having to pay back the 401K loan. Jim and Mary’s adjustable mortgage will reset in 3 months. Jim and Mary have great credit but they are behind on their mortgage payments. With both of their incomes they could have paid the higher mortgage but now they can barely afford their current payment. A recent meeting with a realtor was not encouraging, technically yes they can sell the house and get a little money back, but there is over a year’s inventory in their area.

Let’s now meet their next door neighbors, the Flemings. Patty Fleming is an event planner, Rick is a pharmaceutical salesman. The Flemings often live beyond their means. They lease flashy cars and Patty loves to shop. Patty’s nails and hair are perfect and she has them done frequently. Rick has expensive suits. They have gotten very good at playing credit card roulette, frequently transferring balances to a new card with a teaser rate. They don’t have very good credit but when they bought their house, Rick won a salesman of the year bonus and so they had cash for the 10% down payment. They are current on their mortgage. Their ARM resets in 4 months and they bought their house 20 months ago. They knew up front they wouldn’t be able to afford the higher payment, but figured they could just refinance. Now they can’t because their house is worth less than their mortage.

Who should be helped?

The Flemings have a much better chance of qualifying for the bailout, here’s why the Jones are out of luck:

  • Their FICO score is too high
  • They are behind on their payments
  • They can’t afford their current payments
  • They have equity (although it is fast evaporating)

What do you think?

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There’s been lots of media on the proposed subprime bailout. Mostly it trends towards the negative. I’ve seen so many newspaper, magazine and newspaper articles on this topic, that to single out one or two links in this blog seemed kind of pointless. Media these days is pretty homogeneous, there isn’t a ton of differentiation amoung the pundits. Here is the impressions I’ve captured.

  • Doesn’t help enough people Only people with a lower FICO score and current on their payments qualify. One article derisely called it “The one test you should flunk” (refering to the credit score), another advises “Stop paying your utility bill but pay your mortgage” (so that your FICO score becomes low enough). Additionally to qualify, you have to have little or no equity in your home and you have to prove you can’t afford the current payments but can afford the lower payments under the program. So as you can see, lots of hoops to jump through. And, by the way, investors don’t qualify either.
  • May exacerbate the housing market downturn Some critics feel that by postphoning the reset on some homeowner’s mortgages but not others, the downturn will last longer.
  • Will tarnish mortgages as an investment The investors that invested in the packaged mortgage securities bought them for a projected income. Now a government program is coming in and preventing the investors from receiving the higher income from the ARM resets. That investor may think twice about investing again.
  • Interference with natural market forces Many feel this is a natural market correction to housing prices that got too out of whack. They further blame either the mortgage brokers and the subprime borrowers for being irresponsible and planning to use furture home equity to save them.

Lot’s of anger at bailing out irresponsible homeowners out there.

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