Posts tagged ‘Mortgages’

05/18/2012

Underwater Mortgages: Need “Demand”

When the housing market crashed in 2008, somewhere between 25% and 53% of all homeowners in America, (depending on their geographic region), realized their homes were “underwater,” because they suddenly owed more to the banks on their mortgage balances, than their properties were worth.

The crash was in part caused by “adjustable rate mortgages” that increased to unsustainable levels, causing so many homeowners to default, they triggered a foreclosure crisis. Since the problem was blamed on “easy credit,” tighter rules were implemented, forcing lenders to accept only very creditworthy borrowers, who could start their mortgage schedules with much higher down payments.

As a consequence of resetting the deck, people who were formerly qualified to buy, could no longer do so. The led to a reduction in housing “demand,” at a time when the “supply” on the market was greater than ever, due to all the foreclosures. So we ended up with more houses for sale, but far fewer potential buyers.

In the years to come, underwater homeowners will not get back into the black, until the value of housing market increases to pre-crash levels. The value of homes will not rise, until the quantity of buyers becomes greater than the number of sellers. It is basic economics: “price” rises when “demand” exceeds “supply.”

Since the “supply” of available housing is fixed and finite, the variable that needs adjustment is “demand.” The government needs to trigger more “demand” to bring about a rising tide as to all home values. Today, there are millions who would love to own a home, and could make their monthly payments, but they lack a sufficient down payment, and do not qualify under the new rules.

While stimulating the building of new homes may put people back to work in the construction industry, it does nothing to lessen the oversupply of already existing homes, or to increase the existing weak demand for them.

Gov. Romney said slowing down the foreclosure process, buying up troubled homes, or giving thousands of dollars towards the purchase of a new home, won’t solve the problem. He predicted home prices won’t return, until the market works. His answer is for the government to do nothing, and just hope pre-crash values return, after a decade or so of relatively sluggish sales.

Congressman Paul basically advocated full speed ahead with the foreclosure process, as he said housing debts must be liquidated, as they are only prolonging the agony. If the bad paper had been auctioned and sold, it would have been cleansed by now, he said. As to the bailouts, Paul lamented, if money was to be given out, it should have gone to those who lost mortgages, not the banks.

Putting more money in the hands of buyers is what is needed, so more people can accumulate the down payments they need. This is how the housing market will return. But this can only happen through higher earnings. As long as Romney proposes nothing to help Middle Class people earn more, the housing market will remain flat, and the homes now underwater, will simply remain that way for a long time to come.

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01/31/2012

Housing: What Are “Freddie” & “Fannie?”

FANNIE MAE: CREATED IN 1938 IN GREAT DEPRESSION: The U.S. government enacted the National Housing Act (NHA) in 1934, during the Great Depression, with a goal of making home mortgages more affordable. “Fannie Mae,” the Federal National Mortgage Association (FNMA), was formed under a 1938 amendment.

SECONDARY MORTGAGE MARKET INCREASED LOANS: As local banks had consumers sign Notes and Mortgages, they promptly turned around, and assigned their paperwork to Fannie Mae, in consideration for cash, so they could make even more loans, thereby increasing the level of home ownership. Fannie’s practice of buying mortgages from local lenders became known as the “secondary mortgage market.”

FANNIE WAS PRIVATIZED IN 1968: The Congress changed the nature of Fannie Mae in 1950 from a purely governmental agency, to a “mixed ownership corporation,” by allowing private investors to purchase their common stock. To completely remove Fannie Mae from the federal budget, it was converted in 1968 to a private corporation, with the authority to buy “private mortgages.”

“FREDDIE MAC” WAS FORMED IN 1970: Mortgages backed by government agencies, such as the FHA, VA, and FmHA, fell under the control of a new agency, known as Ginnie Mae, the Government National Mortgage Association. In 1970, it became part of the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as “Freddie Mac.”

MORTGAGES STARTED BEING SOLD AS SECURITIES: Private mortgages were sold and assigned to Fannie Mae, while government-backed paper was sent to Freddie Mac. Although Fannie no longer had a government guarantee, they still enjoyed a line of credit from the U.S. Treasury. Fannie and Freddie both started re-selling their mortgages as securities.

FANNIE ASSUMED GREATER RISK UNDER 1992 LAW: The Housing and Community Development Act of 1992, signed into law by President George H. W. Bush, was intended to make financing more affordable for low and moderate income people. While Freddie Mac maintained their traditional high standards, Fannie started taking risks in the sub-prime market in the 1990s.

EASY CREDIT FOR MORTGAGE LOANS: In the past, borrowers had to put up to 20% down and present tax returns and other documents that showed they were credit worthy. Lenders started bypassing traditional qualifying income documentation, and no longer insisted on down-payments.

VARIABLE INTEREST RATES DOOMED NOTES TO FAIL: Notes were drafted for short-term gain, by taking “interest only,” meaning borrowers would never pay off their mortgages. “Variable interest rates” were used instead of “fixed rates,” which allowed monthly payments to be increased at later dates to levels lenders knew, or should have known, borrowers could not afford.

FANNIE AND FREDDIE CONSUMED HALF OF MARKET: Fannie became the largest purchaser of risky mortgages sold by Countrywide Financial. Fannie and Freddie either owned or guaranteed about 5 trillion of debt.

MORTGAGE-BACKED SECURITIES TRADING GREW: Around 2003 and 2004, when evidence of a sub-prime mortgage crisis began to emerge, the market nevertheless continued trading in Mortgage-Backed Securities (MBS).

HIGHER INTEREST RATES LED TO FORECLOSURES: When higher amounts were charged under “adjustable rate mortgages,” borrowers with poor credit ratings, and no money down, simply walked away from properties in what became a foreclosure crisis.

FORECLOSURES CAUSED HOUSING PRICES TO DROP: Foreclosures and an excess housing supply, caused prices to drop, and they have remained down since then, because few now qualify for loans under traditional lending standards requiring down-payments, employment, and good credit ratings.

CONSERVATOR TOOK OVER FREDDIE & FANNIE: Freddie and Fannie were placed under a conservatorship by the Federal Housing Finance Agency in Sep. 2008. Their stocks, trading at less than $1 a share, dropped off the NYSE in 2010. The Federal Reserve has been granting low interest loans to Fannie and Freddie, which are estimated to ultimately cost the federal government between 224 and 360 billion.

08/25/2011

Low Interest Rates: Correct Fed Policy

The Board of Governors of the Federal Reserve correctly used Monetary Policy to try to turn the economy around, by keeping home mortgage interest rates at their lowest level in 40 years.

Congress created the Federal Reserve System with a Central Bank in 1913 to help prevent recessions and other economic downturns from turning into depressions. Since then, all National Banks have joined the system.

The Federal Reserve has the ability to set interest rates for loans to member banks. When the Fed sets low interest rates, members are able to make loans to the public at correspondingly low rates. The availability of cheap money theoretically allows the economy to expand, provided other factors line up correctly.

Low interest rates at the Fed also help the U.S. Government when short-term loans are needed. Since interest on these loans is later turned over to the U.S. Treasury, the Fed basically provides interest-free money to the government. The principal sums borrowed from the Fed are repaid by the government with money raised from publically sold Treasury Bonds. Interest on the bonds is paid by the U.S. Treasury, until the bondholders are satisfied.

The decision by the Fed to keep interest rates low helps the federal government in terms of the annual deficit and national debt, regional banks in allowing them to offer cheap money, and the public, by enabling them to borrow at relatively low rates.

If the Fed now raised interest rates, while the national economy is still struggling to get out of a deep recession, one consequence would be a contraction, and a worsening of the economic crisis. If the Fed imposed higher interest rates, they certainly would not help, and would likely make the housing crisis worse.

Currently, factors other than interest rates are keeping the housing market from expanding. The Fed should continue to keep interest rates low, until measurable improvements are seen in the housing industry, which unfortunately may take the better part of a decade, no matter who occupies the White House or the Congress.

06/09/2011

Foreclosures Should Be Simple

A headline in the St. Petersburg Times asked: “What should foreclosure help cost?” While most foreclosure cases are simple and routine and should not cost very much, it is impossible to categorically determine the amount of attorney’s fees in every case, since some present unique issues that require more work than others. What can be said is the first hour or so of advice in nearly all cases is perhaps the most useful and worthwhile.

Defendants in foreclosures need some legal advice, so they can understand the process and intelligently decide what to do next. At a minimum, they should understand they gave the lender a note and mortgage, in consideration for a loan. A note is a contract in which they agreed to repay the lender, and a mortgage is an instrument that created a lien to secure the amounts due.

If a borrower fails to pay as agreed, they are deemed in default and the lender proceeds with a foreclosure. The case starts with a complaint, which alleges a breach of the note. A summons is also served with the complaint, commanding an answer.

In the vast majority of cases, the defendant does not bother to file an answer, because there is nothing to deny, and the bank takes a default judgment. If the defendant files an answer, denying some or all of the allegations, the case slows down, but not by much.

In most foreclosure cases, there is generally no need for a trial, because the facts are truly not in dispute. The bank seeks what is known as a Summary Judgment. Without a factual dispute, the court simply decides which side is correct, based on the law of the case. For example, a banker may swear in an affidavit $100,000 was loaned and the borrower failed to make payments as agreed. If the defendant files no counter-affidavit, because the banker is correct, there is no factual dispute, and no reason for a trial. The court simply enters a Summary Judgment for the bank.

In the Judgment of Foreclosure, the court sets a period of redemption, and orders the land sold, if the defendant fails to redeem by paying the entire judgment plus costs, within the time allotted. At a sheriff’s sale, the bank bids what they are owed. If someone outbids the bank, the bank is paid from the proceeds. If no one outbids them, the bank receives a sheriff’s deed. The sale process must then be confirmed by the court.

Many banks are now slow to complete the foreclosure process, because they do not wish to end up owning real estate they cannot resell. They do not want to be stuck owing real estate taxes, insurance, dues, upkeep, and other expenses on the property. Judges should force the banks to complete their foreclosure cases, or suffer a dismissal with prejudice, for a want of prosecution. The country needs to move all of the foreclosed properties through the system, so the nation can get on with a recovery in the housing market.