Tag Archive for 'foreclosure'

Rick Santelli hits a nerve and people are lining up for their bailout

In case you haven’t seen it here’s the Chicago Tea Party video by Rick Santelli.

I live in a pretty wealthy area full of nice houses where the median price is around $1M, which to date has been pretty insulated from the housing price downturn.

So it was more than a little surprising to hear that some people in our area are lining up to get a bailout on their loans – some of which are Negative Amortization  Interest Only loans.  Whether or not they’ll be successful is questionable since the Refinance option is only for Fannie and Freddie owned conforming mortgages – however the Loan Modification component looks like it may help anyone.  We have heard stories of people in this area getting their Jumbo(> $729K loans) written down to 3-4% for 30 years and in some cases principle reductions.  Here’s the executive summary for the Homeowner Affordability and Stability Plan.

Most Americans are current on their mortgages and are paying their debts – many of them have taken big hits to their retirement savings account and other investments.   I understand the idea that you want to prevent the blight of foreclosed houses in areas where there are no buyers.  However in towns like ours and many others that are attractive to people – there are plenty of buyers out there – many of whom have been renting due to the recent housing bubble.  By subsidizing people who bought houses they can’t afford – we are perpetuating artificially high housing prices and rewarding poor decision making and supporting the heads I win / tails you lose philosophy that promulgated excessive risk taking by Wall Street and Sub Prime borrowers.  It’s the same problem – people saw no downside and if we use tax payer dollars to pay down million dollar mortgages – we are just continuing the problem.

If we allow markets to hit and clear at their natural prices – then we’ll create sustainable communities and healthy markets.  If we do otherwise we create all kinds of incentive problems and turn everyone into a welfare seeker that is focused on how to get their bailout vs.  how to contribute constructively to society.  Some people may “lose” their homes (which in many cases they don’t have equity in), but people need somewhere to live so investors will buy the houses and then rent them back out for a profit, which brings private capital back into the markets – so people shouldn’t be homeless they just won’t “own” taxpayer subsidized houses.

What do you think?

Reverse Mortgages: Will they help some seniors avoid foreclosure? Perhaps

As I’m sure you’re aware there is a rising tide of foreclosures that is threatening up to 2 Million households. This is affecting all age groups and unfortunately it doesn’t look like the Hope Now plan to freeze some mortgage rates will bail out many people. However, some housing advocates and legal-aid attorneys are suggesting a new alternative for senior households: taking out a reverse mortgage and using the proceeds to settle current distressed mortgages.

Reverse mortgages are mortgages whereby the payment streams of traditional mortgages are reversed. Instead of the bank lending you a sum of money to finance a new house and you paying the loan back over time (a forward mortgage), a reverse mortgage is structured such that the bank either makes monthly payments to you, gives you a lump sum or issues you a line of credit (all based on your home equity) and the loan is repaid with interest when you either sell your home or die. The big difference with a reverse mortgage is that it is a non-recourse loan – the amount due on the loan can never exceed the value of your house (which is good for the borrower). The lending bank takes the risk that the loan amount won’t grow faster than the equity in your home.

The major drawback of a reverse mortgage is that you will lose some or all of the equity you have built up in your home when you move or pass away. But if you are struggling to make high interest payments and face foreclosure, taking out a reverse mortgage may be an option to prevent the loss of your house. The major qualification for a reverse mortgage is that you have built up enough equity in your home and that you and your spouse are both 62 years old – there are no credit or income requirements.

It used to be difficult to find lenders willing to issue reverse mortgages and buy products other than the plain vanilla government-backed HECM (Home Equity Conversion Mortgage), especially at reasonable costs. Now, more than a dozen large banks and mortgage lenders, the largest issuers being Wells Fargo and Financial Freedom, offer a variety of reverse mortgage products, and there are thousands of smaller lenders throughout the nation. Costs have gone down – although they are still high, with fees typically more than 5% of the home value – and some issuers have reduced the minimum age requirement to take out a reverse mortgage to below 62. It has also given people more flexibility. For example, government-backed mortgages are subject to government rules, one of which prevents homeowners from cashing out above a certain limit (borrowing limits are capped based on where the homeowner lives). But private lenders who have stepped into the reverse mortgage business, such as Banc of America Corp., allow homeowners to borrow more than the limit on HECMs.

As competition in the market increases – expect to see lower fees and more innovation in the reverse mortgage market. Large lenders have become interested in creating a secondary market for securities backed by reverse mortgages; they have started to buy these products and plan to securitize them and sell them to investors on Wall Street. This means more available credit for reverse mortgages, which will decrease the costs of these products.

But more choices, especially with the increased availability of proprietary products offered by private lenders, result in more homework for the consumer. It is essential that distressed homeowners who are looking to purchase a reverse mortgage investigate the options available. It is important for the client not to blindly follow a salesperson’s recommendations, and that appropriate and challenging questions are asked to ensure suitability. Don’t fall into the trap of predatory lenders; this is hopefully one of the lessons learned from the subprime mortgage crisis.

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