We are told today that Freddie Mac has some $3.4 billions in derivatives called "inverse floaters" that profit if homeowners do not refinance out of high interest rate mortgages. At the same time that Freddie Mac was accumulating its holdings of inverse floaters, it was tightening requirements for refinancings, thus either wittingly or unwittingly increasing its chances of profiting from its inverse floaters.
The contradiction between Freddie's investment in inverse floaters and its mission of fostering affordable housing for Americans is obvious. Freddie's regulator, the Federal Housing Finance Agency, has been pushing Freddie and Fannie Mae to limit the extent to which they receive taxpayer subsidies. Seeking investment gains has been one way of pursuing that goal. That may be why Freddie took a flyer with the inverse floaters.
While details remain scarce, it appears from news reports that these inverse floaters are interest only strips--investments that paying the holder (Freddie, in this case) the interest payments from a large pool of mortgages. Refinancings of these mortgages mean that interest payments from the pooled mortgages would stop (while interest payments on the new, refinanced mortgages would go to whoever holds the right to those payments, not to the strip). So the more the old mortgages in the pool are refinanced, the greater the likelihood of Freddie losing money on the strip. Inverse floaters are likely to be volatile in value if interest rates change, and probably aren't very liquid because they're risky.
Refinancings increase as interest rates drop. By investing in the inverse floaters, Freddie was in effect speculating on the direction of interest rates. If rates dropped, the inverse floaters would lose money. If rates rose, the inverse floaters could rise in value (although higher mortgage rates would detract from the value of the stream of interest payments, which would be detrimental to the value of the inverse floaters). These inverse floaters may have been a bet on largely stable interest rates.
The silly thing about all this is that Freddie was speculating on the direction of interest rates in volatile investments that would be an embarrassment if the financial press found out about them. After being nationalized in 2008, Freddie should have become greatly sensitized to the need to look good while doing good. These inverse floaters could produce outsized losses if refinancings pick up. Taxpayers might then be called on to provide more subsidies to Freddie, not fewer. And not because Freddie took losses trying to make homes more affordable for America but because it was betting homes wouldn't become more affordable.
It's entirely possible that Freddie's traders have an explanation for the inverse portfolios that sounded pretty good when they talked among themselves. But from a public relations standpoint, the inverse floaters are silly, at best. The true problem is that Freddie and Fannie have too many conflicting goals, attempt to fulfill too many differing expectations, and are simply too big. There are some pretty good arguments that the biggest banks should be broken up into smaller, not too big to fail pieces. All of those arguments apply a fortiori to Freddie and Fannie.
Showing posts with label mortgage relief. Show all posts
Showing posts with label mortgage relief. Show all posts
Monday, January 30, 2012
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.
Saturday, July 25, 2009
More Mortgage Relief
The Department of Housing and Urban Development has announced an expansion of its Making Home Affordable Refinancing Program. Homeowners who are as much as 25% underwater on their mortgages may be able to refinance. In other words, if your mortgage balance is as much as 125% of the current value of your house, and your mortgage was bought or guaranteed by Fannie Mae or Freddie Mac, you may be able to refinance. This is a considerable improvement over the original criteria for this program (only mortgages not more than 5% underwater were eligible for refinancing), and over commercial refinancing standards (you probably need 20% equity or more in the house). The interest rate for the new program's refinancings is likely to be higher than current market rates for prime borrowers, and naturally there will be charges and fees for refinancing. But underwater homeowners can't get prime borrower rates anyway for refinancings.
If you have a loan with a high interest rate, or one that could adjust upward, you may want to see if you can refinance under this program. Don't wait until you're close to defaulting because the process for refinancing takes time. To participate in the expanded program, you need to have been current on your monthly payments for at least the last twelve months. Also, it will probably be several weeks before lenders have their computer systems set up to handle applications using the new 125% underwater standard.
For more information about the new program, go to http://www.makinghomeaffordable.gov. We also discuss a number of other resources for mortgage payment problems at http://blogger.uncleleosden.com/2007/12/how-to-handle-mortgage-default.html.
If you have a loan with a high interest rate, or one that could adjust upward, you may want to see if you can refinance under this program. Don't wait until you're close to defaulting because the process for refinancing takes time. To participate in the expanded program, you need to have been current on your monthly payments for at least the last twelve months. Also, it will probably be several weeks before lenders have their computer systems set up to handle applications using the new 125% underwater standard.
For more information about the new program, go to http://www.makinghomeaffordable.gov. We also discuss a number of other resources for mortgage payment problems at http://blogger.uncleleosden.com/2007/12/how-to-handle-mortgage-default.html.
Monday, March 23, 2009
Mortgage Relief
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.
Original Blog: The Obama administration has launched a housing affordability initiative called "Making Home Affordable" (www.makinghomeaffordable.gov). It provides two alternatives for homeowners having problems paying their mortgages. Both alternatives are sponsored by the government, so you may get a better deal going through this program than you would if you tried to negotiate on your own. This program is aimed at forestalling foreclosures by helping homeowners who haven't yet defaulted but anticipate problems making their payments. (People who are way deep in default would probably have to pursue other options.)
The first alternative is to refinance. You should try for a mortgage offering a low, fixed rate, to make your housing costs predictable. You may qualify for a refinancing if the amount of the mortgage (plus any refinancing costs) does not exceed 105% of the value of the house. If there is a home equity loan or second mortgage on the house, the second lender will have to agree to the refinancing. (If refinancing would lower the payments on the first mortgage, you could point out to the second lender that these lower payments would increase your ability to pay the second loan.) You also need to be current on your mortgage, and not have been more than 30 days late in making a payment during the last 12 months. Your loan must be owned or guaranteed by Fannie Mae or Freddie Mac (which means larger loans might not qualify). Refinancing will not reduce the amount of the mortgage. But if you can lock in a low, fixed rate mortgage, having predictable monthly payments will reduce your sleep deficit.
The second alternative is to modify the mortgage to lower your payments for a five-year period to not more than 31% of your gross (i.e., pretax) monthly income. People who have been re-assigned from full-time to part-time work, or who no longer get overtime may benefit from this alternative. So may two-income couples when one member is laid off and the combined household income drops. The loan must not exceed $729,750 and the home must be your primary residence. The government offers incentives to loan processors to reduce your interest rate to as low as 2% in order to get your monthly payment to the 31% level. If you stay current on the reduced payments for 5 years, the government will pay down a small part of the principal balance of your mortgage. After 5 years, the government will have reduced your principal balance by $5,000, so it's important to stay current. Also after 5 years, the payments on your mortgage can increase one percentage point a year until they reach the market rate for mortgages on the day when your loan is modified.
The second alternative could involve extending your mortgage to 40 years, or deferring repayment of part of the principal balance of the loan. The latter step might result in a balloon payment at the end of your mortgage, something that you should thoroughly understand before agreeing to the deal. Either you'll have to save up enough cash for the balloon payment, get more financing, or sell the house. The lender also has the option of forgiving part of the principal balance. But that's voluntary on the part of the lender and you shouldn't hold your breath hoping for it. (Our guess is that lottery tickets would be an easier way of reducing your principal balance than expecting voluntary principal reductions from lenders.)
To explore options under the Making Home Affordable program, contact your loan servicer or lender. You may also get free counseling by calling the Hope Now Alliance at 1-888-995-HOPE (4673) and speaking to counsellors approved by the Department of Housing and Urban Development. Beware of people claiming to offer mortgage relief for a fee. There are a lot of mortgage scams, now that numerous borrowers are in trouble.
If you don't qualify for assistance under the Making Home Affordable program, consider seeking help from nonprofit housing organizations. See http://blogger.uncleleosden.com/2007/12/how-to-handle-mortgage-default.html for more information. Good luck.
Original Blog: The Obama administration has launched a housing affordability initiative called "Making Home Affordable" (www.makinghomeaffordable.gov). It provides two alternatives for homeowners having problems paying their mortgages. Both alternatives are sponsored by the government, so you may get a better deal going through this program than you would if you tried to negotiate on your own. This program is aimed at forestalling foreclosures by helping homeowners who haven't yet defaulted but anticipate problems making their payments. (People who are way deep in default would probably have to pursue other options.)
The first alternative is to refinance. You should try for a mortgage offering a low, fixed rate, to make your housing costs predictable. You may qualify for a refinancing if the amount of the mortgage (plus any refinancing costs) does not exceed 105% of the value of the house. If there is a home equity loan or second mortgage on the house, the second lender will have to agree to the refinancing. (If refinancing would lower the payments on the first mortgage, you could point out to the second lender that these lower payments would increase your ability to pay the second loan.) You also need to be current on your mortgage, and not have been more than 30 days late in making a payment during the last 12 months. Your loan must be owned or guaranteed by Fannie Mae or Freddie Mac (which means larger loans might not qualify). Refinancing will not reduce the amount of the mortgage. But if you can lock in a low, fixed rate mortgage, having predictable monthly payments will reduce your sleep deficit.
The second alternative is to modify the mortgage to lower your payments for a five-year period to not more than 31% of your gross (i.e., pretax) monthly income. People who have been re-assigned from full-time to part-time work, or who no longer get overtime may benefit from this alternative. So may two-income couples when one member is laid off and the combined household income drops. The loan must not exceed $729,750 and the home must be your primary residence. The government offers incentives to loan processors to reduce your interest rate to as low as 2% in order to get your monthly payment to the 31% level. If you stay current on the reduced payments for 5 years, the government will pay down a small part of the principal balance of your mortgage. After 5 years, the government will have reduced your principal balance by $5,000, so it's important to stay current. Also after 5 years, the payments on your mortgage can increase one percentage point a year until they reach the market rate for mortgages on the day when your loan is modified.
The second alternative could involve extending your mortgage to 40 years, or deferring repayment of part of the principal balance of the loan. The latter step might result in a balloon payment at the end of your mortgage, something that you should thoroughly understand before agreeing to the deal. Either you'll have to save up enough cash for the balloon payment, get more financing, or sell the house. The lender also has the option of forgiving part of the principal balance. But that's voluntary on the part of the lender and you shouldn't hold your breath hoping for it. (Our guess is that lottery tickets would be an easier way of reducing your principal balance than expecting voluntary principal reductions from lenders.)
To explore options under the Making Home Affordable program, contact your loan servicer or lender. You may also get free counseling by calling the Hope Now Alliance at 1-888-995-HOPE (4673) and speaking to counsellors approved by the Department of Housing and Urban Development. Beware of people claiming to offer mortgage relief for a fee. There are a lot of mortgage scams, now that numerous borrowers are in trouble.
If you don't qualify for assistance under the Making Home Affordable program, consider seeking help from nonprofit housing organizations. See http://blogger.uncleleosden.com/2007/12/how-to-handle-mortgage-default.html for more information. Good luck.
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.
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