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Mortgage Industry Faces Looming Concerns October 9, 2009

Posted by John Watch in News Feed.
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Heading into the 4th Quarter of this tumultuous economic year, the mortgage industry faces growing problems ahead. While news of Obama’s HAMP program reaching its 500,000 goal of helping homeowners faster than expected is promising, concerns on possible bailouts and underperforming programs continues to threaten the vision of recovery in the housing market. Mortgage Assistance Programs are needed to curtail these concerns before problems become “too big to fail.” We must always remember that Real estate is Cyclical Seasonal and Emotional.

Will the FHA Need a Taxpayer Bailout?

The question about a possible Federal Housing Administration bailout in the near future is the story circulating news desks today. F.H.A. commissioner David H. Stevens sought to dispel concerns about the mortgage giant’s looming problems.

“Absent any catastrophic home price decline, F.H.A. will not need to ask Congress and the American taxpayer for extraordinary assistance – we will not need a bailout,” Mr. Stevens said in a prepared testimony on Capitol Hill Thursday.

Providing lenders with protection against losses as the result of homeowners defaulting on their mortgage loans, the FHA now insures more than 25% of mortgages in the country, up from 3% in 2006. Critics argue that a future FHA bailout is almost inevitable, as the agency’s capital is dangerously close to dipping below the mandated level of 2%. Independent financial consultant Edward Pinto concurs,

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward said. He estimates that the agency faces losses of $70 billion on loans it has already made, short of its current reserves by $40 billion.

Fed Preparing for Commercial Real Estate Mortgage Crisis?

An unpublished Federal Reserve Report leaked in a recent Wall Street Journal article reporting rising defaults in the commercial real estate sector. The unpublished report concludes that U.S. banks are slow to take losses on their commercial real estate loans. Specific servicers reported having only 11 cents in reserves for every $1 in bad loans in the second quarter. 

The NuWire Investor had this to say; “I don’t know what’s worse, the banks skimping on reserves and holding off on reporting losses in hope of revival or the Fed for knowing about the problem and trying to keep it a secret. Someone at the Fed must feel the same way because the report somehow found its way to the media.”

TARP Oversight Group Says Treasury Mortgage Plan Not Effective

The TARP group indicates that the government needs to increase its efforts to help struggling homeowners in this article. There is doubt that the $50 billion loan-modification program will provide the necessary relief to all homeowners it intended at the start of the program. With rising factors of unemployment, and decreasing property values the task becomes more daunting.

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The $8,000 Tax Credit for New Home Buyers: Good or Bad? July 21, 2009

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The $8,000 tax credit for new home buyers; good or bad?

An article from biggerpockets.com “A Government Program That Works?” discusses the $8,000 first-time homeowner’s tax credit and the effect it has had on the housing market.

“The idea of the tax credit was to provide an incentive to buy a home which would, in turn, stimulate the housing industry and the economy as a whole.”

 “This [November 30] deadline has created a rush by builders to have homes completed in time for buyers to qualify for the incentive. The most recent housing numbers bear this out. New home construction in June reached its highest level in seven months. Granted these numbers are still way below the peak of recent years, but it is still moving in the right direction.”

 Public records show that $8,000 tax credit has injected a quick jolt into the housing market, permitting new buyers an additional source of funds to acquire a home.  Although generating revenue is vital to economic recovery, additional building onto the housing market’s frail foundation could send us backwards.  

  •  A report by AccuriZ.com entitled ‘Housing in Crisis,’ presents some key factors that attributed to housing boom and its subsequent bust:
  •  Increased home construction since 2000, especially in the key states (FL, NV, AZ, CA, GA) resulting in over 4 million new housing units without any demand.
  • Increase in house sizes from 1,700 square feet to 2,200 square feet from 1996 to 2006. Property value growth was in large part of result of this (30% over value growth), yet the homeowner only saw property values growing at 10% to 20% per year and thought we better buy now.

As time progresses and more property data is available, it will be interesting to see what emerges from the government’s efforts (including the tax credit).   So far, the patterns arising are similar to the key factors of the housing crisis mentioned in the AccuriZ report:

  • Housing starts are stabilizing, but excess supply will hold development in check for several years.
  • Mortgage rates continue to be historically low, permitting new home buyers to lock into fixed rates, not adjustable rate products. (Article)

Here’s an excerpt from a nytimes.com article on housing starts:

Some analysts said low mortgage rates during the spring and federal tax credits for homebuyers played a role in fueling the demand for new housing.

 “New home buyers have been helped into the market,” said Celia Chen, a housing economist at Moody’s Economy.com. “I think they’re building in advance of when that tax credit expires.”

Yet the horizon is still dark, “..adding to the housing difficulties, builders, especially of condominiums and apartments, are continuing to struggle to find financing.”

 The government is proactive in restoring confidence to consumers, but the housing crisis will take months to stabilize and years to recover with the total absorption of existing housing units not expected for another two to three years.

 Another solution can be assistance in the Foreclosure process as reported by Kathy Tyson of Banks.com  “A Viable Homeowner Bailout”.  ……

• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

He added,

This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.

“I can see how this will help homeowners today.  I think of my friend and her family who’ve been unemployed for a year now and know they could easily come up with a house payment of $500 instead of the $900 they are paying now.  If they had two years of help (capped at $50,000 as suggested in the post), they’d be that far ahead still on their own home and could start paying back when they get back on their feet – the seven year delay to start paying back is genius.”

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Foreclosure Plan Presented for Discussion July 15, 2009

Posted by John Watch in AccuriZ News.
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4 comments
FDR signs H.R. 1946, the lend-lease bill to give aid to Britain and China

President Franklin D. Roosevelt signs H.R. 1946, the lend-lease bill to give aid to Britain and China.

If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future?? Here is an example of how it could work.

• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

What the government has done is to provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.

This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.

A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.

There needs to be conditions such as confirming gross income via income tax statements; confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%).

  • This total assistance would be capped at $50,000 and could run for 24 to 36 months
  •  In a given year up to $25,000 could be provided.
  • The government would be releasing the funds over 12 months, thus the federal outlay would be limited.
  • The total cost of $10 million loans receiving assistance would be $250 billion per year or $500 billion in total.
  • This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.

The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost due to desperate situations.

Yes it is possible and yes it can work.

The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices, everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.

As stated earlier, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try.

We only fail if we do not try.

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