Invasion of the House Snatchers

"Invasion of the House Snatchers" is the latest in Rolling Stone

http://www.rollingstone.com/politics/news/17390/232611

Here are two quotes, "the borrower-lender relationship can only go one of two ways: full payment or total war." And "Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them.... Bank of America...is required by law to buy back every faulty loan."

Drop the rates, fewer foreclosures. Better for the bank. Better for the borrower.

True interest rates and default rates

From Minyanville:

"Default rates estimate the probability of getting your money back; interest rates how much you get paid for taking that risk. Banks and dealers made gobs of loans valuing them way too high because they under-estimated default rates and over-estimated the interest rates they'd receive (the bank gave full value to the paper assuming the borrower would successfully be able to pay higher rates when the lower teaser rate converted to a higher fixed rate).

"So all this paper was carried on the books at a high price: The banks showed profits by marking up the value of the paper.

"That brings us to our paradox. Now we know that those variables were fallacious: higher default rates and lower interest rate assumptions are forcing those banks to write-down the value of those loans. … If banks assume higher interest rates so they get more cash over the life of the loan, they must then assume higher default rates for those go up when interest rates, the cost of a loan, goes up."

http://www.minyanville.com/businessmarkets/articles/todd-harrison-midterm-elections-quantitative-easing/11/2/2010/id/30895

And, if interest rates on a given loan goes down, the default rate goes down. The rate which the bank makes, net of defaults, improves. Just lower the mortgage rate on exisiting loans!

Appraisals prevent refinance

1. Think about it. You are an appraiser. All the appraisals you did for the last 3 years are "wrong." And every media outlet claims you made a mistake by "over-valuing" houses. They question your integrity. What do you do today to compensate? .... Undervalue. So current owners can not refinance their own home and get a lower interest rate. Does this mean appraisers are now operating with more integrity now than in the past? Or less?

2. It gets worse. One method of appraising is "Capitalizing" the expected cash return. This is not normally applied to houses, since houses don't have an "income stream." (Or do they? Isn't a mortgage payment a negative income stream?) The "cap rate" is normally related to the interest rate on a loan. The appraisal process incorporates sophisticated arguments, but basically just divides the income stream by the "cap rate." Apply that approach to the 7%, 30 year, $100,000 house loan. The monthly payment is $661.44. Cap that at 7% and the "value" is $113,000. ($100k/7% x 12).
Now cap it at the current mortgage rate of 4.5% and the "value" is $175,000. The lower the interest rate, the higher the value of the home.

Of course it makes intuitive sense. The lower the monthly payment, the more likely the borrower can make the payment, the more secure the loan. Lower the interest rates!

3. "The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can't grow." -LA Times. What if these underwater borrowers lived on Cove Street and just got the lower rate but did not lower their monthly payment? Assume they are currently 75% underwater. With their current 7% interest rate, they would take over 14 years to reduce the principle to 75% of their original balance. After 14 years, their home is now worth the amount of the mortgage. After 14 years, they can trade up.
However, if rates were dropped to 4.5% and they kept making the old monthly payment, it would take less than half that time. And, if houses stop depreciating, (which they will if rates are dropped), and modestly appreciated (which they will if rates are dropped), then that 6 years compresses to less than 5. They can trade up in less than half the time. Drop the interest rates!

Millions of homeowners keep paying on underwater mortgages

But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It's not that these homeowners will stop making their payments. It's just the opposite — that they will keep doing it.

How could that be a source of future trouble? Because, with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending — a drag on family finances, the housing market and the overall economy.

http://www.latimes.com/business/la-fi-economy-mortgages-20101101,0,722187,full.story

Just drop the rates, without the hazing of refinancing.

Foreclosure

The Wall Street Journal reports that foreclosure is a stealth stimulus

"Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department. That's 0.25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.

"It's hard to know how much of that money will find its way into the economy through consumer spending. Some defaulters sock away their mortgage payments, in hopes that they'll strike a modification agreement with their bank and get current again."

Why not just stop the clock on fees and drop the rates for those in and out of foreclosure?

Whitehouse Brings Together Experts and Local Homeowners to Discuss Foreclosure Crisis

Senator Chairs Official Senate Judiciary Subcommittee Hearing at Rhode Island Housing
October 28, 2010

Providence, RI – U.S. Senator Sheldon Whitehouse (D-RI) today brought together a panel of local experts and homeowners to discuss the impact of the foreclosure crisis on Rhode Island families and to examine whether bankruptcy court mediation programs can help to keep families in their homes. The participants joined Whitehouse at Rhode Island Housing in Providence for an official field hearing of the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts, which Whitehouse chairs.

http://whitehouse.senate.gov/newsroom/press/release/?id=2628A837-FF08-4FF1-B3A8-0C2185850808

Senator, just drop the rates!

Quest for a foreclosure fix

The 10/18/2010 Christian Science Monitor's article, "Quest for a foreclosure fix," listed three options.

"1. Create an all-out refinancing effort.

One approach, advocated by economists Glenn Hubbard and chris Mayer, would be to offer a simple refinance for most US borrowers at today's ultralow mortgage rate (just over 4 percent). ...Under this approach, the low fixed rate would be available to anyone with a loan backed by Fannie Mae, Freddi Mac, or the Federal Housing Administration.
The result would put cash in the pockets of millions of borrowers--quickly and for years to come. That could boost consumer spending and reduce the likelihood of default."

We wrote Chris and said, "skip the refinance, just drop the rate." He wrote back, "Thanks for your note. Unfortunately, Fannie and Freddie have to do a formal refinance in order to reduce payments. I am hopeful we will see some progress."

Thank you for writing back. We can put a man on the moon, but we can't just drop the mortgage rate without the childish hazing called refinance.

Over 30% of the homes in California and over 20% of the homes in Georgia are underwater. The banks get bailed out, but they continue to lean on the home owner (with the regulators cheering them on). At some point borrowers are going to get a bit churlish. Just drop the rates! The time is now. The action is simple.

Foreclosure costs

This is the 10/23/2010 Wall Street Journal. Couldn't some of these foreclosures and related costs have been avoided if the lender had just reduced the interest rate?

"Other ways the foreclosure crisis could sting homeowners"

The foreclosure mess could hurt homeowners in another way: The costs of buying a home and paying off the mortgage are likely to go up, say housing experts.

The rising costs will come both during the closing and throughout the life of the loan.

At the closing, the cost of title insurance, which protects a property buyer from claims of ownership made by other people, is likely to rise, industry officials say. Title insurance is one of those annoying costs that can sneak up on a buyer during a close; premiums average around $2,000 across states, says Tim Dwyer, CEO of insurer Entitle Direct Group.

The foreclosure mess has sent insurers scrambling. One of the largest, Old Republic Title Insurance, told its agents on Oct. 1 not to issue policies on homes that have been foreclosed by GMAC Mortgage or J.P. Morgan Chase. And on Wednesday, the nation's largest title insurer, Fidelity National Financial, said lenders must vouch for the accuracy of their paperwork before it will insure properties.

Just like homeowners-insurance rates rise after a hurricane, the rates for title insurance are expected to rise, to compensate for the added risk.

The turmoil will likely lead to pricey premiums for new homeowners, says McLean, Va.-based housing economist Tom Lawler. Adds Cameron Finlay, chief economist at mortgage lender LendingTree.com: "Any time there is uncertainty in the market or risk implied, it follows that costs go up."

Other costs could be felt during the life of the loan. Until the current mess, servicing loans was a low-margin, high-volume business. Servicers collect mortgage payments from borrowers and send them off to mortgage holders, and if the loan gets into trouble, they manage the foreclosure. Few doubt this process will get costlier now that it is under scrutiny from regulators and the courts. That higher cost likely will show up in higher interest rates for borrowers.

Both of these higher costs also would hit homeowners who refinance their loans.

How much the costs of buying a home will rise is unknown. Mortgage industry officials say it is too soon to tell. And no one believes the costs will significantly change the price of a home. But with the housing market still weak, the uncertainty is making the prospect of buying—or selling—a home that much dicier.

I Can Afford My Home With the Right Loan

This is from the Wall Street Journal.

http://online.wsj.com/article/SB10001424052748703369704575461920484221104.html#articleTabs%3Dcomments%26commentId=1536726?mod=djemcomnewtrackedcomment

Your editorial "The Housing Mirage" (Aug. 25) reflects a common misconception held by many outside the housing meltdown ground zero regions. You categorize the troubled borrowers as people unable to become "reliable" simply through modifying their home loans, and that efforts focused on keeping people in "homes they can't afford" should be abandoned.

I am one of those "troubled borrowers." My problem is not that I can't afford my home, but that I can't afford my existing 15-year mortgage. I need a 30-year mortgage, but I'm unable to refinance because of my home's decline in value. I could easily afford to buy my home at today's value with a 30-year mortgage at today's interest rates. And the miserable irony is that the next owner of my house, after the foreclosure sale, will receive exactly that deal.

Clearly, the maximum misery of the housing meltdown is concentrated in certain regions of our country, in much the same way natural disasters don't affect everyone. Victims of localized disasters are usually deemed worthy of collective help since, after all, it could have been your state or your zip code where housing values have fallen 50%.

I've been turned down for HAMP modification and see no way of keeping my home.