Oct292013
Emerging loanowners stepping down the housing ladder
I feel bad for loanowners (AKA underwater borrowers). When I started blogging in February of 2007, I felt a sense of urgency to convince as many people as I could they shouldn’t buy a house. I knew the impending price collapse was going to have serious long-term consequences on people’s lives. Many would succumb to the weight of their debts and lose their homes in foreclosure. Many more would endure years of owing more on their mortgage than their home was worth. Mortgage debt is always a heavy burden, but when it greatly exceeds the value of the house it’s attached to, the crushing weight is almost too much to bear (remember Swiller’s bizarre rants?)
For many loanowners, the last seven years in borrower purgatory felt more like borrower hell. They’ve been trapped beneath their debts, and any remedies for their situation would carry negative consequences of their own. Many people opted to strategically default, and I openly encouraged this action for years because it immediately relieved the emotional distress and put people on a path toward building a new future. However, those that did strategically default had to pay a price of a lowered credit score and lingering debt collection issues. Many others borrowers opted to sell short, but this too had credit implications. A few even sold the house and paid the shortfall out of savings, but these sellers were the exception rather than the rule.
Nearly all these borrowers who escaped their debt prisons shared one common characteristic: They generally left their properties dead broke. Unfortunately, the same is true of most loanowners who finally sell and get out from under their burdensome mortgage debt.
The celebration among the financial media about the underwater borrower problem going away ignores another serious problem directly related to it. When they finally get far enough above water to sell, pay commissions and closing costs, and not take a loss, these loanowners still end up penniless. These borrowers do not end up executing a move up trade. Many must wait and save for down payment to sell again.
My loanowner inspiration
Prior to my writing for the IHB, my wife was close friends with a woman who lived in the Cottage neighborhoods in Woodbridge. This family bought their house for about $400,000 in 2001, and by 2006, it was worth about $725,000. When I told them houses can’t possibly appreciate that quickly and sustain the gains, they told me I didn’t understand California real estate. The woman’s mother was a real estate agent, and she knew this market better than I ever could — or so I was told. Despite my long conversations with them on the subject, I could not convince them there was a housing bubble. These conversations provided much of the early energy to write for the IHB. Maybe I couldn’t save them, but I could try to save everyone else.
The family who was my inspiration decided to execute a move-up in November of 2007. They only had $100,000 because the breadwinner borrowed the rest of their equity to start a successful business (the only use of HELOCs I can understand and endorse). They took their $100,000, borrowed $1,000,000 in a first mortgage, borrowed $100,000 in a HELOC second mortgage (maximized their tax write offs), and bought a $1,200,000 trophy home in Woodbridge. After launching their new business, they quickly took on an $8,000 per month mortgage payment on a property they could have rented for $4,000 a month.
They struggled with this payment for over six years. Finally, in May of 2013, values had come back to where they could sell the house, pay the commission and get out with a small profit. The traded down to a cottage home very similar to the one they left six years earlier. It couldn’t have been an easy decision. They had to pay $40,000 more than they sold their cottage for back in 2007, and they put about $100,000 down, so the last six years had no net loss, but no gain either. Their new mortgage payment is at least 60% less than their previous one.
My wife asked me if perhaps they did it right. They got to live in that beautiful house for six years and feel like they owned it. They got to impress their family, friends, and neighbors and live the good life — at least that’s what was seen from the outside. I pointed out to my wife what you didn’t see was the emotional cost the breadwinner of the family endured trying to make that $8,000 per month payment. Since they could have rented the house for $4,000 per month and since they ended up with no additional equity, the extra $4,000 per month they were spending was “throwing their money away on mortgage interest.” That $4,000 could have funded many family trips and vacations, possessions for their teenage daughters, savings for their retirement, savings for their children’s education, and a plethora of other benefits they gave up to “own” that house. Even after the tax breaks, this family flushed $200,000+ down the mortgage toilet.
I give this family credit for finally making the right financial decision. The discussions about selling their dream home to take a step down the property ladder could not have been easy, but it was clearly the right choice. They cut their housing costs by 60%, and now they will have the extra money to do all the things they gave up to own that huge home loan.
Many others will chose to hang on because the moment they rise above water, the stress of being a loanowner almost immediately turns to greed about making enough money to buy a nice move-up. Unfortunately for them, many others will not keep enduring the high monthly payments when they emerge, and these newly-equitied owners will get out as soon as they can and execute a move-down trade. These new listings and move-down trades will pressure higher price points and create more demand at lower ones. That’s why I believe The move-up market will suffer for another decade.
Eight years to recycle this property
Have you ever wondered why we used to have rules that require lenders to resolve their bad loans? We suspended those rules when we instituted mark-to-fantasy accounting, but prior to that, lenders used to have to write down their bad loans. This usually prompted them to foreclose on the property and sell it to recover their capital so they could recycle that money into a more productive use. It’s the concept of productive use that drives the need to recycle bad loans. Failure to liberate money tied up in bad loans lead to the lost decade in Japan, and it’s responsible for the economic malaise we experienced over the last six years.
Today’s featured property has been non-performing for the better part of eight years. It was originally purchased as a flip in 2005. Zovall at the IHB profiled this property back in November of 2006. Since then it’s been in and out of foreclosure and listed on and off for the last seven years. Nobody has made any payments on this mortgage since 2006 at least. This non-performing note kept getting can-kicked. Finally, it was bought by the bank late last year, but they sat on it for another year hoping to make some of the lost interest from eight years of non-performance.
Should it really take eight years to resolve a bad loan?
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”OC13216903″ showpricehistory=”true”]
108 CORAL ROSE Irvine, CA 92603
$619,900 …….. Asking Price
$620,000 ………. Purchase Price
5/9/2005 ………. Purchase Date
($100) ………. Gross Gain (Loss)
($49,592) ………… Commissions and Costs at 8%
============================================
($49,692) ………. Net Gain (Loss)
============================================
0.0% ………. Gross Percent Change
-8.0% ………. Net Percent Change
0.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$619,900 …….. Asking Price
$123,980 ………… 20% Down Conventional
4.24% …………. Mortgage Interest Rate
30 ……………… Number of Years
$495,920 …….. Mortgage
$140,211 ………. Income Requirement
$2,437 ………… Monthly Mortgage Payment
$537 ………… Property Tax at 1.04%
$200 ………… Mello Roos & Special Taxes
$129 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$319 ………… Homeowners Association Fees
============================================
$3,622 ………. Monthly Cash Outlays
($472) ………. Tax Savings
($684) ………. Principal Amortization
$189 ………….. Opportunity Cost of Down Payment
$97 ………….. Maintenance and Replacement Reserves
============================================
$2,752 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,699 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,699 ………… Closing Costs at 1% + $1,500
$4,959 ………… Interest Points at 1%
$123,980 ………… Down Payment
============================================
$144,337 ………. Total Cash Costs
$42,100 ………. Emergency Cash Reserves
============================================
$186,437 ………. Total Savings Needed
[raw_html_snippet id=”property”]
If something cannot continue, it will end….
http://advisorperspectives.com/dshort/charts/index.html?guest/2013/CK-131028-Fig-1.jpg
Should it really take eight years to resolve a bad loan?
This person won the can kicking lottery. Only smucks pay mortgages or rent, I should try to a ponzi next time.
If we all knew in advance how much of a benefit stupid speculators would get from the banks, we all would have levered up and bought irresponsibly.
I know several who are purchasing lately with “squatting for a couple years” as their worst case scenario plan. And these people are financially responsible. Moral hazard…
I hate to admit, but it’s entered my mind as well. The option to squat for a couple of years is our new reality. If there is another housing bubble and prices crash, people will quit paying, and they will be coddled until prices recover.
Rising Rates and Prices, Static Incomes Lower Housing Affordability
Over the past year, home prices have risen 16 percent and mortgage rates have climbed from 3.7 percent to 4.43 percent, all while incomes have risen by just 3 percent, according to Chicago-based Interest.com, which is owned by Bankrate.com.
These diverging trends have led to a decline in affordability across the nation.
“The simple fact is that the very small improvement Americans have seen in their paychecks hasn’t kept pace with a jump in home prices and mortgage rates,” said Mike Sante, managing editor of Interest.com.
In all 25 of the nation’s largest metropolitan areas, it is more difficult to afford a home this year than last year, according to Interest.com.
In fact, in 17 of the 25 markets, a median income is not enough to purchase a median-priced home. Last year, this held true in only six markets, according to Interest.com.
The least affordable market is San Francisco, California, where the median income is 47.93 percent below what would be necessary to purchase a median-priced home.
Slow Quarter Ahead Judging from Pending Home Sales
The National Association of Realtors’ (NAR) Pending Home Sales Index (PHSI) for September indicates home sales will stumble in the year’s final quarter as buyers struggle with declining home affordability.
The PHSI, a forward-looking indicator that’s based on contract signings (not closings) fell for the fourth straight month to 101.6 from August’s downwardly revised reading of 107.6—a 5.6 percent drop. Year-over-year, September’s index was down 1.2 percent from 102.8—the first yearly drop in 29 months, the association reports.
“Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity,” said NAR chief economist Lawrence Yun. “In addition, government and contract workers were on the sidelines
with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.
“This tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014. Even so, ongoing inventory shortages will continue to lift home prices, though at a slower single-digit growth rate next year,” he added
The magic beans of the federal guarantee can’t work against an affordability problem. And it’s the GSE business model sort like the FHA model? They new loans to pay for the old ones.
GSE Sees New Business Slip to Lowest Volume in 18 Months
September marked the third straight month of declining business for Freddie Mac, with purchases and issuances coming in at their lowest level in a year and a half.
Freddie Mac’s total mortgage portfolio shrank at an annualized rate of 4.3 percent in September, contracting at a slightly lessened pace compared to August’s -5.0 percent growth rate. Through September, 2013’s average monthly growth rate has been -2.0 percent.
As of September 30, Freddie Mac’s portfolio has contracted through six of the year’s first nine months. By the end of the month, its ending balance stood at $1.927 trillion.
New business fell for the second straight month to a 2013 low, with purchases and issuances totaling approximately $28.2 billion—the lowest since April 2012 ($25.9 billion). Year-to-date, new business has totaled $382.5 billion
My guess is that Watt will get sacrificed in order to confirm Yellen.
The gloves are off: Senators ready to fight over Yellen, Watt appointments
Senate Democrats spent Monday getting jittery, a situation that resulted in Sen. Harry Reid, D-N.V., filing a motion for cloture to cut off a potential Senate filibuster over the confirmation vote covering Rep. Mel Watt’s, D-N.C., nomination to lead the Federal Housing Finance Agency later this week.
Senate Banking Committee Chairman Tim Johnson, D-SD, backed Reid’s maneuver Monday afternoon.
“There is no legitimate reason Mel Watt should not be confirmed as the director of the Federal Housing Finance Agency, and I look forward to the Senate vote on his nomination later this week,” Sen. Johnson said.
Yet, some in the Senate may find good reason, especially when it comes to the other big nomination from the President’s desk — namely that of Janet Yellen to lead the Federal Reserve.
Word on the street is Sen. Rand Paul, R-Ky., is threatening to interfer with the Yellen nomination, which is expected to take place sometime in November. Paul wants it delayed until he gets a full vote on the Federal Reserve Transparency Act – a proposed law that calls for an audit of the Fed.
But veteran banking expert Christopher Whalen took to Breitbart.com to say, Sen. Paul’s request to stall the nomination only addresses part of the problem.
He writes, “While it is notable that Senator Paul is willing to use the Yellen nomination to push forward his proposal to audit the central bank, the fact is that conservatives in the Senate who want to see job creation and growth restored in the U.S. should be opposing Yellen’s nomination in general terms.”
While Whalen is fine auditing the Fed, he’s more concerned about having a Fed that can focus on pro-growth policies. He doesn’t find this spirit in Yellen, so he’s not threatened by a solid challenge to her appointment.
“In their new book ‘Code Red,’ co-authors John Mauldin and Jonathan Tepper note that in 2005 Janet Yellen was an unapologetic apologist for former Fed Chairman Alan Greenspan’s inflationist policies,” Whalen points out. “She explicitly supported Greenspan’s decision not to deflate the housing bubble created by the Fed via easy money starting back in 2001.”
While the Yellen nomination is expected to occur next month, the push for cloture to prevent a filibuster of Mel’s Watt confirmation shows these appointments are still contentious, even with Yellen remaining Wall Street’s favored pick in many ways.
This is a huge difference between now and 2003.
48 percent of Americans fear a housing bubble over the next two years
While many indicators suggest the housing market is on the road to recovery, some fear another bubble is already forming. Country Financial, a financial services company based in Bloomington, Illinois, found in a recent survey that 48 percent of Americans say the market could reach a bubble over the next two years.
The Country Financial survey also found varying financial obstacles across the generations of Americans in the housing market.
While nearly half of Americans say we may be headed toward another bubble, only 6 percent say the housing market is their top economic concern at the moment, according to Country Financial.
The housing market ranks in the top three economic concerns for about 25 percent of Americans, according to Country Financial.
“Perhaps the government shutdown and debt ceiling are eclipsing just how concerned Americans are about the housing market right now, but with home prices up 12.4 percent in the last year alone, concerns for an ‘echo bubble’ of the housing market collapse certainly make sense,” said Troy Frerichs, director of investments and wealth management at Country Financial.
Meanwhile, Zillow this week dismissed bubble fears, finding home value appreciation fell off over the past three months.
However, bubble or no bubble, many Americans continue to suffer financial burdens that impede them from homeownership, and according to Country Financial, “the obstacle that tops the list for each generation is different.”
Generation Y and those headed for retirement—between the ages of 50 and 64—in the next few years tend to lack the cash for a down payment.
Those ages 40 to 49 cite job security as their greatest obstacle to owning a home.
Lastly, debt is the biggest barrier for those in their 30s, according to the Country Financial survey.
About 41 percent of Americans think a middle-income family can afford a home in today’s market.
Of those who do own a home, about 27 percent say they will not have their mortgage paid off when they retire. The rate is even higher—37 percent—among those nearing retirement age—50 to 64, according to the survey.
This is a good development. People are becoming realistic about the broken property ladder.
Buyers today want a house for the long haul
When Amy Lewis sits in her Lafayette, Calif., home, she can envision her three young daughters growing up there. She sees them forming lasting friendships with the neighborhood kids, graduating from the local schools, coming home for visits during college breaks.
It doesn’t stop there: The 43-year-old can also imagine grandchildren running around the halls.
It’s a different mentality than in years past, when people would buy a home, stay for several years and move up to something bigger or better. First and foremost, Lewis said she and her husband wanted an experience similar to one that they had growing up, one where the neighborhood kids went from preschool to high school together. Her parents still live in the same house they moved to when she was 2 years old (and they’re also flush with home equity in their 80s).
But Lewis adds there is another financial reason to staying put: Mortgage rates are very low, and there is a good chance it will be hard to trade in that monthly payment in several years.
“Definitely, for the next 30 years, we feel confident we want to be there,” Lewis said.
Expectations have adjusted, and trading up is no longer the goal for many, Bishop said. People became accustomed to the move-up mentality when they’d see their neighbors move for extra square footage or a more desirable area. Now, your neighbors probably aren’t going anywhere.
“[Buying a home] is a very complex procedure—much, much more than before,” said Sherry Chris, chief executive of Better Homes and Gardens Real Estate, a national real-estate brand. “People are in it for the long haul, and it’s not just ‘I’m going to buy a house and see what happens in a few years.’”
Added Cara Ameer, broker associate with Coldwell Banker Vanguard Realty in Ponte Vedra, Fla.: “A lot of people tend now to think more logically than irrationally. They are really scrutinizing ‘do I need this?’ They’re looking at hard costs, and not throwing caution to the wind.”
Our next house purchase will definitely be made with “owning for the long haul” as a top priority. While you can’t be certain your family’s circumstances (income, job locations, etc.) will remain constant, you can reasonably project. Second on my priority list will be financing an amount for 30 years, that we can reasonably pay off within 15 years.
This is exactly what we did. We were looking at either buying a house for 10 years and moving up, or buying our final house. We ended up buying the latter figuring that executing a trade up later would be problematic, what with rising rates and all. We stretched a little more to make it happen, but we can still afford the payment on one income. With two incomes we can pay off the loan early.
Fed Balance Sheet Not Seen Returning to Normal Until at Least 2019
The Federal Reserve’s balance sheet, which is fast approaching $4 trillion in total assets, won’t return to normal until sometime between mid-2019 and mid-2021, according to new projections prepared by central bank researchers.
The research suggests the Fed could go as long as 6.5 years without generating enough income to make annual remittances of cash to the U.S. Treasury as it normally does, though that is in an extreme scenario that the researchers don’t envision.
The Fed’s holdings of Treasury and mortgage securities have soared since it began experimenting with bond buying programs during the 2008 financial crisis. Fed staff economists prepare simulations of how the Fed’s holdings and profits might evolve in the coming years.
In the baseline scenario prepared by the economists, the Fed would not sell its growing portfolio of mortgage and Treasury securities, and would instead let the portfolio gradually shrink as the bonds mature. Fed Chairman Ben Bernanke suggested that was the Fed’s preferred strategy at a press conference in June.
In this scenario, the Fed’s balance sheet would eventually shrink to a more normal level by August 2020, meaning the financial system would no longer be flooded with the trillions of dollars of excess cash that the Fed has pumped into banks.
In this scenario, the Fed would continue generating income and would in sum turn over $910 billion in profits to the Treasury between 2009 and 2025.
In other scenarios, however, the Fed could take a bigger hit. For instance, if interest rates rise two percentage points more than the Fed is expecting, to 6.9% on 10-year Treasury notes rather than 4.9% as expected, the Fed could go for a stretch without making enough money to make payments to the Treasury.
In one scenario, in which rates rise and the Fed sells mortgage bonds, the Fed would go more than six years without making payments. In such a scenario, which could be triggered by an inflation shock, the Fed’s balance sheet would get back to normal by 2019, but its overall income would be $100 billion less than in the baseline scenario.
Paul Ryan: We will try to get QM delayed
Paul Ryan, the Republican congressman from Wisconsin and former vice presidential candidate, doesn’t mince his words. Actually, discussing the nation’s economy is more important to him than eating.
Let me explain.
Not ten minutes after I watched Paul Ryan debate the Obama administration’s troubled launch of healthcare.gov with Health and Human Services Secretary Kathleen Sebelius on CNN, Ryan strode into a lunch with roughly 30 of the nation’s lenders.
No one from the too-big-to-fails were there, but rather many of the mid- to larger non banks were in representation. The lunch, put together at the Capitol Hill Club by DocuTech and Stearns Lending, gave Ryan a chance to do what he could to reassure these creditors that he intends to fight burdensome regulations.
He took particular pause when discussing the Consumer Financial Protection Bureau’s plans for the qualified mortgage rule and safe harbor. This is a man who wasn’t just briefed on an issue; he knows his stuff.
“In my state, up to 75% of mortgages won’t qualify under QM,” he said, pushing his unfinished salad aside and grabbing a pack of Sweet’N Low for his iced tea. “Community banks, they all think they’ll get sued.”
Later on he would add, “we’ll try to get it delayed,” but considering the history of negotiations with the administration over health care and the government shutdown, few believe such an effort would be successful. After the lunch, some felt Ryan’s estimation of 75% was way too high and placed for dramatic impact.
At any rate, the issue Ryan had with the QM is that it offers a standardization of credit, locking his state’s smaller lenders into a box.
Ryan is a moron. He opposes the “standardization of credit” when standardized mortgages would have prevented the financial crisis. It’s not even a debatable point.
If the government insisted on a one-size-fits-all mortgage, then all the ARMs, piggybacks, subprimes, liar’s loans etc would vanish overnight and the only people who would get a mortgage would be the people who could put down 20%, with good credit scores and a job.
That’s the way it should be, too, but the chiseling bankers can’t make money playing by the rules because they need their cheater loans to cash in.
Okay, now it’s time for mellow ruse to pop up and start defending his friends the bankers.
Go on, Mellow. The floor is yours.
I apologize to everyone who tried to reach the site on a mobile device today. My soon-to-be-replaced IDX service provider has a mobile app they just updated that redirects everyone to their mobile site. I disabled the mobile app, so this shouldn’t be an ongoing problem.