Recent projections estimate that by June, over 5 million homeowners will be heavily underwater. Let us define that a little more precisely. You are heavily underwater if the current market value of your home is only 75% of the balance on your mortgage. Between you and me, this means you are pretty screwed. The scary part is that if this projection proves true 10% of all US homeowners will be in this pickle; not the place you want an economy to be if you are trying to dig yourself out of a recession.
This is why the Obama Administration is running about like headless chickens trying to find solutions to this problem, quick, mid-term, and long term solutions; any kind of solution that will get us out of this.
It was this kind of panic that caused the government to put all their weight behind HAMP, the government’s loan modification program. Loan modifications were and always have been procedures designed to help homeowners stuck with sub-premium loans. Sub-premium loans as you all know is a kind way of talking of usury, loans with interest rates so high they give you vertigo if just to think about them. However loan modifications are not, and never have been a fix for homeowners with great loans that are unemployed and cannot afford their mortgage.
What alternative solutions are there?
One proposal is to buy time by simply banning foreclosures until other options have been looked into by the homeowner and lender. You have to love that proposal, if you cannot stop homes foreclosing by economics just make it illegal. As crazy as this measure seems it is designed to buy time and allow homeowners to find ways of keeping their home. This would take the current guideline of asking lenders to evaluate defaulting homeowners for a loan modification to the next level by making it compulsory.
The Mortgage Bankers Association says its members are already following this principle, and that foreclosure is always a last resort when all other options have been exhausted.
Another plan sponsored by the Mortgage Bankers Association is to not modify permanently the loans of troubled homeowners that have lost their jobs but simply to reduce their mortgage payments substantially for up to nine months to give homeowners a chance of looking for a new job.
As you probably guessed the Banker’s Association is requesting Treasury to pay for the program. Nevertheless, it does seem like a good idea to provide a homeowners with a break until he finds a new job than taking forever to marginally reduce the mortgage payments of an unemployed borrower.
However, many are analysts are saying that the real strategy to follow is to find a way to improve the economy. A strong job market would pull out the housing market from the fix it is in. On this theme, there were some good news last week. The number of homeowners starting to default unexpectedly dropped in the fourth quarter of 2009. However, the government also reported that home prices dropped by 1.6% in December; making it clear that the economy still has a long way to go before it gets a clean bill of health.
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Loan Modifications have been sold as the way out of this credit mortgage crisis. However delinquencies and repossessed homes are breaking records and are at their highest level since 1972, which is when the Mortgage Bankers Association started to keep records.
This is scary, at the beginning of the year 1 in 10 of American loans was past due or going through a foreclosure. Regardless of the efforts to stop this trend the rates just continue to increase. This surge in delinquencies indicates that a recovery in the housing market could be thwarted by the worsening employing rates and the drying up of the easy-money lending coffers.
On a more positive note, we had to find something; the median home prices do seem to be recuperating. Areas like California, which were hardest hit by the crisis, do seem to inching their way up. Some predict a rise of 9% in California by the end of next year. One reader quite rightly commented I must be crazy to report that. I don’t expect such a rise either but that is what some are forecasting based on current trends. Unfortunately it is likely this is just a local anomaly caused by the special circumstances of California that it many cases can be considered an country on its own, it would after all be the fourth economy in the world if it was separated from the U.S.
All other indicators remain very negative, in the third quarter of this year 14.4% of U.S home loans were foreclosing or 30 days past due, that is 1 in 7, a steep rise from the beginning of the year.
Jay Brinkmann, the mortgage group’s chief economist, is reported by the Los Angeles Times to predict delinquencies will continue to rise after unemployment tops, which according to him will occur in the first or second quarter of 2010. The rule book predicts that foreclosures will continue to rise for two quarters after unemployment peaks, but we don’t get drops in housing prices like those we have experienced in the last year every decade so the rule book will probably be useless. In other words expect foreclosures to continue into the fourth quarter of 2010 and beyond.
What is probably the scariest statistic and we have had plenty of them, is that prime loans, the best loans with the lowest interest rates, represent 33% of all foreclosures. Prime loans mean prime clients with good jobs (or former jobs) and good credit scores (i.e. reliable, conservative clients). When the best clients struggle where does that leave the rest?
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Loan Modification figures right now are scary. According to one survey one in eight U.S households that have a mortgage are in foreclosure or will be soon. This puts great pressure on Government Institutions that are trying to help ailing home owners while the numbers just add up. It is like trying to build a dam while the river is still flowing.
As it often happens the problems Loan Modification Programs face are changing. While the focus of Loan Modification programs is on subprime loans (high interest loans generally purchased by people with low credit rating) a new demographic of struggling home owners is appearing.
Foreclosures of Sub prime borrowers that by some accounts ignited the banking crisis are actually slowing down while borrowers with good credit records are deteriorating faster due to falling home prices and job losses.
The MBA (Mortgage Bankers Association reported last week that 13.2% of mortgages on homes with one to four units were at least a month overdue or actually undergoing foreclosure. This a rather steep rise from 12.1% in the first quarter.
These figures are disappointing as many expected foreclosures to drop as home sales have picked up in the last months. However some analysts have commented that we shouldn’t expect significant improvement until 2010 when the economy really starts to improve.
This shift from the decline of sub prime borrowers to prime borrowers is illustrated by the percentage of prime and subprime foreclosures in the last year. Last year 44% of foreclosures were from prime mortgages, now the figure is around 58%. Last year 49% of foreclosures were from sub prime mortgages, now it is 33%. While sub prime mortgages are recovering, prime mortgages are suffering even more.
What can we learn from this?
It could be good news for the measures the administration. We could read this shift as proof that the demographic the administration has chosen to focus their energies on is benefiting from that help and digging itself out of the whole while the demographic that is not highlighted in the programs measures continues to fall.
It is interesting that more than 235,000 borrowers have started a three month loan modification trial under the current administration under the effort of the administration to reduce monthly mortgage payments. But do these loan modifications target the real problems.
Most of these loan modifications target loans that reset to higher interest rates or to home owners with high debt to income ratios. In other words these loan modifications seek to help people who fell for high interest mortgages when the housing industry looked like it was going to soar forever. The idea behind the loan modification programs is to allow borrowers to benefit from the current low interest rates.
However prime borrowers that have gone through dire straits struggle to receive the benefits of this program.
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Loan Modifications has been the flavor of the month in the finance news sections for some time now and August was no exception. We started the month with the government’s report on mortgage services participating in the government’s loan modification program. The administration reported how unsatisfied it was with the progress and that mortgage providers had been inconsistent in their efforts to modify loans which is a polite way of saying they were doing a rubbish job.
The Treasury department also reported the number of loan modifications and trial modifications that were being carried out. The picture was not great but it is very likely that the real picture is far worse.
The Treasury department prepared its figures by comparing the number of trial modifications each bank or service provider had started with the number of loans eligible for the loan modification program. All is clear up to there. The glitch occurs when you realize that only borrowers that are 60 days or more behind in their payments are included as “eligible borrowers”. The real number of borrowers in desperate need of a loan modification is much larger.
Is this a small discrepancy with the real story, just a different way of describing the situation? Hardly.
The Making Home Affordable program included in its data homeowners that had already defaulted or will likely default “imminently” which includes those that have not missed a payment yet. This is very different when compared with what the Treasury department did and the discrepancy is by no means small. For instance in the first quarter of this year 8.8 percent of mortgages were 60 days or more delinquent but there was an additional 3.25 percent between 30 and 60 days according to the Mortgage Bankers Association National Delinquency Survey. If we counted those that were just on the edge of becoming delinquent the picture just gets worse and worse.
The Treasury Department reported that 9 percent of the eligible borrowers were being helped by the loan modification program. However the real figure is really between 5.9 percent and 7.8 percent if we use the Making Homes Affordable figures.
The change in accounting methods is caused by what the Treasury Department wanted to highlight; the number of desperate homeowners that are already in trouble that are being helped. Up to now over 235,000 homeowners are involved in a three month trial modification and the goal is to reach 500,000 by November.
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We live in the age of information. That is good and it is bad. It is good because you can get information from a great variety of sources and have the choice of seeing the world from a number of perspectives. The bad news is that you really need to get your information from a variety of sources because it is hard to know who to trust or who got the story right.
An example of this occurred last Wednesday when we received conflicting reports. The Mortgage Bankers Association said mortgage loan applications were up 16.1% for the week ending August 7 in relation to the same week last year. This news item seemed feasible because there has been an increase in the home sales in the second quarter in 39 states. Other figures also seemed to support this with mortgage refinancing accounting for 52.3% OF mortgage applications and adjustable rate mortgage applications also rose by 0.4%.
On the other hand, Reuters saw the situation in a completely different light by focusing on a different perspective of the situation. Reuters looked at a week over week seasonally adjusted decline of 3.5% which is not exactly the good news the Mortgage Bankers Association reported. Reuters cites the increase in interest rates as the reason for the drop coupled with the current 9.4% unemployment rate which is keeping homebuyers shy and cautions because of the economic climate.
So who is right? Are mortgage rates rising or dropping? The answer is that both are right, they just are focusing on different data to express their opinion. It is left to you to decide what argument is more compelling.
The Mortgage Bankers Association chose to compare this last week with the same week last year while Reuters analyzed the behavior of the market week over week.
To illustrate how this can affect our view of the situation look at these mortgage figures. The Mortgage Bankers Association reported that the cost to borrow on a 30 year fixed rate at 5.38% a rise of 0.21 percentage from the previous week. The lowest interest rate or cost to purchase a mortgage hit an all time low of 4.61% in the end of March. If you look at these figures it does seem like things are going rather badly and that the Mortgage Market is falling.
However if you compare this week’s interest rate with last year’s in the same week you see that last year the 30 year fixed rate mortgage was a the hair rising rate of 6.57%! A far cry from the 5.38% we now have.
So are we rising or falling? We are both it just depends what point of reference you choose.
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FHA loans are back as good business.
The Federal Housing Administration guaranteed almost 186,000 mortgages in June, a record tally for the agency, which has insured more than 34 million properties since its establishment in 1934.
First-time homebuyers are in part driving the record push. Since late May, prospective purchasers have been able to use the $8,000 first-time homebuyer’s tax credit on FHA-backed loans.
Part of the American Recovery and Reinstatement Act of 2009, the tax credit allows first-timers to pay for closing costs or even defray the 3.5 percent minimum down payment on FHA loans.
These long-standing loans continue to grow in popularity given the slumping economy and tight credit market. The FHA’s record performance in June smashed the agency’s old record of about 157,000 loans in October 2008. Before that, the record dated back to March 1994.
“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” Orawin Velz, associate vice president of economic forecasting for the Mortgage Bankers Association, said in a news release. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”
FHA loans represent an affordable avenue for many first-time buyers. Anyone who has not purchased a home in three years gets that “first-time” status. But there are some strings attached for buyers looking to capitalize on the new $8,000 tax credit.
Prospective borrowers hoping to offset their down payment costs must utilize a proper FHA-approved lender. Otherwise, that $8,000 can be put toward closing costs or shaving down interest rates.
First-time homebuyers also must meet a handful of other criteria. There are income thresholds that exclude individuals who make more than $75,000 or joint filers who clear $150,000.
At present, first-time buyers can also decide when to claim the tax credit – either for 2009 or by filing an amended 2008 return.
About a dozen states have started offering bridge loans to help spark home buying. These low- and zero-interest loans have to be repaid when the tax credit is applied. The FHA has also begun offering tax credit advance for prospective homebuyers who do not want to wait.
This post was written by Brandon Laughridge of Mortgage Loan Place. MLP specializes in educating consumers about all types of mortgage loans with an emphasis on government mortgage programs such as FHA refinancing and VA Loans.
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Obama’s Mortgage Refinancing Aid, Who Really Benefits?
Obama’s administration latest efforts to protect and aid family’s that cannot pay their mortgages and are in serious risk to foreclose aims to help 9 million home owners and further measures intend to provide information and advice to home owners on mortgage refinancing and on mortgage options to home buyers.
What are the effects of these measures and who really benefits from them?
Obama’s refinance and modification program could help as we said up to 9 million homeowners to reduce their monthly payments to an affordable level. The program does not stop there, aiming to provide 5 million homeowners with aid through government owned Fannie Mae and Freddie Mac as well as earmarking $75 billion to prevent foreclosures.
What has happened up to now? Up to date it seems (reliable stats are still to be produced due to the lack of a tracking system) around 200,000 borrowers have received the option for trial modifications according to the U.S Department of Housing and Urban Development, HUD.
This is great news for the 200,000 that benefited but still a far cry from a real solution. It is early days to bury the program but the predictions of the Mortgage Bankers Association are not promising. The MBA says that the government’s expectations are unrealistic and that lenders will only make $2.03 trillion from mortgages this year, not even close to the associations forecast for this year which was $750 billion more than the estimated amount.
Why is this the case when the U.S government is investing hand over fist in mortgage backed securities and printing money like it’s going out of fashion to invest in banks. The banks will say that the increase in interest rate is negating the government’s efforts while others blame the fact that banks have little incentive to speed up the financial aid procedures and that there is not enough control from the government. It does seem like banks are getting a pretty good deal being provided with cash to invest in government backed mortgages, a win-win situation for the lender.
On the other hand the borrowers that need the aid to continue living in their home are facing long procedures that stretch for months and months with no guarantee of a clear answer after the ordeal.
Another glitch in the mortgage refinance aid is that it seems to ignore those that are worse off with upside down mortgages. Although the latest aid packages have included mortgages that are up to 125% of the current value of the house this only applies to Fannie and Freddie backed mortgages that do not have a very large presence in the worst hit areas like California and Las Vegas to mention two.
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