Home Loan Focus

Archive for March, 2009

While the Obama team and Secretary of Treasury Timothy Geithner have been very short on detailed plans they have been very thorough in ‘promising’ detailed plan almost every month.

Geithner was one of President Obama’s first nominees to get pushed through the pipeline after Obama himself took office in January.  Geithner and Obama were both very quick to promise detailed plans to instill confidence in Americans, the economy and the world.  They then promptly started to demonstrate that they had no such detailed plan to share.

Communications 101 teaches students to

1. Tell the audience what you will tell them
2. Tell them
3. Tell them what you told them.

The Obama Administration which seemed almost super human at communications before the election seems to have been infected with the same communications virus that plagued George W Bush, and it shows in their approach of:

1. Tell the audience what you will tell them
2. Don’t Tell them; watch things get worse
3. Tell the audience that you will tell them in two weeks
4. Don’t Tell them; watch things get worse
5. Tell the audience that you will tell them in two weeks
6. . . . .  ??????  Who knows what they will tell us next?

It is pretty obvious why consumer sentiment, investor sentiment and job approval numbers for Obama and Geithner are all dropping.  (People still like Obama, but don’t think he is doing well, which is also very similar to the effect that Bush had on America at one time.)

So when we are told that Geithner will once again tell us in a couple weeks about a detailed plan, I’m skeptical.  In fact, I’d suggest that if he does not provide a ‘real’ detailed plan in two weeks that he should be removed from office.  We do not have time for ineffective people to pander to us.

U.S. officials have pledged to push forward with a revamping of the rules governing the financial system as a necessary complement to emergency efforts to prop up the financial sector and pull the economy out of a deep recession. Geithner said he planned to roll out "a set of relatively detailed concrete proposals" on regulatory reform prior to testifying on the issue before a House of Representatives panel on March 26.

Geithner: Rules revamp needed to shield economy | Special Coverage | Reuters

When the CEO’s of the largest banks in America appeared in front of Congress during the middle of February, Congress asked them to put a moratorium on foreclosures in place until the government could get their plans together to help.

One bank already had a moratorium on foreclosures in place and two other followed shortly after by the end of the month.  However, the request for a moratorium only went out to the largest banks and then very late in the month of February.

That moratorium may have prevented February from being the worst month for foreclosures since this crisis started, but it did not keep it out of the top 3 and did not help to save 290,000 properties.

Slightly more than 290,000 properties – one in every 440 housing units – were slapped with a foreclosure filing in February, up nearly 30% from a year earlier. That total, a roughly 6% increase from January, was the third-highest monthly total – following those in August and December 2008 – since the foreclosure-listing service’s report was launched in early 2005.

The results, which come amid widespread foreclosure-prevention efforts, show filings spike after moratoriums expire. After a 45-day voluntary moratorium in Florida ended at the end of January, foreclosure activity increased 14% from a month earlier, RealtyTrac said. Many New York proceedings delayed by a 90-day extension appear to have hit the system in February, boosting foreclosure activity by 23%, the report said.

US Foreclosure Filings In February Up 30% On Year -RealtyTrac

Here is a copy of the new Treasury Guidelines.  Note that the second part of this DOES cover people outside of the scope of Fannie Mae and Freddie Mac, which is an improvement on previous indications and reports.  Passing the tests offered on part 2 however, will be extremely difficult for many homeowners.  The bottom line is that to qualify for a modification the modification has to pay the bank more than allowing you to foreclose and give the house back.

 

 

U.S. DEPARTMENT OF THE TREASURY
Washington 
March 4, 2009 

Making Home Affordable
Summary of Guidelines

Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosures on families, communities and the national economy.

The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.
GSE lenders and servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome. In addition, in some cases an appraisal will not be necessary. This flexibility will make the refinance quicker and less costly for both borrowers and lenders. The Home Affordable Refinance program ends in June 2010.

The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. This program will work in tandem with an expanded and improved Hope for Homeowners program.
With the information now available, servicers can begin immediately to modify eligible mortgages under the Modification program so that at-risk borrowers can better afford their payments. The detailed guidelines (separate document) provide information on the following:

Eligibility and Verification

• Loans originated on or before January 1, 2009.

• First-lien loans on owner-occupied properties with unpaid principal balance up to $729,750. Higher limits allowed for owner-occupied properties with 2-4 units.

• All borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship.

• Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties.

• Incentives to lenders and servicers to modify at risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default.

• Modifications can start from now until December 31, 2012; loans can be modified only once under the program.
Loan Modification Terms and Procedures

• Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waivers of limits on participation.

• Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive

– meaning that the net present value of expected cash flow is greater in the modification scenario – the servicer must modify absent fraud or a contract prohibition.

• Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation assumptions, foreclosure costs and timelines, and borrower cure and redefault rate assumptions.

• Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI).

• The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.

• The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.

• Servicers must enter into the program agreements with Treasury’s financial agent on or before December 31, 2009.
Payments to Servicers, Lenders, and Responsible Borrowers

• The program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI.

• Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus “pay for success” fees on still-performing loans of $1,000 per year.

• Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.

• The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments.

• The program will include incentives for extinguishing second liens on loans modified under this program.

• No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.

• Similar incentives will be paid for Hope for Homeowner refinances.

Transparency and Accountability

• Measures to prevent and detect fraud, such as documentation and audit requirements, will be central to the program.

• Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification, and other documentation.

• Freddie Mac will audit compliance.

The Geithner/Obama plan to ‘help’ home owners called the “Homeowner Affordability and Stability Plan” and the guidelines – Text Version – that spell out how it is to be executed called the “Making Home Affordable” Guidelines have some holes big enough to drop a country (the size of the United States) through.

Problem 1 – Not Big Enough

The program is only designed to cover 7 – 9 million Americans despite the fact that there are between 50 – 80 million Americans holding mortgages.  In 2008 over 2 million people went through foreclosure and 2 million+ more are expected to go through foreclosure in 2009 by the most modest estimates.  8.3 million people currently owe more on their homes than those homes are worth, which means they can not sell their homes and relocate if they lose a job or even get a promotion requiring a move.  Furthermore, if home prices drop just another 5% (and rates have been going down that much every month in 40% of states in the US (not just California as the problem is spreading) then 2.2 million additional borrowers will be underwater.  Plus, almost 2 million people left the United States and moved to Central America last year as jobs evaporated, which also helped to fuel the evaporation of new home buyers capable of buying a home.

This drop in home prices works like an avalanche.  As it drops more, it picks up more snow and increases in speed consuming more and more formerly safe, stable and financially secure Americans that are in its path.  There are only about 40-50 million American homes that are owned free and clear with no mortgage.  But even these are at the risk of lower prices, increasing property taxes, and rising incidences of property crime as suburbia is turns into gang infest ghost towns.

Problem 2 – Wrong Focus

Then there is the issue that after paying $2 trillion to bail out Wall Street this plan only offers up $75 – %80 billion to actual home owners.

$2 trillion if divided amongst 75 million mortgage holders could have provided $26,000 to each home owner to revalue those mortgages, write down principle, and lower mortgage payments or even payoff mortgages all together!  This could have enabled people to tighten their finances, fix their budgets, and if they need to move, sell or buy a home, they could have done it.  And that is 75 MILLION households, not 7 million that just happen to be covered by 2 failed institutions (Fannie and Freddie).

Instead the government has put good money after bad in a never ending hole for capital currently nick named the financial markets.  They complain about the hocus pocus of hedge funds while poring more money into the banks that own, run and invest in hedge funds instead of the people that own real assets (homes).

Problem 3 – Too Little Too Late – Incentive to Foreclose or go Bankrupt

Essentially the government is simply creating an incentive for homeowners to go through foreclosure or bankruptcy.  The real estate market is not in the tank it is going down and down into the tank.  We are NOT at the bottom yet.  Throwing money on the fire does not stifle the flames, it causes it to burn more.

More and more homeowners that are underwater are realizing that their only real option is to sell their home to the highest bidder, their bank holding the mortgage. 

When that isn’t enough the other option is to walk away from their debt all together in bankruptcy.  Through a bankruptcy consumers can dismiss tens of thousands of dollars in debt on their unsecured credit cards, renegotiate their mortgage rates, their mortgage principal, their car loans and more.  Even if they go through Chapter 13 – Reorganization, they stand a better chance of renegotiating their credit card interest rates down to single digits at a time when credit card companies are racing to raise rates up to 30% before new laws go into effect in July 2009.

Plus, the credit card companies are eliminating credit limits for card holders left and right.  They are dropping credit lines, canceling cards and more.  For those people that worked very hard to keep their credit up and pay their credit cards on time, they are seeing their credit rating sabotaged by banks cutting their limits for no reasons that have to do with that consumer.  They might as well already be in bankruptcy!  Their credit rating goes in the tank, their interest rate goes up to 30%, their cards are canceled, Chapter 13 starts to look like a blessing because all the perils of bankruptcy have already been experienced by people that pay their bills on time!

Problem 4 – Government Reinvention of Sub Prime Loans

So after subprime loans supposedly got us into this mess, the government plan relies heavily on sub prime tools to get people ‘out of this problem’.

• ARMs
• 40 Year Loans

Those ‘evil’ adjustable rate mortgages(ARMs) that trapped millions of people are essentially exactly what the government is offering.  They are enabling people to finance at interest rates of 2-4% for 1-4 years to make their homes ‘more affordable’.

Hello! That is exactly what mortgage brokers did with sub prime loans.  They even went one step better offering 0% mortgages. 

The government is essentially prolonging the problem.  This does enable people to live and fight another day from one perspective.  It also enslaves them to their homes, to the banks and now to the government (with a loan that might not be able to be forgiven in bankruptcy) from another perspective.  Would you rather be enslaved to your home, the bank and the government, or rather sell your home back in a foreclosure or escape the bondages of your debt in a bankruptcy and be on the path to healing your finances (with your full income that you have now).

The second thing that the government is offering is a 40 year mortgage.  There is a historical reason why 40 year mortgages have not been offered to the masses.

40 Year Mortgages are a rip off and they do not make homes more affordable. 

A 40 year mortgage will force a person to pay far more on a mortgage than a 30 year mortgage.  The interest like a credit card where a person pays a minimum payment, almost never stops.  After the first 10 years, you might as well have rented your home, because you will not have much more principle built up in your home.  The banks will earn significantly more interest from you during that time.  In fact you will pay for your home multiple times over in interest even though you will still owe the principle!

This isn’t change we can believe in this is just a really bad idea.  That pretty much sums up all of the plans offered so far in fact.

Not counting Florida, the real estate crisis has been raging at its worst in California, Nevada and Phoenix, but last month the growing real estate and financial crisis which was proving very problematic for the rest of the country accelerated its correction in the north east. 

The index of pending home resales fell 7.7 percent after a 4.8 percent gain in December, the National Association of Realtors said today in Washington.

…..

A lack of credit and record foreclosures that are pushing property values even lower may keep prospective buyers out of the market for much of 2009.

Three of four regions dropped, led by a 13 percent slump in the Northeast and a 12 percent slide in the South. Pending sales increased 2.4 percent in the West.

Bloomberg

As you can tell from the numbers, the decline in January was more than the surprise gain in December, which indicates that the December gain reflected people cramming deals in before year end.  To average the 2 months together, we come up with 1.45 percent decrease both month or a net of 2.9 percent decline.

The decline is not the news.  The news is that the decrease is now being fueled by correction in the Northeast and the southeast.  Many homeowners around the country still feel that they live in pockets where the boom was not that big and the correction should therefore not be so big either.

The reality is that even in those areas where the boom was not that big, those areas might have experienced decreases had it not been for the boom at the time.  So the correction will likely bring slow growing areas down significantly just like it brought fast growing areas down significantly.  This is a bubble and the bubble does not care which part of the plastic on the bubble grew the most, when it pops the entire bubble is junk.

Ironically, the Northeast is one part of the country that will likely face tax increases in home heating taxes that will go to the federal government to pay for the bank bailouts and the bailout of local economies in California and Nevada, two states that won big in the Stimulus package.