Politicians make their livings bashing other people, so it's only right and fair to bash them. There's a lot of grist for this mill.
Republican Congressional leaders were quick to criticize the Obama administration on Friday, June 3, 2011, after bad unemployment numbers were announced. Total job creation in May was 54,000, and the unemployment rate rose from 9.0% in April to 9.1% in May. The weak job creation number wasn't surprising, given other recent data signaling stagnation. The unemployment rate increase naturally flowed from the economy's need for a net increase of over 100,000 jobs every month simply to keep up with population growth (which increases the labor force). In addition, some previously discouraged workers may have jumped back into the labor force to actively look for work. That expands the labor force and raises the unemployment rate when there aren't enough jobs for them.
How did the Republicans shoot themselves in the foot? The private sector increased employment in May by a net of 83,000 jobs. That's not a great number, but it shows hiring exceeded firing. The reason for the lower total of 54,000 new jobs was that governments laid off a net 29,000 workers. This is due to state and municipal governments cutting back to meet austerity demands from primarily Republican governors and legislators. Do we think these government workers who lost their jobs because of Republican policies will blame the Obama administration? (Hint: take a look at recent events in Wisconsin politics.) Government employment levels have fallen for seven months in a row, and that's not because the Obama administration is laying off federal employees. If unemployment trends continue like this, expect the growing numbers of unemployed government workers, and many among their family and friends, to vote Democrat. Republicans hoping to see their party do well in 2012 should be careful what they wish for because the jobless have plenty of time to vote.
As for the Democrats, the Obama Administration announced on Saturday, June 4, that it would make a renewed push for principal reductions on defaulting mortgages, in an effort to keep more homeowners in their homes. This is meant to help not only struggling homeowners, but also to keep more houses off the foreclosure and resale markets, where distress sales continue to nudge home prices lower. But principal reduction has been a fools errand. It hasn't worked well in the past and isn't likely to work well now. The people who need principal reduction the most--the jobless--won't qualify because of their lack of income. Banks aren't required to reduce principal, and have little incentive to do so. There may be arguments why banks and mortgage investors lose less from principal reductions than from foreclosure. But the legal latitude banks have to make principal reductions on mortgages they have sold to investors is less clear than proceeding with foreclosure, and banks may be stuck with some or all of the loss to lenders when principal is reduced. In other words, banks may be in a riskier position with principal reduction than they would be with foreclosure (where they can generally pass the loss onto investors because banks mostly sell mortgages they originate). So why would they put themselves at increased risk in order to give a defaulting borrower a break? Never forget that on Wall Street, money talks and bullswaggle walks.
A second, and more important point for political purposes, is that the neighbors are watching. Yes, they want to see if the person next door has a better big screen TV than they, or if the person across the street is having an affair, or if the teenagers two houses away are getting out of control. But keeping up with the Jones would become most urgent if neighbors got a reduced mortgage because they didn't keep up with their monthly payments. Talk about envy. The defaulting Jones would get, perhaps, the equivalent of tens of thousands of dollars over time because they were deadbeats. Principal reductions could have a bandwagon effect--give one to the Jones, and others on their block will start defaulting so they, too, can get a principal reduction. After all, how can you tell your kid to borrow tens of thousands of dollars for college because you wouldn't stiff the bank like the folks next door? If entire neighborhoods start having mortgage default parties, bank earnings will fall and bankers contributions to the Republican Party will soar. Neighbors too proud or too protective of their credit ratings won't default. But they will likely vote Republican to assuage their anger.
So politicians are stupid. That's not news. The scary thing is they don't move up the learning curve. Governance failures are now in vogue. The Japanese government's dysfunction exacerbated its slow reaction to the nuclear crisis that followed the recent earthquake. The Euro bloc's weak governance structure makes bailouts without a true restoration of fiscal discipline the only way to cope with its sovereign debt crisis. This is not a solution, but a deferral of the train wreck to come. California's governance failure has pushed its budget crisis virtually beyond the realm of resolution. And, last but certainly not least, the mud-slinging, gotcha-politics in gridlocked Washington have imperiled the creditworthiness of the U.S. government and the strength of the U.S. dollar. The dumb thing about all this is that Japan, Europe, California and America are all very wealthy. They have the resources to solve their problems. But they can't make their political processes work in a constructive way. Forget all the predictions for the economy and the stock market you're now hearing. Politics has thrown a wild card into the game, and no one knows how things will turn out.
Showing posts with label mortgage default. Show all posts
Showing posts with label mortgage default. Show all posts
Sunday, June 5, 2011
Wednesday, April 14, 2010
Mortgage Relief: the Principal Writedown Illusion
Both the Bush and Obama administrations have pursued the idea of writedowns of the principal balances of defaulting mortgages as a way of furnishing distressed homeowners relief. About 25% of all mortgages are now underwater. In spite of well over a year of effort, something like a few hundreds of thousands of borrowers, at most, out of the millions in trouble, have received permanent principal writedowns. They may be the most effective way to help struggling owners stay in their homes. They reduce payments to a level that will, long term, hopefully be manageable. At the same time, they keep houses off the foreclosure market, thereby reducing downward pressure on housing prices. If housing prices keep declining, the number of homeowners underwater on their mortgages will increase, thereby producing more pressure to default and repeat the downward cycle. Why, then, have principal writedowns been so strongly resisted by banks?
Here's our take. Fairness isn't the issue. Principal writedowns are unfair, benefiting in many cases the reckless and irresponsible at the expense of the conscientious and taxpaying. But the big banks don't give a rat's big toe about fairness (they didn't seem to have a problem taking a multi-trillion dollar bailout when their survival was on the line). The problem is that they can't dump the bulk of the costs of principal writedowns onto the federal government.
If banks were today to write down all underwater mortgages to the market value of the homes, they'd have to book losses somewhere around $600 billion (with perhaps a couple hundred billion more for federal agencies like Fannie Mae, Freddie Mac and the FHA). The Tier 1 capital (a commonly used measure of bank capital) of the 20 largest banks in the U.S. (which among banks hold the most mortgage assets) is probably in the range of $900 billion. Comprehensive principal writedowns could reduce Tier 1 capital by hundreds of billions and require a major recapitalization binge. The banks' existing shareholders would be displeased, to say the least. In addition, the federal government and the ever accommodative federal taxpayers would probably have to prop the banks up as they returned to the capital markets.
While not every underwater homeowner would seek a principal writedown, the attractiveness of the proposition would likely motivate a lot of people who aren't currently in default to volunteer for a bum's rush out of part of their monthly payments. After all, why pay full freight when the neighbor across street gets a break and comes up with enough cash for an annual vacation? You may recognize the moral ambiguity of not paying a loan you voluntarily undertook. But what will you say when the kids across the street can suddenly afford summer internships in Europe and your kid wants one?
The Obama administration is willing to toss principal writing down banks 10 to 21 cents per dollar written down for their trouble, depending on how far underwater the loan is. But with many loans tens of thousands or even hundreds of thousands of dollars underwater, the 79 to 90 cents on each dollar of write down the banks absorb hits their bottom line hard. Politically coerced changes to the accounting rules last year allow banks to waffle and delay on recognizing loss on mortgages, until they've been sold after foreclosure. It's only after the foreclosure sale that banks have to book a loss. Foreclosure rates have been rising, but banks have been dribbling out foreclosed properties, holding many off the market to prevent a downward price panic. They hope to get more than the current market price for the house, something that wouldn't be possible if they had to do an immediate principal writedown. So it makes more sense to foreclose, hide behind relaxed accounting rules, and hold onto the house while hoping for a better price in the future.
Another reason for waiting, which surely no banker will admit, is that political pressure on the Obama administration to expand the use of principal writedowns will probably grow. Just two weeks ago, the administration announced the 10 to 21 cents on the dollar offer. As the mid-term election approaches, those terms could improve. No administration, Democrat or Republican, has ever done anything except protect and advance the interests of homeowners and the housing industry. Even the Bush Administration's nationalizations of Fannie Mae and Freddie Mac only further entrenched those institutions' comprehensive grip on housing finance. The Obama administration may well up its bid before this fall's elections. And if it doesn't, the banks are under no additional pressure than what they face now--a moribund real estate market, but no need under the accounting rules to recognize that reality--to offer principal writedowns. It makes sense for the banks to stall and delay, until the feds to come through with more dinero.
Since the 1930s, housing has been a federal program, not a market. It doesn't operate in accord with market principles, and market forces in housing operate spasmodically and unpredictably. Struggling homeowners realistically have few or no good options. Potential buyers are mystified by a market where nothing makes sense. Transaction costs are indefensibly high, and closing processes are tortuous enough to extract full confessions from the most hard core terrorists. Because the real estate market isn't truly functional, the huge overhang of bad loans from the early and mid-2000s hasn't cleared the market, and we muddle along even after years of loss and stagnation. If you're going to buy a house, save up a big downpayment and buy only as much as you need. Good luck.
Here's our take. Fairness isn't the issue. Principal writedowns are unfair, benefiting in many cases the reckless and irresponsible at the expense of the conscientious and taxpaying. But the big banks don't give a rat's big toe about fairness (they didn't seem to have a problem taking a multi-trillion dollar bailout when their survival was on the line). The problem is that they can't dump the bulk of the costs of principal writedowns onto the federal government.
If banks were today to write down all underwater mortgages to the market value of the homes, they'd have to book losses somewhere around $600 billion (with perhaps a couple hundred billion more for federal agencies like Fannie Mae, Freddie Mac and the FHA). The Tier 1 capital (a commonly used measure of bank capital) of the 20 largest banks in the U.S. (which among banks hold the most mortgage assets) is probably in the range of $900 billion. Comprehensive principal writedowns could reduce Tier 1 capital by hundreds of billions and require a major recapitalization binge. The banks' existing shareholders would be displeased, to say the least. In addition, the federal government and the ever accommodative federal taxpayers would probably have to prop the banks up as they returned to the capital markets.
While not every underwater homeowner would seek a principal writedown, the attractiveness of the proposition would likely motivate a lot of people who aren't currently in default to volunteer for a bum's rush out of part of their monthly payments. After all, why pay full freight when the neighbor across street gets a break and comes up with enough cash for an annual vacation? You may recognize the moral ambiguity of not paying a loan you voluntarily undertook. But what will you say when the kids across the street can suddenly afford summer internships in Europe and your kid wants one?
The Obama administration is willing to toss principal writing down banks 10 to 21 cents per dollar written down for their trouble, depending on how far underwater the loan is. But with many loans tens of thousands or even hundreds of thousands of dollars underwater, the 79 to 90 cents on each dollar of write down the banks absorb hits their bottom line hard. Politically coerced changes to the accounting rules last year allow banks to waffle and delay on recognizing loss on mortgages, until they've been sold after foreclosure. It's only after the foreclosure sale that banks have to book a loss. Foreclosure rates have been rising, but banks have been dribbling out foreclosed properties, holding many off the market to prevent a downward price panic. They hope to get more than the current market price for the house, something that wouldn't be possible if they had to do an immediate principal writedown. So it makes more sense to foreclose, hide behind relaxed accounting rules, and hold onto the house while hoping for a better price in the future.
Another reason for waiting, which surely no banker will admit, is that political pressure on the Obama administration to expand the use of principal writedowns will probably grow. Just two weeks ago, the administration announced the 10 to 21 cents on the dollar offer. As the mid-term election approaches, those terms could improve. No administration, Democrat or Republican, has ever done anything except protect and advance the interests of homeowners and the housing industry. Even the Bush Administration's nationalizations of Fannie Mae and Freddie Mac only further entrenched those institutions' comprehensive grip on housing finance. The Obama administration may well up its bid before this fall's elections. And if it doesn't, the banks are under no additional pressure than what they face now--a moribund real estate market, but no need under the accounting rules to recognize that reality--to offer principal writedowns. It makes sense for the banks to stall and delay, until the feds to come through with more dinero.
Since the 1930s, housing has been a federal program, not a market. It doesn't operate in accord with market principles, and market forces in housing operate spasmodically and unpredictably. Struggling homeowners realistically have few or no good options. Potential buyers are mystified by a market where nothing makes sense. Transaction costs are indefensibly high, and closing processes are tortuous enough to extract full confessions from the most hard core terrorists. Because the real estate market isn't truly functional, the huge overhang of bad loans from the early and mid-2000s hasn't cleared the market, and we muddle along even after years of loss and stagnation. If you're going to buy a house, save up a big downpayment and buy only as much as you need. Good luck.
Tuesday, December 1, 2009
Will the Fed's Reverse Repos Reverse Anything?
To settle the tummies of inflation hawks, the Federal Reserve Board has announced that it will use reverse repurchases to withdraw some of the oceans of dollars it has pumped into the financial system in the last year or so. If one sniffs this proposal carefully, one might detect an odd odor. We won't go so far as to suggest that it might be a rat, or fishy. Nor will we make commentaries about the state of Denmark. But a brief pause to think might be in order.
As part of its actions earlier this year to stimulate the economy, the Fed purchased vast quantities of U.S. Treasury securities and mortgage-backed securities. In so doing, it shoved enormous amounts of cash out its loading dock. That cash could be an inflationary time bomb if left long enough in the financial system. Now the Fed has been testing the reverse repo as a means of draining away some of the oceans of cash. The question is how well this would work.
A reverse repo consists of the Fed selling some of its Treasury or mortgage backed securities temporarily, with an agreement that it will buy the securities back on a predetermined date. The price it will pay when the securities return is fixed at the time the transaction is initiated, and includes an interest factor that in effect makes the transaction a loan of cash to the Fed by the temporary buyer of the securities. Lending cash to the Fed takes money out of the financial system. But the return trip of the securities back to the Fed releases the cash back into the financial system along with interest. Thus, the cash is withdrawn, but only temporarily.
Reverse repos are short term transactions, lasting a day, two days, a week or perhaps a month. But they do not permanently remove funds from the financial system, nor do they permanently reduce the Fed's balance sheet. At the end of the transaction, the cash goes back out into the financial system and the securities return to the Fed's $2 trillion balance sheet. The Fed could reduce its stimulus over a longer term by doing a continuing sequence of reverse repos, rolling over each transaction as it comes due with a replacement reverse repo. But there are limits to the reverse repo market, as there are to any market. Moving hundreds of billions of dollars of stimulus out of the financial system via reverse repo would surely require raising interest rates and perhaps sharply. That doesn't seem to be in the Fed's game plan, given its stated intention to keep short term rates at zero for an extended period of time.
A reverse repo is a very tentative and temporary way of withdrawing liquidity, and gives the Fed great flexibility to stop withdrawing liquidity on a moment's notice (especially if it uses reverse repos having maturities of not more than a few days). It's not a way to withdraw stimulus on a large-scale permanent basis. One begins to suspect that the Fed doesn't really want to withdraw much liquidity, and is using the reverse repo as a way of doing something to appease inflation hawks without committing to do much. In short, if you're worried about inflation, keep worrying.
The Fed's reverse repo plan also signals more storm clouds for the economy. There is hardly a crowd of "natural buyers" clamoring to buy the hundreds of billions of dollars of mortgage backed securities held by the Fed. "Natural buyers" is a Wall Street term referring to persons who buy for the purposes of investing. Five years ago, mutual funds, pension funds, money managers, municipalities and all variety of investors were natural buyers of mortgage backed securities. We know what happened next. Now, with the real estate market way down and still shaky, borrowers are defaulting and walking away as their homes go underwater. Mortgage backed securities tend to be dodgy investments because it's difficult, at best, to predict default rates (except that we know they can be ugly). In other words, the Fed can't sell its mortgage backed securities, not without driving long term interest rates way, way up (which is something it won't do). And if it tried, it would drain away whatever limited investor money exists for mortgage financing for current and future home purchases. That would only further batter the real estate market. So the Fed's balance sheet is likely to remain very large for quite a while.
The Fed, in truth, is no longer just a bank regulator but has become one of the largest banks in America. It's bought up a large part of the mortgage backed securities market, and funded a lot of sales of Treasury securities (which is really weird because it means, in reality, that the Fed is printing money and handing it over to the Treasury Dept.). The Fed has also provided significant funding for other asset backed securities and assisted money market funds and the commercial paper market. All the while, it's served as the banker of last (and now first) resort of its member banks. The Fed has intervened in a major way with market forces that ordinarily determine who is creditworthy and who is not, and its intervention doesn't appear likely to recede any time soon. Long term suspension of market forces will have deleterious effects. The only question is which deleterious effects will emerge to erode our prosperity. Inflation? Asset bubbles and busts? Inefficient allocation of society's resources in politically favored asset classes? Growth of irrational and irascible populism that will trigger capital flight? More than any other branch or agency, the Fed is substituting governmental judgment for the market's judgment, and for an increasingly extended period of time. Many nations on the Eurasian continent and elsewhere tried this, and it didn't end well. There's no reason to think that things will be different here.
As Congress considers what to do about financial regulatory reform, it is appropriately scrutinizing the growing power of the Fed. We don't think the Fed is acting in bad faith or in collusion with gnomes in Zurich. The gold standard, rifle-cleaning, nonperishables-stocking crowd needs professional treatment for paranoia. But recent history amply demonstrates that the Fed doesn't have all the answers. It reasonably argues it needs independence from political pressure in the formulation of monetary policy. But it doesn't need the authority to be the largest bank and most powerful financial regulator at the same time. There's too much potential for conflict between the roles of central bank, bank regulator, systemic risk regulator and large scale extender of credit to borrowers high and low. The Fed's overall authority should be limited, just as its independence in formulating monetary policy should be safeguarded.
As part of its actions earlier this year to stimulate the economy, the Fed purchased vast quantities of U.S. Treasury securities and mortgage-backed securities. In so doing, it shoved enormous amounts of cash out its loading dock. That cash could be an inflationary time bomb if left long enough in the financial system. Now the Fed has been testing the reverse repo as a means of draining away some of the oceans of cash. The question is how well this would work.
A reverse repo consists of the Fed selling some of its Treasury or mortgage backed securities temporarily, with an agreement that it will buy the securities back on a predetermined date. The price it will pay when the securities return is fixed at the time the transaction is initiated, and includes an interest factor that in effect makes the transaction a loan of cash to the Fed by the temporary buyer of the securities. Lending cash to the Fed takes money out of the financial system. But the return trip of the securities back to the Fed releases the cash back into the financial system along with interest. Thus, the cash is withdrawn, but only temporarily.
Reverse repos are short term transactions, lasting a day, two days, a week or perhaps a month. But they do not permanently remove funds from the financial system, nor do they permanently reduce the Fed's balance sheet. At the end of the transaction, the cash goes back out into the financial system and the securities return to the Fed's $2 trillion balance sheet. The Fed could reduce its stimulus over a longer term by doing a continuing sequence of reverse repos, rolling over each transaction as it comes due with a replacement reverse repo. But there are limits to the reverse repo market, as there are to any market. Moving hundreds of billions of dollars of stimulus out of the financial system via reverse repo would surely require raising interest rates and perhaps sharply. That doesn't seem to be in the Fed's game plan, given its stated intention to keep short term rates at zero for an extended period of time.
A reverse repo is a very tentative and temporary way of withdrawing liquidity, and gives the Fed great flexibility to stop withdrawing liquidity on a moment's notice (especially if it uses reverse repos having maturities of not more than a few days). It's not a way to withdraw stimulus on a large-scale permanent basis. One begins to suspect that the Fed doesn't really want to withdraw much liquidity, and is using the reverse repo as a way of doing something to appease inflation hawks without committing to do much. In short, if you're worried about inflation, keep worrying.
The Fed's reverse repo plan also signals more storm clouds for the economy. There is hardly a crowd of "natural buyers" clamoring to buy the hundreds of billions of dollars of mortgage backed securities held by the Fed. "Natural buyers" is a Wall Street term referring to persons who buy for the purposes of investing. Five years ago, mutual funds, pension funds, money managers, municipalities and all variety of investors were natural buyers of mortgage backed securities. We know what happened next. Now, with the real estate market way down and still shaky, borrowers are defaulting and walking away as their homes go underwater. Mortgage backed securities tend to be dodgy investments because it's difficult, at best, to predict default rates (except that we know they can be ugly). In other words, the Fed can't sell its mortgage backed securities, not without driving long term interest rates way, way up (which is something it won't do). And if it tried, it would drain away whatever limited investor money exists for mortgage financing for current and future home purchases. That would only further batter the real estate market. So the Fed's balance sheet is likely to remain very large for quite a while.
The Fed, in truth, is no longer just a bank regulator but has become one of the largest banks in America. It's bought up a large part of the mortgage backed securities market, and funded a lot of sales of Treasury securities (which is really weird because it means, in reality, that the Fed is printing money and handing it over to the Treasury Dept.). The Fed has also provided significant funding for other asset backed securities and assisted money market funds and the commercial paper market. All the while, it's served as the banker of last (and now first) resort of its member banks. The Fed has intervened in a major way with market forces that ordinarily determine who is creditworthy and who is not, and its intervention doesn't appear likely to recede any time soon. Long term suspension of market forces will have deleterious effects. The only question is which deleterious effects will emerge to erode our prosperity. Inflation? Asset bubbles and busts? Inefficient allocation of society's resources in politically favored asset classes? Growth of irrational and irascible populism that will trigger capital flight? More than any other branch or agency, the Fed is substituting governmental judgment for the market's judgment, and for an increasingly extended period of time. Many nations on the Eurasian continent and elsewhere tried this, and it didn't end well. There's no reason to think that things will be different here.
As Congress considers what to do about financial regulatory reform, it is appropriately scrutinizing the growing power of the Fed. We don't think the Fed is acting in bad faith or in collusion with gnomes in Zurich. The gold standard, rifle-cleaning, nonperishables-stocking crowd needs professional treatment for paranoia. But recent history amply demonstrates that the Fed doesn't have all the answers. It reasonably argues it needs independence from political pressure in the formulation of monetary policy. But it doesn't need the authority to be the largest bank and most powerful financial regulator at the same time. There's too much potential for conflict between the roles of central bank, bank regulator, systemic risk regulator and large scale extender of credit to borrowers high and low. The Fed's overall authority should be limited, just as its independence in formulating monetary policy should be safeguarded.
Monday, December 24, 2007
How to Handle a Mortgage Default
November 12, 2010 Update: Mediation of mortgage defaults has become available in a number of states and other locales. The idea behind mediation is that you and the lender meet with a neutral 3rd party (the mediator) who tries to facilitate an agreement for you to avoid foreclosure and stay in the home. The mediator won't take sides or make a decision. The goal of mediation is to foster an agreement between the homeowner and the lender. You should seriously consider mediation if it is available, because it provides a way to have a dialogue, correct misunderstandings and reach a deal allowing you to stay in your home. For more information about mediation, go the the National Consumer Law Center at http://www.nclc.org/issues/foreclosure-mediation-programs.html. You can also check your state or local government's website for the availability of mediation programs.
Foreclosure Documentation Problems have recently been prominent in the news. In many cases, courts have halted foreclosure proceedings until lenders can clean up their acts. In a few cases, judges have found the documentation problems to be so severe that they have awarded homes to the owners free of any mortgage debt. Lenders are appealing these latter decisions. If you want to litigate with the lender, you'll need an attorney. Ask around for references. A resource for finding an attorney would be at the National Consumer Law Center website: http://www.nclc.org/for-consumers/how-to-get-legal-assistance.html.
March 9, 2010 Update: Some states offer loans to struggling homeowners. If you live in Delaware, Massachusetts, North Carolina or Pennsylvania, contact your state's housing finance department or agency for information. California, Florida and Nevada may institute such programs. So if you live in one of these states, contact the state housing finance department or agency to see if anything is available.
July 25, 2009 Update: The Obama administration has improved the Making Home Affordable program to give homeowners who are not yet in foreclosure an expanded opportunity to refinance. If you've been current on your monthly payments for the past year, you may now be able to refinance even if you are as much as 125% underwater on your mortgage (the earlier standard was not more than 105% underwater). This is a significant improvement over the original program. For more details, see http://blogger.uncleleosden.com/2009/07/more-mortgage-relief.html.
March 23, 2009 Update: The Obama administration has announced the "Making Home Affordable" program, an initiative to provide mortgage relief to homeowners who are not yet in foreclosure. This program could help some people who would not be assisted by other programs, such as those discussed below. See http://blogger.uncleleosden.com/2009/03/mortgage-relief.html for more on the Making Home Affordable program.
Original Blog (with a reference to a discontinued program called FHASecure deleted):
If you’ve defaulted on your mortgage, or are close to defaulting, you’ll find that the resources for assisting you are limited and scattered about. There’s no overall program, and no easy way to access the available resources. That doesn’t mean you won’t find help, though, especially if you have a moderate or low income. Here are some avenues to explore.
Rate Freeze: the federal government has sponsored a voluntary five-year rate freeze for certain subprime ARM mortgages. Covered mortgages may have their rates frozen at the initial level for five additional years past the initial teaser rate period. You could be in luck if you meet the following criteria: (a) you live in the home purchased with the mortgage and took out a subprime ARM loan made between Jan. 1, 2005 and July 31, 2007; (b) the ARM’s interest rate resets between Jan. 1, 2008 and July 31, 2010; (b) your mortgage loan was packaged into securities sold to investors; (c) you have a credit score less than 660, which hasn’t improved by more than 10% since the mortgage loan was first made; (d) the monthly payment will increase more than 10% in the first reset; and (e) you haven’t been more than 60 days late with a mortgage payment more than once in the last 12 months.
This is a narrowly defined group of mortgages. If, for example, your mortgage was not sold to investors but is still held by a bank or savings and loan association, you’re not covered by the rate freeze. If you took out your mortgage in 2004, too bad. If you’ve been conscientious about paying debts on time and your credit rating has improved more than 10% since you took out the mortgage, you’re out of luck. If you’re already in foreclosure proceedings and really need help, the rate freeze won’t be there for you. In many respects, the rate freeze was designed with the interests of Wall Street investors in mind, so its limited scope shouldn’t be surprising.
Call your mortgage servicer to find out if you qualify for a rate freeze. Most borrowers won’t get one. Here are some additional resources. They mostly focus on helping low and moderate income homeowners.
Contact the Hope Now Alliance at 888-995-4673. This organization was established by a group of nonprofits and lenders, and provides counseling services to borrowers having trouble paying their mortgages.
A national nonprofit organization that helps low and moderate income homebuyers is Acorn Housing Corp. Acorn can be reached by email at help@www.acornhousing.org or by calling 1-888-409-3557. Acorn also has offices in a number of cities. If you are one of the borrowers that Acorn aims to assist, they may help you negotiate with the lender for relief.
Another national nonprofit organization that helps low and moderate income homeowners is Neighborhood Assistance Corp. of America. Its program for distressed homeowners is described at https://www.naca.com/program/homesaveProgram.jsp, and you can call at 1-888-302-NACA. NACA also has offices in a number of cities, and may help you negotiate with the lender for relief.
Contact state and local nonprofit organizations that promote home ownership or provide credit counseling. The extent to which they can help you will vary. But for some homeowners, particularly those with modest or low incomes, these nonprofit organizations can provide a degree of negotiating leverage you would never have on your own. Stay away from mortgage brokers and other for-profit businesses that purport to provide mortgage assistance. If you’re in trouble on your mortgage, the last thing you need is someone who sees you as a profit opportunity.
Higher income people and investors will probably have to take care of themselves. If that’s your situation, here are some thoughts.
Dispassionately evaluate your situation and your ability to keep the house. The bank will be dispassionate, and so should you. Emotion won’t save your house. If necessary, assemble your financial records, go to the public library, and find a quiet corner in the reading room where you can work without distractions.
Calculate your net worth to find out what your financial situation is. Add up your assets, and subtract your debts and other liabilities. Don’t count as assets things like household furnishings, furniture and clothing, which you won’t sell to pay your mortgage. Count only financial assets, and physical assets you’re prepared to sell.
It’s very important to figure out if you’re upside down on your mortgage—i.e., whether or not the house is worth less than the mortgage debt. If so, then you have to make a hard decision whether it’s worthwhile to try to keep the house. Mortgage loans are almost always “with recourse,” which means that if the house is sold in foreclosure proceedings and doesn’t raise enough money to cover the mortgage debt, you will be legally responsible for the unpaid difference. But determining if you have positive or negative equity in the house gives you an idea of how much it’s worth your while to try to hold onto the house. The more equity you have in the house, the more it’s worth trying to keep. And it also gives you a sense for the feasibility of selling the house to pay the mortgage.
Estimate your ability to cut back on other spending in order to meet the mortgage payments. Cutting back on spending is the best option, because it preserves the part of your income that is needed to pay other debts and cover basic living expenses. If spending cutbacks won’t get you there, look at how much of your taxable savings and investments you could use for mortgage payments. Don’t forget that the sale of investment assets like mutual funds and stocks could create tax liabilities and you have to set aside enough money to cover taxes. If you have physical assets you are willing sell to raise money, like your 1971 Chevy Camaro SS with a 396 cubic inch engine, add them to the calculation (with reserves for taxes if necessary).
As a general rule, don’t tap into retirement accounts to make mortgage payments. You’ll have to pay taxes and a 10% penalty on withdrawals, and will have only the remainder for the mortgage. For most people, somewhere between a third and a half of a withdrawal will go to pay taxes and penalties. You could quickly deplete retirement savings you took years to build up. The mortgage lender can’t reach into your retirement accounts for payment (these accounts are protected by law from creditors) and you’d only be needlessly risking your retirement.
Once you have a sense of your financial resources (or lack thereof), you can then negotiate an end game with the lender. Have a bottom line, and if the negotiations get there, stop at the bottom line. Don’t give up everything to keep the house. That’s what the lender wants you to do, but you may be throwing good money after bad, and end up with nothing—no house, no savings and no retirement. Whether or not you lose the house, life will continue and you should preserve something for the future.
To stay in your home, ask if you can refinance into an affordable fixed rate mortgage. If the lender won't agree to that, ask for reduced rates and payments, and forgiveness of some of the principal of the debt. Also ask the lender not to add unpaid interest to the principal balance of the mortgage debt. This is called “negative amortization,” and only delays the pain. It really doesn’t do much to help you.
If you're 62 or older, you could think about refinancing with a reverse mortgage. Although the reverse mortgage might provide less money than you owe on your current mortgage, if you're having trouble making payments, your current lender may take what it can get from the reverse mortgage rather than face potentially larger losses from a foreclosure. One important advantage of a reverse mortgage is that you don't have to repay it until you sell the house, move permanently from the house or pass away. In other words, there are no monthly payments and you can't be kicked out of your house by foreclosure. It's worth looking into if you're 62 or older and about to lose your home. For more information about reverse mortgages, go to http://blogger.uncleleosden.com/2007/06/reverse-mortgages.html.
If you can't work out an affordable payment plan with the lender, consider selling the house. This may be a viable option if the house is worth more than the mortgage debt. If not, you might be able to negotiate a “short sale” with the lender, where you sell the house for whatever you can get, and the lender doesn’t go after you for the unpaid balance of the mortgage loan. Short sales may generate a better price than an auction, and lenders sometimes will agree to them rather than see you walk away from the house.
If you can’t feasibly pay, refinance or renegotiate the mortgage, and can't sell the house on acceptable terms, abandon the house. But let the lender know that you’re leaving and send them the keys. At a minimum, they might do a little upkeep and maintenance on the property to preserve its auction value. That’s in your interest. The more the house sells for at auction, the less recourse the bank will seek from you.
A couple of things to keep in mind. Act sooner rather than later. If you expect problems making your mortgage payments, contact the lender up front and try to work things out before you default. Once you default, the stakes are raised and positions can harden. Avoid is asking family and friends for help with the mortgage. If borrowing from friends and family doesn’t give you enough money to prevent foreclosure, you’ll lose the house, and will also have tapped out the last ditch resources you might need to rebuild your life. (Remember, life will continue after your personal mortgage crisis.) Keep family and friends out of your housing problems.
If you do lose your house, there’s one thing you could gain—wisdom. Next time around, be more prudent and conservative with the price of the house you buy and the amount you borrow. A good-sized downpayment is in everyone’s interests. It obviously protects lenders, but also gives you a cushion to refinance or sell if things go wrong. A fixed-rate mortgage that you can afford makes everyone—homeowners and lenders—better off. Since time immemorial, common sense has paid off and recklessness has been costly.
How to Save for a New Truck: http://www.wtop.com/?nid=456&sid=1315653.
Foreclosure Documentation Problems have recently been prominent in the news. In many cases, courts have halted foreclosure proceedings until lenders can clean up their acts. In a few cases, judges have found the documentation problems to be so severe that they have awarded homes to the owners free of any mortgage debt. Lenders are appealing these latter decisions. If you want to litigate with the lender, you'll need an attorney. Ask around for references. A resource for finding an attorney would be at the National Consumer Law Center website: http://www.nclc.org/for-consumers/how-to-get-legal-assistance.html.
March 9, 2010 Update: Some states offer loans to struggling homeowners. If you live in Delaware, Massachusetts, North Carolina or Pennsylvania, contact your state's housing finance department or agency for information. California, Florida and Nevada may institute such programs. So if you live in one of these states, contact the state housing finance department or agency to see if anything is available.
July 25, 2009 Update: The Obama administration has improved the Making Home Affordable program to give homeowners who are not yet in foreclosure an expanded opportunity to refinance. If you've been current on your monthly payments for the past year, you may now be able to refinance even if you are as much as 125% underwater on your mortgage (the earlier standard was not more than 105% underwater). This is a significant improvement over the original program. For more details, see http://blogger.uncleleosden.com/2009/07/more-mortgage-relief.html.
March 23, 2009 Update: The Obama administration has announced the "Making Home Affordable" program, an initiative to provide mortgage relief to homeowners who are not yet in foreclosure. This program could help some people who would not be assisted by other programs, such as those discussed below. See http://blogger.uncleleosden.com/2009/03/mortgage-relief.html for more on the Making Home Affordable program.
Original Blog (with a reference to a discontinued program called FHASecure deleted):
If you’ve defaulted on your mortgage, or are close to defaulting, you’ll find that the resources for assisting you are limited and scattered about. There’s no overall program, and no easy way to access the available resources. That doesn’t mean you won’t find help, though, especially if you have a moderate or low income. Here are some avenues to explore.
Rate Freeze: the federal government has sponsored a voluntary five-year rate freeze for certain subprime ARM mortgages. Covered mortgages may have their rates frozen at the initial level for five additional years past the initial teaser rate period. You could be in luck if you meet the following criteria: (a) you live in the home purchased with the mortgage and took out a subprime ARM loan made between Jan. 1, 2005 and July 31, 2007; (b) the ARM’s interest rate resets between Jan. 1, 2008 and July 31, 2010; (b) your mortgage loan was packaged into securities sold to investors; (c) you have a credit score less than 660, which hasn’t improved by more than 10% since the mortgage loan was first made; (d) the monthly payment will increase more than 10% in the first reset; and (e) you haven’t been more than 60 days late with a mortgage payment more than once in the last 12 months.
This is a narrowly defined group of mortgages. If, for example, your mortgage was not sold to investors but is still held by a bank or savings and loan association, you’re not covered by the rate freeze. If you took out your mortgage in 2004, too bad. If you’ve been conscientious about paying debts on time and your credit rating has improved more than 10% since you took out the mortgage, you’re out of luck. If you’re already in foreclosure proceedings and really need help, the rate freeze won’t be there for you. In many respects, the rate freeze was designed with the interests of Wall Street investors in mind, so its limited scope shouldn’t be surprising.
Call your mortgage servicer to find out if you qualify for a rate freeze. Most borrowers won’t get one. Here are some additional resources. They mostly focus on helping low and moderate income homeowners.
Contact the Hope Now Alliance at 888-995-4673. This organization was established by a group of nonprofits and lenders, and provides counseling services to borrowers having trouble paying their mortgages.
A national nonprofit organization that helps low and moderate income homebuyers is Acorn Housing Corp. Acorn can be reached by email at help@www.acornhousing.org or by calling 1-888-409-3557. Acorn also has offices in a number of cities. If you are one of the borrowers that Acorn aims to assist, they may help you negotiate with the lender for relief.
Another national nonprofit organization that helps low and moderate income homeowners is Neighborhood Assistance Corp. of America. Its program for distressed homeowners is described at https://www.naca.com/program/homesaveProgram.jsp, and you can call at 1-888-302-NACA. NACA also has offices in a number of cities, and may help you negotiate with the lender for relief.
Contact state and local nonprofit organizations that promote home ownership or provide credit counseling. The extent to which they can help you will vary. But for some homeowners, particularly those with modest or low incomes, these nonprofit organizations can provide a degree of negotiating leverage you would never have on your own. Stay away from mortgage brokers and other for-profit businesses that purport to provide mortgage assistance. If you’re in trouble on your mortgage, the last thing you need is someone who sees you as a profit opportunity.
Higher income people and investors will probably have to take care of themselves. If that’s your situation, here are some thoughts.
Dispassionately evaluate your situation and your ability to keep the house. The bank will be dispassionate, and so should you. Emotion won’t save your house. If necessary, assemble your financial records, go to the public library, and find a quiet corner in the reading room where you can work without distractions.
Calculate your net worth to find out what your financial situation is. Add up your assets, and subtract your debts and other liabilities. Don’t count as assets things like household furnishings, furniture and clothing, which you won’t sell to pay your mortgage. Count only financial assets, and physical assets you’re prepared to sell.
It’s very important to figure out if you’re upside down on your mortgage—i.e., whether or not the house is worth less than the mortgage debt. If so, then you have to make a hard decision whether it’s worthwhile to try to keep the house. Mortgage loans are almost always “with recourse,” which means that if the house is sold in foreclosure proceedings and doesn’t raise enough money to cover the mortgage debt, you will be legally responsible for the unpaid difference. But determining if you have positive or negative equity in the house gives you an idea of how much it’s worth your while to try to hold onto the house. The more equity you have in the house, the more it’s worth trying to keep. And it also gives you a sense for the feasibility of selling the house to pay the mortgage.
Estimate your ability to cut back on other spending in order to meet the mortgage payments. Cutting back on spending is the best option, because it preserves the part of your income that is needed to pay other debts and cover basic living expenses. If spending cutbacks won’t get you there, look at how much of your taxable savings and investments you could use for mortgage payments. Don’t forget that the sale of investment assets like mutual funds and stocks could create tax liabilities and you have to set aside enough money to cover taxes. If you have physical assets you are willing sell to raise money, like your 1971 Chevy Camaro SS with a 396 cubic inch engine, add them to the calculation (with reserves for taxes if necessary).
As a general rule, don’t tap into retirement accounts to make mortgage payments. You’ll have to pay taxes and a 10% penalty on withdrawals, and will have only the remainder for the mortgage. For most people, somewhere between a third and a half of a withdrawal will go to pay taxes and penalties. You could quickly deplete retirement savings you took years to build up. The mortgage lender can’t reach into your retirement accounts for payment (these accounts are protected by law from creditors) and you’d only be needlessly risking your retirement.
Once you have a sense of your financial resources (or lack thereof), you can then negotiate an end game with the lender. Have a bottom line, and if the negotiations get there, stop at the bottom line. Don’t give up everything to keep the house. That’s what the lender wants you to do, but you may be throwing good money after bad, and end up with nothing—no house, no savings and no retirement. Whether or not you lose the house, life will continue and you should preserve something for the future.
To stay in your home, ask if you can refinance into an affordable fixed rate mortgage. If the lender won't agree to that, ask for reduced rates and payments, and forgiveness of some of the principal of the debt. Also ask the lender not to add unpaid interest to the principal balance of the mortgage debt. This is called “negative amortization,” and only delays the pain. It really doesn’t do much to help you.
If you're 62 or older, you could think about refinancing with a reverse mortgage. Although the reverse mortgage might provide less money than you owe on your current mortgage, if you're having trouble making payments, your current lender may take what it can get from the reverse mortgage rather than face potentially larger losses from a foreclosure. One important advantage of a reverse mortgage is that you don't have to repay it until you sell the house, move permanently from the house or pass away. In other words, there are no monthly payments and you can't be kicked out of your house by foreclosure. It's worth looking into if you're 62 or older and about to lose your home. For more information about reverse mortgages, go to http://blogger.uncleleosden.com/2007/06/reverse-mortgages.html.
If you can't work out an affordable payment plan with the lender, consider selling the house. This may be a viable option if the house is worth more than the mortgage debt. If not, you might be able to negotiate a “short sale” with the lender, where you sell the house for whatever you can get, and the lender doesn’t go after you for the unpaid balance of the mortgage loan. Short sales may generate a better price than an auction, and lenders sometimes will agree to them rather than see you walk away from the house.
If you can’t feasibly pay, refinance or renegotiate the mortgage, and can't sell the house on acceptable terms, abandon the house. But let the lender know that you’re leaving and send them the keys. At a minimum, they might do a little upkeep and maintenance on the property to preserve its auction value. That’s in your interest. The more the house sells for at auction, the less recourse the bank will seek from you.
A couple of things to keep in mind. Act sooner rather than later. If you expect problems making your mortgage payments, contact the lender up front and try to work things out before you default. Once you default, the stakes are raised and positions can harden. Avoid is asking family and friends for help with the mortgage. If borrowing from friends and family doesn’t give you enough money to prevent foreclosure, you’ll lose the house, and will also have tapped out the last ditch resources you might need to rebuild your life. (Remember, life will continue after your personal mortgage crisis.) Keep family and friends out of your housing problems.
If you do lose your house, there’s one thing you could gain—wisdom. Next time around, be more prudent and conservative with the price of the house you buy and the amount you borrow. A good-sized downpayment is in everyone’s interests. It obviously protects lenders, but also gives you a cushion to refinance or sell if things go wrong. A fixed-rate mortgage that you can afford makes everyone—homeowners and lenders—better off. Since time immemorial, common sense has paid off and recklessness has been costly.
How to Save for a New Truck: http://www.wtop.com/?nid=456&sid=1315653.
Subscribe to:
Posts (Atom)
Posts
