Mortgage Companies are rushing to complete foreclosures. Why? Aren't there enough houses on the market?Practically, they don't care if people stay in the house (they can't sell the house anyway, it lowers vandalism, and there is less risk or damage if the house looses heat). So homeowners are becoming mortgage squatters.
Why are Banks rushing to complete foreclosures? Is it because in this age of layoffs, that this is one area that they can still generate fees, or does it have something to do with getting paid with TARP funds?
Regardless, once the Treasury buys these troubled assets, then the Government will have to evict the homeowners!!!! I suspect the Treasury won't have the stamina to evict, particularly when homeowners realize that Treasury used their tax dollars to bail out Banks, they will continue to squat in the home, free. Will the Treasury examine each homeowner on case by case basis? (a Herculean task). A better alternative is the Housing Protection Plan at http://charlienospam.blogspot.com/
Friday, January 30, 2009
How to stop Mortgage Foreclosures- FAST
Tell Banks, that TARP funds will not be used to buy homes that the banks already own. They will only be used to help Banks and Homeowners where the homeowner still owns the home AND still lives in it (i.e. the ones that have not yet been foreclosed on).
Thursday, January 15, 2009
An Alternative to Bailing out the Banks
I have a proposal that should greatly help address the housing crisis.
It is an alternative to using TARP funds to bail out the banks, instead helping all the citizens of our country.
But I have been frustrated, Why?
I have been unable to get it to Obama’s Economic Development Team.
I understand they must be overwhelmed with suggestions, and therefore they have no email (to limit junk mail)
So how do they get a suggestion from someone like me, with lots of experience, fresh ideas, but no contacts?
Soon they will be putting in front of congress a stimulus package, and I am afraid my ideas will not be heard.
How can you help?
1) Read the attached, and if you agree that it has merit,
2) Send a comment to President Obama with a link to this blog
http://www.whitehouse.gov/contact/
http://www.senate.gov/general/contact_information/senators_cfm.cfm?OrderBy=state&Sort=ASC
4) Send a comment to your congressmen/women with a blog link
https://writerep.house.gov/writerep/welcome.shtml
5) Link your blog (or website) to this blog, so it will register higher in Google search engine, and create buzz
6) Send me your feedback.
CharlieNoSpam-Economy [at] yahoo.com
Home Protection Program (Part 1)
Re: Alternative to using TARP funds to buy toxic assets
The Problem with buying toxic assets, is two fold. First, what do you do once the Federal government owns them? Do you blanketly forgive the borrowers debts? Individually renegotiate the loans? Auction off the houses? Hold the houses in inventory and pay someone to manage them? That is a lot of money for a lot of bad loans, even at a discount; and it is expensive to own foreclosed homes (and loans that will be defaulting).
Second, how does the Treasury hope to recover the funds, or is this just a way to give banks money, without appearing to give them something for nothing? Since mortgages are sold in “pools” would you be buying all loans in the pool (even ones that have not yet defaulted)? What do the banks then do with the money? Reinvest it? Pay bonuses? Buy planes? Take Seminars in exotic locations? Buy other banks? Or do you have to oversee and watch how they spend the money? (A cumbersome project, that can be "gamed" by using other funds to pay bonuses, now that they are getting federal funds)
A better solution is to understand why the loans are toxic, and use money to make them untoxic, using the coming economic stimulus legislation. This would necessitate much fewer dollars per loan and would enable the borrower to initiate the process before having to go to foreclosure.
My Plan would take advantage of current low rates, and borrowers would refinance with conventional FNMA/FREDDIE MAC/GINNE MAE loans at the current value of their home. Banks would not be the only ones who would be helped, since many mortgages of distressed homeowners are not held by the big banks. Many more distressed homeowners can be helped.
Also, we could avert the next wave of the housing crisis which will come in 2010 when HEL loans balloon. HEL loans are when homebuyers used an 80% LTV (loan to Value) first mortgage and a 20% LTV second mortgages to finance a home purchase, thus avoiding MIP fees (Mortgage Insurance Premiums). These loans will balloon in 2010; the owners will not be able to refinance the equity loan, since there is no longer any equity left.
I think it is important to have another goal of getting the Treasury repaid (my program does that). It just make sense fiscally.
If we don’t stop the drop in home prices now, they are going to crater to absurd levels! (crater is the opposite of balloon, which we are now heading into)
I heard of Citigroups acceptance of a proposal to allow bankruptcy judges the ability to modify payments; the problem is that this is just one lender, and it requires a case by case review by bankruptcy judges. (Of course it took a call from the president for Citirgroup to ground buying a 50 million dollar jet- ABC news 1/26/2009)
I have a proposal called the Home Protection Plan
It is for a program that is more streamlined (using the internet), not needing all the paperwork or expense of a conventional bankruptcy, not needing to have each case reviewed by a bankruptcy judge; it takes advantage of current low fixed rates and gives all servicers & lenders the incentive to address even future defaults, now.
Most importantly, my plan would almost instantaneously end the massive numbers of homes entering the foreclosure market for the next 5 years.
(Go to Part 2)
When you are finished reading, I would be interested in your feedback. Please email me at
CharlieNoSpam-Economy [at] yahoo.com
The Problem with buying toxic assets, is two fold. First, what do you do once the Federal government owns them? Do you blanketly forgive the borrowers debts? Individually renegotiate the loans? Auction off the houses? Hold the houses in inventory and pay someone to manage them? That is a lot of money for a lot of bad loans, even at a discount; and it is expensive to own foreclosed homes (and loans that will be defaulting).
Second, how does the Treasury hope to recover the funds, or is this just a way to give banks money, without appearing to give them something for nothing? Since mortgages are sold in “pools” would you be buying all loans in the pool (even ones that have not yet defaulted)? What do the banks then do with the money? Reinvest it? Pay bonuses? Buy planes? Take Seminars in exotic locations? Buy other banks? Or do you have to oversee and watch how they spend the money? (A cumbersome project, that can be "gamed" by using other funds to pay bonuses, now that they are getting federal funds)
A better solution is to understand why the loans are toxic, and use money to make them untoxic, using the coming economic stimulus legislation. This would necessitate much fewer dollars per loan and would enable the borrower to initiate the process before having to go to foreclosure.
My Plan would take advantage of current low rates, and borrowers would refinance with conventional FNMA/FREDDIE MAC/GINNE MAE loans at the current value of their home. Banks would not be the only ones who would be helped, since many mortgages of distressed homeowners are not held by the big banks. Many more distressed homeowners can be helped.
Also, we could avert the next wave of the housing crisis which will come in 2010 when HEL loans balloon. HEL loans are when homebuyers used an 80% LTV (loan to Value) first mortgage and a 20% LTV second mortgages to finance a home purchase, thus avoiding MIP fees (Mortgage Insurance Premiums). These loans will balloon in 2010; the owners will not be able to refinance the equity loan, since there is no longer any equity left.
I think it is important to have another goal of getting the Treasury repaid (my program does that). It just make sense fiscally.
If we don’t stop the drop in home prices now, they are going to crater to absurd levels! (crater is the opposite of balloon, which we are now heading into)
I heard of Citigroups acceptance of a proposal to allow bankruptcy judges the ability to modify payments; the problem is that this is just one lender, and it requires a case by case review by bankruptcy judges. (Of course it took a call from the president for Citirgroup to ground buying a 50 million dollar jet- ABC news 1/26/2009)
I have a proposal called the Home Protection Plan
It is for a program that is more streamlined (using the internet), not needing all the paperwork or expense of a conventional bankruptcy, not needing to have each case reviewed by a bankruptcy judge; it takes advantage of current low fixed rates and gives all servicers & lenders the incentive to address even future defaults, now.
Most importantly, my plan would almost instantaneously end the massive numbers of homes entering the foreclosure market for the next 5 years.
(Go to Part 2)
When you are finished reading, I would be interested in your feedback. Please email me at
CharlieNoSpam-Economy [at] yahoo.com
Home Protection Program (Part 2)
Overview
1.We need a plan to put an end to the current ongoing mortgage foreclosures (it is not over yet and will get worse in 2010). This starts with understanding why lenders are foreclosing on homes, rather than renegotiating loans. It is counter intuitive why supposedly rational lenders who are sophisticated and would normally seek to make economic decisions in their own best interest, are flooding the market with even more foreclosed homes every day, rather than renegotiating with a homeowner. A foreclosed home means no cash flow, increased management costs, sales commissions (if a buyer can be found), and creating even greater supply, which lowers everyone’s prices. (see explanation below, and my solution).
2. My plan solves the problem of contract obligations on the part of mortgage servicers, gives them a financial inducement to co-operate; gives the borrower a break without bailing them out, but locks them in from selling for the next 5 years (until this mess sorts itself out); & is fiscally responsible.
3. Increasing down payment requirements, may sound good (i.e. many pundits say the problem was caused by poor quality borrowers who had no money down); but the reality was that it didn’t matter for many foreclosed buyers how much money they put down, they could not afford the increased payments on adjustable loans. Plus, the only people who had sizable down payments were people who already owned homes, and had increased equity from the housing bubble.
4. We need affordable (unsubsidized) housing so first time homebuyers, single parents, and the common working person can purchase homes; without resorting to 1% or 2% teaser loans (which was the only way they could afford starter homes from 2002- 2005).
5. The Housing Business is a domino type business, which starts with the first-time homebuyer (and other buyers in that bracket, ie divorced single parents, young married couples, nurses, teachers, firemen, police, EMTs) who buy their first home, thus enabling the seller to use their equity to purchase a larger more expensive home (often caused by a growing family). That seller then buys another home. Etc.Etc.
6. Starter homes do not need to be 2,500 square feet and more, but skyrocketing development costs have made smaller homes unfeasible to builders. In the 1970’s and 1980’s a typical new construction starter home was 1,200 square feet (3 BR, 1 ½ baths, Living room, Dining room, eat-in Kitchen, over a full unfinished basement)
7. We need affordable mortgages that will enable these buyers to buy homes, which usually means low down payments, but if the homes is priced at under $175,000 this is possible. It is possible to build new homes and sell them for under $175,000 without subsidies! (see unsubsidized affordable housing)
8. The future of the housing industry should be based on a moderate increase in housing prices, making available more affordable homes, enabling homeowners to gradually build up equity, and enabling baby boomers to sell their homes so that the next generation can move up, as their family sizes increase. Many of these baby boomers would today be looking for new homes, often in adult communities in the same neighborhoods where they live now (close to family, church and friends). They want leisure activities, and a new home with little or no maintenance, but with the bells and whistles (central vacuum, modern kitchen, 2BR and a den, 2 car garage), and interestingly, not that much smaller than their current home, just rearranged differently. But they are having a hard time finding buyers for their current home.
The first step is to pass a Home Protection Plan, to stop the foreclosures, and pre-empt the next wave of coming foreclosures of 2010. This plan has two main components. It solves the questions of “How do you purchase mortgage debt at a discount, without rewarding bad behavior on the part of the lender?” AND “How do you only buy debt that you know will actually be repaid (or are reasonably assured the buyer can afford to repay?)” I also think the plan has to address how to get the housing market back on track, hiring laid off workers by building “affordable housing” (a much neglected housing sector) because you will only get one chance at getting this right.
Most people do not understand what was the major cause of the housing bubble of 2004. It was fear. Home buyers were competing for houses that were limited in supply and whose prices were rising so fast that before they could get an agreement of sale accepted by a home seller, another buyer overbid them. The next house they found and wanted to buy, they would often submit a purchase contract with a price higher than the asking price, often over bidding other home buyers.
Prior to 2000, there was a control that would have limited the bidding wars of 2002- 2005. That control was that buyers could only pay what they could afford. Underwriting standards limited their purchasing power to 28% of their gross monthly income (Housing Ratio). If a home buyer could not afford a home, then they would have to rent. Then there would have been one less buyer in the market driving up the housing prices.
However, starting around 2000, Wall Street was competing with Fannie Mae and Freddie Mac by offering mortgage backed securities, and they were doing so with exotic mortgages that did not have Fannie/Freddie/Ginnie underwriting requirements, (see Historical Housing Perspective, below). Mortgage Brokers filled a market demand for loans with a lower monthly payment. The result was that buyers could afford to buy that home they wanted, and this resulted in increased competition, which drove prices even higher. Fear was the catalyst that in some cases caused a buyer to offer more than the asking price, when in reality he may not have been bidding against anyone else. Lenders downplayed the risk of teaser rate loans, and/or Buyers rationalized the risky loans by believing that housing prices were headed one direction, up. Regardless, in most cases, buyers felt they had no alternatives.
The current problem with housing prices and mortgages will continue for the next few years; particularly because, there is a coming problem when HEL loans balloon in 2010. HEL loans were loans where Buyers would finance at settlement, the entire 100% of their purchase price (and in some cases, closing costs too). Thus we have coming, a second wave of foreclosures, because there is no longer any equity in the homes.
Most people don’t understand why mortgage holders don’t work out reasonable accommodations with homeowners, when it is in their economic interest to do so, given falling prices and high foreclosure costs.
The reason is that most Mortgage Servicers are unable to modify terms on loans for three reasons. First their ability to amend a mortgage is restricted by their servicing agreement. To amend a mortgage they need multiple approvals, often from multiple investors with different goals and motivations. Second, if a loan that goes into foreclosure, they earn additional fees. Third, if modifying a loan, their contract penalizes them.
There is also a misunderstanding by many homeowners that they can walk away from a house, not realizing the full long term financial consequences to their financial future; or perhaps they feel they have no choice. With every house they walk away from, the worse the housing crisis gets not just for them, but for their neighbors and the economy. However, if they had a viable option, I believe that they would not default, and a greater housing crisis can be averted.
So how do we get out of this mess, now, without gong through years of foreclosures and the result economic turmoil that will continue? Simply put, as part of the Economic Recovery Act, an amendment would be made to the Foreclosure Act (I’ll call it Chapter 13B), now mortgage servicers will have a contractual ability and a financial incentive to fix mortgage problems.
The Home Protection Plan (version 4i) by Charles Breinig
· A homeowner whose home is worth less than their mortgage may apply for Home Protection bankruptcy (Chapter 13B) by applying on-line and paying a fee to cover costs (Appraisal, filing fee).
· If the current mortgage holder and the homeowner agree, the homeowner will apply for a new government insured loan (insured by Federal National Mortgage Association) for the amount of the appraisal done by the bankruptcy court; and a Second Mortgage (Home Protection Program loan), in the amount of 50% of the difference between the current value of the home and the current value of the existing mortgage loan.
· The proceeds from the new first loan and the Home Protection Program loan will be paid to the current mortgage holder. No other fees will be paid or due to the current mortgage holder by the owner.
· There will be no monthly payments and no interest on the Home Protection Program loan (the second mortgage); which will be funded by the U.S. Treasury; however, when the loan is paid off, the amount due on the loan or ½ of the equity appreciation in the property (whichever is greater) will be paid to the US Treasury. The Home Protection Program loan will be for a term of 30 years, and may not be refinanced, paid off, or assumed until the 6th year after it is made.
· During the pendency of the application for Home Protection bankruptcy, the applicant will pay into an escrow account, held by a Chapter 13B trustee, on a monthly basis, an amount equal to 1/360th the value of the home (as determined by an appraiser appointed by the bankruptcy trustee), and interest*, and 1/12th the real estate taxes, and 1/12th the annual home owner insurance fee, or whatever other payment that the bankruptcy court determines is reasonable.
(* the Interest rate will be the last published monthly average of FNMA 30 yr Mortgage Commitments w/delivery in 60 days)
· Henceforth, for any owner occupied dwelling, for any mortgage and/or note that specifies adjustable payments or adjustable interest, said mortgage and note shall specify the following: Any increase in the monthly payment will be limited to an increase of 10 % from the monthly payment of the previous year; the interest rate can not increase more than 1% per year; the interest rate can not increase more than 5% from the initial starting interest rate (over the life of the loan); the monthly payments will not adjust more than once per year (and then only on the anniversary date of the loan); such loan must be based on a independent clearly defined published index (out of the control of the lender); and such loan can not have a balloon, reset, or call feature; and there can not be any negative amortization on the loan. If a lender elects to issue a “mortgage commitment”, it shall be without conditions.
This plan should be a streamlined plan that could be done on the internet, where the applicant files for this Special Chapter 13b, Home Protection Bankruptcy, pays a fee, gives contact information for the loan servicer such as the name, address and phone number, fax, email (if possible), as well as Account Number, account balance, interest rate and terms, etc. The Bankruptcy Court then assigns a fee appraisal to an appraiser (that is on their list) and the appraisal is emailed to the lender, the bankruptcy court and the applicant, and then it is up to the lender to decide if he wants to continue. Normal underwriting will apply as would title insurance, etc.
The benefits to this plan are as follows:
1. Any homeowner can take advantage of it now; they do not have to currently be in foreclosure.
The plan stops the flood of foreclosures entering the market and it doesn’t lower the values of neighboring properties; there is no vacancy or sale that decreases neighboring values.
2. The other assets of the homeowner who enters Home Protection foreclosure are not affected. It is a temporary state, which ends when the loan is refinanced. No attorney is needed to file the papers, no complicated forms are needed disclosing other assets, and no other assets are impacted. It can be done on line, by paying a fee.
3. Lenders do not have to agree to let a homeowner complete Home Protection foreclosure. If a lender decides they do not want the Borrower to complete Home Protection foreclosure, the process ends.
4. Mortgage Servicers can earn new fees (from their investors and from placing new mortgages) and they have the incentive to get homeowners into the program rather than facing the prospect that an owner may go into full conventional foreclosure. (This will be the major factor in the success of the program).
5. All the stakeholders are sacrificing something, and gaining something. The lender is giving up some principle, but they would probably lose more in a foreclosure. The government is putting out cash, but benefiting by solving the housing crisis, reducing real estate foreclosures, supporting homeowners, and the temporary cash will insure investor participation. The homeowner is not getting a free pass, either, they will share equity with the treasury, if the housing financial system recovers over the next 5 years, plus they have a bankruptcy on their record.
6. If the Lender does agree to allow the Borrower to complete Home Protection foreclosure, they are getting the loan paid off up to the current value of the home, plus they are getting 50 cents on the dollar for any amounts over the current value of the house. Arguably a cheaper process than going through conventional mortgage foreclosure.
7. The homeowner gets to stay in his home, and gets a payment he can afford, based on the current value of the home, and a new mortgage (insured by FNMA) at today’s low rates.
8. This is not a government handout, the borrower is not getting something for nothing, since they have to share in the equity appreciation over the next 5 years; and not everyone that could apply, will apply, because not everyone will want to do that.
9. Instead of giving TARP loans only to the big banks, who may or may not use the funds as the Treasury would like, this shares the funds with all investors in mortgage backed securities (pension funds, etc), and these investors are far more likely to buy FNMA backed mortgage securities (higher rate of return than Treasury Bills. There also would be no shenigans like Citibank buying a 9 million dollar jet, saying that public funds are not being used. The investors would not be paying themselves bonuses, etc.
10. Is it fair to borrowers who put down higher amounts of down payment? Yes, because almost all the people who put down large down payments, did so not because of frugality (i.e. putting money away in savings), but because they received the benefit of the housing bubble (i.e. their home ballooned in value, more than it would normally have).
11. The Bankruptcy judge may be in the picture in the event that some other modification is appropriate. Otherwise the system is on auto pilot with the value being determined by appraisers on a preapproved list, assigned by the bankruptcy court.
12. The Federal government will eventually be repaid the loan, it is not a gift; they may not earn interest, but will receive the benefit of increases in equity, plus they stop the downward spiral of the housing market.
13. A home buyer may elect to not enter the program, if he doesn’t want to share equity with the Treasury
14. Restricting the resale of participants in this program, from selling in the next 5 years, means that every house that enters this program this year, will not be going on the market in the next 5 years, which will stop the housing crisis, very quickly !
15. A homeowner may elect to refinance the loan in 5 years, if the program works well and housing prices increase, (so he doesn’t have to continue sharing equity with the federal government).
16. Borrowers that purchased homes with HEL loans, (first and second mortgages) can enter the program now, if the homeowner can afford a new first mortgage, thus limiting the impact of HEL loans in 2010.
17. Prices will stop dropping, as borrowers refinance with the Home Protection Foreclosure Program, rather than being forced to leave their homes. 100% financing will be needed, cash reserves & equity are nill.
18. Many of the existing programs developed over the last few months to forestall foreclosures are proving ineffective. Why? Because they do not adequately address the problems of the borrowers, and many of the borrowers are ending up going into default a second time. There are many reasons for this, most of which have to do with the inability of servicing agents to make real modifications, their goal is to get the borrow back on tract, paying as much as possible, without considering what a borrower can truly afford.
19. This Program gets the money out there, instead of giving it to banks, hoping they will start lending again.
20. There is also a misunderstanding by the public that they can walk away from a house, not realizing the long term financial consequences to their financial future; or are so desperate they see no other option. With every house they walk away from, the housing crisis gets worse not just for them, but for their neighbors and the economy. However, if they had a viable option, I believe that they would not default, and a greater housing crisis can be averted.
21. Is it true that many of the home buyers did not understand the mortgage they were getting? My experience tells me that whether through deception, lack of disclosures, or inattention on their part, they were not totally at fault. Regardless, there needs to be protections set in place to prevent future problems. Otherwise this problem will repeat itself. So, the Home Protection Act must include the following: All Future Mortgages that have an adjustable interest rate or adjustable payment component is restricted to a 1% increase per year in the interest rate (i.e. a limit of 10% increase on the monthly payment) or 5% increase in the interest rate over the life of the loan. If a lender wants to issue a teaser rate, interest only loan, or a buy down, so be it, but they are limited to increases which the borrower should be able to afford. (Note: the old 2% per year interest adjustment limit of the 1980’s was at a time of high inflation; borrowers assumed ever increasing pay raises, which is not true today).
22. Some may ask, What does this Home Protection Program have to do with foreclosures? By creating this special Chapter in the foreclosure laws, this plan now falls under special contract provisions which mortgage servicers need, in order to participate in this plan. This plan is far less complicated/convoluted than our tax system or the earmarks that have no correlation to the bill being voted on. It keeps buyers from entering full conventional bankruptcy, & gives them a better less expensive option. As far as public policy goes, it is clear this will drastically cut the number of foreclosed homes entering the market.
23. The sooner foreclosed properties stop entering the market, the sooner housing prices will stabilize, and eventually begin rising again. If this does not happen before 2010, we are surely headed for a depression, as those borrowers with HEL loans will be unable to refinance the equity loans that were part of their purchase price.
24. People who are not making their mortgage payment can not afford to pay credit cards either. Bad credit affects borrowers in multiple ways, higher interest rates on credit cards, higher auto and homeowner rates. Bad debit leads to a downward spiral that affects more than just the financial health of families.
25. It is critical that future mortgages have consumer protections so mortgage originators (who have direct interaction with the public) do not use the process to their advantage; & adjustable loans have practical limits, disclosures and no negative amortization.
Here is some Historical Housing Perspective which you may find helpful-
Prior to 2000, there was a control that would have limited the bidding wars of 2002- 2005. That control was that buyers could only pay what they could afford. There were two ratios that lenders used to determine if a buyer could afford a house. If the buyer’s mortgage exceeded the standard 28 %(Housing Ratio) or if his mortgage plus debts exceeded 36% (Debt ratio), they were turned down and the house was returned to the market. Some argued that borrowers without debts could afford the full 36% of their income to pay for housing (however, many borrowers later used credit cards to pay for home furnishings, decorating, improvement projects and repairs). Some lenders adopted 36%/50% ratios. Then came “no doc” loans where contractors (who dealt with cash) could buy a house with 20% down, and they would not have to provide documentation of income. Because of the high downpayment, these loans were justified as being secure. Then came HEL (Home Equity Closing Loans) loans where the borrower could take out a second mortgage on the property (to cover the 20% down payment he needed at settlement). The reasoning was that, if a borrow could take out a home equity loan after settlement, why not combine one with settlement. HEL loans also meant the borrower didn’t have to pay for mortgage insurance (which protected the lender from default); because the first mortgage loan was now a conventional 80% LTV. Then came HEL loans for up to 110% of the appraisal (allowing the borrower to cover settlement costs).
These developments did not directly affect housing prices, but they allowed borrowers to pay more for a home, than historically they could have. What would have been the result if these loans were not made? Housing prices would not have risen so fast or high, because there would have been fewer buyers bidding for homes. Fear of not getting a home, before the prices rose again, was one of the major cause of the housing bubble. Who could blame Joe and Jane the plumbers from needing to pay what the market would bare, in order to house their family?
Contingencies on the sale of a home, like home inspections became rare, since buyers feared contingencies would be unacceptable to the Seller; often resulting in home buyers purchasing a home with a defect, which otherwise, they could have negotiated with the seller to remedy.
There were also Sub Prime Mortgages, and ALT A loans for borrowers who didn’t have great credit. Lenders found that if the borrower had any ding on their credit, it was a great excuse to get a borrower to accept a higher rate, and/or an adjustable rate mortgage. Then came NIJA loans, where borrowers did not have to verify income, job, or assets (cash in the bank).
Prior to 2000, the shady deals were limited to excuses that the lender didn’t get the loan processed in time, because they were waiting for the borrower to provide them with something. A borrower I know, had provided an employment verification three times to her lender. Yet she was given this excuse as a reason to not honor a mortgage commitment with a 60 day rate lock. (All three verifications that her employer sent, never made it to the file by settlement). Just prior to settlement, since the time for the rate lock had expired, a higher rate was demanded or she could choose an adjustable mortgage with a lower rate. I don’t remember which she chose.
After 2000, borrowers were similarly told everything was going along OK, and everything would be approved prior to closing. Then, just before settlement, something happened, there was a ding on the borrower’s credit, the borrower didn’t qualify for the loan; but the lender did have a sub prime loan that they did qualify for. In fact, it has an even lower rate (it was an adjustable and/or a teaser rate). If the borrower was astute, and asked about the increases, the mortgage solicitor would often alleviate fears by explaining it had no prepayment penalty, so the borrower could refinance at any time. With settlement in a few days, most buyers were already packed, had given notice to utility companies to end service on the old house, had the movers scheduled, and probably had sold the previous home or given notice to the landlord, etc, etc, etc.
In the times of the housing bubble, Buyers also realized that prices had increased from the date they bought the house, so fear or not completing settlement had another reason to accept whatever the lender was willing to offer. What choice did they have, being homeless, paying the same price for a lesser home, or more for the similar home? Mortgage Solicitors often assured Buyers that they could wait a year and refinance their house for even more money, and some people asserted that housing prices never go down.
No one expected in 2004, to be in today’s situation where they can not refinance because the mortgage is higher than what the house would be appraised for today. No one expected that in 2010, when the HEL loans reset (or balloon), they will not qualify for a mortgage because the house is worth less than the first mortgage. This has nothing to do with a buyer making imprudent decisions, the amount of his down payment, or being laid off.
There is a lot being said today, that the mortgage mess was caused by people who did not have enough money to buy a house, or by people with poor credit. But a person with 10% down, 20% down, or no money down, are all in the same boat today. In most parts of the country, anyone who bought a house in 2004 or early 2005 has little if any equity, unless their down payment exceeded 20%.
In this time period, almost exclusively, the only people who could afford to buy a home with 20% down, were people who already owned a home and who had benefited from the appreciation of their home. The values of homes in this time period were an illusion. But move up buyers generally didn’t need Alt A or Ninja loans; they had 20 – 30% downpayments, and have not been hurt as badly by the housing collapse. Yet they benefited from the housing price increases. With no move up buyers to buy their new homes, today, they are stuck where they are, but if more homes continue entering foreclosure, soon they too will have a mortgage that exceeds the value of their home.
First time home buyers are the base upon which the domino like real estate industry is based. If they don’t buy houses, their Sellers can’t buy houses.
Those that have proposed future mortgages should require more of a down payment don’t understand the real estate business, nor the reason for the current housing crisis. As I have pointed out, it was caused by the inability of borrowers to afford real housing payments (not temporary teaser rates). Buyers were forced to compete for homes whose prices escalated beyond reasonable amounts. The amount of down payment had little affect!
The VA (Veteran’s Administration) and the FHA (Federal Housing Administration) had no downpayment and low downpayment programs going back to the 1970’s. These programs were successful, because they were based on the borrower’s ability to pay, not on down payment, and they did not have teaser rated programs. FHA and VA were not big players after 2000 because they still used older, more conventional underwriting standards.
The only people with large down payments were people who already owned homes. Their large down payments rarely came from savings, but usually came from the increase in housing prices. Without a buyer for their home, they would not have had a build up of equity. Equity also provided cash for home improvements, college educations, vacations, and most of the consumer spending that has fueled our economy.
It is my opinion that prices are currently where they should be today. Unfortunately, without government intervention, like a pendulum, I see housing prices swinging too far in the other direction. Which is why a Home Protection Plan is needed.
Mortgage Backed Securities can still be a viable instrument:
The amazing thing about the mortgage backed securities for Alt A and Ninja loans was that despite their higher risk, the margins for the resale of the mortgage backed securities for these loans was not significantly higher than conventional mortgage backed securities. Investors, who relied on derivatives, to insure against loss of these higher risk loans felt very secure. However, if derivatives had been treated as insurance products, which is what they were, perhaps we would not be in the mess we are in. State insurance agencies were barred from regulating these instruments, so there was no state oversight, and the Federal Government was of the opinion that Wall Street could regulate itself. Derivatives gave investors a false sense of security. If someone is going to provide insurance, then they should be rated as an insurance company, and be required to keep reserves commensurate with the risk, just as all insurance companies do. Mortgage Insurance firms have done this for years.
But the mortgage market does not need derivatives. If there were regulations on how future adjustable mortgages can adjust, then defaults would be low, and this would instill confidence by investors that the mortgage backed securities are reasonably secure. Or the free market would adjust pricing and margin spreads based on risks. Or the loans may need mortgage insurance, just as Banks are required to get mortgage insurance on loans that exceed 80%.
Is today’s housing bubble different from previous bubbles?
When was the last Housing Bubble and how severe was it?
Another major cause of today’s housing crisis was a lack of memory of the 1991 housing bubble, when contrary to popular memory, housing prices did decline. People were often told in 2002-2005, that prices have never dropped, other than during the great depression. That was not true. Actually, the housing declines of 1991-1995 were masked by what I would call Seller stubbornness. In 1991, we entered a recession. Many a young couple, who had bought a condo in 1990, with the goal of selling it in a couple years, as their family grew, found that prices were dropping in 1991. But Home Sellers were psychologically unwilling or financially unable to lower their prices to sell their homes. They needed a profit and down payment for a larger, more suitable home, to accommodate children. Many ended up renting their homes, because they didn’t have extra cash to pay the difference between sales price, sales commissions, mortgage amount and the amount they needed to buy another house. Although housing appreciated in many markets 20% in 1990; and although panic buying happened then too, there was a difference. Lenders required all buyers to provide proof of employment, proof of income, cash in the bank was verified, and they had to meet 28/36 ratios. The bubble collapsed because housing prices exceeded what buyers could afford. This limited the increases in housing prices, and the market adjusted after about 4 years. Instead of dropping prices, many sellers waited a couple years until inflation caught up with the housing price increases (not an option this time).
The 2005 housing bubble was bigger, but more importantly, borrowers were not limited to buying houses they could afford. As the bubble bursts, and prices continue to adjust, buyers don’t have the option of waiting it out. Current owners will not be able to refinance the HEL loans in 2010, because their homes have no equity! Instead they will loose their homes and it may take a decade to recover. Interest rates are low now. Now is the time for them to enter the Home Protection Plan!
Would Increased Down Payments have helped lessen the housing crisis?
Housing Bubbles are not an issue of down payment. Keeping buyers out of the market at a time like this by increasing the requirements on down payments does not do anything but further hurt the housing market. Low down payments were not the reason for the housing crisis we are in.
Requiring home buyers to have a substantial downpayment, may sound fiscally conservative, but in reality it is counter productive. If you lower the number of first time buyers in the market, you may feel like you are requiring them to first prove their fiscal responsibility, but you are also lowering demand.
Generally, the only ones with a sizable down payment is someone who already owns a home and has built up equity in it. Equity in a home is always preferable, but the Veteran’s Administration has lent to veterans for years with “no money down”.
FHA used to provide a valuable service of helping people get into homes, even if they had bad credit, but there was an important caveat, the borrower had to prove that the reason for the bad credit was no longer applicable today (e.g. a laid off worker who got behind on bills would qualify for a mortgage if he had been rehired).
Home buyers still need funds to complete settlement like mortgage application fees and various costs, one full year of prepaid real estate taxes, prepaid homeowners insurance, transfer taxes, title insurance, etc. It is not uncommon for these fees to exceed down payment requirements.
Homeowners who bought houses for $400,000 and put 20% down, in many markets today have no equity. Most likely their down payment came from the sale of a previous home, not from fiscal responsibility and savings. Compare that with working men and women in Philadelphia who bought $100,000 row homes, with no money down, with an Alt A mortgage. They also have no equity. Neither one wants to be homeless.
Increasing downpayment requirements hurts first time home buyers most. This impacts owners who have a house to sell, by lowering competition. So increasing down payment requirements will not benefit anyone.
Conclussion:
Congradulations on your patience, and persistance in reading my entire plan. I hope you have learned something and think my proposal has merit.
I am interested in your feedbackand your help in getting this circulated to congress and the President's Economic Development Team. If you too think it has merit, please send an email to your congressperson with a link to this blog.
Sincerely,
Charles Breinig
CharlieNoSpam-Economy [at] yahoo.com
PO Box 606, Dresher, PA 19025
PS. I also have ideas on how FHA can make its affordable housing program more effective, and rely less on subsidized housing, instead encouraging free market “work force” housing. The average starter home in the 1970’s and 1980’s was 1,200 square feet. The FHA has the mandate and ability to bring affordable homes to the poor and to the “Work Force”.
Terms used:
Housing Ratio – In the 1990’s, 28% was the maximum percent of gross monthly income that could go towards a housing payment. This included the mortgage principal and interest as well as his monthly payment to the real estate tax and insurance escrow account. Thus homeowners who had a mortgage payment of $1,000 (including taxes and insurance), had to earn at least $3,571 per month ($42,800 per year). (3,572 x 28%= $1,000) How much of a house could such a home buyer afford? At 6%, a home buyer could roughly afford a $147,000 home.
Debt ratio – According to FannieMae guidelines, a homeowner who had $286 in monthly credit card debt (in the above example) would be fine. His housing ratio was 36%. ($3,573 x 36% = 1,286); thus he could afford $1,000 in housing payment and $286 in debt, and he had enough left over to pay for income taxes, food, clothing, etc. If the debt payment was higher, it would lower what the home buyer could afford to buy. Buyers with a lot of debt would need to payoff debt or consolidate their debts.
1.We need a plan to put an end to the current ongoing mortgage foreclosures (it is not over yet and will get worse in 2010). This starts with understanding why lenders are foreclosing on homes, rather than renegotiating loans. It is counter intuitive why supposedly rational lenders who are sophisticated and would normally seek to make economic decisions in their own best interest, are flooding the market with even more foreclosed homes every day, rather than renegotiating with a homeowner. A foreclosed home means no cash flow, increased management costs, sales commissions (if a buyer can be found), and creating even greater supply, which lowers everyone’s prices. (see explanation below, and my solution).
2. My plan solves the problem of contract obligations on the part of mortgage servicers, gives them a financial inducement to co-operate; gives the borrower a break without bailing them out, but locks them in from selling for the next 5 years (until this mess sorts itself out); & is fiscally responsible.
3. Increasing down payment requirements, may sound good (i.e. many pundits say the problem was caused by poor quality borrowers who had no money down); but the reality was that it didn’t matter for many foreclosed buyers how much money they put down, they could not afford the increased payments on adjustable loans. Plus, the only people who had sizable down payments were people who already owned homes, and had increased equity from the housing bubble.
4. We need affordable (unsubsidized) housing so first time homebuyers, single parents, and the common working person can purchase homes; without resorting to 1% or 2% teaser loans (which was the only way they could afford starter homes from 2002- 2005).
5. The Housing Business is a domino type business, which starts with the first-time homebuyer (and other buyers in that bracket, ie divorced single parents, young married couples, nurses, teachers, firemen, police, EMTs) who buy their first home, thus enabling the seller to use their equity to purchase a larger more expensive home (often caused by a growing family). That seller then buys another home. Etc.Etc.
6. Starter homes do not need to be 2,500 square feet and more, but skyrocketing development costs have made smaller homes unfeasible to builders. In the 1970’s and 1980’s a typical new construction starter home was 1,200 square feet (3 BR, 1 ½ baths, Living room, Dining room, eat-in Kitchen, over a full unfinished basement)
7. We need affordable mortgages that will enable these buyers to buy homes, which usually means low down payments, but if the homes is priced at under $175,000 this is possible. It is possible to build new homes and sell them for under $175,000 without subsidies! (see unsubsidized affordable housing)
8. The future of the housing industry should be based on a moderate increase in housing prices, making available more affordable homes, enabling homeowners to gradually build up equity, and enabling baby boomers to sell their homes so that the next generation can move up, as their family sizes increase. Many of these baby boomers would today be looking for new homes, often in adult communities in the same neighborhoods where they live now (close to family, church and friends). They want leisure activities, and a new home with little or no maintenance, but with the bells and whistles (central vacuum, modern kitchen, 2BR and a den, 2 car garage), and interestingly, not that much smaller than their current home, just rearranged differently. But they are having a hard time finding buyers for their current home.
The first step is to pass a Home Protection Plan, to stop the foreclosures, and pre-empt the next wave of coming foreclosures of 2010. This plan has two main components. It solves the questions of “How do you purchase mortgage debt at a discount, without rewarding bad behavior on the part of the lender?” AND “How do you only buy debt that you know will actually be repaid (or are reasonably assured the buyer can afford to repay?)” I also think the plan has to address how to get the housing market back on track, hiring laid off workers by building “affordable housing” (a much neglected housing sector) because you will only get one chance at getting this right.
Most people do not understand what was the major cause of the housing bubble of 2004. It was fear. Home buyers were competing for houses that were limited in supply and whose prices were rising so fast that before they could get an agreement of sale accepted by a home seller, another buyer overbid them. The next house they found and wanted to buy, they would often submit a purchase contract with a price higher than the asking price, often over bidding other home buyers.
Prior to 2000, there was a control that would have limited the bidding wars of 2002- 2005. That control was that buyers could only pay what they could afford. Underwriting standards limited their purchasing power to 28% of their gross monthly income (Housing Ratio). If a home buyer could not afford a home, then they would have to rent. Then there would have been one less buyer in the market driving up the housing prices.
However, starting around 2000, Wall Street was competing with Fannie Mae and Freddie Mac by offering mortgage backed securities, and they were doing so with exotic mortgages that did not have Fannie/Freddie/Ginnie underwriting requirements, (see Historical Housing Perspective, below). Mortgage Brokers filled a market demand for loans with a lower monthly payment. The result was that buyers could afford to buy that home they wanted, and this resulted in increased competition, which drove prices even higher. Fear was the catalyst that in some cases caused a buyer to offer more than the asking price, when in reality he may not have been bidding against anyone else. Lenders downplayed the risk of teaser rate loans, and/or Buyers rationalized the risky loans by believing that housing prices were headed one direction, up. Regardless, in most cases, buyers felt they had no alternatives.
The current problem with housing prices and mortgages will continue for the next few years; particularly because, there is a coming problem when HEL loans balloon in 2010. HEL loans were loans where Buyers would finance at settlement, the entire 100% of their purchase price (and in some cases, closing costs too). Thus we have coming, a second wave of foreclosures, because there is no longer any equity in the homes.
Most people don’t understand why mortgage holders don’t work out reasonable accommodations with homeowners, when it is in their economic interest to do so, given falling prices and high foreclosure costs.
The reason is that most Mortgage Servicers are unable to modify terms on loans for three reasons. First their ability to amend a mortgage is restricted by their servicing agreement. To amend a mortgage they need multiple approvals, often from multiple investors with different goals and motivations. Second, if a loan that goes into foreclosure, they earn additional fees. Third, if modifying a loan, their contract penalizes them.
There is also a misunderstanding by many homeowners that they can walk away from a house, not realizing the full long term financial consequences to their financial future; or perhaps they feel they have no choice. With every house they walk away from, the worse the housing crisis gets not just for them, but for their neighbors and the economy. However, if they had a viable option, I believe that they would not default, and a greater housing crisis can be averted.
So how do we get out of this mess, now, without gong through years of foreclosures and the result economic turmoil that will continue? Simply put, as part of the Economic Recovery Act, an amendment would be made to the Foreclosure Act (I’ll call it Chapter 13B), now mortgage servicers will have a contractual ability and a financial incentive to fix mortgage problems.
The Home Protection Plan (version 4i) by Charles Breinig
· A homeowner whose home is worth less than their mortgage may apply for Home Protection bankruptcy (Chapter 13B) by applying on-line and paying a fee to cover costs (Appraisal, filing fee).
· If the current mortgage holder and the homeowner agree, the homeowner will apply for a new government insured loan (insured by Federal National Mortgage Association) for the amount of the appraisal done by the bankruptcy court; and a Second Mortgage (Home Protection Program loan), in the amount of 50% of the difference between the current value of the home and the current value of the existing mortgage loan.
· The proceeds from the new first loan and the Home Protection Program loan will be paid to the current mortgage holder. No other fees will be paid or due to the current mortgage holder by the owner.
· There will be no monthly payments and no interest on the Home Protection Program loan (the second mortgage); which will be funded by the U.S. Treasury; however, when the loan is paid off, the amount due on the loan or ½ of the equity appreciation in the property (whichever is greater) will be paid to the US Treasury. The Home Protection Program loan will be for a term of 30 years, and may not be refinanced, paid off, or assumed until the 6th year after it is made.
· During the pendency of the application for Home Protection bankruptcy, the applicant will pay into an escrow account, held by a Chapter 13B trustee, on a monthly basis, an amount equal to 1/360th the value of the home (as determined by an appraiser appointed by the bankruptcy trustee), and interest*, and 1/12th the real estate taxes, and 1/12th the annual home owner insurance fee, or whatever other payment that the bankruptcy court determines is reasonable.
(* the Interest rate will be the last published monthly average of FNMA 30 yr Mortgage Commitments w/delivery in 60 days)
· Henceforth, for any owner occupied dwelling, for any mortgage and/or note that specifies adjustable payments or adjustable interest, said mortgage and note shall specify the following: Any increase in the monthly payment will be limited to an increase of 10 % from the monthly payment of the previous year; the interest rate can not increase more than 1% per year; the interest rate can not increase more than 5% from the initial starting interest rate (over the life of the loan); the monthly payments will not adjust more than once per year (and then only on the anniversary date of the loan); such loan must be based on a independent clearly defined published index (out of the control of the lender); and such loan can not have a balloon, reset, or call feature; and there can not be any negative amortization on the loan. If a lender elects to issue a “mortgage commitment”, it shall be without conditions.
This plan should be a streamlined plan that could be done on the internet, where the applicant files for this Special Chapter 13b, Home Protection Bankruptcy, pays a fee, gives contact information for the loan servicer such as the name, address and phone number, fax, email (if possible), as well as Account Number, account balance, interest rate and terms, etc. The Bankruptcy Court then assigns a fee appraisal to an appraiser (that is on their list) and the appraisal is emailed to the lender, the bankruptcy court and the applicant, and then it is up to the lender to decide if he wants to continue. Normal underwriting will apply as would title insurance, etc.
The benefits to this plan are as follows:
1. Any homeowner can take advantage of it now; they do not have to currently be in foreclosure.
The plan stops the flood of foreclosures entering the market and it doesn’t lower the values of neighboring properties; there is no vacancy or sale that decreases neighboring values.
2. The other assets of the homeowner who enters Home Protection foreclosure are not affected. It is a temporary state, which ends when the loan is refinanced. No attorney is needed to file the papers, no complicated forms are needed disclosing other assets, and no other assets are impacted. It can be done on line, by paying a fee.
3. Lenders do not have to agree to let a homeowner complete Home Protection foreclosure. If a lender decides they do not want the Borrower to complete Home Protection foreclosure, the process ends.
4. Mortgage Servicers can earn new fees (from their investors and from placing new mortgages) and they have the incentive to get homeowners into the program rather than facing the prospect that an owner may go into full conventional foreclosure. (This will be the major factor in the success of the program).
5. All the stakeholders are sacrificing something, and gaining something. The lender is giving up some principle, but they would probably lose more in a foreclosure. The government is putting out cash, but benefiting by solving the housing crisis, reducing real estate foreclosures, supporting homeowners, and the temporary cash will insure investor participation. The homeowner is not getting a free pass, either, they will share equity with the treasury, if the housing financial system recovers over the next 5 years, plus they have a bankruptcy on their record.
6. If the Lender does agree to allow the Borrower to complete Home Protection foreclosure, they are getting the loan paid off up to the current value of the home, plus they are getting 50 cents on the dollar for any amounts over the current value of the house. Arguably a cheaper process than going through conventional mortgage foreclosure.
7. The homeowner gets to stay in his home, and gets a payment he can afford, based on the current value of the home, and a new mortgage (insured by FNMA) at today’s low rates.
8. This is not a government handout, the borrower is not getting something for nothing, since they have to share in the equity appreciation over the next 5 years; and not everyone that could apply, will apply, because not everyone will want to do that.
9. Instead of giving TARP loans only to the big banks, who may or may not use the funds as the Treasury would like, this shares the funds with all investors in mortgage backed securities (pension funds, etc), and these investors are far more likely to buy FNMA backed mortgage securities (higher rate of return than Treasury Bills. There also would be no shenigans like Citibank buying a 9 million dollar jet, saying that public funds are not being used. The investors would not be paying themselves bonuses, etc.
10. Is it fair to borrowers who put down higher amounts of down payment? Yes, because almost all the people who put down large down payments, did so not because of frugality (i.e. putting money away in savings), but because they received the benefit of the housing bubble (i.e. their home ballooned in value, more than it would normally have).
11. The Bankruptcy judge may be in the picture in the event that some other modification is appropriate. Otherwise the system is on auto pilot with the value being determined by appraisers on a preapproved list, assigned by the bankruptcy court.
12. The Federal government will eventually be repaid the loan, it is not a gift; they may not earn interest, but will receive the benefit of increases in equity, plus they stop the downward spiral of the housing market.
13. A home buyer may elect to not enter the program, if he doesn’t want to share equity with the Treasury
14. Restricting the resale of participants in this program, from selling in the next 5 years, means that every house that enters this program this year, will not be going on the market in the next 5 years, which will stop the housing crisis, very quickly !
15. A homeowner may elect to refinance the loan in 5 years, if the program works well and housing prices increase, (so he doesn’t have to continue sharing equity with the federal government).
16. Borrowers that purchased homes with HEL loans, (first and second mortgages) can enter the program now, if the homeowner can afford a new first mortgage, thus limiting the impact of HEL loans in 2010.
17. Prices will stop dropping, as borrowers refinance with the Home Protection Foreclosure Program, rather than being forced to leave their homes. 100% financing will be needed, cash reserves & equity are nill.
18. Many of the existing programs developed over the last few months to forestall foreclosures are proving ineffective. Why? Because they do not adequately address the problems of the borrowers, and many of the borrowers are ending up going into default a second time. There are many reasons for this, most of which have to do with the inability of servicing agents to make real modifications, their goal is to get the borrow back on tract, paying as much as possible, without considering what a borrower can truly afford.
19. This Program gets the money out there, instead of giving it to banks, hoping they will start lending again.
20. There is also a misunderstanding by the public that they can walk away from a house, not realizing the long term financial consequences to their financial future; or are so desperate they see no other option. With every house they walk away from, the housing crisis gets worse not just for them, but for their neighbors and the economy. However, if they had a viable option, I believe that they would not default, and a greater housing crisis can be averted.
21. Is it true that many of the home buyers did not understand the mortgage they were getting? My experience tells me that whether through deception, lack of disclosures, or inattention on their part, they were not totally at fault. Regardless, there needs to be protections set in place to prevent future problems. Otherwise this problem will repeat itself. So, the Home Protection Act must include the following: All Future Mortgages that have an adjustable interest rate or adjustable payment component is restricted to a 1% increase per year in the interest rate (i.e. a limit of 10% increase on the monthly payment) or 5% increase in the interest rate over the life of the loan. If a lender wants to issue a teaser rate, interest only loan, or a buy down, so be it, but they are limited to increases which the borrower should be able to afford. (Note: the old 2% per year interest adjustment limit of the 1980’s was at a time of high inflation; borrowers assumed ever increasing pay raises, which is not true today).
22. Some may ask, What does this Home Protection Program have to do with foreclosures? By creating this special Chapter in the foreclosure laws, this plan now falls under special contract provisions which mortgage servicers need, in order to participate in this plan. This plan is far less complicated/convoluted than our tax system or the earmarks that have no correlation to the bill being voted on. It keeps buyers from entering full conventional bankruptcy, & gives them a better less expensive option. As far as public policy goes, it is clear this will drastically cut the number of foreclosed homes entering the market.
23. The sooner foreclosed properties stop entering the market, the sooner housing prices will stabilize, and eventually begin rising again. If this does not happen before 2010, we are surely headed for a depression, as those borrowers with HEL loans will be unable to refinance the equity loans that were part of their purchase price.
24. People who are not making their mortgage payment can not afford to pay credit cards either. Bad credit affects borrowers in multiple ways, higher interest rates on credit cards, higher auto and homeowner rates. Bad debit leads to a downward spiral that affects more than just the financial health of families.
25. It is critical that future mortgages have consumer protections so mortgage originators (who have direct interaction with the public) do not use the process to their advantage; & adjustable loans have practical limits, disclosures and no negative amortization.
Here is some Historical Housing Perspective which you may find helpful-
Prior to 2000, there was a control that would have limited the bidding wars of 2002- 2005. That control was that buyers could only pay what they could afford. There were two ratios that lenders used to determine if a buyer could afford a house. If the buyer’s mortgage exceeded the standard 28 %(Housing Ratio) or if his mortgage plus debts exceeded 36% (Debt ratio), they were turned down and the house was returned to the market. Some argued that borrowers without debts could afford the full 36% of their income to pay for housing (however, many borrowers later used credit cards to pay for home furnishings, decorating, improvement projects and repairs). Some lenders adopted 36%/50% ratios. Then came “no doc” loans where contractors (who dealt with cash) could buy a house with 20% down, and they would not have to provide documentation of income. Because of the high downpayment, these loans were justified as being secure. Then came HEL (Home Equity Closing Loans) loans where the borrower could take out a second mortgage on the property (to cover the 20% down payment he needed at settlement). The reasoning was that, if a borrow could take out a home equity loan after settlement, why not combine one with settlement. HEL loans also meant the borrower didn’t have to pay for mortgage insurance (which protected the lender from default); because the first mortgage loan was now a conventional 80% LTV. Then came HEL loans for up to 110% of the appraisal (allowing the borrower to cover settlement costs).
These developments did not directly affect housing prices, but they allowed borrowers to pay more for a home, than historically they could have. What would have been the result if these loans were not made? Housing prices would not have risen so fast or high, because there would have been fewer buyers bidding for homes. Fear of not getting a home, before the prices rose again, was one of the major cause of the housing bubble. Who could blame Joe and Jane the plumbers from needing to pay what the market would bare, in order to house their family?
Contingencies on the sale of a home, like home inspections became rare, since buyers feared contingencies would be unacceptable to the Seller; often resulting in home buyers purchasing a home with a defect, which otherwise, they could have negotiated with the seller to remedy.
There were also Sub Prime Mortgages, and ALT A loans for borrowers who didn’t have great credit. Lenders found that if the borrower had any ding on their credit, it was a great excuse to get a borrower to accept a higher rate, and/or an adjustable rate mortgage. Then came NIJA loans, where borrowers did not have to verify income, job, or assets (cash in the bank).
Prior to 2000, the shady deals were limited to excuses that the lender didn’t get the loan processed in time, because they were waiting for the borrower to provide them with something. A borrower I know, had provided an employment verification three times to her lender. Yet she was given this excuse as a reason to not honor a mortgage commitment with a 60 day rate lock. (All three verifications that her employer sent, never made it to the file by settlement). Just prior to settlement, since the time for the rate lock had expired, a higher rate was demanded or she could choose an adjustable mortgage with a lower rate. I don’t remember which she chose.
After 2000, borrowers were similarly told everything was going along OK, and everything would be approved prior to closing. Then, just before settlement, something happened, there was a ding on the borrower’s credit, the borrower didn’t qualify for the loan; but the lender did have a sub prime loan that they did qualify for. In fact, it has an even lower rate (it was an adjustable and/or a teaser rate). If the borrower was astute, and asked about the increases, the mortgage solicitor would often alleviate fears by explaining it had no prepayment penalty, so the borrower could refinance at any time. With settlement in a few days, most buyers were already packed, had given notice to utility companies to end service on the old house, had the movers scheduled, and probably had sold the previous home or given notice to the landlord, etc, etc, etc.
In the times of the housing bubble, Buyers also realized that prices had increased from the date they bought the house, so fear or not completing settlement had another reason to accept whatever the lender was willing to offer. What choice did they have, being homeless, paying the same price for a lesser home, or more for the similar home? Mortgage Solicitors often assured Buyers that they could wait a year and refinance their house for even more money, and some people asserted that housing prices never go down.
No one expected in 2004, to be in today’s situation where they can not refinance because the mortgage is higher than what the house would be appraised for today. No one expected that in 2010, when the HEL loans reset (or balloon), they will not qualify for a mortgage because the house is worth less than the first mortgage. This has nothing to do with a buyer making imprudent decisions, the amount of his down payment, or being laid off.
There is a lot being said today, that the mortgage mess was caused by people who did not have enough money to buy a house, or by people with poor credit. But a person with 10% down, 20% down, or no money down, are all in the same boat today. In most parts of the country, anyone who bought a house in 2004 or early 2005 has little if any equity, unless their down payment exceeded 20%.
In this time period, almost exclusively, the only people who could afford to buy a home with 20% down, were people who already owned a home and who had benefited from the appreciation of their home. The values of homes in this time period were an illusion. But move up buyers generally didn’t need Alt A or Ninja loans; they had 20 – 30% downpayments, and have not been hurt as badly by the housing collapse. Yet they benefited from the housing price increases. With no move up buyers to buy their new homes, today, they are stuck where they are, but if more homes continue entering foreclosure, soon they too will have a mortgage that exceeds the value of their home.
First time home buyers are the base upon which the domino like real estate industry is based. If they don’t buy houses, their Sellers can’t buy houses.
Those that have proposed future mortgages should require more of a down payment don’t understand the real estate business, nor the reason for the current housing crisis. As I have pointed out, it was caused by the inability of borrowers to afford real housing payments (not temporary teaser rates). Buyers were forced to compete for homes whose prices escalated beyond reasonable amounts. The amount of down payment had little affect!
The VA (Veteran’s Administration) and the FHA (Federal Housing Administration) had no downpayment and low downpayment programs going back to the 1970’s. These programs were successful, because they were based on the borrower’s ability to pay, not on down payment, and they did not have teaser rated programs. FHA and VA were not big players after 2000 because they still used older, more conventional underwriting standards.
The only people with large down payments were people who already owned homes. Their large down payments rarely came from savings, but usually came from the increase in housing prices. Without a buyer for their home, they would not have had a build up of equity. Equity also provided cash for home improvements, college educations, vacations, and most of the consumer spending that has fueled our economy.
It is my opinion that prices are currently where they should be today. Unfortunately, without government intervention, like a pendulum, I see housing prices swinging too far in the other direction. Which is why a Home Protection Plan is needed.
Mortgage Backed Securities can still be a viable instrument:
The amazing thing about the mortgage backed securities for Alt A and Ninja loans was that despite their higher risk, the margins for the resale of the mortgage backed securities for these loans was not significantly higher than conventional mortgage backed securities. Investors, who relied on derivatives, to insure against loss of these higher risk loans felt very secure. However, if derivatives had been treated as insurance products, which is what they were, perhaps we would not be in the mess we are in. State insurance agencies were barred from regulating these instruments, so there was no state oversight, and the Federal Government was of the opinion that Wall Street could regulate itself. Derivatives gave investors a false sense of security. If someone is going to provide insurance, then they should be rated as an insurance company, and be required to keep reserves commensurate with the risk, just as all insurance companies do. Mortgage Insurance firms have done this for years.
But the mortgage market does not need derivatives. If there were regulations on how future adjustable mortgages can adjust, then defaults would be low, and this would instill confidence by investors that the mortgage backed securities are reasonably secure. Or the free market would adjust pricing and margin spreads based on risks. Or the loans may need mortgage insurance, just as Banks are required to get mortgage insurance on loans that exceed 80%.
Is today’s housing bubble different from previous bubbles?
When was the last Housing Bubble and how severe was it?
Another major cause of today’s housing crisis was a lack of memory of the 1991 housing bubble, when contrary to popular memory, housing prices did decline. People were often told in 2002-2005, that prices have never dropped, other than during the great depression. That was not true. Actually, the housing declines of 1991-1995 were masked by what I would call Seller stubbornness. In 1991, we entered a recession. Many a young couple, who had bought a condo in 1990, with the goal of selling it in a couple years, as their family grew, found that prices were dropping in 1991. But Home Sellers were psychologically unwilling or financially unable to lower their prices to sell their homes. They needed a profit and down payment for a larger, more suitable home, to accommodate children. Many ended up renting their homes, because they didn’t have extra cash to pay the difference between sales price, sales commissions, mortgage amount and the amount they needed to buy another house. Although housing appreciated in many markets 20% in 1990; and although panic buying happened then too, there was a difference. Lenders required all buyers to provide proof of employment, proof of income, cash in the bank was verified, and they had to meet 28/36 ratios. The bubble collapsed because housing prices exceeded what buyers could afford. This limited the increases in housing prices, and the market adjusted after about 4 years. Instead of dropping prices, many sellers waited a couple years until inflation caught up with the housing price increases (not an option this time).
The 2005 housing bubble was bigger, but more importantly, borrowers were not limited to buying houses they could afford. As the bubble bursts, and prices continue to adjust, buyers don’t have the option of waiting it out. Current owners will not be able to refinance the HEL loans in 2010, because their homes have no equity! Instead they will loose their homes and it may take a decade to recover. Interest rates are low now. Now is the time for them to enter the Home Protection Plan!
Would Increased Down Payments have helped lessen the housing crisis?
Housing Bubbles are not an issue of down payment. Keeping buyers out of the market at a time like this by increasing the requirements on down payments does not do anything but further hurt the housing market. Low down payments were not the reason for the housing crisis we are in.
Requiring home buyers to have a substantial downpayment, may sound fiscally conservative, but in reality it is counter productive. If you lower the number of first time buyers in the market, you may feel like you are requiring them to first prove their fiscal responsibility, but you are also lowering demand.
Generally, the only ones with a sizable down payment is someone who already owns a home and has built up equity in it. Equity in a home is always preferable, but the Veteran’s Administration has lent to veterans for years with “no money down”.
FHA used to provide a valuable service of helping people get into homes, even if they had bad credit, but there was an important caveat, the borrower had to prove that the reason for the bad credit was no longer applicable today (e.g. a laid off worker who got behind on bills would qualify for a mortgage if he had been rehired).
Home buyers still need funds to complete settlement like mortgage application fees and various costs, one full year of prepaid real estate taxes, prepaid homeowners insurance, transfer taxes, title insurance, etc. It is not uncommon for these fees to exceed down payment requirements.
Homeowners who bought houses for $400,000 and put 20% down, in many markets today have no equity. Most likely their down payment came from the sale of a previous home, not from fiscal responsibility and savings. Compare that with working men and women in Philadelphia who bought $100,000 row homes, with no money down, with an Alt A mortgage. They also have no equity. Neither one wants to be homeless.
Increasing downpayment requirements hurts first time home buyers most. This impacts owners who have a house to sell, by lowering competition. So increasing down payment requirements will not benefit anyone.
Conclussion:
Congradulations on your patience, and persistance in reading my entire plan. I hope you have learned something and think my proposal has merit.
I am interested in your feedbackand your help in getting this circulated to congress and the President's Economic Development Team. If you too think it has merit, please send an email to your congressperson with a link to this blog.
Sincerely,
Charles Breinig
CharlieNoSpam-Economy [at] yahoo.com
PO Box 606, Dresher, PA 19025
PS. I also have ideas on how FHA can make its affordable housing program more effective, and rely less on subsidized housing, instead encouraging free market “work force” housing. The average starter home in the 1970’s and 1980’s was 1,200 square feet. The FHA has the mandate and ability to bring affordable homes to the poor and to the “Work Force”.
Terms used:
Housing Ratio – In the 1990’s, 28% was the maximum percent of gross monthly income that could go towards a housing payment. This included the mortgage principal and interest as well as his monthly payment to the real estate tax and insurance escrow account. Thus homeowners who had a mortgage payment of $1,000 (including taxes and insurance), had to earn at least $3,571 per month ($42,800 per year). (3,572 x 28%= $1,000) How much of a house could such a home buyer afford? At 6%, a home buyer could roughly afford a $147,000 home.
Debt ratio – According to FannieMae guidelines, a homeowner who had $286 in monthly credit card debt (in the above example) would be fine. His housing ratio was 36%. ($3,573 x 36% = 1,286); thus he could afford $1,000 in housing payment and $286 in debt, and he had enough left over to pay for income taxes, food, clothing, etc. If the debt payment was higher, it would lower what the home buyer could afford to buy. Buyers with a lot of debt would need to payoff debt or consolidate their debts.
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