Housing Crisis Over? Mixed Data Suggests….
DebInVenice on May 7th, 2008
P2P-Loans.com has recently noticed a number of smart folks writing about the end of the housing crisis. In two separate articles in the WSJ ("Opinion: The Housing Crisis is Over" and "Is Housing Slump at a Bottom?"). These articles make very valid points with regard to housing starts, low interest rates, etc. What these articles fail to debate in any material fashion is that housing prices relative to disposable income are still extremely high!
This chart from Ned Davis Research (the line graph at the bottom of this page is most relevant) demonstrates that we remain at very high price levels relative to historical data. Ultimately, the value of housing is a function of affordability. When it's all said and done, this is the single most important factor that drives demand for new housing and the price of such housing. For example, the data in the chart suggest that in 2001 (yes, interest rates were in the sub 7% range for 30-year fixed mortgages then as well) the Median New Home Price / Disposable Income ratio was near its 30-year average, which is where it had been for the better part of 15 years. In fact, the ratio had been even lower before that, however this is likely due to the artificially high interest rates of the 1970's and early 1980's.
This dynamic has served to dramatically reduce demand for housing in conjunction with tougher lending standards (fewer buyer approved for new mortgages) and skitish buyers (when will prices stop falling). As a result, housing inventories have spiked to record highs. Accross the US, housing inventories are more than double typical levels, and are as high as 4-5 years worth of inventory (versus a long-term average of 5-6 months) in formerly hot markets such as Florida and California.
According to a recent post at Seeking Alpha, housing inventories are beginning to come down, but remain well above historical averages. Seeking Alpha points out that, at the current sales pace, inventories of new homes will be "back to normal" by the end of 2009. Simply put, we will be in a supply/demand imbalance for the next two years (and this is assuming that the market doesn't overshoot to the downside, which it's been known to do in prior busts - think about when many tech stocks were trading at less than cash value in 2003). The data is similar on the inventories of resales as well. In my estimation, this means we still have a ways to go before calling the end of the housing crisis. I hope I am wrong.
On a side note, the government is trying to push through a MASSIVE bailout program. Generally, when the government makes a move like this, they are too late to the party. Thus, this single fact alone could lead one to believe we are at the end of the housing crisis.
This chart from Ned Davis Research (the line graph at the bottom of this page is most relevant) demonstrates that we remain at very high price levels relative to historical data. Ultimately, the value of housing is a function of affordability. When it's all said and done, this is the single most important factor that drives demand for new housing and the price of such housing. For example, the data in the chart suggest that in 2001 (yes, interest rates were in the sub 7% range for 30-year fixed mortgages then as well) the Median New Home Price / Disposable Income ratio was near its 30-year average, which is where it had been for the better part of 15 years. In fact, the ratio had been even lower before that, however this is likely due to the artificially high interest rates of the 1970's and early 1980's.
This dynamic has served to dramatically reduce demand for housing in conjunction with tougher lending standards (fewer buyer approved for new mortgages) and skitish buyers (when will prices stop falling). As a result, housing inventories have spiked to record highs. Accross the US, housing inventories are more than double typical levels, and are as high as 4-5 years worth of inventory (versus a long-term average of 5-6 months) in formerly hot markets such as Florida and California.
According to a recent post at Seeking Alpha, housing inventories are beginning to come down, but remain well above historical averages. Seeking Alpha points out that, at the current sales pace, inventories of new homes will be "back to normal" by the end of 2009. Simply put, we will be in a supply/demand imbalance for the next two years (and this is assuming that the market doesn't overshoot to the downside, which it's been known to do in prior busts - think about when many tech stocks were trading at less than cash value in 2003). The data is similar on the inventories of resales as well. In my estimation, this means we still have a ways to go before calling the end of the housing crisis. I hope I am wrong.On a side note, the government is trying to push through a MASSIVE bailout program. Generally, when the government makes a move like this, they are too late to the party. Thus, this single fact alone could lead one to believe we are at the end of the housing crisis.
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Tax Payer ALERT! The Gov’t Wants To Bail Out Troubled Homeowners
DebInVenice on April 18th, 2008
Is there a tax-payer funded (err... "government sponsored") bailout coming for honeowners? Momentum appears to be building for a broad-based program to bail out folks that bought homes in the boom times and can no longer afford to make their payments (e.g. are approaching or are already in foreclosure proceedings). This has been a topic of much debate. For those that made smart, sound financial decisions (e.g. didn't borrow more than they could afford to pay back, and read the fine print on their mortgage documents, etc.), this seems like it might be unfair since the taxpayers will potentially be bailing out these folks. But, as the outline below reflects, the current debate in Congress revolves around structuring a compromise that enables any eventual program to pay for itself. P2P-Loans.com is encouraged by some of the provisions being discussed (especially the payment of insurance premiums to the FHA and a sharing in any equity gains to homeowners upon a sale). We would hope that the equity gain sharing is substantial and not a pittance given any gain will be made entirely on the backs of tax payers (errr...the "government-sponsored" program). Generally speaking, the government has a terrible track record on projects like this (they underestimate the total costs, botch the execution and mess up a market-based system that works pretty well in the long run).
Here is a summary (from an article at Money.com) of what's being debated (P2P-Loans.com will report back on this issue once a program is passed):
While critics worry that an FHA rescue plan could amount to a bailout, supporters say it's not since everyone involved - lenders, borrowers and mortgage investors - would make a sacrifice.
Lenders get 100% backing from the FHA if a loan goes south. In exchange, the lender takes a "haircut" - reducing the principal owed and converting adjustable-rate loans to fixed-rate mortgages.
Borrowers get to keep their homes, but they would pay a premium to the FHA for the mortgage insurance and they would have to give a small portion of their equity to the FHA when the house is sold. They would also have to show they can afford the newly refinanced loan.
Mortgage investors - while they would sacrifice some future income from loans that have been reduced - would have more confidence investing in the new loans since the refinanced loans will be affordable and the borrower therefore will be more likely to pay them back.
Here is a summary (from an article at Money.com) of what's being debated (P2P-Loans.com will report back on this issue once a program is passed):
While critics worry that an FHA rescue plan could amount to a bailout, supporters say it's not since everyone involved - lenders, borrowers and mortgage investors - would make a sacrifice.
Lenders get 100% backing from the FHA if a loan goes south. In exchange, the lender takes a "haircut" - reducing the principal owed and converting adjustable-rate loans to fixed-rate mortgages.
Borrowers get to keep their homes, but they would pay a premium to the FHA for the mortgage insurance and they would have to give a small portion of their equity to the FHA when the house is sold. They would also have to show they can afford the newly refinanced loan.
Mortgage investors - while they would sacrifice some future income from loans that have been reduced - would have more confidence investing in the new loans since the refinanced loans will be affordable and the borrower therefore will be more likely to pay them back.
Rebate for the Rich? Stimulus Plan Has Something For the Wealthy, Too!
DebInVenice on April 14th, 2008
P2P-Loans.com came accross this Fortune magazine article and thought our readers might like to know more about the stimulus plan (even if you don't qualify for the rebate check, READ ON). In a previous blog post, we wrote about the tentative stimulus plan (at the time of our posting it was not a done deal) and what it might mean to taxpayers. But, we didn't know about the details (and impact) of the change in the conforming mortgage amounts (discussed in the article below). The bottom line is that if you are an owner of an expensive home, but do not qualify for the tax rebate, this could be a huge money saver for you!
---------------------------------
A gift from the Beltway
High-income folks like me don't qualify for rebate checks. But we're getting so much more.
By Allan Sloan, senior editor at large
(Fortune Magazine) -- I won't be getting an economic-stimulus tax rebate check, but I'm not complaining about it. Not only am I fortunate to make too much money to qualify for a rebate, but I'm getting something far more valuable than the maximum $1,200 my wife and I could have gotten. Thanks to a relatively little-noticed portion of the stimulus package, we'll be able to refinance our house more cheaply than we otherwise could, or presumably sell it for more.
This means that higher-income couples like us who don't qualify for rebates because we have adjusted gross income of more than $174,000 ($87,000 for singles) are arguably getting a better stimulus deal than the 130 million taxpayers to whom Uncle Sam is sending payments.
Let me take you through it. The stimulus package raises the maximum size of a "conforming" mortgage to $729,750 from the previous cap of $417,000. A conforming mortgage is a mortgage that can be sold to Fannie Mae (FNM) or Freddie Mac (FRE, Fortune 500), and it carries a lower interest rate than "jumbo" loans that exceed those limits. Similarly, the maximum mortgage that can be insured by the Federal Housing Administration has also risen to $729,750. For people in high-home-price areas, including mine, these maximum mortgages are now high enough to matter.
Doing the math
Being able to borrow $417,000 on the cheap doesn't help much when you're hoping to sell or refinance your house for, say, $750,000. But a $729,750 limit works out just fine. This higher limit translates into cheaper refinancing or a higher sales price, because the lower interest rate means buyers can presumably afford to pay a higher price.
If we assume a 5% down payment, we're talking about houses in the $450,000 to $765,000 range becoming eligible for these loans. The range rises if people make larger down payments or put second mortgages on top of these loans.
We're talking major money here, folks. In today's market, the interest difference between a conforming loan and a non-conforming loan for a 30-year fixed-rate mortgage is a whopping 1.27% a year, according to Keith Gumbinger, a vice president at HSH Associates, a mortgage research firm. So a $700,000 conforming loan at 6.01% would carry almost $9,000 less annual interest than a nonconforming loan (at 7.28%).
Gumbinger says that's an artificially high difference caused by the current freeze-up in credit markets. "The spread was about 20 basis points [20-hundredths of a percent] before things got ugly in June," he says. So even if normalcy returns - alas, that doesn't seem imminent - having a $700,000 conforming mortgage would cut a borrower's interest costs by $1,400 a year. Call it $1,000 a year after taxes if you itemize. That's worth much more than a one-time $1,200 nontaxable rebate payment.
READ THE REST OF THIS ARTICLE ON FORTUNE.COM...
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---------------------------------
A gift from the Beltway
High-income folks like me don't qualify for rebate checks. But we're getting so much more.
By Allan Sloan, senior editor at large
(Fortune Magazine) -- I won't be getting an economic-stimulus tax rebate check, but I'm not complaining about it. Not only am I fortunate to make too much money to qualify for a rebate, but I'm getting something far more valuable than the maximum $1,200 my wife and I could have gotten. Thanks to a relatively little-noticed portion of the stimulus package, we'll be able to refinance our house more cheaply than we otherwise could, or presumably sell it for more.
This means that higher-income couples like us who don't qualify for rebates because we have adjusted gross income of more than $174,000 ($87,000 for singles) are arguably getting a better stimulus deal than the 130 million taxpayers to whom Uncle Sam is sending payments.
Let me take you through it. The stimulus package raises the maximum size of a "conforming" mortgage to $729,750 from the previous cap of $417,000. A conforming mortgage is a mortgage that can be sold to Fannie Mae (FNM) or Freddie Mac (FRE, Fortune 500), and it carries a lower interest rate than "jumbo" loans that exceed those limits. Similarly, the maximum mortgage that can be insured by the Federal Housing Administration has also risen to $729,750. For people in high-home-price areas, including mine, these maximum mortgages are now high enough to matter.
Doing the math
Being able to borrow $417,000 on the cheap doesn't help much when you're hoping to sell or refinance your house for, say, $750,000. But a $729,750 limit works out just fine. This higher limit translates into cheaper refinancing or a higher sales price, because the lower interest rate means buyers can presumably afford to pay a higher price.
If we assume a 5% down payment, we're talking about houses in the $450,000 to $765,000 range becoming eligible for these loans. The range rises if people make larger down payments or put second mortgages on top of these loans.
We're talking major money here, folks. In today's market, the interest difference between a conforming loan and a non-conforming loan for a 30-year fixed-rate mortgage is a whopping 1.27% a year, according to Keith Gumbinger, a vice president at HSH Associates, a mortgage research firm. So a $700,000 conforming loan at 6.01% would carry almost $9,000 less annual interest than a nonconforming loan (at 7.28%).
Gumbinger says that's an artificially high difference caused by the current freeze-up in credit markets. "The spread was about 20 basis points [20-hundredths of a percent] before things got ugly in June," he says. So even if normalcy returns - alas, that doesn't seem imminent - having a $700,000 conforming mortgage would cut a borrower's interest costs by $1,400 a year. Call it $1,000 a year after taxes if you itemize. That's worth much more than a one-time $1,200 nontaxable rebate payment.
READ THE REST OF THIS ARTICLE ON FORTUNE.COM...
If you'd like to receive P2P-Loans.com blog postings via email, CLICK HERE to sign up.
Help, My Credit Score Just Fell Off A Cliff (and I didn’t even do anything)!
DebInVenice on March 25th, 2008
As you may not know, Fair Isaac (what's so fair about them, I don't know) recently updated its FICO score formula and it is being rolled out by the three primary credit agencies. While there are many views on whether these changes are good or bad, the one certainty about all of this is that your credit score is probably going to change. Here's our quick and dirty on how this might affect you:
If your credit is currently being bolstered because you are an authorized user on your parents credit card account, you are probably going to get HAMMERED! One of the largest (and most negative) changes to the formula is the removal of the benefit you get from being on someone elses account as an authorized user. Some credit analysts belive as many of 25% of all Americans with credit could be negatively affected by this one change (that's about 40 million people whose credit score could fall). The good news is that it may take a number of months before all the credit card companies, banks, etc. begin to use this new score (so, get some new credit while you can - P2P-Loans.com has some great credit card offers if you are interested). Getting credit now (while you can still piggyback with daddy's good credit) will allow you to start building your own on-time credit file.
However, there are some positive changes to the scoring methodology as well. For example, the system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.
Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.
Finally, the new system rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, home equity lines of credit) and installment loans (Prosper Loans, student, auto or boat loans, mortgages). Even if you show a wide range of loans but a solid history of paying them on time, expect your score to jump up as well. Go figure, if you pay on time, you have a good score!
Just as a helpful refresher, here is what we do know about the FICO system (even though the exact numbers are closely guarded by Fair Isaac) and what the rough weighting is for certain types of credit data used:
- 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
- 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
- 15% — length of credit history
- 10% — types of credit used (installment, revolving, consumer finance)
- 10% — recent search for credit and/or amount of credit obtained recently
I Need Money (Don’t We All) - Read On To Learn How to Get Some…
DebInVenice on March 20th, 2008
As you probably know by now, I tend to blog about things that I find curious, interesting or about P2P lending, Prosper, etc. Well, I recently came upon what I felt was a pretty useful collection of some of the best financial sites and tools on the web. So, naturally, I wanted to share it with my loyal fan base (thanks for reading, Mom!). Seriously, I've found that the best way to accumulate savings (and ultimately wealth) is to focus on living within your means and cutting a mean bargain when you make large purchases or other financial decisions (cars, homes, jobs, etc.). That's what I found so cool about these sites/tools.
The source of these links was CNN Money, but I added my own color commentary for your enjoyment.
Your financial life: Track it. Improve it.
New ways to keep tabs on your inflows and outflows can make a big difference to your bottom line. Did you know that saving $0.99 per day beginning when you are 25 years old will get you over $187,000 in cash when you retire (10% annual return assumed)!
Buying a new ride will never be the same
The new resources put you on more equal footing with car dealers. If you buy a car every 5 years (about average) and save $1,000 each time by using these tools, you will save over $100,000 between the ages of 25 and retirement (same 10% assumption)!
Where you can go for advice you can trust (really)
Before betting the farm on some hot new investment, head to these Web communities. Make sure you don't lose the nearly $300,000 I saved you above...=)
Create your own "network effect"
When searching for a new job, it's easier than ever to get on the inside track. Few things will be as important to your financial future as your job. Make sure you are paid what you are worth!
Get the lowest price on anything
Before you plunk down hard-earned cash, you can quickly see which stores are offering the best deals. Remember how much $0.99 per day is worth...?
Know your home's future
Is a neighborhood you're interested caught up in the housing bust? How do the schools rate? This information is a few clicks away.
Click your way to the right school
Get the latest stats and even take a virtual tour to find the college of your dreams. Don't waste your money on an average school. Do your homework (before and during school).
The source of these links was CNN Money, but I added my own color commentary for your enjoyment.
Your financial life: Track it. Improve it.
New ways to keep tabs on your inflows and outflows can make a big difference to your bottom line. Did you know that saving $0.99 per day beginning when you are 25 years old will get you over $187,000 in cash when you retire (10% annual return assumed)!
Buying a new ride will never be the same
The new resources put you on more equal footing with car dealers. If you buy a car every 5 years (about average) and save $1,000 each time by using these tools, you will save over $100,000 between the ages of 25 and retirement (same 10% assumption)!
Where you can go for advice you can trust (really)
Before betting the farm on some hot new investment, head to these Web communities. Make sure you don't lose the nearly $300,000 I saved you above...=)
Create your own "network effect"
When searching for a new job, it's easier than ever to get on the inside track. Few things will be as important to your financial future as your job. Make sure you are paid what you are worth!
Get the lowest price on anything
Before you plunk down hard-earned cash, you can quickly see which stores are offering the best deals. Remember how much $0.99 per day is worth...?
Know your home's future
Is a neighborhood you're interested caught up in the housing bust? How do the schools rate? This information is a few clicks away.
Click your way to the right school
Get the latest stats and even take a virtual tour to find the college of your dreams. Don't waste your money on an average school. Do your homework (before and during school).
So, What the Heck Does This Fed Rate Cut Mean to Me?
DebInVenice on March 19th, 2008
I was in the process of writing a blog posting on this very topic when I stumbled accross this well-written article from Bankrate. So, I thought I would share it with you. Enjoy!
Who wins, who loses in Fed's rate-cutting spree?
By Chris Kissell • Bankrate.com
When the Federal Reserve meets and changes rates, we all have questions: What does it mean to me? Will my mortgage rate go up or down? Is this a good time to refinance? Bankrate is here to help. We've looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser. Here's a look at mortgages:
Winner: People locked into a good loan rate
When the Federal Reserve cut the federal funds rate dramatically in January, many soothsayers speculated that mortgage rates would plunge in response. Instead, mortgage rates actually rose significantly, reminding everyone that changes in the federal funds rate do not directly control the direction of mortgage rates.
Now that the Fed has cut rates by 75 basis points (that's 0.75% for you newbies), it's anyone's guess where mortgage rates will go. But Richard DeKaser, chief economist for National City Corp., is betting the cost of carrying a mortgage won't be going down substantially any time soon.
"We've seen the lowest for mortgage rates," he says. "We're going to be in the range of 6 percent for the balance of the year."
Time may prove DeKaser right. If so, consider yourself a winner if you locked into a mortgage before January's rate cut, when mortgage rates were near historic lows.
Winner: Homeowners whose loans are about to reset
The Fed's rate cut won't directly affect people with fixed-rate mortgages. But it will lower the payments of most homeowners with adjustable-rate mortgages.
This will be a boon for countless Americans with subprime mortgages who fear their next reset could leave them facing foreclosure.
"The Fed's actions in their own right are going to reduce the burden of mortgage resets," DeKaser says. "So that will help directly."
Loser: Fixed-rate mortgage shoppers
Way back in January, times were good for people shopping for a mortgage. Mortgage rates were near historic lows, making it cheaper to borrow.
Of course, not everything was rosy. The U.S. credit crunch and falling home values made it difficult for some borrowers to take advantage of sinking rates. Nonetheless, many homeowners and homebuyers had a window of opportunity to lock into historically low borrowing costs for many years to come.
For now, it appears that window has slammed shut, leaving those who failed to act earlier feeling like losers.
Take action
The Federal Reserve slashed the federal funds rate dramatically in late January. How did mortgage rates respond? They rose, fast and furiously. The moral of the story is simple: Don't make mortgage decisions based on Fed actions, such as this week's rate cut. Instead, take the appropriate action given your individual circumstances.
"Trying to time the market is historically a fruitless exercise," says Bob Walters, chief economist at Quicken Loans. "If it saves you money to convert your ARM or to lower your fixed rate, then by all means do so."
Who wins, who loses in Fed's rate-cutting spree?
By Chris Kissell • Bankrate.com
When the Federal Reserve meets and changes rates, we all have questions: What does it mean to me? Will my mortgage rate go up or down? Is this a good time to refinance? Bankrate is here to help. We've looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser. Here's a look at mortgages:
Winner: People locked into a good loan rate
When the Federal Reserve cut the federal funds rate dramatically in January, many soothsayers speculated that mortgage rates would plunge in response. Instead, mortgage rates actually rose significantly, reminding everyone that changes in the federal funds rate do not directly control the direction of mortgage rates.
Now that the Fed has cut rates by 75 basis points (that's 0.75% for you newbies), it's anyone's guess where mortgage rates will go. But Richard DeKaser, chief economist for National City Corp., is betting the cost of carrying a mortgage won't be going down substantially any time soon.
"We've seen the lowest for mortgage rates," he says. "We're going to be in the range of 6 percent for the balance of the year."
Time may prove DeKaser right. If so, consider yourself a winner if you locked into a mortgage before January's rate cut, when mortgage rates were near historic lows.
Winner: Homeowners whose loans are about to reset
The Fed's rate cut won't directly affect people with fixed-rate mortgages. But it will lower the payments of most homeowners with adjustable-rate mortgages.
This will be a boon for countless Americans with subprime mortgages who fear their next reset could leave them facing foreclosure.
"The Fed's actions in their own right are going to reduce the burden of mortgage resets," DeKaser says. "So that will help directly."
Loser: Fixed-rate mortgage shoppers
Way back in January, times were good for people shopping for a mortgage. Mortgage rates were near historic lows, making it cheaper to borrow.
Of course, not everything was rosy. The U.S. credit crunch and falling home values made it difficult for some borrowers to take advantage of sinking rates. Nonetheless, many homeowners and homebuyers had a window of opportunity to lock into historically low borrowing costs for many years to come.
For now, it appears that window has slammed shut, leaving those who failed to act earlier feeling like losers.
Take action
The Federal Reserve slashed the federal funds rate dramatically in late January. How did mortgage rates respond? They rose, fast and furiously. The moral of the story is simple: Don't make mortgage decisions based on Fed actions, such as this week's rate cut. Instead, take the appropriate action given your individual circumstances.
"Trying to time the market is historically a fruitless exercise," says Bob Walters, chief economist at Quicken Loans. "If it saves you money to convert your ARM or to lower your fixed rate, then by all means do so."
Forget Mailing Your Keys to The Bank: Live in Your Home Free (at least for a while)
DebInVenice on March 6th, 2008
I don't normally re-post blogs, but I found this posting from the WSJ and found it particularly interesting. In fact, I have some experience with this area as I know someone in my local market that has executed the home squatter strategy to near perfection over the last few years.
This person owns a second home (it's actually a condo on the beach) and has had foreclosure proceedings started on him on 3 different occasions. Each time, he's taken the bank for a "rent-free" ride for 9-12 months. During each of these processes, he negotiated a "new deal / payment plan" with the bank, which ended in dismissal of the foreclosure proceedings. The net result of his actions has been effectively free rent for nearly 3 years (e.g. no cash payments) on his second home since the back payments, interest and penalties/fees were simply added to his mortgage balance (which he may or may not make payments on going forward). I suspect he'll try this again in a few months, and maybe the bank will wise up (doubtful). Or, maybe he will just continue to live in the condo as long as he can continue to play this game (in reality, he cannot afford this second home without playing this game with his bank).
With so many folks upside down on their homes (their home is worth less than their mortgage balance), one might expect to hear about more of these cases going forward. Let's hope that the banks will show a little compassion since many folks in foreclosure today are not gaming the system (per the story above), but genuinely need their help to keep their families in their homes.
Here's the blog posting and a link to the blog (there are some interesting comments on the actual posting, so I encourage you to visit).
Why Walk Away? Mortgage ‘Squatters’ Stay in Their Homes
by Lauren Baier Kim
We’ve written about homeowners who are walking away from their homes instead of paying back their mortgages as home values fall. But why give up your house when you can continue living in it without paying a cent? That’s essentially what some people are doing, according to a recent post on the Big Picture blog.
The blog shares the observation of one South Florida developer, MW, who says that in “the very best neighborhoods of Florida,” owners of houses valued in excess of $2 million have ceased making mortgage payments and are essentially squatting in their luxury homes. And thanks to a backlog of foreclosure cases in the local courts, they may be able to live in their home for months, maybe even years, before the banks can take action (many have also quit paying property taxes and insurance, the post notes).
The post reminds us of a December Journal article written by Amir Efrati about a family in Cleveland who fought off foreclosure in the courts and continued to live in their home for 11 years without forking over a single mortgage payment. Ultimately, the bank foreclosed on the house, the family was evicted and the house was sold to another family, Mr. Efrati says.
There’s a similar tale on Bloomberg.com of a Boca Raton, Fla., resident who hasn’t paid his $1.5 million mortgage since 2002, but still has ownership of his home because the bank can’t prove that it owns the mortgage note. The article says that homeowners across the U.S. have seen foreclosure cases against them dismissed because of lenders’ inability to prove ownership of mortgages that have been pooled into securities and have changed hands multiple times, sometimes with poor documentation.
Of course, many people stay in their homes for a year or two while awaiting eviction. But with so many folks holding negative equity in their homes, should we expect to see more of this? — Lauren Baier Kim
This person owns a second home (it's actually a condo on the beach) and has had foreclosure proceedings started on him on 3 different occasions. Each time, he's taken the bank for a "rent-free" ride for 9-12 months. During each of these processes, he negotiated a "new deal / payment plan" with the bank, which ended in dismissal of the foreclosure proceedings. The net result of his actions has been effectively free rent for nearly 3 years (e.g. no cash payments) on his second home since the back payments, interest and penalties/fees were simply added to his mortgage balance (which he may or may not make payments on going forward). I suspect he'll try this again in a few months, and maybe the bank will wise up (doubtful). Or, maybe he will just continue to live in the condo as long as he can continue to play this game (in reality, he cannot afford this second home without playing this game with his bank).
With so many folks upside down on their homes (their home is worth less than their mortgage balance), one might expect to hear about more of these cases going forward. Let's hope that the banks will show a little compassion since many folks in foreclosure today are not gaming the system (per the story above), but genuinely need their help to keep their families in their homes.
Here's the blog posting and a link to the blog (there are some interesting comments on the actual posting, so I encourage you to visit).
Why Walk Away? Mortgage ‘Squatters’ Stay in Their Homes
by Lauren Baier Kim
We’ve written about homeowners who are walking away from their homes instead of paying back their mortgages as home values fall. But why give up your house when you can continue living in it without paying a cent? That’s essentially what some people are doing, according to a recent post on the Big Picture blog.
The blog shares the observation of one South Florida developer, MW, who says that in “the very best neighborhoods of Florida,” owners of houses valued in excess of $2 million have ceased making mortgage payments and are essentially squatting in their luxury homes. And thanks to a backlog of foreclosure cases in the local courts, they may be able to live in their home for months, maybe even years, before the banks can take action (many have also quit paying property taxes and insurance, the post notes).
The post reminds us of a December Journal article written by Amir Efrati about a family in Cleveland who fought off foreclosure in the courts and continued to live in their home for 11 years without forking over a single mortgage payment. Ultimately, the bank foreclosed on the house, the family was evicted and the house was sold to another family, Mr. Efrati says.
There’s a similar tale on Bloomberg.com of a Boca Raton, Fla., resident who hasn’t paid his $1.5 million mortgage since 2002, but still has ownership of his home because the bank can’t prove that it owns the mortgage note. The article says that homeowners across the U.S. have seen foreclosure cases against them dismissed because of lenders’ inability to prove ownership of mortgages that have been pooled into securities and have changed hands multiple times, sometimes with poor documentation.
Of course, many people stay in their homes for a year or two while awaiting eviction. But with so many folks holding negative equity in their homes, should we expect to see more of this? — Lauren Baier Kim
Bank of America Buys Countrywide: Good News For Countrywide Customers?
DebInVenice on January 14th, 2008
As you likely know by now, Bank of America announced plans to acquire Countrywide last week in what many have called a "rescue" deal. But, if you are a Countrywide customer, what does this mean to you? I believe it is good news for you and here's why. The price that Bank of America paid for Countrywide indicates that they are assuming a large chunk of Countrywide loans will go bad. Thus, if you are currently behind on your Countrywide mortgage, HELOC, etc. payments, this may be an historic opportunity for you to cut a deal with the new owner/servicer of your loan. The math is quite simple - BoA purchased your loan for a HUGE discount meaning they may have paid $150,000 or less for your $200,000 mortgage/HELOC. Thus, if they cut a new deal with you that gets them $150,000 or more of value (through a new payment plan, a more traditional mortgage product through a refinance, etc.), they win and you win! Countrywide could not have done this as easily because it would have required further write-downs of their assets (mortgages they hold on their balance sheet), which would have precipitated further negative press, loss of investor confidence, and potentially bankruptcy for the company. CNN Money recently published an article on this very topic, which I would encourage you to read.
If you are having trouble with your Countrywide mortgage or if your mortgage is an ARM, Option ARM, or similar, I would strongly encourage you to inquire about your options with the new Countrywide. You may not have another opportunity like this down the road!
If you would like to contact Countrywide (or any other mortgage company), you can refer to the contact information in this blog posting. You may also contact Countrywide's Loss Mitigation Department on the web at:
https://customers.countrywide.com/secure/FHAStart_login254.asp
If you are having trouble with your Countrywide mortgage or if your mortgage is an ARM, Option ARM, or similar, I would strongly encourage you to inquire about your options with the new Countrywide. You may not have another opportunity like this down the road!
If you would like to contact Countrywide (or any other mortgage company), you can refer to the contact information in this blog posting. You may also contact Countrywide's Loss Mitigation Department on the web at:
https://customers.countrywide.com/secure/FHAStart_login254.asp