With home values falling and a rough economy denting people's wallets, it doesn't take much for a homeowner to get underwater on a mortgage, owing more on the loan than the home is worth. Toss in a personal dilemma or two and the situation can become even more bleak.During the year's second quarter (the most recent data available), one in seven homeowners, regardless of when they bought, had negative equity in their homes, according to Zillow.com. The statistics were worse for people who bought their homes during the market's peak in 2006; 45 percent of those homeowners were upside down.
Kenneth Baldwin is one of those statistics, and it took him months to decide that it was better to walk away from his home with his dignity and credit-worthiness relatively intact than to continue struggling to keep it.In July 2006, with a good credit history but no down payment to make, the then-42-year-old bought a $236,500 three-bedroom, bi-level home in Lake in the Hills for himself and his fiancé. He received an interest-only 80/20 loan. An 80/20 loan is typically two loans—a primary loan for 80 percent of the value of your home, and a secondary loan, sometimes called a piggybank loan, in lieu of a down payment that covers the remaining 20 percent at a much higher interest rate than the first.Then his relationship soured and the terms of the loan reset. Instead of a $1,800 monthly payment covered by two incomes, Baldwin had to fund a monthly payment of $2,200 by himself. He tried to make it work, and found himself stressed when he couldn't make a payment.By the spring, he'd had enough of the stress and decided to sell his home, with his lender's permission, for less than the amount he owed on it in a short sale.
Delinquent borrowers whose homes are listed for sale at a discount and carry the "lender approval required" caveat. Despite what can be a time-consuming approval process, the transactions have become an increasingly popular option.
In May, Baldwin's lender, IndyMac Bank, agreed to let him sell his house for $214,000, forgiving $49,659.60 of the loan. The transaction still will dent his credit record but nowhere to the extent it would have, had he let the house lapse into foreclosure. After the closing, Baldwin received a $5,000 check as a sort of "thank-you" from the lender.
courtesy of Chicago Tribune 10/17/08
Thursday
No Quick Fix for Housing Prices
The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.
The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.
At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. "If the financial system doesn't get working again, then the economic downturn is going to be much worse, and that means the housing market will be a lot worse than it otherwise would be," says Frederic Mishkin, a Columbia University economist who stepped down as a Federal Reserve Board governor in August.
But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein. He proposes that the federal government offer low-interest loans to replace 20% of homeowners' mortgages.
The government's latest intervention comes as mortgage delinquencies continue to climb and home prices are plummeting in many markets. Some 5% of mortgages were at least 30 days past due at the end of the third quarter, according to Equifax and Moody's Economy.com, up from 4.6% in the second quarter and 3.5% a year earlier. In Florida and Nevada, delinquency rates now top 8%.
Nationwide, house prices have fallen 18% from their peak in the first quarter of 2006, according to Case Shiller. By another measure, from the National Association of Realtors, home prices are off 12% from their peak. They are expected to fall an additional 10% to 15% between now and mid-2009, says Mark Zandi, chief economist at Moody's Economy.com.
Falling prices are feeding a vicious cycle that leads to more mortgage delinquencies and foreclosures. As more Americans end up "under water," or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
The rescue effort could buy the government some time to get other measures up and running -- and to see whether they will help stabilize home prices. Some analysts say one government initiative that appears to be bearing fruit is the increase in loan limits of mortgages backed by the Federal Housing Administration -- to as high as $729,000 in some cities. In September, FHA mortgages financed 28% of home purchases, up from 19% in August, according to Zelman & Associates, a housing research firm, and the number of buyers seeking government-backed mortgages more than doubled from last year, as houses have become affordable again....more
The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.
At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. "If the financial system doesn't get working again, then the economic downturn is going to be much worse, and that means the housing market will be a lot worse than it otherwise would be," says Frederic Mishkin, a Columbia University economist who stepped down as a Federal Reserve Board governor in August.
But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein. He proposes that the federal government offer low-interest loans to replace 20% of homeowners' mortgages.
The government's latest intervention comes as mortgage delinquencies continue to climb and home prices are plummeting in many markets. Some 5% of mortgages were at least 30 days past due at the end of the third quarter, according to Equifax and Moody's Economy.com, up from 4.6% in the second quarter and 3.5% a year earlier. In Florida and Nevada, delinquency rates now top 8%.
Nationwide, house prices have fallen 18% from their peak in the first quarter of 2006, according to Case Shiller. By another measure, from the National Association of Realtors, home prices are off 12% from their peak. They are expected to fall an additional 10% to 15% between now and mid-2009, says Mark Zandi, chief economist at Moody's Economy.com.
Falling prices are feeding a vicious cycle that leads to more mortgage delinquencies and foreclosures. As more Americans end up "under water," or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
The rescue effort could buy the government some time to get other measures up and running -- and to see whether they will help stabilize home prices. Some analysts say one government initiative that appears to be bearing fruit is the increase in loan limits of mortgages backed by the Federal Housing Administration -- to as high as $729,000 in some cities. In September, FHA mortgages financed 28% of home purchases, up from 19% in August, according to Zelman & Associates, a housing research firm, and the number of buyers seeking government-backed mortgages more than doubled from last year, as houses have become affordable again....more
Tumultuous Times...Credit Crisis Information & Summary...
Summary
The Emergency Economic Stabilization Act of 2008 was signed by President Bush into law on October 3. NAR closely monitored the Federal Government response to the credit crisis, and our Washington D.C. Policy staff worked with regulatory agencies and elected officials on Capitol Hill to assure a robust secondary mortgage market. Liquidity in the mortgage market is essential to the health of the economy.
The Bill Will Help Homeowners and Borrowers
The Senate legislation responded to the criticisms that lenders have been slow and/or unwilling to work with homeowners and borrowers. It encouraged negotiation in short sales and consumer efforts to refinance or reconfigure existing mortgages: When the Treasury (or other federal agency that holds mortgages) acquires troubled existing mortgages from financial institutions, agencies are required to work with lenders and mortgage servicers to find ways to avoid foreclosures. All federal agencies are required to work with servicers to facilitate loan modifications that will consider the net present value of the mortgage. Similar refinancing and foreclosure prevention requirements apply to mortgages involving owners of multi-family properties and owners of commercial properties. Policy goal is to assure that tenants don’t lose their residence or their place of business when an owner has problems with the mortgage. Changes to existing mortgages can include (but are not limited to) revisions in principal, interest rate and period for repayment.
The Bill Will Get Money into the Financial System Quickly
The credit markets are nearly frozen. Lenders can’t lend because they are receiving no payments on existing loans. The legislation allowed the government to buy troubled loans and mortgage securities. The funds that the institutions received when the government purchased the existing portfolios were to be available to issue new mortgages with more carefully specified and monitored lending standards. Provisions include:
Create a Troubled Asset Relief Program (TARP) to purchase and guarantee the troubled assets from the financial institutions that hold mortgages and/or mortgage-backed securities.
A new Office of Financial Stability within the Treasury to operate TARP, with input from the Federal Reserve, Federal Deposit Insurance Corp (FDIC – the agency that works with failed and failing financial institutions to insure and protect consumers), the Comptroller of the Currency (bank regulator), Office of Thrift Supervision (regulator of former savings and loan companies) and the Secretary of Housing and Urban Development.
Don’t give out all the money at one time. First release of funds to purchase troubled assets will be $250 Billion. Second release of up to $100 Billion must be authorized by the President. Final $350 Billion can be issued only on Congressional approval. Congress given 15 days to act.
courtesy of IAR
The Emergency Economic Stabilization Act of 2008 was signed by President Bush into law on October 3. NAR closely monitored the Federal Government response to the credit crisis, and our Washington D.C. Policy staff worked with regulatory agencies and elected officials on Capitol Hill to assure a robust secondary mortgage market. Liquidity in the mortgage market is essential to the health of the economy.
The Bill Will Help Homeowners and Borrowers
The Senate legislation responded to the criticisms that lenders have been slow and/or unwilling to work with homeowners and borrowers. It encouraged negotiation in short sales and consumer efforts to refinance or reconfigure existing mortgages: When the Treasury (or other federal agency that holds mortgages) acquires troubled existing mortgages from financial institutions, agencies are required to work with lenders and mortgage servicers to find ways to avoid foreclosures. All federal agencies are required to work with servicers to facilitate loan modifications that will consider the net present value of the mortgage. Similar refinancing and foreclosure prevention requirements apply to mortgages involving owners of multi-family properties and owners of commercial properties. Policy goal is to assure that tenants don’t lose their residence or their place of business when an owner has problems with the mortgage. Changes to existing mortgages can include (but are not limited to) revisions in principal, interest rate and period for repayment.
The Bill Will Get Money into the Financial System Quickly
The credit markets are nearly frozen. Lenders can’t lend because they are receiving no payments on existing loans. The legislation allowed the government to buy troubled loans and mortgage securities. The funds that the institutions received when the government purchased the existing portfolios were to be available to issue new mortgages with more carefully specified and monitored lending standards. Provisions include:
Create a Troubled Asset Relief Program (TARP) to purchase and guarantee the troubled assets from the financial institutions that hold mortgages and/or mortgage-backed securities.
A new Office of Financial Stability within the Treasury to operate TARP, with input from the Federal Reserve, Federal Deposit Insurance Corp (FDIC – the agency that works with failed and failing financial institutions to insure and protect consumers), the Comptroller of the Currency (bank regulator), Office of Thrift Supervision (regulator of former savings and loan companies) and the Secretary of Housing and Urban Development.
Don’t give out all the money at one time. First release of funds to purchase troubled assets will be $250 Billion. Second release of up to $100 Billion must be authorized by the President. Final $350 Billion can be issued only on Congressional approval. Congress given 15 days to act.
courtesy of IAR
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