Bloomberg reports today on Fed findings that state that (OMG!) piggyback mortgages are making it harder for homeowners to modify the terms of their existing first mortgages. No sh&$ Sherlock. Really? This is newsbreaking stuff here. 2nd lien holders who purchased piggyback 2nd mortgages are in a terrible position, althought it may be in their interest to get the first loan modification done, especially in bubble states where they’re basically holding air.
For those of you not overly familiar with the parlance of the early 2000’s housing boom, a piggyback mortgage is a 2nd mortgage used at the time of purchase (or refinancing) so that the first mortgage is kept below 80% of the value of the house to avoid mortgage insurance costs. The 2nd, piggyback mortgage makes up the difference of the financing, usually 100% to make it cheaper to buy (um, borrow) a home from the bank.
These loans were super-popular because it allowed you to either 1) by a home with no money down or 2) refinance and pull cash out of your existing home up to 100% of the property value. Granted you’re now stuck with a huge loan and often with an adjustable rate first loan and a high-interest rate 2nd, but you got the cash and you were happy.
Until things started to get nasty.
Nowadays, these piggyback 2nds are litterally unsecured debt. Like a credit card. The property values where this type of financing was popular (CA, FL, NV, AZ) have tanked more than 20% in most places rendering the 2nd lien completely unsecured. Because the 2nd lien is subordinate to the first, they have no right to the devalued property ahead of the first lien holder in the event of a default. So they just sit nervously chewing their nails and hoping the monthly payments continue to roll in until the tide starts to rise again. That’s a long time to be biting your nails.
Companies like Wells Fargo, who hold millions of dollars in 2nd mortgages in states like California are very jumpy because these piggyback mortgages are starting to default at alarming rates. More people are figuring out that they’d rather just not pay a loan that is $100,000 more than the value of the home and are walking away.
There are several reasons that piggyback mortgages make loan modifications tough (and short sales for that matter). First, is the overwhelming complexity of trying to get approvals lined up. Most piggyback mortgages are not held by the originating party and therefore the servicing companies have to track down the final holder of the note and get approvals to allow the note to be subordinated to a new first mortgage (the one being modified). If the 2nd mortgage is in some type of security that has been sliced and diced with many investors holding some interest it can be even tougher. Second, as we’ve already covered, the 2nd lien holder is already in a precarious position due to the plummenting house values. And a loan modification request is a sure sign of a borrower in distress which doesn’t bode well for the 2nd lien holder if the market keeps dropping. The 2nd mortgage holder may decide that they’d rather take their chance with a foreclosure now and try to recoup something out of the deal instead of waiting as the housing market continues to tank.
2nd mortgage holders may consider allowing loan modifications in situations where either they have no options. Such as a home that is completely underwater and they’re left in a position where the note is now basically an unsecured debt. In this instance their only chance at recovering the debt is to give the homeowner the best chance at repaying it. This chance can be improved by allowing the first mortgage to be modified to provide a more manageable monthly payment. (But this is a bit of a pipe dream, since more than half of all modified mortgages are still defaulting.)
Alternatively, if they have a very good security position they may consider allowing a modification because they’d rather make the money on the interest and servicing while knowing that they’ll be compensated to one degree or another in a foreclosure proceeding. (This, again is a bit of a pipe dream because I can’t think of too many areas where properties have appreciated to the point where original 100% financing is now, say, 85-90% of the home value.)
Wells Fargo and other holders of millions of dollars of second mortgages are going to find themselves taking massive losses on these portfolios over the next several years. With the housing market continuing to tank, the likelihood of cram-downs as a relief tactic increasing, and the job market crashing it is easy to make an argument that most of these 2nd mortgages aren’t worth 10 cents on the dollar.
Not that it won’t be deserved. If you were out there buying up portfolios and pools of piggyback 2nd mortgages with 100% financing to people with 580 credit scores you deserve to eat it. It’s just too bad that the taxpayers will end up paying for your bad decisions too.
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The current financial crisis affects everyone. No where, however, has the impact been more striking than on the middle-class.
“The gap between the ‘haves’ and the ‘have-nots’ is widening for families with children in the United States,” said Bruce Western, professor of sociology of the Multidisciplinary Program in Inequality and Social Policy at Harvard University. And primary author of a new study exploring income inequalities in the middle class during the past 30 years. “Inequality for these families has grown faster than the combined rates of inequality for all families and for men’s hourly wages.”
Results of the study, “Inequality Among American Families with children 1975-2005” indicate that several factors have contributed to the increasing stratification among the middle class. These factors include the growing income advantage of college graduates and rising number of single-parent households. The effects of these factors were somewhat offset by the the increasing rate of women’s employment and higher educational attainment among parents.
Current economic conditions may be slowing the rising tide of single parent families. A poll conducted by the American Academy of Matrimonial Lawyers (AAML) reveals that the number of divorces actually declines during periods of economic turbulence.
“The reason that the economy has such an enormous impact on divorces is that most people in the middle-income brackets are getting by on whatever income they have. They’re just getting by,” Bonnie Booden, a family law and divorce attorney in Phoenix, AZ told MarketWatch.
Circuit courts across the country are seeing notably fewer divorce and legal separation filings, MarketWatch reports. According to the AAML, more than one-third of members responding to the poll say they typically see a decrease in the number of divorce cases during economic downturns.
This is good news for families, children and the economy in general because the incomes varied the least among two-parent families according to the inequality study. Income inequality was greatest in single-parent families without a working mother. Unfortunately, the gap between high and low income families increased across all family groups during the 30-year period studied. The effect of the economic slowdown on the middle-class is important because it is a large and vibrant middle-class that purchases many of the products and services making up the bulk of the American economy. Without them, the economy continues to struggle and shrink.
“Our research suggests a broad increase in income insecurity that goes beyond low-skill workers and single parents and extends to families from every class,” Western states. “The polarization of family incomes among this generation has implications for the social and economic mobility of future generations and suggest the further erosion of the middle class in in years to come.”
The current financial crisis affects everyone. No where, however, has the impact been more striking than on the middle-class.
“The gap between the ‘haves’ and the ‘have-nots’ is widening for families with children in the United States,” said Bruce Western, professor of sociology of the Multidisciplinary Program in Inequality and Social Policy at Harvard University. And primary author of a new study exploring income inequalities in the middle class during the past 30 years. “Inequality for these families has grown faster than the combined rates of inequality for all families and for men’s hourly wages.”
Results of the study, “Inequality Among American Families with children 1975-2005” indicate that several factors have contributed to the increasing stratification among the middle class. These factors include the growing income advantage of college graduates and rising number of single-parent households. The effects of these factors were somewhat offset by the the increasing rate of women’s employment and higher educational attainment among parents.
Current economic conditions may be slowing the rising tide of single parent families. A poll conducted by the American Academy of Matrimonial Lawyers (AAML) reveals that the number of divorces actually declines during periods of economic turbulence.
“The reason that the economy has such an enormous impact on divorces is that most people in the middle-income brackets are getting by on whatever income they have. They’re just getting by,” Bonnie Booden, a family law and divorce attorney in Phoenix, AZ told MarketWatch.
Circuit courts across the country are seeing notably fewer divorce and legal separation filings, MarketWatch reports. According to the AAML, more than one-third of members responding to the poll say they typically see a decrease in the number of divorce cases during economic downturns.
This is good news for families, children and the economy in general because the incomes varied the least among two-parent families according to the inequality study. Income inequality was greatest in single-parent families without a working mother. Unfortunately, the gap between high and low income families increased across all family groups during the 30-year period studied. The effect of the economic slowdown on the middle-class is important because it is a large and vibrant middle-class that purchases many of the products and services making up the bulk of the American economy. Without them, the economy continues to struggle and shrink.
“Our research suggests a broad increase in income insecurity that goes beyond low-skill workers and single parents and extends to families from every class,” Western states. “The polarization of family incomes among this generation has implications for the social and economic mobility of future generations and suggest the further erosion of the middle class in in years to come.”
The Internal Revenue Service (IRS) does not have a reputation for being a good guy. In the current crisis, however, the IRS has been one of the few government agencies taking action that actually helps the individual taxpayer. They have provided guidance on the Mortgage Debt Forgiveness Act and expedited the process for removing or subjugating government liens. Now they are reminding taxpayers of two other benefits they may be eligible for that will lessen their 2008 tax burden.
With 2009 only a day a way, the IRS urges taxpayer not to put off preparing their tax files or their year-end tax planning. Among the tax tips to consider are:
First Time Home-buyers Tax Credit – First-time home buyers and those who have not owned a home during the past three years are eligible for a credit equal to 10 percent of the purchase of the home up to $7,500. This new tax credit is only available for a limited time. It applies only to primary homes purchased between April 9, 2008 and June 30, 2009. The credit is fully refundable however, it operates like a no-interest loans which must be repaid over a period of 15 years. Either single taxpayers or married taxpayers filing jointly may claim the credit using IRS Form 5405.
The first-time home buyers tax credit was part of the Housing and Economic Recovery Act of 2008.
Real Estate Tax Deduction – Taxpayers who pay real estate taxes are eligible for this additional standard deduction even if they don’t itemize the deductions when filing their tax returns. Simply Enter the amount of the deduction on Line 6 of Form 1040 Schedule A. The amount of the deduction is equal to the amount paid in real estate taxes up to $500 for a single filer or $1,000 for joint filers. The deduction is available for the 2008 and 2009 tax years, however, to claim the deduction this year you must have paid the real estate tax before January 1, 2009. Claiming this deduction increases your standard deduction.
The real estate tax deduction is especially good news since communities across the country have begun raising real estate and property taxes as a means of increasing revenues. Some communities, like Hoboken, NJ have seen real estate taxes increase almost half over (47 percent) while others such as East Hanover Township, PA saw in change at all. Taxpayers whose real estate and property taxes are paid by their mortgage company pays the taxes. They should receive a statement or receipt indicating the amount of tax assessed and paid. The amount may also be shown on the end-of-year statement provided by the mortgage company for tax purposes.
Tax-free Profits from the Sale of a Home – Under certain conditions, taxpayers who sell their primary homes for more than they initially paid for the home may qualify to exclude all or part of the profits from their taxable income. IRS Publication 523, Selling Your Home, provides the rules and worksheets for determining whether you qualify for the exclusion.
Individual taxpayers can find information on these tax tips as well as others online at the IRS website (www.irs.gov) IRS Publication 17, Your Federal Income Tax, is a comprehensive tax guide for individuals containing more than 900 links in nearly 300 pages. Printed copies of Publication 17 will be available in January 2009.
The Case-Shiller home price index was released for October today, and (surprise, surprise) home prices are down a record 18% from last year’s levels. This drop marks the 27th straight monthly drop in home prices in the 20 major metro areas tracked by the study.
Surely, it will only get worse with this dismal economy really starting to stall out just about now.
All of this begs the following questions.
The answer is simple. They’re all telling the same lies they’ve been telling for the last two years. They’re simply pushing out their estimates three more months. “Not spring, but definitely fall 2009,” is the new refrain.
Don’t buy it. The housing market will only pick up speed on its way down, aided by a crumbling economy. There is absolutely no reason to believe that we will see bottom any time before 2011/2012. And, most importantly, YOU WON’T MISS IT! Housing bottoms are long, painful and flat. It’s not like stocks. The only way you’ll miss this bottom is if you die, seriously.
So don’t listen to real estate agents trying to push you in to a home. Don’t feel intimidated about putting in an ultra low bid on a property. And surely, feel no pressure at all to buy anything within the next 12 months easy.
It’s (still) all downhill from here.