Showing posts with label subprime. Show all posts
Showing posts with label subprime. Show all posts

Monday, December 7, 2009

FHA Will Tighten Underwriting

FHA Will Tighten Underwriting

According to this Inman News article, FHA will tighten up in 2010, "The Obama administration is moving to tighten underwriting standards on FHA-backed loans by increasing the amount of upfront cash homebuyers must bring to the table, raising minimum FICO scores for new borrowers, and reducing maximum seller concessions from 6 percent to 3 percent." Many industry experts and insiders believe that this will result in the FHA raising the minimum down payment from 3.5% to 5.0%, raising the minimum credit score to around 620 and reducing (from 6% to 3%) the amount of closing costs that the seller can pay on behalf of buyers. The reason that the FHA is taking these measures is that the FHA is currently experiencing record default rates and is insolvent as a result of the FHA's role in becoming the de-facto replacement for the extinct subprime mortgage market. I covered this issue in my blog post FHA in Deep Trouble: Default Rates Skyrocketing.

If you are a Middle TN homeowner, property owner, condo owner, real estate investor, home builder or real estate developer who cannot pay your mortgage payments (due to losing your job, having your income reduced, illness, health problems, adverse business conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), know that you will not be able to pay your mortgage, have defaulted on your mortgage, are already in foreclosure, or owe more than your home is worth, please contact me to discuss your options including a loan modification and a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home). I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I primarily help sellers (homeowners, property owners, condo owners, owners of high end homes and properties (estate homes, luxury homes and executive homes), real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Robertson County TN, Maury County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN, Belle Meade TN, Nolensville TN, Spring Hill TN, Gallatin TN, Springfield TN and Mt. Juliet TN).  If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

Wednesday, November 4, 2009

New Subprime Lender: The US Government

New Subprime Lender: The US Government

According to this City Journal article, Our Subprime Federal Government, "President Obama’s mortgage plan imitates the lenders who inflated the housing bubble." The article references the 10/9/2009 Congressional Oversight Panel report, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months, for its data.

On 10/9/2009 the Congressional Oversight Panel released its first analysis of the Obama Administration's Making Home Affordable (MHA) initiative (Through the US Treasury, the MHA is "the federal government's central tool to combat foreclosures. MHA consists of two primary programs. The Home Affordable Refinance Program (HARP) helps homeowners who are current on their mortgage payments but owe more than their homes are worth, refinance into more stable, affordable loans. The larger Home Affordable Modification Program (HAMP) reduces monthly mortgage payments in order to help borrowers facing foreclosure keep their homes.") via the report mentioned above, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months. According to the report, the US Treasury's stated goal for the HAMP program is to "prevent as many as 3 to 4 million of these foreclosures." The report goes on to say that "there is reason to doubt whether the program will be able to achieve this goal."

The article states "The analysis shows that the Treasury, in trying to keep people in homes they can’t afford, is relying on the same perverse principle that inflated the housing bubble in the first place: namely, that it’s fine to borrow recklessly to buy a house, because house prices can only go up and up. Trying to maintain a bubble mentality, rather than help people adjust to life after the bubble has burst, will hobble economic recovery."  I absolutely agree with this statement.  The question I keep asking myself is why when the real estate market was going up rapidly did we repeatedly hear the cry of "affordable housing" with the result of more and more low down payment and easy to qualify for mortgage loans combined with federal, state and local housing grants, bond programs, etc. (the result of these loans and subsidies was to artificially increase buyer demand and push home prices up further), and now that the real estate market is finally moving home prices back into affordable territory we have the federal government intervening to artificially prop up home prices?

The article states "President Obama first announced HAMP eight months ago. The program helps struggling borrowers slash their monthly mortgage payments to 31 percent of their gross income (from participants’ original median of 45 percent). To encourage the financial industry to modify the loans, the government offers inducements to mortgage “servicers” (the companies that handle paperwork for borrowers and lenders), including a $1,000 payment each year for the first three years of a successful “workout.” The government also offers lenders partial compensation for the losses that they will take on the workouts. And the government gives borrowers $1,000 a year for up to five years for staying current on their modified loans; the extra money will help pay down their loans. Reworking bad loans isn’t a bad idea; it can prevent even bigger losses for both borrower and lender. Say you purchased a house worth $220,000 in 2006, borrowing 100 percent of the value, and the house’s value has since fallen to $150,000. If you can afford a mortgage on $175,000 worth of debt, it likely makes more sense for your lender to cut your mortgage debt down to $175,000 than to sell your house for $150,000. Indeed, such write-downs should be a healthy part of the economy’s readjustment to a post-bubble world. They would help address the housing bubble’s legacy: one-quarter or so of homeowners now owe more than what their houses are worth.  Healthy write-downs of bad debt are not what the White House is encouraging, though. HAMP has been reducing people’s mortgage payments not by cutting the amount they owe in line with realistic home values, but by slashing the interest rates on their mortgages. Of the nearly 2,000 completed workouts so far, mostly of initially fixed-rate mortgages, under 1 percent have included forgiveness of any debt, the congressional oversight panel said; instead, mortgage administrators have cut payments "almost exclusively" through interest-rate reductions. The HAMP borrowers’ median annual interest rate has thus fallen from 6.85 percent to an absurdly low 2 percent annually. The cuts have made a big difference in monthly payments, which have dropped from a median $1,419 to just $849.  But there’s a catch: the cuts are temporary. Five years from modification, the interest rate on each modified mortgage will begin to increase, either to the original mortgage rate or to the market mortgage rate at the time the loan was modified. As the congressional report notes, “the affordability of the loans will move back toward [original] levels eight years from now.” Treasury has taken fixed-rate mortgages that borrowers can’t afford and transformed them into the very “teaser-rate” mortgages that grew so popular during the housing bubble—to mask and exacerbate the same problem: the house costs too much for the buyer."

Even worse than the loan modifications being temporary is the fact that the mortgage lenders and servicers can add on some of the costs of missed mortgage payments and other fees to the homeowner's original mortgage balance.  Therefore, unless there is a substantial increase in housing prices, these homeowners could be even more underwater/upside down than when they started!  According to the article, "The median homeowner in HAMP owed an untenable 122 percent of the value of his house before entering the program; today, the same owner owes an even more untenable 124 percent. Worse, before modification, 474 of the 2,000 HAMP borrowers weren’t yet “underwater”—that is, owing more than the value of their homes. Now, only 424 remain in that relatively good position. Will the $5,000 (maximum) in government payments to borrowers who stick to their new mortgages cut the amount they owe by more than the lenders will eventually increase it?  So far, it looks to be close to a wash.  Notwithstanding the government’s best efforts to sustain a bubble, home prices are falling to about where they should be so that people can afford to buy houses again without incurring impossible debt burdens."  I have been saying this for some time now.  Home prices need to fall to a point that they are sustainable based on peoples' incomes and not their ability to take on debt. The result of this "false propping" will be more short sales and foreclosures for years to come.

The article goes on to state "Consider the Treasury’s small universe of HAMP participants. Treasury balks at releasing the raw data behind its program, but the interest rates and monthly payments detailed in the congressional report make it easy to determine that the average HAMP borrower likely owed about $220,000 on his mortgage before and finds himself with a house worth about $180,000 today. Suppose, in an ordinary process of healthy write-downs, lenders reduced that average loan to today’s value and lenders of any second mortgages or home-equity loans—which are supposed to offer less protection—lost all of their money (as they should, but don’t, under HAMP). In that case, the borrowers’ median monthly payment would be less than $1,200, even at the original 6.85 percent interest rate. And at the record-low 5 percent rates that qualified borrowers can secure today—something that the government could more reasonably support than the 2 percent rates—payments would fall below $1,000.  The White House, instead of letting the market bring prices down to where they should be, is kicking the problem five years down the road. It hopes that five years from now, home prices will have risen so much that borrowers will no longer be underwater. Borrowers would then be able to sell their homes at prices higher than their mortgage balances, getting out of their still-unaffordable original mortgages without huge losses for lenders. Washington is trying to prearrange this outcome through other programs, such as its $8,000 tax credit for first-time homebuyers—another attempt to keep home prices artificially high with taxpayer money. But this policy isn’t good for the economy. Overvalued houses force people to continue borrowing too much and keep their financial resources from going into savings or investments—that is, into more productive, job-creating industries. Using borrowed federal money to further this goal also takes funding away from infrastructure and other public investments that a healthy economy needs.  Nor is this policy good for the homeowners whom Treasury is purporting to help—those who can’t afford their mortgages. If housing prices aren’t substantially higher in five years even after the government’s best efforts at distortion, the Treasury program will only have discouraged people from cutting their losses and moving on with their lives.  HAMP’s beneficiaries could better adjust to reality without this government intervention. Borrowers are generally free to walk away from their houses without declaring bankruptcy. Under the contracts that mortgage lenders and servicers drew up as well as precedent, mortgage debt is understood to be backed by the value of the house, not by a borrower’s full pledge to pay the debt with his personal resources. (In fact, that’s why mortgage interest rates have historically been lower than credit-card rates: lenders know that a valuable physical asset secures the home, not a person’s ability and willingness to pay his debt.) A borrower who can’t afford his house under normal conditions may have to leave the property and start renting instead, but that’s hardly sufficient reason for the government to sink tens of billions of dollars into maintaining an irrational environment of high prices—one in which it makes perverse sense to keep mindlessly buying houses.  Instead, the White House should help the economy adjust to lower home prices and force lenders and borrowers to recognize their losses—both key elements to a recovery. Treasury should say that it won’t subsidize mortgage administrators that offer temporary interest-rate cuts; it should use any subsidy to encourage lenders to forgive principal. Someone who couldn’t afford a mortgage based on his home’s current value—or less, if the mortgage administrator thinks fit—would have to move. All of these steps would make far more sense than Washington’s current policy: becoming the biggest predatory lender of them all, and eating the economy alive."

I normally would not quote so much of an article, but the author, Nicole Gelinas, hit all the points so well that I did not want to mess with such a well written and reasoned piece of journalism. The conclusion of all of this information is that you cannot buy into any of the home sale figures offered by the US government showing a "real estate recovery" because they are all based on temporary housing programs and incentives, which will only serve to delay (not prevent) the inevitable: more foreclosures and short sales resulting in lower home prices in the future.

If you are a homeowner in Middle Tennessee who cannot pay your mortgage (due to losing your job, having your income reduced, illness, health problems, etc.), or your home is already in foreclosure, or you owe more than your home is worth, please contact me to discuss your options including a loan modification or a short sale. I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I serve real estate owners, homeowners and investment property owners in Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN. If you do need to short sell your home (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home), or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

Tuesday, September 1, 2009

Prime Mortgages Make Up One Third of Foreclosure Actions

According to this article, Prime Mortgages Are Failing, between April and June of 2009 13% of all homeowners in the United States were either behind on their mortgage payments, or in foreclosure. If that is not bad enough news, the article goes on to state that while subprime (sub prime) ARM loan defaults decreased, the decrease was offset by large a large increase in the number of delinquent prime mortgages (that is mortgages to the most credit worthy borrowers who actually invested down payments, had verifiable jobs and excellent credit). The article quotes Jay Brinkmann, chief economist of the Mortgage Bankers Association (MBA), as stating "Prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five. While 41 states had increases in the foreclosure start rate for prime fixed-rate loans, 43 states had decreases in that rate for subprime (sub prime) adjustable-rate loans." According to the article, the MBA defines delinquencies as those between 30 and 90 days past due. Homeowners beyond 90 days past due, or in foreclosure, are identified as seriously delinquent. The article blames increasing unemployment and declining property values (think underwater homeowners) as the main causes of this huge increase in prime mortgage foreclosure starts. According to the article, California, Florida, Arizona and Nevada continue to make up the largest % of foreclosures, but that % has decreased from 46% in the 1st quarter of 2009 to 44% in the 2nd quarter of 2009. The article states that Florida is in particularly bad shape with 12% of mortgages in the process of foreclosure, and at least 22.8% are delinquent. Also, according to the article, there was a major jump in Federal Housing Authority (FHA) foreclosures.

Here is my synopsis of the real estate market based on the information above and other information.
  • The most financially responsible borrowers (prime mortgagors) are hurting. Even large down payments are not enough to counter the huge price declines. More homeowners underwater = more foreclosures.
  • Foreclosures are increasing in general. This will cause more price declines.
  • While the "Fab 4" (California, Florida, Arizona and Nevada) are still the kingdoms of foreclosure and prices will surely continue to fall in those markets, the decrease in % of total foreclosures nationwide from 46% to 44% while overall foreclosures increased means that foreclosures in other states increased at a higher pace that the "Fab 4" states. This means prices will decline nearly everywhere.
  • More distressed homeowners will cause more people to try to rent out their homes. Until prices decline to a point where monthly rents exceed total monthly housing payments prices will continue to decline. Rampant foreclosures will make sure prices actually head below this normal equilibrium.
  • Government meddling (expanded FHA mortgages, tax credits, etc.) has not and will not work to save the real estate market. The market is correcting itself to sustainable levels. FHA mortgages are now failing at alarming rates. Tax payers will once again have to foot the bill for regulatory incompetence. It seems that very few people are stating the truth about the real estate market. That is that high housing prices are bad for people (especially lower income people) and high commercial real estate prices are bad for business, which is in turn bad for job growth. Also, real estate has never (until the last few years) been the driver of the economic bus. It has been the passenger, meaning that economic growth (and the resultant business, job and income growth) caused housing prices to increase and new construction to increase. Not the other way around. Any attempt to work in reverse logic = insanity.
Please be clear about my opinion. "The worst is yet to come." I have been saying this since early 2006 and I see no reason to change my outlook on the housing and commercial real estate markets.