MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
Troy, MI - Bloomberg reported late last week that Joseph Murin was stepping down after only 13 months on the job.
GNMA (Government National Mortgage Association) mainly securitizes FHA and VA mortgages and has seen its business almost double in the last 2 years.
Why would an executive walk away from a business seeing such explosive growth?
FHA loans have only become popular because so many other mortgage options have dried up. The low credit score & down payment requirements for FHA loans have many mortgage experts predicting significant future defaults.
David Moffet resigned as FHLMC CEO this past March and Herb Allison recently left FNMA.
Makes on wonder why all these executives are leaving these mortgage related organizations.
It does not bode well for the future of these organizations. More trouble is coming, which means more governmment bailouts.
Monday, August 17, 2009
Sunday, August 16, 2009
HUD finally allows Loan Modifications on FHA Mortgages
Better late than never - four months after Obama announces FNMA/FHLMC loan modification plan, HUD makes FHA loans eligible.
MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
TROY, MI – On July 30, HUD published Mortgagee Letter 2009-23, that detailed their long awaited loan modification program for homeowners with FHA mortgages. What took so long? President Obama announced the “Making Home Affordable Program” (MHA) for FNMA & FHLMC mortgages back on March 4th of this year.
We should all be glad HUD’s modification program is finally available, but HUD is supposed to be a homeowner advocate and watchdog. Some watchdog! HUD’s response time on this means if they were guarding your house, the crooks would have already been back several times and stolen everything but the kitchen sink before they sounded an alarm.
This latest piece of legislation does show the Obama administration fully believes the best way to solve the housing crisis and stem the tide of foreclosures is to make home payments affordable. This was sorely lacking with FHA’s other modification options. Most homeowners with FHA mortgages were forced into forbearance programs that usually increased their monthly payments.
HUD’s forbearance program was actually designed for different economic times when a job loss or other economic hardship was typically temporary. Worse-case in those days, a homeowner could usually sell their home to pay off the mortgage they were having difficulty paying. The current Great Recession and percentage of upside homes no longer makes forbearance a very realistic and viable option.
The new guideline kicks in August 15, 2009 for homeowners with FHA mortgages.
Who’s Eligible
The FHA mortgage to be modified must be at least 12 months old and the homeowner must have made at least 4 full monthly payments.
The FHA mortgage must be less than 12 months behind on payments, but surprisingly, it s required that the mortgage be at least 30 days behind. This is a major difference from the MHA program where no delinquency is required.
The homeowner must still live in the property with the FHA mortgage being modified, so rental properties with FHA mortgages are not eligible.
The homeowner cannot have deliberately defaulted on their FHA mortgage payments. I’d like to know how HUD and the mortgage servicers intend to determine this. My guess is that they won’t - except in obvious cases where a homeowner has a lot of liquid reserve funds in non-retirement accounts.
The homeowner must first try to qualify for other loss mitigation home retention options – FHA Special Forbearance, Loan Modification and Partial Claim. This is a silly requirement that could lead to confusion, unnecessary delays and ultimately foreclosures instead of the intended modifications. FNMA & FHLMC modifications have no such requirement.
The Modification Process
A homeowner will have to submit detailed financial information to whoever is servicing their FHA mortgage and sign a hardship affidavit attesting to their financial difficulties. This information may be provided either in writing or verbally over the phone.
Similar to the FNMA/FHLMC modification process, the goal of the FHA modification is to lower the Principal, Interest, Taxes & Insurance (PITI) payment to 31% of the homeowner’s gross monthly income. HUD calls this a Front End Ratio.
Unlike the FNMA/FHLMC modification program though, the FHA version also has a Back End Ratio requirement where total debt payments including PITI, cannot exceed 55% of gross monthly income. Any second mortgages must also be included in the Back End Ratio.
The last calculation is the toughest to understand – up to 30% of the current mortgage balance, less payments in arrears (up to 12 months) and allowable foreclosure costs, may be deferred along with the corresponding payment amount. The amount deferred is also limited to that which will bring the PITI payment down to 31% of the homeowner’s gross monthly income.
Confused yet? I’d like to know why HUD made this so complicated. It’s bound to cause major confusion in the customer service ranks. HUD did provide an example to illustrate the process:
Homeowner had a reduction of income and is delinquent 3 full mortgage payments. The unpaid principal balance on the mortgage on the date of default is $150,000 and the monthly payment is $1,220 (consisting of P&I of $920 and escrows, including MIP, of $300). The financial analysis reveals that the homeowner’s gross monthly income is $3,500 and the total monthly other recurring debt payments are $800.
In order to fulfill the 31% Front End Ratio requirement, the homeowner’s total monthly mortgage payment would have to be reduced to $1,085 ($3,500 x 31%). Therefore, P&I would have to be reduced to $785 ($1,085 total monthly mortgage payment less $300 escrow and MIP). Assuming that the loan modification will have an interest rate of 6% and a P&I of $785, the new mortgage amount would have to be $130,931, resulting in a principal reduction of $19,069 ($150,000 unpaid principal balance less $130,931). In this example, the homeowner’s Back End ratio is 53.9% ($1,885/$3,500), which satisfies the 55% Back End Ratio limitation.
In this example, the maximum principal deferment is $41,340 (30% of $150,000, less the $3,660 delinquency, or $45,000 - $3,660). However, based on their gross income, the homeowner is eligible only for a principal deferment of $19,069 plus $3,660 arrearages (which would include any foreclosure costs incurred to that point, in accord with Mortgagee Letter 2008-21) for the total deferment of $22,729.
Once a modified payment is calculated, a homeowner must undergo a trial modification period and make three consecutive trial monthly mortgage payments on time. Failure to do so will result in foreclosure.
The good news is that no payments will be due and no interest charged on the amount deferred until the rest of the mortgage is paid off. HUD is NOT forgiving part of the mortgage balance. Effectively, HUD is lowering the current payment by extending the term of the mortgage.
Other Issues
A lender may not charge a homeowner any fees for doing an FHA loan modification and all late fees must be waived.
No appraisal is required, but a lender may perform an inspection of the property to confirm it’s in livable condition.
The interest rate may be lowered to 2% above the monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of 10 years.
A modified mortgage must result in a lower payment for the homeowner.
By the way, lenders will be paid up to $1250 for each FHA mortgage they modify. Hopefully, lenders use that money to hire a few extra bodies to handle the increased workload and don’t just use the funds to pad their profits.
Click here to read more HUD issued guidelines on modifications.
Overall, it’s about time HUD caught up with FNMA & FHLMC in regards to more aggressive loan modification guidelines. It didn’t make sense to force FHA lenders to only offer an antiquated forbearance option to homeowners experiencing economic hardships.
It’s interesting that there’s still no official loan modification program to lower payments on VA mortgages.
I’d like to know how many homeowners with FHA mortgages lost their homes to foreclosure while waiting for these new modification guidelines from HUD. Many of them could probably have avoided foreclosure with this new modification plan. Congress should call the organization to task for this delay.
If anyone you know has any questions on modifying their FHA mortgage please forward them this article. Although we don’t handle loan modifications, if they need further assistance have them contact me, but please warn them there may be a consulting fee for my time.
MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
TROY, MI – On July 30, HUD published Mortgagee Letter 2009-23, that detailed their long awaited loan modification program for homeowners with FHA mortgages. What took so long? President Obama announced the “Making Home Affordable Program” (MHA) for FNMA & FHLMC mortgages back on March 4th of this year.
We should all be glad HUD’s modification program is finally available, but HUD is supposed to be a homeowner advocate and watchdog. Some watchdog! HUD’s response time on this means if they were guarding your house, the crooks would have already been back several times and stolen everything but the kitchen sink before they sounded an alarm.
This latest piece of legislation does show the Obama administration fully believes the best way to solve the housing crisis and stem the tide of foreclosures is to make home payments affordable. This was sorely lacking with FHA’s other modification options. Most homeowners with FHA mortgages were forced into forbearance programs that usually increased their monthly payments.
HUD’s forbearance program was actually designed for different economic times when a job loss or other economic hardship was typically temporary. Worse-case in those days, a homeowner could usually sell their home to pay off the mortgage they were having difficulty paying. The current Great Recession and percentage of upside homes no longer makes forbearance a very realistic and viable option.
The new guideline kicks in August 15, 2009 for homeowners with FHA mortgages.
Who’s Eligible
The FHA mortgage to be modified must be at least 12 months old and the homeowner must have made at least 4 full monthly payments.
The FHA mortgage must be less than 12 months behind on payments, but surprisingly, it s required that the mortgage be at least 30 days behind. This is a major difference from the MHA program where no delinquency is required.
The homeowner must still live in the property with the FHA mortgage being modified, so rental properties with FHA mortgages are not eligible.
The homeowner cannot have deliberately defaulted on their FHA mortgage payments. I’d like to know how HUD and the mortgage servicers intend to determine this. My guess is that they won’t - except in obvious cases where a homeowner has a lot of liquid reserve funds in non-retirement accounts.
The homeowner must first try to qualify for other loss mitigation home retention options – FHA Special Forbearance, Loan Modification and Partial Claim. This is a silly requirement that could lead to confusion, unnecessary delays and ultimately foreclosures instead of the intended modifications. FNMA & FHLMC modifications have no such requirement.
The Modification Process
A homeowner will have to submit detailed financial information to whoever is servicing their FHA mortgage and sign a hardship affidavit attesting to their financial difficulties. This information may be provided either in writing or verbally over the phone.
Similar to the FNMA/FHLMC modification process, the goal of the FHA modification is to lower the Principal, Interest, Taxes & Insurance (PITI) payment to 31% of the homeowner’s gross monthly income. HUD calls this a Front End Ratio.
Unlike the FNMA/FHLMC modification program though, the FHA version also has a Back End Ratio requirement where total debt payments including PITI, cannot exceed 55% of gross monthly income. Any second mortgages must also be included in the Back End Ratio.
The last calculation is the toughest to understand – up to 30% of the current mortgage balance, less payments in arrears (up to 12 months) and allowable foreclosure costs, may be deferred along with the corresponding payment amount. The amount deferred is also limited to that which will bring the PITI payment down to 31% of the homeowner’s gross monthly income.
Confused yet? I’d like to know why HUD made this so complicated. It’s bound to cause major confusion in the customer service ranks. HUD did provide an example to illustrate the process:
Homeowner had a reduction of income and is delinquent 3 full mortgage payments. The unpaid principal balance on the mortgage on the date of default is $150,000 and the monthly payment is $1,220 (consisting of P&I of $920 and escrows, including MIP, of $300). The financial analysis reveals that the homeowner’s gross monthly income is $3,500 and the total monthly other recurring debt payments are $800.
In order to fulfill the 31% Front End Ratio requirement, the homeowner’s total monthly mortgage payment would have to be reduced to $1,085 ($3,500 x 31%). Therefore, P&I would have to be reduced to $785 ($1,085 total monthly mortgage payment less $300 escrow and MIP). Assuming that the loan modification will have an interest rate of 6% and a P&I of $785, the new mortgage amount would have to be $130,931, resulting in a principal reduction of $19,069 ($150,000 unpaid principal balance less $130,931). In this example, the homeowner’s Back End ratio is 53.9% ($1,885/$3,500), which satisfies the 55% Back End Ratio limitation.
In this example, the maximum principal deferment is $41,340 (30% of $150,000, less the $3,660 delinquency, or $45,000 - $3,660). However, based on their gross income, the homeowner is eligible only for a principal deferment of $19,069 plus $3,660 arrearages (which would include any foreclosure costs incurred to that point, in accord with Mortgagee Letter 2008-21) for the total deferment of $22,729.
Once a modified payment is calculated, a homeowner must undergo a trial modification period and make three consecutive trial monthly mortgage payments on time. Failure to do so will result in foreclosure.
The good news is that no payments will be due and no interest charged on the amount deferred until the rest of the mortgage is paid off. HUD is NOT forgiving part of the mortgage balance. Effectively, HUD is lowering the current payment by extending the term of the mortgage.
Other Issues
A lender may not charge a homeowner any fees for doing an FHA loan modification and all late fees must be waived.
No appraisal is required, but a lender may perform an inspection of the property to confirm it’s in livable condition.
The interest rate may be lowered to 2% above the monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of 10 years.
A modified mortgage must result in a lower payment for the homeowner.
By the way, lenders will be paid up to $1250 for each FHA mortgage they modify. Hopefully, lenders use that money to hire a few extra bodies to handle the increased workload and don’t just use the funds to pad their profits.
Click here to read more HUD issued guidelines on modifications.
Overall, it’s about time HUD caught up with FNMA & FHLMC in regards to more aggressive loan modification guidelines. It didn’t make sense to force FHA lenders to only offer an antiquated forbearance option to homeowners experiencing economic hardships.
It’s interesting that there’s still no official loan modification program to lower payments on VA mortgages.
I’d like to know how many homeowners with FHA mortgages lost their homes to foreclosure while waiting for these new modification guidelines from HUD. Many of them could probably have avoided foreclosure with this new modification plan. Congress should call the organization to task for this delay.
If anyone you know has any questions on modifying their FHA mortgage please forward them this article. Although we don’t handle loan modifications, if they need further assistance have them contact me, but please warn them there may be a consulting fee for my time.
Sunday, July 26, 2009
Homebuyers – You’re Pre-Approved by Payment, not Purchase Price!
Lenders do a terrible job of educating homebuyers that they’re actually approved for a monthly payment, not a purchase price. Why don’t pre-approval letters make this clear?
MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
July 26, 2009 -- Troy, MI – A homebuyer follows instructions and jumps through the hoops (which are many today) necessary to get a pre-approval letter before looking at homes for sale. They find one they like, at a price their pre-approval letter says they’re good for, make an offer, negotiate back and forth with the seller and finally agree on a price. They’re elated.
Then the rug gets pulled out from under them and they’re told they don’t qualify for this house and all their efforts were in vain.
What’s even scarier is that often the homebuyer doesn’t find out they don’t qualify for the property they got their hopes up for, until weeks into the formal approval process, sometimes only days before the target closing date.
Why does this happen?
The lender they were dealing with didn’t do a very good job of explaining how the mortgage industry actually approves homebuyers. Even if they did, it was just one of the numerous topics discussed and the homebuyer forgot about it. Then, the lender didn’t double-check the pre-approval requirements for the specific property.
Because of issues like this, it’s extremely important that homebuyers understand the following:
MORTGAGE APPROVALS ARE MOSTLY BASED ON MONTHLY HOUSING PAYMENTS NOT PURCHASE PRICES!
Let’s study the pre-approval process to understand why.
A homebuyer only makes so much money per month, which means they can only afford to spend a portion of that income on a monthly housing payment. The rest of their income goes towards various income taxes, car payments, credit card payments, student loans, etc. On top of that, unless the homebuyer wants to freeze in the dark during winter, they have to pay utilities to keep the heat & lights on (if you’re outside the snowbelt, think air-conditioning).
If you think about this, it makes sense.
Now, let’s look at an example homebuyer:
Annual Income: $75,000
Monthly Debt Payments: $1,000
How much of a housing payment would this person qualify for?
First, let’s break the annual income down to a monthly basis: $75,000 / 12 = $6,250/month income.
FNMA/FHLMC typically allows 40% of one’s gross monthly income to go towards monthly debt, including a housing payment. The 40% number is called a Debt Ratio. The other 60% of monthly income is allocated for income taxes, utilities, food, clothing, car insurance & gas and other necessities of life.
So, to calculate the maximum amount of monthly debt allowed we calculate 40% of the monthly income:
$6,250 x 40% = $2,500.
But, our example homebuyer already has $1,000 per month in existing debt. That money then, cannot be allocated towards a housing payment. So, we calculate what’s left:
$2500 minus current debt payments of $1,000 = $1,500 for a maximum housing payment
This is what our example homebuyer could afford. Now, they don’t have to spend that much of course. There are also other variables that could allow for a somewhat higher housing payment. For example, if the homebuyer put 20% down, the 40% debt ratio might be allowed to increase to 45% as the higher down payment compensates for the higher debt ratio.
Now that we know our example homebuyer’s maximum housing payment we’re done right? Wrong – houses are sold by price, not monthly payments. So now we have to convert the maximum housing payment to a purchase price.
Here we run into a problem. It’s actually the reason many pre-approval letters are misleading and homebuyers get unpleasant surprises.
The term “housing payment” is not the same thing as a mortgage payment. The mortgage industry considers a housing payment to include the following:
Mortgage payment
Monthly amount for property taxes
Monthly amount for home insurance
Monthly association fees
Property taxes are usually the biggest unknown when pre-approving a homebuyer for a home they haven’t identified yet. Depending on the state your in, property taxes can vary significantly for similarly priced homes. Let’s look at an example:
Assume:
Loan amount: $200,000
Interest Rate: 5.250% (APR 5.891) no PMI
Home insurance: $900 annually
If we compare these two monthly housing payments to our maximum payment allowed of $1,500, you can see that our example homebuyer would not qualify for property #2 - even though it had the exact same sales price as property #1.
We’ll leave the reason as to why property taxes may vary on similarly priced properties to a future article. For now, just ask your local real estate expert.
How can a homebuyer address this problem? Simple, demand something in writing from the lender you get pre-approved by, that specifically states the maximum payment you’re qualified for. While they’re at it, they should also disclose the interest rate they pre-approved you at. Interest rates change daily and if it takes you a month or two to find a property, higher rates could affect your pre-approval purchase price just like property taxes.
Real estate agents also need to understand this issue to better assist their homebuyers. Agents should contact their homebuyer’s lender with the property taxes and any association fees to confirm the homebuyer does indeed qualify for the specific property, before writing an offer.
Understanding the process, putting specifics in writing and relying on true professionals can remove many of the unpleasant surprises in the pre-approval and home buying process.
MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
July 26, 2009 -- Troy, MI – A homebuyer follows instructions and jumps through the hoops (which are many today) necessary to get a pre-approval letter before looking at homes for sale. They find one they like, at a price their pre-approval letter says they’re good for, make an offer, negotiate back and forth with the seller and finally agree on a price. They’re elated.
Then the rug gets pulled out from under them and they’re told they don’t qualify for this house and all their efforts were in vain.
What’s even scarier is that often the homebuyer doesn’t find out they don’t qualify for the property they got their hopes up for, until weeks into the formal approval process, sometimes only days before the target closing date.
Why does this happen?
The lender they were dealing with didn’t do a very good job of explaining how the mortgage industry actually approves homebuyers. Even if they did, it was just one of the numerous topics discussed and the homebuyer forgot about it. Then, the lender didn’t double-check the pre-approval requirements for the specific property.
Because of issues like this, it’s extremely important that homebuyers understand the following:
MORTGAGE APPROVALS ARE MOSTLY BASED ON MONTHLY HOUSING PAYMENTS NOT PURCHASE PRICES!
Let’s study the pre-approval process to understand why.
A homebuyer only makes so much money per month, which means they can only afford to spend a portion of that income on a monthly housing payment. The rest of their income goes towards various income taxes, car payments, credit card payments, student loans, etc. On top of that, unless the homebuyer wants to freeze in the dark during winter, they have to pay utilities to keep the heat & lights on (if you’re outside the snowbelt, think air-conditioning).
If you think about this, it makes sense.
Now, let’s look at an example homebuyer:
Annual Income: $75,000
Monthly Debt Payments: $1,000
How much of a housing payment would this person qualify for?
First, let’s break the annual income down to a monthly basis: $75,000 / 12 = $6,250/month income.
FNMA/FHLMC typically allows 40% of one’s gross monthly income to go towards monthly debt, including a housing payment. The 40% number is called a Debt Ratio. The other 60% of monthly income is allocated for income taxes, utilities, food, clothing, car insurance & gas and other necessities of life.
So, to calculate the maximum amount of monthly debt allowed we calculate 40% of the monthly income:
$6,250 x 40% = $2,500.
But, our example homebuyer already has $1,000 per month in existing debt. That money then, cannot be allocated towards a housing payment. So, we calculate what’s left:
$2500 minus current debt payments of $1,000 = $1,500 for a maximum housing payment
This is what our example homebuyer could afford. Now, they don’t have to spend that much of course. There are also other variables that could allow for a somewhat higher housing payment. For example, if the homebuyer put 20% down, the 40% debt ratio might be allowed to increase to 45% as the higher down payment compensates for the higher debt ratio.
Now that we know our example homebuyer’s maximum housing payment we’re done right? Wrong – houses are sold by price, not monthly payments. So now we have to convert the maximum housing payment to a purchase price.
Here we run into a problem. It’s actually the reason many pre-approval letters are misleading and homebuyers get unpleasant surprises.
The term “housing payment” is not the same thing as a mortgage payment. The mortgage industry considers a housing payment to include the following:
Mortgage payment
Monthly amount for property taxes
Monthly amount for home insurance
Monthly association fees
Property taxes are usually the biggest unknown when pre-approving a homebuyer for a home they haven’t identified yet. Depending on the state your in, property taxes can vary significantly for similarly priced homes. Let’s look at an example:
Assume:
Loan amount: $200,000
Interest Rate: 5.250% (APR 5.891) no PMI
Home insurance: $900 annually
If we compare these two monthly housing payments to our maximum payment allowed of $1,500, you can see that our example homebuyer would not qualify for property #2 - even though it had the exact same sales price as property #1.
We’ll leave the reason as to why property taxes may vary on similarly priced properties to a future article. For now, just ask your local real estate expert.
How can a homebuyer address this problem? Simple, demand something in writing from the lender you get pre-approved by, that specifically states the maximum payment you’re qualified for. While they’re at it, they should also disclose the interest rate they pre-approved you at. Interest rates change daily and if it takes you a month or two to find a property, higher rates could affect your pre-approval purchase price just like property taxes.
Real estate agents also need to understand this issue to better assist their homebuyers. Agents should contact their homebuyer’s lender with the property taxes and any association fees to confirm the homebuyer does indeed qualify for the specific property, before writing an offer.
Understanding the process, putting specifics in writing and relying on true professionals can remove many of the unpleasant surprises in the pre-approval and home buying process.
Sunday, July 19, 2009
Witch Hunt or Consumer Protection? - 178 Loan Mod Companies Pursued by Government.
Loan Modification companies seem to be the latest mortgage industry group in the crosshairs of government officials.
MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
-- DETROIT, MI – Over the last several weeks I’ve noticed a substantial increase in the number of loan modification companies being investigated by various government agencies.
All I can say is that it’s about time.
Now don’t misinterpret that statement - I believe that loan modifications may be part of a viable solution in getting our country out of the current housing crisis, although it’s too soon to determine their actual long-term effectiveness.
I also have nothing against loan modification companies in general nor the people that work at them. I’ve met or connected with many individuals that are intent on really helping people and do their best to do so.
Lastly, many homeowners do need some type of assistance as lenders don’t have their best interests in mind when they do loan modifications and many lenders draw the process out seemingly forever.
On the other hand, I’ve personally heard many stories from homeowners victimized by loan modification companies, have heard the same stories from mortgage associates and have read many more on the internet.
From Subprime to Loan Mods
I predicted over a year ago that loan modification companies would become the new subprime “churn & burn” debacle. This was triggered by my observations that many local subprime loan originators were flocking to do loan modifications. I even heard several stories of these originators approaching the same clients they’d put in subprime loans, with offers to now do loan modifications for them.
There really is no barrier of entry to do loan modifications. All you need is a phone and the ability to find clients. Finding clients is easy with so many homeowners struggling with their mortgage payment.
This should all sound familiar as much of it applied to the mortgage industry in general until recently, when state governments started requiring individual licensing of loan originators and the federal government created a national registration system.
When Michigan enacted its Loan Officer Registration Act, April 1, 2009, the state expected 10,000 to register based on past data. To date only 3141 have met the requirements of 24 hours of class time, passed a multiple choice test and background screening. How many of the unregistered do you think are now using their limited mortgage knowledge to do loan modifications?
Desperate People do Desperate Things
One would think that a homeowner, burned by a bad mortgage, would be a bit more cautious when considering a loan modification.
The number of loan mod companies popping up however, prove otherwise. It’s basic supply and demand – the numbers of these companies wouldn’t be expanding if there weren’t desperate homeowners to support them.
So, how do homeowners get burned by these companies? In no particular order:
It’s all boils down to these companies over-promising and under-delivering.
What Took the Government So Long to Act?
If I saw this problem coming over a year ago, you’d think the smart people in our government would’ve saw it coming also.
In a recent informal poll of mortgage originators by “Think Big Work Small”, 81% responded that over 50% of those doing loan modifications are “rats”.
Unfortunately, just like with the mortgage meltdown and the banking crisis, the government only seems to act after the damage has already been done. Here’s a list of the agencies currently chasing loan mod companies:
Charges are being filed because of deceptive and/or false advertising (Section 5 of the FTC Act), charging upfront for services before rendered, unlicensed activities, mail fraud, attorney misconduct and several others.
Solutions
The Obama administration really needs to step up and address this issue quickly. The crooks and sharks need to be forced out of the industry to protect homeowners. Honest professionals also need protection - from overzealous government agencies. It’d be a real shame if those that were actually doing good things for homeowners were put out of business, fined or jailed.
An easy to implement option would be to allow loan modifications to only be done by licensed mortgage companies and attorneys. The mechanisms are already in place across the country to control this.
A better solution would be for the administration to create a national solution instead of letting all 50 states come up with their individual plans.
For a list of the loan modification companies currently be investigated, click here and then click on “preview”.
MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
-- DETROIT, MI – Over the last several weeks I’ve noticed a substantial increase in the number of loan modification companies being investigated by various government agencies.
All I can say is that it’s about time.
Now don’t misinterpret that statement - I believe that loan modifications may be part of a viable solution in getting our country out of the current housing crisis, although it’s too soon to determine their actual long-term effectiveness.
I also have nothing against loan modification companies in general nor the people that work at them. I’ve met or connected with many individuals that are intent on really helping people and do their best to do so.
Lastly, many homeowners do need some type of assistance as lenders don’t have their best interests in mind when they do loan modifications and many lenders draw the process out seemingly forever.
On the other hand, I’ve personally heard many stories from homeowners victimized by loan modification companies, have heard the same stories from mortgage associates and have read many more on the internet.
From Subprime to Loan Mods
I predicted over a year ago that loan modification companies would become the new subprime “churn & burn” debacle. This was triggered by my observations that many local subprime loan originators were flocking to do loan modifications. I even heard several stories of these originators approaching the same clients they’d put in subprime loans, with offers to now do loan modifications for them.
There really is no barrier of entry to do loan modifications. All you need is a phone and the ability to find clients. Finding clients is easy with so many homeowners struggling with their mortgage payment.
This should all sound familiar as much of it applied to the mortgage industry in general until recently, when state governments started requiring individual licensing of loan originators and the federal government created a national registration system.
When Michigan enacted its Loan Officer Registration Act, April 1, 2009, the state expected 10,000 to register based on past data. To date only 3141 have met the requirements of 24 hours of class time, passed a multiple choice test and background screening. How many of the unregistered do you think are now using their limited mortgage knowledge to do loan modifications?
Desperate People do Desperate Things
One would think that a homeowner, burned by a bad mortgage, would be a bit more cautious when considering a loan modification.
The number of loan mod companies popping up however, prove otherwise. It’s basic supply and demand – the numbers of these companies wouldn’t be expanding if there weren’t desperate homeowners to support them.
So, how do homeowners get burned by these companies? In no particular order:
- Paying upfront fees for a modification never completed.
- Being told they’ll get a principal balance reduction, when in reality it rarely happens.
- Getting approved for a modification that raises their payment or insignificantly lowers it.
- Following advice to not contact their lenders during the loan mod process, only to get foreclosed on.
- Not being made fully aware of the possible credit damage, legal issues and tax consequences.
It’s all boils down to these companies over-promising and under-delivering.
What Took the Government So Long to Act?
If I saw this problem coming over a year ago, you’d think the smart people in our government would’ve saw it coming also.
In a recent informal poll of mortgage originators by “Think Big Work Small”, 81% responded that over 50% of those doing loan modifications are “rats”.
Unfortunately, just like with the mortgage meltdown and the banking crisis, the government only seems to act after the damage has already been done. Here’s a list of the agencies currently chasing loan mod companies:
- Federal Trade Commission
- United States Attorney’s Office for the Central District of California
- Arizona Attorney General’s Office
- California Department of Justice
- California Department of Real Estate
- State Bar of California
- Colorado Attorney General’s Office
- Idaho Attorney General’s Office
- Illinois Attorney General’s Office
- Iowa Department of Justice
- Kansas Attorney General’s Office
- Maine Attorney General’s Office
- Maine Department of Professional and Financial Regulation, Bureau of Consumer Protection
- Maryland Department of Labor, Licensing, and Regulation, Office of the Commissioner of Financial Regulation
- Massachusetts Attorney General’s Office
- Michigan Attorney General’s Office
- Missouri Attorney General’s Office
- New Jersey Attorney General’s Office
- New Jersey Department of Banking and Insurance
- New Mexico Attorney General’s Office, Consumer Protection Division
- North Carolina Department of Justice
- Ohio Attorney General’s Office
- Oregon Department of Justice
- Texas Attorney General’s Office
- Washington Attorney General’s Office
Charges are being filed because of deceptive and/or false advertising (Section 5 of the FTC Act), charging upfront for services before rendered, unlicensed activities, mail fraud, attorney misconduct and several others.
Solutions
The Obama administration really needs to step up and address this issue quickly. The crooks and sharks need to be forced out of the industry to protect homeowners. Honest professionals also need protection - from overzealous government agencies. It’d be a real shame if those that were actually doing good things for homeowners were put out of business, fined or jailed.
An easy to implement option would be to allow loan modifications to only be done by licensed mortgage companies and attorneys. The mechanisms are already in place across the country to control this.
A better solution would be for the administration to create a national solution instead of letting all 50 states come up with their individual plans.
For a list of the loan modification companies currently be investigated, click here and then click on “preview”.
Monday, July 13, 2009
Are Loan Modification Programs Working?
Many financial experts say they aren’t, quoting old data to support their statements. The latest data may force them to change their tune though.
DETROIT, MI – The Obama administration continues to push loan modifications as the best way to address the nation’s growing housing crisis. Many so called financial “experts’ though, disagree with this focus.
It’s interesting to note that the administration recently announced that due to disappointing numbers for its Home Affordable Refinance Plan (HARP), the program was being expanded to allow refinances to 125% of a homeowner’s property value, up from 105%. To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets.
The disappointing numbers for HARP are a sign that many homeowners don’t qualify for it because they’re either too far upside in their homes or they’re behind on their mortgage payments. This makes loan modifications their only option - hence the administration’s focus on loan mods.
So, what about all the naysayers against loan modifications?
Well, they all quote studies that seem to “support” their claims that modifications aren’t working due to the high number of homeowners that default on their loan modifications.
One of these studies was done by the Federal Reserve Bank of Boston, published July 6, 2009. The study had some valid points:
1. Lenders are reluctant to modify mortgages. Only 3% of seriously delinquent loans have had modifications.
2. Percentage-wise, lenders are modifying FNMA/FHLMC and mortgages held on their books the same.
3. 30% of delinquent loans become current with no intervention by the lender.
4. Most modifications result in an increased loan balance as back payments are rolled into the loan amount.
5. More and more modifications are being done and resulting in lower homeowner payments.
6. 26% of modified loans in the 4th quarter of 2008 resulted in lower payments.
7. Payment decreases before the 3rd quarter of 2008 ranged from 10-14%.
8. Payment decreases in the 4th quarter 2008 averaged 22%.
9. 30-45% of modified mortgages redefaulted within 6 months of a modification.
These are all interesting statistics. The financial “experts’ all seem to focus on the fact that 30-45% of modified mortgages redefault, while ignoring one important fact – only 26% of the loans modified resulted in a lower payment!
Why would a lender expect a homeowner that’s already defaulted on their current payment, to be able to afford that same payment or a higher one? Anyone citing this report’s redefault rate without taking that point into consideration should stop calling themselves an “expert”.
A more recent report (through 1st quarter of 2009) from the Comptroller of the Currency Administrator of National Banks, shows something a bit different:
1. A significant increase in the number of modifications made by servicers. Up 55% from last quarter. Payment plans decreased in favor of loan modifications.
DETROIT, MI – The Obama administration continues to push loan modifications as the best way to address the nation’s growing housing crisis. Many so called financial “experts’ though, disagree with this focus.
It’s interesting to note that the administration recently announced that due to disappointing numbers for its Home Affordable Refinance Plan (HARP), the program was being expanded to allow refinances to 125% of a homeowner’s property value, up from 105%. To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets.
The disappointing numbers for HARP are a sign that many homeowners don’t qualify for it because they’re either too far upside in their homes or they’re behind on their mortgage payments. This makes loan modifications their only option - hence the administration’s focus on loan mods.
So, what about all the naysayers against loan modifications?
Well, they all quote studies that seem to “support” their claims that modifications aren’t working due to the high number of homeowners that default on their loan modifications.
One of these studies was done by the Federal Reserve Bank of Boston, published July 6, 2009. The study had some valid points:
1. Lenders are reluctant to modify mortgages. Only 3% of seriously delinquent loans have had modifications.
2. Percentage-wise, lenders are modifying FNMA/FHLMC and mortgages held on their books the same.
3. 30% of delinquent loans become current with no intervention by the lender.
4. Most modifications result in an increased loan balance as back payments are rolled into the loan amount.
5. More and more modifications are being done and resulting in lower homeowner payments.
6. 26% of modified loans in the 4th quarter of 2008 resulted in lower payments.
7. Payment decreases before the 3rd quarter of 2008 ranged from 10-14%.
8. Payment decreases in the 4th quarter 2008 averaged 22%.
9. 30-45% of modified mortgages redefaulted within 6 months of a modification.
These are all interesting statistics. The financial “experts’ all seem to focus on the fact that 30-45% of modified mortgages redefault, while ignoring one important fact – only 26% of the loans modified resulted in a lower payment!
Why would a lender expect a homeowner that’s already defaulted on their current payment, to be able to afford that same payment or a higher one? Anyone citing this report’s redefault rate without taking that point into consideration should stop calling themselves an “expert”.
A more recent report (through 1st quarter of 2009) from the Comptroller of the Currency Administrator of National Banks, shows something a bit different:
1. A significant increase in the number of modifications made by servicers. Up 55% from last quarter. Payment plans decreased in favor of loan modifications.
2. Servicers implemented a higher percentage of mods that reduced monthly payments than in previous quarters.
3. Modifications with lower payments continued to show fewer delinquencies each month following modification than those that left payments unchanged or increased payments.
4. Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans
5. The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter.
6. Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter.
One very important statement from the report: “The number of modifications recorded in this report does not reflect actions taken under the Administration's "Making Home Affordable" program, which was announced in March and began to be implemented after this reporting period.”
As Obama’s plan is the most aggressive loan modification attempt to date, focusing on reducing homeowner payments to 31% of monthly income, the numbers should start turning even more positive.
Even without those numbers, statistics from the 1st quarter of 2009 show improvements in loan modification performance after previous quarters showed a trend to the negative:
What can we conclude from all this?
While it’s important to note that we’re far from out of the woods on the housing crisis and we don’t have enough recent data to really draw any long-term conclusions on the benefits of loan modifications – we do seem to be heading in the right direction.
For all the free-market advocates out there railing against bailing out upside homeowners – your arguments went out the window when the government bailed out the banks. If we can bailout upside down banks, how can we not bailout upside down homeowners?
For those who believe we have to lower mortgage balances to effectively modify mortgages, I disagree that we have to do so. It would be nice as I’m upside down in my own home, but I think it’s more important to lower house payments.
People buy cars all the time where as soon as you drive it off the dealer’s lot, you’re upside down in it. I don’t hear anyone asking for a bailout on their car loan. Why do they continue to pay on their upside down car? Because they need transportation and they can afford the payment.
Why are people losing their homes? Because they can’t afford the payments. Statistically, most people are emotionally tied to their homes. Most won’t do the logical thing and walk-away from their upside down home anymore than they would walk-away from their upside down car. Give them an affordable payment and even if they’re upside down, they won’t walk. Bring the payment down to their local rental rates and they won’t be able to live anywhere cheaper. Yes, their will be a small percentage that move in with relatives or move to a lower income area, but most will stay.
It seems the so called “experts” live in their own little worlds and seem to have their own agendas. Few actually report unbiased facts, instead preferring to only focus on what supports their positions while ignoring all other facts. Heaven forbid they actually take the time to digest & think through the statistics.
The media is just looking for sensational headlines to sell more advertising. Very little actual research seems to happen these days. What’s more, they all seem to regurgitate the same stories, propagating incorrect stories, fooling the public into believing them because of the repetition.
So be forewarned not to buy into what you read in the headlines or what so called experts tell you. Click on the links I’ve provided and read the material for yourselves to come to your own conclusions.
# # #
Drew Sygit writes and speaks about the mortgage & real estate industries. He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He’s presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA’s, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications. He also publishes his own blog: http://drewsmortgagenews.blogspot.com/. He can be reached at dsygit@TheLendingEdge.com.
Wednesday, July 1, 2009
125% Refi's Announced! The Government Finally Gets it
The government appears to be finally understanding how many Americans are upside down in their homes.
As I've been predicting for months, the FHFA just announced today that they will be allowing FNMA & FHLMC to refi underwater homeowners up to 125% of their property's value.
Previously the cap was at a joke amount of 105% LTV, resulting in President Obama's hyped Home Affordable & Stability Plan being way behind on the estimated number of homeowners it was meant to help.
Whether or not the government should be doing this is up for debate.
The argument against is all for letting the free market work its magic. Get the pain over now and let the economy recover.
Those for government intervention argue that the nation's housing market is "too big to fail". If the government bailed out the "fat cats" on Wall Street, then it should bail out ""Joe Six-Pack" also.
Since we've already started down this slippery slope, it would have been better if they would've done away with the appraisal requirement on refinances all together. A new appraisal hasn't been required on an FHA Streamline refi since 1984. Now with FNMA/FHLMC owned by the government, what's the difference? If it works for FHA, it'll work for FNMA/FHLMC.
As a side note, think about what doing away with appraisals on refiances would do to HVCC appraisal issues!
Now, keep in mind that this will take awhile to be implemented as a lot of software needs to be rewritten.
Lastly, let's hope FNMA & FHLMC allow more lenders and brokers to do these loans. Right now, FHLMC forces homeowners to only go to their current lender. These lenders are pretty backed up, some taking 60-90 days or more to close these loans causing many homeowners to miss low rate opportunities.
As I've been predicting for months, the FHFA just announced today that they will be allowing FNMA & FHLMC to refi underwater homeowners up to 125% of their property's value.
Previously the cap was at a joke amount of 105% LTV, resulting in President Obama's hyped Home Affordable & Stability Plan being way behind on the estimated number of homeowners it was meant to help.
Whether or not the government should be doing this is up for debate.
The argument against is all for letting the free market work its magic. Get the pain over now and let the economy recover.
Those for government intervention argue that the nation's housing market is "too big to fail". If the government bailed out the "fat cats" on Wall Street, then it should bail out ""Joe Six-Pack" also.
Since we've already started down this slippery slope, it would have been better if they would've done away with the appraisal requirement on refinances all together. A new appraisal hasn't been required on an FHA Streamline refi since 1984. Now with FNMA/FHLMC owned by the government, what's the difference? If it works for FHA, it'll work for FNMA/FHLMC.
Either way, this county's mortgage debt is backed by the government and if payments can be lowered, less homeowners will foreclose. People have to live somewhere.
As a side note, think about what doing away with appraisals on refiances would do to HVCC appraisal issues!
Now, keep in mind that this will take awhile to be implemented as a lot of software needs to be rewritten.
Also, the when the government approved the 105% LTV, FNMA & FHLMC both added pricing hits, which offset some of the gains of lower rates. I would hope they don't do the same this time.
Lastly, let's hope FNMA & FHLMC allow more lenders and brokers to do these loans. Right now, FHLMC forces homeowners to only go to their current lender. These lenders are pretty backed up, some taking 60-90 days or more to close these loans causing many homeowners to miss low rate opportunities.
Sunday, June 28, 2009
Talking About a Housing Revolution – Predictions on Housing
The Beatles song comes to mind when I consider what the bottom of the housing market and recovery will look like.
June 28, 2009 -- DETROIT, MI – Recent housing reports brought apparently good news on housing as it was reported that Housing Starts in May jumped 17.2% and Building Permits jumped 4% in April. Also, the National Association of Realtors (NAR) reported that Existing Home Sales, the Pending Home Sales Index and New Home Sales were all up in recent months.
According to Lawrence Yun, chief economist for NAR, "We are at or near bottom in terms of sales."
So, it’s a great time to put that home of yours on the market that you desperately want to sell?
Not even close.
One month of good news doesn’t mean the housing crisis is over. On top of that, it’s spring – a time when home sales invariably go up after winter. Look at the following graph, the same thing happens just about every year:
June 28, 2009 -- DETROIT, MI – Recent housing reports brought apparently good news on housing as it was reported that Housing Starts in May jumped 17.2% and Building Permits jumped 4% in April. Also, the National Association of Realtors (NAR) reported that Existing Home Sales, the Pending Home Sales Index and New Home Sales were all up in recent months.
According to Lawrence Yun, chief economist for NAR, "We are at or near bottom in terms of sales."
So, it’s a great time to put that home of yours on the market that you desperately want to sell?
Not even close.
One month of good news doesn’t mean the housing crisis is over. On top of that, it’s spring – a time when home sales invariably go up after winter. Look at the following graph, the same thing happens just about every year:
As for the housing starts and building permit numbers – it’s amazing how theses numbers were skewed to look good. The numbers reported by NAR and the media compared May of 2009 numbers to April of 2009. If one references the source of these numbers, the U.S. Census Bureau website, the May numbers for 2009 when compared to 2008 are actually down – by 45.2% for Housing Starts and 47.0% for Building Permits. How does that qualify as good news?
Yesterday it was also reported by NAR that May home sales were up 2.4% over April. Yet again, when compared to May of 2008, sales were actually off 3.6%. Not really good news as it doesn’t show we’ve reached a bottom yet.
THE REAL STORY
Looking at the big picture, it’s obvious that the housing market is not out of the woods yet.
The FNMA/FHLMC foreclosure moratorium from Thanksgiving through March (waiting for Obama’s housing plan) created an artificial shortage of foreclosed properties on the market. Not surprisingly, April foreclosure filings set a record.
Last week, California announced its own 90 day moratorium on foreclosures which will further hide the true extent of the housing problems in that state. Michigan recently passed legislation that will have a similar, albeit more limited, effect. Several other states have passed or are considering doing the same.
All the Adjustable Rate Mortgages (ARM) that borrowers took out at the peak of the housing market so they could afford to buy or cashout of their homes, are starting to reset in record numbers and will continue to do so for the next two years. The ugliest situation is for those with “Option ARMS” also known as “Pick a Payment” plans, but technically called “Negative Amortizing” ARMs. Anything with the word “negative” in it is usually not good. In the case of these products, they were originally designed for sophisticated borrowers that understood how they worked and the inherent dangers. Only two lenders, WAMU and World Savings, initially offered them. At the height of the housing boom, many more banks jumped on the bandwagon to offer them and pushed mortgage brokers to sell them to their clients by offering insane commissions. Of course, many unscrupulous brokers, few understanding the product themselves, pushed these loans onto borrowers that didn’t take the time to understand anything but the artificially low payment. Now, many of these borrowers will see their payments increase by 50% or even double. Many won’t be able to afford the payment shock and will eventually be added to the foreclose statistics.
There’s also the issue of a “Shadow Inventory” of homes. How many of you see vacant homes in your neighborhoods that aren’t for sale? Many of these are foreclosures where the lender is just sitting on the home instead of trying to sell it at a loss. There’s also the inventory of homes where owners aren’t making payments, but haven’t been foreclosed on yet, despite being well past the point where they should’ve been. Several sources have estimated this shadow inventory at 600,000 homes. Now do you understand why banks were forced to take TARP funds?
Real estate investors are also contributing to the problem. I know of many that are struggling with rentals where the rents don’t cover their payments. Many of them will eventually throw in the towel as their reserves run dry or the value of the rental falls to where it just doesn’t make sense to keep throwing good money after bad.
Finally, we have the unemployment situation. May’s unemployment figure hit 9.4%, the highest since 1983. June’s number is expected to hit 9.6%. Since the recession begin in December 2007, we’ve lost 6 million jobs. These numbers are bad, but actually are worse if you include all the workers that have had to settle for part-time jobs or are making less than half of what they used to. Housing won’t stabilize until unemployment does. Even then, there’ll be a lagging effect as households paydown debt, replenish reserves and proceed cautiously.
PUTTING IT ALL IN PERSPECTIVE
The highly touted, and over referenced, Case-Shiller Index predicted that housing prices would fall 10-20% this year. As of May, the median price of a home is off 16.8% from last year.
Faced with these numbers and all this information, what would you do if you were in charge of our government?
Would you let housing free-fall and probably put the country into a Great Depression II?
Or would you use every financial tool at your disposal to soften the landing, wherever that may be?
Obviously, the current administration has chosen the soft-landing option and is pulling out all the stops to make it happen:
The real reason for the Thanksgiving to March foreclosure moratorium was to come up with a plan to force banks to modify mortgages and slow the flow of foreclosures hitting the market and driving down prices. Obama’s administration had to do something dramatic after the disaster of Bush’s “Hope for Homeowners” plan that resulted in only 50 or so homeowners being helped. TARP funds were probably used as “bribes” to get banks to go along with the new plan.
Ben Bernanke is doing his best to keep mortgage rates low. Not only does this encourage home buying, it also encourages people to refinance to lower their payments and not let them go to foreclosure. After a brief spike to 6%, when Wall Street bluffed the Fed, rates are back to the mid 5’s, still historically low.
FNMA/FHLMC, now under government control, currently allow homeowners to refinance up to 105% of their home’s value so they can lower their monthly payment. Again, this was done to keep people in their homes through lower monthly payments. I expect to see the 105% increased to at least 115%, or done away with altogether, as housing prices have fallen faster than expected and the number of homeowners qualifying for a 105% refinance are much lower than the original target.
The $8,000 tax credit to buy a home has generated quite a bit of home buying activity as intended. I predicted a couple of months ago that the tax credit program would probably be extended past its December 2009 deadline. There’s now talk in Congress about not only extending the program, but increasing the tax credit to $15,000 and opening it up to anyone that buys a home. It’ll be interesting to see what they do with the income restrictions as the current plan has propped up the lower end of the housing market, but left the rest of the market struggling.
PREDICTIONS
So far, the housing market is down over 30% from its 2006 highs.
The government is doing its best to prop up our housing market, but it’s expected to fall further. How far is anyone’s guess, as one can’t predict it any better than one can predict where the stock market is going.
I don’t think we’ll see housing bottom until late 2010 at the earliest. That being said, I think the pace of the decrease will slow after this winter.
I also think that we won’t see a rebound for quite some time and it won’t be the rebound that many are hoping for. We won’t see double digit appreciation of housing for decades, if ever again. Nationally, we’ll see very slow anemic appreciation as homebuyers will be extremely cautious after this crisis.
There will be a rebound bounce in areas where prices dropped ridiculously low. Detroit immediately comes to mind. The median price of a home in Detroit (the actual city) stands at $6,000 as of today. As long as one buys in a decent area of the city, that price could easily double, triple, even quadruple once unemployment improves. A house at $24,000 is still quite a bargain, especially when it would cost at least $80,000 to build a new one. The southern Florida condo market is another place that might have a double digit rebound as prices there are quite low due to over building. Understand that any double digit rebound in areas like these will be a quick, one-time thing as values bounce back from their oversold positions. Then they’ll follow the national trend of anemic appreciation.
It could take a generation (25 years) for nationwide home values to return to the peaks of this decade.
THE HOUSING REVOLUTION
We’re also going to see residual effects from this crisis, much the same as we saw after the Great Depression. People that lived through the scarcity of those years tended to be savers and hoarders, not throwing anything away. Going forward, I think we’ll see a large increase in the number of people that never buy another home. After going through the trauma of getting foreclosed on or watching their parents, family, neighbors and/or friends go through it, they’ll choose to be lifetime renters. That’s good news for real estate investors as many of these people will still want to raise their families in houses, not apartments.
I also think we’re seeing the end of the “McMansions” and sprawling suburbia. Inland California was overbuilt, in the middle of nowhere (that’s why it was cheap to develop) and is now turning out near vacant ghost towns due to all the foreclosures. Values have already dropped over 50% in many of these areas and show no signs of slowing yet. Why? It’s too far to commute to work. Eventually population growth will fill these towns back up, but that could take a decade or more.
Millennial’s, those born after 1980, are flocking to urban landscapes and smaller homes. They don’t want to be house poor or commute more than minutes to work, preferably via mass transit. As gas and energy prices rise when the world economy recovers, more of us will be forced to address these same issues. This will eventually be good news for decaying urban areas and those that invest there ahead of the curve.
People will also stop looking at their homes as a source of wealth. Homes will be seen less as “castles” and more as just places to live. Europe and Asia are already like this. People there don’t socialize in their homes as much as we do (most are too small), they meet at cafes, restaurants, parks, etc.
SHOULD YOU BUY NOW?
No one can predict the bottom of the housing market. So, if you’re in the market for a home, you should buy something that fits your budget, that you think is a good deal, when you think you’re ready for the monthly liability. Notice I didn’t say a great deal or a steal of a deal. Too many people still fall into the trap of following the herd lining up for the sensationalism the media peddles to get our attention. They want to hit the jackpot with the deal of a lifetime on a home. Well, keep in mind that very few hit the jackpot in Las Vegas and even fewer win the lottery. It’s usually better to play it safe and follow you head than gamble your future away by listening to others.
Buy a home you can afford now that fits your lifestyle. Don’t stretch to afford something and put yourself in a tenuous financial situation. You also don’t need to be keeping up with the Jones’ and getting in over your head by doing so.
Homes should be bought that fit one’s monthly budget. I can’t believe all the homebuyers I talk to that have never sat down and put together a monthly budget to figure out what they can afford for a monthly housing payment. They expect ME to tell THEM what they can afford! I’d be very appreciative if this was because they trusted me, but it’s actually due to laziness. Don’t they realize that they’re looking at buying a foreclosure where the previous owner probably made this same mistake?
Consider how long you plan to live in a home before deciding whether to buy it. Don’t count on buying something and being able to break even if you sell it 2 years from now. You’ll probably need 5 years or so to be able to do that.
Overall, homes are now more affordable than they’ve been in over a decade. Foreclosures have created unique opportunities for many to get solid deals on homes. Throw in the current $8,000 tax credit (with talk of it going to $15k soon) and this could be the time for many to buy a home. Not for everyone, but for many.
If all of this is a bit much to take in and analyze, find professionals that can assist you. Run from those that are pushy. They should ask a lot of questions and rarely tell you what to do, but rather help you find your own answers.
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