Loan Modification programs like HAMP were set up with the goal of providing financial stability to the housing industry. A crippled Real Estate market affects everyone, even people who are not struggling with their mortgages. Neighborhoods get run down, house prices drop, and house service provides like builders, plumbers, electricians and pool cleaners also feel the pinch.
The numbers show that loan modifications and the programs that promote them are not providing the solution hoped for. Could house flippers provide the stability that lenders, servicers and the government have failed to deliver?
First, what is a house flipper? It is an investor that buys a home with the sole purpose of quickly reselling it. This practice is often restricted on homes that have received some kind of government subsidy. House flipping is an industry in its own right. Investors are always looking out for bargains they can quickly resell. During the housing boom everybody was doing it. Even rookies that had never bought a house before were making a profit from buying a house making some small (or large) improvements and selling it again. Now, deep in the financial and housing crisis it is certainly not a game for amateurs. However, professional are doing just great, in fact they are making more of a profit than ever before.
House flipping is one of the few housing sectors that are still booming. On a national level the number of flipped homes increased by 19%, and there is still time for this figure to grow even more before the end of the year.
House flipping has often been considered a scourge of the housing industry, made up of ruthless investors out to make a profit from troubled borrowers. Now, many hail them as financial heroes that are injecting much needed cash into homes and neighborhoods hard hit by the crisis. This practice is also helping to clear out properties from moribund housing markets that are suffering from the raise in foreclosures.
House flipping also generates business for carpenters, builders and other home service providers that are contracted to clean up old homes in need of maintenance. It has also created new jobs like that of a “runner” or a “driver”, who are used to check out homes that are going to be auctioned off and inform potential buyers if they are occupied, what condition they are in, what the neighborhood is like, and other relevant information.
Such are the benefits of house flipping to the housing market that the Federal Housing Authority is considering a one year waiver on anti-flipping regulations. This will allow buyers to purchase foreclosed homes form owners that have owned the property house for less than 90 days. This will help first time buyers get their hands on renovated properties at lower prices.
Could this be a case of digging our way out of a financial crisis by helping people make money instead of just passing on handouts? Granted house flipping will not help troubled borrowers keep their homes, but it might help the housing market recover faster and reduce the negative effects of the current housing crisis.
Related posts:
If Mortgage providers cannot be coaxed into action maybe they can be shamed into action. That seems the line the Obama administration is taking with banks that are dragging their feet and digging their heels while the administration is flexing every muscle to push forward its Mortgage Modification program to help millions of Americans avoid foreclosure.
Naming and shaming has been a popular business tool to “encourage” people and companies to do what they don’t want but know they must. Banks realize they must help homeowners to save their homes just as banks were rescued with the recent bailout on banks. They understand that in the long run a healthy housing industry will mean larger profits for banks. However getting lenders to reduce loans and provide breaks that limit their profit or cost money to provide is never going to be an easy task.
So how did banks do in the shaming and naming game?
The leader of the pack in loan modification turnover (now that is a performance figure that wasn’t used before) is Saxon Mortgage Services a subsidiary of Morgan Stanley with a 25 percent of its loans in trial modifications. It is not only the smaller banks that have shown willingness to work with the administration. Larger banks like JPMorgan Chase with 20 percent and Citigroup with 15 percent are showing how it’s done even when you have to maneuver a behemoth of a company to reorganize the services you provide.
Unfortunately it is not all good news for banks. Wells Fargo parent of Wachovia showed a puny 6 percent of delinquent mortgages in trial modifications while Bank of America bottomed the list with 4 percent.
The Obama administration has responded to this with a clear target for banks to meet a cumulative magic number of 500,000 trial modifications by November the first. These trial modifications are part of the Mortgage Plan set by the Obama administration. The idea is that before a borrower is allowed to qualify for a final modification he or she must undergo a three month trial where he must pay every payment on time. If he or she does just that there is an incentive in cash that is deducted from the borrower’s principal. The incentives don’t stop there, for every year payments are made the government will pay cash to reduce the principal of the loan up to $3,000 which means larger sums when interest is calculated.
Why are banks so slow in responding to the mortgage plan?
There are various reasons, mainly two, banks are not geared to providing loan modifications and there are not always in the best interest of the bank. Let’s have a look at these two factors.
1) Loan Modifications as a new bank service.
Up to recently banks tended to simply lend, collect and process mortgage payments. They of course have their fingers in all kinds of investments but in the retail mortgage sector lending and collecting is pretty much what a bank did. Other debt relief companies would specialize in providing debt consolidation loans and similar services. Now the government wants banks to become loan modification machines and FAST.
This is not as easy as it seems. It includes training staff, setting protocols and guidelines, a new type of management that can make fast and effective decisions on a relatively new product. In other words, changes, changes and changes. Something big banks are not that used to making.
2) It just isn’t always that profitable.
Banks are profit organizations not charities. The decisions they make are based on profit analysis not a generous spirit and you could argue that is the only way our current economy model is going to work. Loan Modifications are simply not always profitable for companies. In some cases they are a win win operation as they help borrowers make smaller monthly payments and increase the overall interest the bank makes on their investment. However on many occasions loan modifications simply cost the bank more money for no measurable benefit.
Encouraging banks to do that is not an easy task, which is probably why they are trying to shame them into doing it.
Related posts:
Will Jumbo Loan Refinancing Stage A Comeback
It is hard to feel bad for millionaires and billionaires when there is enough misery going about in the real estate market to keep everyone in tears.
However there is no denying that foreclosures have respected neither class nor wallet size with jumbo mortgages being shredded with foreclosures all over the place in what some have called the million dollar home massacre. Houses that only some months ago were priced at $3 million are now struggling to be sold at $1 million with some streets having dozens of luxury home on sale.
Has the time for large mortgages on luxury homes come to a sudden end?
Although this sector is feeling the flak as much as any other sector there might be light at the end of the tunnel for jumbo loans. Why should I care you might ask? Well as the saying goes rich women (and men) are only pitied by their psychologists but the health of jumbo mortgages might be a serious indicator of the health of the economy as a whole which is kind of interesting to all of us.
To illustrate this, note how the largest jumbo lenders are Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. The share of the total mortgage market dropped from 14.3% in 2007 to 4.4% in the last quarter of 2008. For some companies the percentage of their portfolio invested in jumbo mortgages is even higher, take for instance ING Direct, 40% of their mortgages are jumbo mortgages. In the U.S the jumbo mortgage market alone was worth $100 billion last year, now that is important to all of us if we are part of the economy, which like it are not we are.
So what is the news for this important sector of the housing industry?
Up to now the drop in interest rates that lower cost loans were enjoying hadn’t really affected jumbo mortgages as banks and lending institutions clammed in shock and made jumbo mortgages expensive and very difficult to obtain. But interest rates are predicted to drop for this sector making it easier to buy a house worth $1 million or more as interest rates drop at more affordable levels as banks view them as a better and better asset for their portfolio.
The interest rates are still much higher than complying mortgages (complying as in loans guaranteed by the a federal mortgage agency). For example jumbo loan interest rates is now at 6.63% in comparison to the 5.07% for a conforming mortgage.
Interest rates drop but requirements tighten.
Even though jumbo mortgages will be cheaper they won’t necessarily be easier to get. Banks have been bruised by the credit crisis and are very careful who they lend to. Jumbo borrowers will have to Glatt Kosher in order to qualify for a jumbo mortgage with credit scores in the neighborhood of 700, 20% minimum downpayment and 3 to 6 months payments in savings.
Related posts:
Has The Mortgage Refinancing Season Ended
Mortgage refinancing has become as exciting as watching the stock market. The once droll and wonderful (for home owners) business of seeing interests remain pretty much stable while house prices increased with any sign of stopping has been exchanged for the much more exciting activity of seeing how low the interest rates can be dropped and how far the Government can bend back to lower them further.
This has created an excellent opportunity for those conservative people that were boring and smart enough to save when everybody was spending of being prudent when prudence seemed pointless, because if you have cash now and an excellent credit score you could get the deal of your life. With 30 year interest rates at historical lows you could buy the house of your dreams for around 4.25%.
This window of opportunity is of course not the main outcome the Government is working towards although it may very well prove to be a benign side effect that can further contribute to jump start the credit and housing industry.
The main issue Government is trying to deal with when lower is as we mentioned to incentivize the buying of new and built homes while giving home owners that have fallen in financial difficulties the possibility of renegotiation their mortgages at a more advantageous rate of interest. If a family renegotiates their mortgage wisely the significant drop in interest rates could mean the difference between affording the monthly mortgage payments and not. For those home owners that are not in any particular financial strife it can mean paying off the mortgage sooner or financing the purchase of a car or a home improvement on the interest drop.
However the fear for those that are planning to modify their loans or are in the process of getting their paperwork or credit in order is that they will miss the train. That the Government’s incentives will work raising interest rates and closing the window of opportunity that currently exists.
Should we worry?
If we are to trust the Mortgage Bankers Association’s chief economist the answer is no. Jay Brinkmann the MBA’s chief economist predicts that in the next the current interest rates should hold for the next six to seven months. That is music to the ears of home owners that see how their loan modification and mortgage refinancing procedures take more than they expect or is experiencing delays in getting to the closing table.
If you are wondering who to thank for the drop in interest rates thank the Uncle Sam for investing so heavily in Banks, providing cheap money for banks to invest in insured loans and mortgages.
The sobering question is how long can this continue for, the short to mid-term may be safe but can this continue in the long term? It can’t if you listen to Dan Cutaia, president of Fairway Independent Mortgage Corp who recently said at an MBA’s conference: “The government can’t keep printing money and buying mortgage backed securities forever”.
Historically the secondary housing market has been a meeting place for investors and borrowers where offer and demand created its own prices and conditions. The government has modified the “natural” state of things by using its muscle to provide the money few are willing to invest.
What will happen in the long term is a bridge we have yet to cross, however if you are currently in the market to refinance or buy a home don’t worry you will not miss train, low interest rates are here to stay, for now.
Related posts:
Mortgage Requests Continue To Drop Despite Mortage Relief
The efforts of Governments worldwide to rescue the credit and Housing industry from the pit they have dug for themselves are truly amazing. Banks have been bailed out, loans are guaranteed, interest rates are kept low, mortgage refinancing relief programs are set up. However despite the best efforts the market is yet to find a bottom it can bounce back from. One of the indicators that give no reason for immediate relief to the crisis is the fall in mortgage requests since Feb.
This drop is, as we mentioned, despite the great efforts from the Obama administration to turn around the housing market. This article will have a look at some of the indexes that provide us with snapshots of the housing market economy and try to decipher what they tells us about how things will be in the short and middle term.
The MortgageBankers Association Index
One of the indexes that housing market analysts keep a close eye on is the Mortgage Bankers Association index of applications, this index dropped a further 19 percent down to 444.8 by June 26, a drop of more than a hundred points from the previous week. The refinancing gauge of the Mortgage Bankers Association fared even worse with a 30% drop to the lowest level in 7 months.
Unemployment levels
Unemployment has hit a record high that has not been experienced since 1983. Unemployment and the fear of unemployment has further slowed down the effects of revival packages from the government as buyers are scared to commit to further spending when they feel their source of income is in danger. This is accentuated by the fact that prices don’t seem to have stop dropping making it a rather difficult market for buyers to assess if they are getting a good deal or not on the property they want to purchase.
Mortgage rates
One of the measures governments, United States included, have carried out to massage the housing and credit industries back into action is to keep interest rates low as an incentive for buyers and investors to borrow cash. This had substantial results, especially in countries like Australia where the crises did not hit quite so hard causing an actual shortage in cash to lend, causing banks to search for money to feed demand. In the United States low interest rates has encouraged and allowed some to refinance their how to either save it or reap substantial savings when refinancing at a lower interest rate.
The drop in interest rates reached record lows of 4.25% for 30 year fixed interest loans creating a window of opportunity for large savings. However interest rates are now rising which seems like a rather bad move when the market seems to not have reached rock bottom yet.
An interesting index that also puts a somber shadow on the current housing market is the percentage of people who are planning to buy a house in the short term. A recent poll indicated that only 2.7% (a slight drop from 2.8%) are planning to buy a house soon.
Foreclosures
All of this occurs with a very large and sharp Damocles hanging over our heads, foreclosures. Some analysts predict 7 million foreclosures this year and next, 4.5 million of them as distress foreclosures. If the government can’t turn around the current trend these foreclosures would drag the prices of homes further which by itself would be enough to nullify any measures the government tries to carry out.
Related posts:
