Ask your favorite politician "Why do we need a bailout?".
The answer we are getting is that there are too many foreclosures.
Oh, so you mean banks are using the Mortgage Insurance Premium known as PMI (Private Mortgage Insurance) that they charge to anyone that has a mortgage balance of more than 80% of the home value, to offset their loss, and have run out of money?
The dirty little secret of PMI is that the premium that homeowners pay, does not go to an insurance company, it goes directly to the bank. Effectively increasing the banks profit margin without making the bank disclose a higher "interest rate".
PMI is what was SUPPOSED to make it so we would not need to bailout a bank.
Sunday, September 28, 2008
Chuck's commentary on Bailout equity effect.
If you thought the last post was too long, here's my summary. The bailout will create a downward equity spiral like the water leaving your toilet.
The commentary at the end of the presentation was not conclusive or convincing.
Here's the basics from the homeowner's point of view.
Let's look at "Whiskey Pete (obviously name has been changed to protect the innocent)" in Las Vegas, NV.
Pete bought a home at the top of the housing market 2.5 years ago for $350k
After the majority of homes in his neighborhood have been foreclosed on, and the 80/20 mortgage has had the 20% second thrown out the window, homes are now selling for $130k.
Pete has not walked away from his home, but now looks at an equity hole of $220k.
The bailout allows Pete to refinance at 85% of his new appraisal.
If the appraisal is honest ($130k) and not artificially deflated (like the artificially inflated appraisal he received when he purchased the home) Pete can now refinance with a balance of $110k (130 X .85).
Wow! Pete has been saved by the government bailout!
Or has He?
The forgiveness of a debt is a TAXABLE EVENT just like income.
Yes, come tax time, Pete will need to pay taxes on his debt forgiveness of $240k. This amount of "paper income" will probably change his tax bracket as well. So Pete will need to find between 15-50% ($36k-$120k) just to satisfy his tax obligation on his "bailout"
UNLESS......
Pete can find a LOSS to offset his debt forgiveness. (like the sale of his home at the new lower value). So Pete Sells his home for $110k, tax liability taken care of.
Now the homes in his neighborhood that the banks are trying to sell at $130k will lose value, because the newest comparable sale is $110k driving all of their values down so the next bailout refi and sale is at $93k (85% of 110k).
Keep in mind, this is IF everyone in the process is HONEST and doesn't intentionally seek a undervalued appraisal.
The commentary at the end of the presentation was not conclusive or convincing.
Here's the basics from the homeowner's point of view.
Let's look at "Whiskey Pete (obviously name has been changed to protect the innocent)" in Las Vegas, NV.
Pete bought a home at the top of the housing market 2.5 years ago for $350k
After the majority of homes in his neighborhood have been foreclosed on, and the 80/20 mortgage has had the 20% second thrown out the window, homes are now selling for $130k.
Pete has not walked away from his home, but now looks at an equity hole of $220k.
The bailout allows Pete to refinance at 85% of his new appraisal.
If the appraisal is honest ($130k) and not artificially deflated (like the artificially inflated appraisal he received when he purchased the home) Pete can now refinance with a balance of $110k (130 X .85).
Wow! Pete has been saved by the government bailout!
Or has He?
The forgiveness of a debt is a TAXABLE EVENT just like income.
Yes, come tax time, Pete will need to pay taxes on his debt forgiveness of $240k. This amount of "paper income" will probably change his tax bracket as well. So Pete will need to find between 15-50% ($36k-$120k) just to satisfy his tax obligation on his "bailout"
UNLESS......
Pete can find a LOSS to offset his debt forgiveness. (like the sale of his home at the new lower value). So Pete Sells his home for $110k, tax liability taken care of.
Now the homes in his neighborhood that the banks are trying to sell at $130k will lose value, because the newest comparable sale is $110k driving all of their values down so the next bailout refi and sale is at $93k (85% of 110k).
Keep in mind, this is IF everyone in the process is HONEST and doesn't intentionally seek a undervalued appraisal.
Saturday, September 27, 2008
Continuing Ed slideshow on bailout.
I'm not able to post the actual slideshow, so I'll cut and paste the text in this posting.
FHA changes make housing bill a 'mixed bag'
By Matt Carter
Created 07/30/2008
President Bush signed historic legislation today that props up mortgage financers Fannie Mae and Freddie Mac and authorizes a $300 billion expansion of Federal Housing Administration loan guarantee programs.
But the sweeping housing bill, HR 3221, inevitably has its critics -- including Housing Secretary Steve Preston, who's unhappy that Congress has placed a one-year moratorium on the use of "risk based" premium pricing for FHA loan guarantees.
Home builders are also bracing for the elimination of seller-funded down payment assistance with FHA-guaranteed loans beginning Oct. 1.
Others in the housing industry are lamenting that a $7,500 tax credit for first-time homebuyers that will expire July 1, 2009, must be repaid over 15 years -- making it, in effect, an interest free loan.
The National Association of Home Builders and other industry groups are nevertheless working to publicize the tax credit to consumers, with NAHB rolling out a dedicated Web site, FederalHousingTaxCredit.com.
“The tax credit is the best stimulative measure,” NAHB President Sandy Dunn said in a press realease. “It will increase housing demand, get home buyers back into the marketplace and fight falling home prices, which threaten the economy as a whole.”.
HUD Secretary Preston last week called HR 3221 "a mixed bag," because it places a moratorium on the use of risk-based pricing on FHA loan guarantees for one year. The moratorium begins Oct. 1, 2008 and ends Sept. 30, 2009.
Preston said FHA will now be required to increase prices on all customers “or eliminate its refinancing program for subprime borrowers at a time when they need it the most."
HUD just rolled out risk based pricing on July 14, saying it would allow FHA to operate more like other insurers, saving lower-risk borrowers money and averting the need for a taxpayer bailout of what has traditionally been a self-sustaining program.
Under the old pricing structure, all borrowers paid 1.5 percent of their loan balance up front, and 0.5 percent a year for FHA insurance, regardless of their credit standing. Under risk-based pricing, the upfront premium ranges from 1.25 percent to 2.25 percent. On a $150,000 mortgage, the difference between the old 1.5 percent upfront premium and the maximum 2.25 percent "risk based" premium is about $7 per month.
The Bush administration had pushed for risk-based pricing as part of a larger "FHA modernization" package that, in various proposals put forward by lawmakers in recent years, would also have reduced or eliminated FHA's 3 percent minimum down payment requirement.
Instead, Congress ended up raising minimum down payment requirements for FHA-backed loans to 3.5 percent.
Also, beginning in October, home buyers will no longer be able to rely on nonprofits that funnel money from homebuilders into seller-funded down payment assistance programs, as HR 3221 finalizes HUD's long quest to end the practice.
HUD claimed the practice artificially inflates home prices and triples the likelihood of default. HUD's attempts to end the practice through an administrative proceeding was thwarted by legal challenges filed by nonprofits that operate assistance programs.
Now that Congress and the Bush administration have agreed to ban the practice through legislation, that battle appears to be over, and home builders expect to see the pool of eligible buyers shrink.
According to HUD, seller-funded down-payment assistance was used on more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier.
Home builder Lennar Corp. relied on down-payment assistance for one in three mortgages it originated in the second quarter, the Wall Street Journal reported.
Housing research firm Zelman & Associates estimates that eliminating seller-funded down-payment assistance could reduce the homebuyer pool by 10 percent nationwide, and by up to 25 percent in lower-priced markets where they are used more often, the Journal said.
"It is certainly not in a builder’s interest to have a recently sold home to return to the market through foreclosure," NAHB said in a July 10 letter to Senate Banking Committee chairman Sen. Chris Dodd, D-Conn., and ranking member Sen. Richard Shelby, R-Ala. " That is why NAHB is committed to finding ways to continue seller-provided down-payment assistance in a manner that is in the best interest of home buyers, builders and the FHA."
Other key provisions of HR 3221 relating to FHA modernization include streamlined processing for FHA condos, reforms to the home equity conversion (reverse) mortgage program, and reforms to the FHA manufactured housing program, according to a summary by the National Association of Realtors.
A $300 billion expansion of FHA loan guarantee programs is intended to help troubled borrowers refinance into more affordable loans when their existing lenders agree to forgive part of their debt.
Lenders would effectively write down existing mortgages to 85 percent of their current appraised value, and borrowers would have to share gains with the FHA if they later sold at a profit.
The Congressional Budget Office has estimated the program might help 400,000 borrowers, and cost $680 million over 10 years. HR 3221 creates a new assessment on Fannie Mae and Freddie Mac that’s expected to cover those costs and also provide money for affordable housing.
The bill also creates a new independent regulator for Fannie Mae and Freddie Mac and authorizes the Treasury Department to buy the companies’ debt or stock.
The Congressional Budget Office estimates that there’s a better than even chance Fannie and Freddie won’t require government assistance, but that the cost to the government might be $25 billion if they do.
The bill allows Fannie and Freddie to purchase or guarantee loans of up to 115 percent of the local area median home price in high cost areas, up to $625,500. The conforming loan limit for normal markets remains $417,000
The bill increases the floor for FHA loans to a minimum of $271,050, and allows it to guarantee loans in high cost markets up to 115 percent of local area median home price, with a $625,500 cap.
The caps in high cost markets go into effect on Jan. 1, when the current, temporary cap of $729,750 for Fannie, Freddie and FHA expires.
William Brown, president of the California Association of Realtors, welcomed the extra leeway for Fannie and Freddie to buy mortgages above the old $417,000 conforming loan limit in high cost markets.
“Although we would have liked Congress to make permanent the (temporary) $729,750 loan limit, C.A.R. is pleased with the new permanent loan limit of $625,500,” Brown said.
“It will allow California homeowners to refinance their loans into safe affordable loan products and allow first-time home buyers to enter the market.”
Lou Barnes commentary on New Law
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com
The new housing assistance bill, dismissed here briefly last week, deserves a more thorough hatchet-job.
Its centerpiece is a $300-billion FHA loan guarantee (not money) to refinance underwater home "owners."
Consider a Bubble-Zone victim who bought a $200,000 home five years ago, made a 5 percent down payment and got a 5-year interest-only ARM for $190,000. The home has fallen 25 percent in value to $150,000.
The home has fallen 25 percent in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset.
Her rate is not bad, 5.5 percent even after adjustment.
However, her payment will jump from $871 to a killing $1,167.
To her rescue, the bill's
"Hope for Homeowners."
In the land of unfortunate acronyms, gotta call it HoHo.
HoHo provides for a write-down of the mortgage to 90 percent of current market value, to $135,000, plus a 3 percent refinance fee to the FHA, $139,000 total.
$150,000 X 90% = $135,000
+ $4,000 (3%) = $139,000
HoHo further provides a 1.5 percent annual surcharge; added to 6.5 percent current market equals 8 percent, amortized for 30 years is $1,020 per month. Better by a little, possibly affordable, equity negligible, pride failing.
Then there's HoHo's anti-equity kicker: When the place appreciates in value (how many years ahead?) and she either refinances off the 8 percent or sells, HoHo will take half of any appreciation. I bet HoHo won't split costs.
While she considers HoHo humiliation, a new renter moves into the house next door, identical, rent $700. Millions of people just like her are now condemned as "Walkaways." Professionals, fiddle with local examples; I think this one is mainstream.
A more pernicious provision in the bill is the First-Time Homebuyer Tax Credit, retroactive to April 9, 2008, $7,500 per household. This is a credit, not a deduction; if you owed $7,500 in '08 taxes and had $7,500 withheld, you'll get a refund of your whole withholding. The advice from this firm to all buyers except compulsive savers and the rich:
Don't take the FHOBTAC credit.
There's a fishhook in the FHOBTAC sirloin:
You have to pay it back.
$500 per year added to your taxes (goodbye, refund), and the whole remaining balance if you sell the place. Own for three years, you'll still owe $6,000. How many recipients of the credit will still have that cash when it's time to pay at tax time?
Scammers are already trying a payday-loan trap:
Assign your credit to us, and we'll give you money for a down payment.
Meanwhile, mortgage credit starvation -- the real problem -- is doing its grim work.
MGIC, the mortgage insurer, published its new regional risk guide: of 73 metro areas, two are strong, 31 soft or weak. Of the remaining 42 rated "stable," 19 are weakening.
It is one thing to allow Bubble Zones to correct, another to let a credit crunch do some inflation-fighting.
But, allow the entire housing market to sink?
FHA changes make housing bill a 'mixed bag'
By Matt Carter
Created 07/30/2008
President Bush signed historic legislation today that props up mortgage financers Fannie Mae and Freddie Mac and authorizes a $300 billion expansion of Federal Housing Administration loan guarantee programs.
But the sweeping housing bill, HR 3221, inevitably has its critics -- including Housing Secretary Steve Preston, who's unhappy that Congress has placed a one-year moratorium on the use of "risk based" premium pricing for FHA loan guarantees.
Home builders are also bracing for the elimination of seller-funded down payment assistance with FHA-guaranteed loans beginning Oct. 1.
Others in the housing industry are lamenting that a $7,500 tax credit for first-time homebuyers that will expire July 1, 2009, must be repaid over 15 years -- making it, in effect, an interest free loan.
The National Association of Home Builders and other industry groups are nevertheless working to publicize the tax credit to consumers, with NAHB rolling out a dedicated Web site, FederalHousingTaxCredit.com.
“The tax credit is the best stimulative measure,” NAHB President Sandy Dunn said in a press realease. “It will increase housing demand, get home buyers back into the marketplace and fight falling home prices, which threaten the economy as a whole.”.
HUD Secretary Preston last week called HR 3221 "a mixed bag," because it places a moratorium on the use of risk-based pricing on FHA loan guarantees for one year. The moratorium begins Oct. 1, 2008 and ends Sept. 30, 2009.
Preston said FHA will now be required to increase prices on all customers “or eliminate its refinancing program for subprime borrowers at a time when they need it the most."
HUD just rolled out risk based pricing on July 14, saying it would allow FHA to operate more like other insurers, saving lower-risk borrowers money and averting the need for a taxpayer bailout of what has traditionally been a self-sustaining program.
Under the old pricing structure, all borrowers paid 1.5 percent of their loan balance up front, and 0.5 percent a year for FHA insurance, regardless of their credit standing. Under risk-based pricing, the upfront premium ranges from 1.25 percent to 2.25 percent. On a $150,000 mortgage, the difference between the old 1.5 percent upfront premium and the maximum 2.25 percent "risk based" premium is about $7 per month.
The Bush administration had pushed for risk-based pricing as part of a larger "FHA modernization" package that, in various proposals put forward by lawmakers in recent years, would also have reduced or eliminated FHA's 3 percent minimum down payment requirement.
Instead, Congress ended up raising minimum down payment requirements for FHA-backed loans to 3.5 percent.
Also, beginning in October, home buyers will no longer be able to rely on nonprofits that funnel money from homebuilders into seller-funded down payment assistance programs, as HR 3221 finalizes HUD's long quest to end the practice.
HUD claimed the practice artificially inflates home prices and triples the likelihood of default. HUD's attempts to end the practice through an administrative proceeding was thwarted by legal challenges filed by nonprofits that operate assistance programs.
Now that Congress and the Bush administration have agreed to ban the practice through legislation, that battle appears to be over, and home builders expect to see the pool of eligible buyers shrink.
According to HUD, seller-funded down-payment assistance was used on more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier.
Home builder Lennar Corp. relied on down-payment assistance for one in three mortgages it originated in the second quarter, the Wall Street Journal reported.
Housing research firm Zelman & Associates estimates that eliminating seller-funded down-payment assistance could reduce the homebuyer pool by 10 percent nationwide, and by up to 25 percent in lower-priced markets where they are used more often, the Journal said.
"It is certainly not in a builder’s interest to have a recently sold home to return to the market through foreclosure," NAHB said in a July 10 letter to Senate Banking Committee chairman Sen. Chris Dodd, D-Conn., and ranking member Sen. Richard Shelby, R-Ala. " That is why NAHB is committed to finding ways to continue seller-provided down-payment assistance in a manner that is in the best interest of home buyers, builders and the FHA."
Other key provisions of HR 3221 relating to FHA modernization include streamlined processing for FHA condos, reforms to the home equity conversion (reverse) mortgage program, and reforms to the FHA manufactured housing program, according to a summary by the National Association of Realtors.
A $300 billion expansion of FHA loan guarantee programs is intended to help troubled borrowers refinance into more affordable loans when their existing lenders agree to forgive part of their debt.
Lenders would effectively write down existing mortgages to 85 percent of their current appraised value, and borrowers would have to share gains with the FHA if they later sold at a profit.
The Congressional Budget Office has estimated the program might help 400,000 borrowers, and cost $680 million over 10 years. HR 3221 creates a new assessment on Fannie Mae and Freddie Mac that’s expected to cover those costs and also provide money for affordable housing.
The bill also creates a new independent regulator for Fannie Mae and Freddie Mac and authorizes the Treasury Department to buy the companies’ debt or stock.
The Congressional Budget Office estimates that there’s a better than even chance Fannie and Freddie won’t require government assistance, but that the cost to the government might be $25 billion if they do.
The bill allows Fannie and Freddie to purchase or guarantee loans of up to 115 percent of the local area median home price in high cost areas, up to $625,500. The conforming loan limit for normal markets remains $417,000
The bill increases the floor for FHA loans to a minimum of $271,050, and allows it to guarantee loans in high cost markets up to 115 percent of local area median home price, with a $625,500 cap.
The caps in high cost markets go into effect on Jan. 1, when the current, temporary cap of $729,750 for Fannie, Freddie and FHA expires.
William Brown, president of the California Association of Realtors, welcomed the extra leeway for Fannie and Freddie to buy mortgages above the old $417,000 conforming loan limit in high cost markets.
“Although we would have liked Congress to make permanent the (temporary) $729,750 loan limit, C.A.R. is pleased with the new permanent loan limit of $625,500,” Brown said.
“It will allow California homeowners to refinance their loans into safe affordable loan products and allow first-time home buyers to enter the market.”
Lou Barnes commentary on New Law
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com
The new housing assistance bill, dismissed here briefly last week, deserves a more thorough hatchet-job.
Its centerpiece is a $300-billion FHA loan guarantee (not money) to refinance underwater home "owners."
Consider a Bubble-Zone victim who bought a $200,000 home five years ago, made a 5 percent down payment and got a 5-year interest-only ARM for $190,000. The home has fallen 25 percent in value to $150,000.
The home has fallen 25 percent in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset.
Her rate is not bad, 5.5 percent even after adjustment.
However, her payment will jump from $871 to a killing $1,167.
To her rescue, the bill's
"Hope for Homeowners."
In the land of unfortunate acronyms, gotta call it HoHo.
HoHo provides for a write-down of the mortgage to 90 percent of current market value, to $135,000, plus a 3 percent refinance fee to the FHA, $139,000 total.
$150,000 X 90% = $135,000
+ $4,000 (3%) = $139,000
HoHo further provides a 1.5 percent annual surcharge; added to 6.5 percent current market equals 8 percent, amortized for 30 years is $1,020 per month. Better by a little, possibly affordable, equity negligible, pride failing.
Then there's HoHo's anti-equity kicker: When the place appreciates in value (how many years ahead?) and she either refinances off the 8 percent or sells, HoHo will take half of any appreciation. I bet HoHo won't split costs.
While she considers HoHo humiliation, a new renter moves into the house next door, identical, rent $700. Millions of people just like her are now condemned as "Walkaways." Professionals, fiddle with local examples; I think this one is mainstream.
A more pernicious provision in the bill is the First-Time Homebuyer Tax Credit, retroactive to April 9, 2008, $7,500 per household. This is a credit, not a deduction; if you owed $7,500 in '08 taxes and had $7,500 withheld, you'll get a refund of your whole withholding. The advice from this firm to all buyers except compulsive savers and the rich:
Don't take the FHOBTAC credit.
There's a fishhook in the FHOBTAC sirloin:
You have to pay it back.
$500 per year added to your taxes (goodbye, refund), and the whole remaining balance if you sell the place. Own for three years, you'll still owe $6,000. How many recipients of the credit will still have that cash when it's time to pay at tax time?
Scammers are already trying a payday-loan trap:
Assign your credit to us, and we'll give you money for a down payment.
Meanwhile, mortgage credit starvation -- the real problem -- is doing its grim work.
MGIC, the mortgage insurer, published its new regional risk guide: of 73 metro areas, two are strong, 31 soft or weak. Of the remaining 42 rated "stable," 19 are weakening.
It is one thing to allow Bubble Zones to correct, another to let a credit crunch do some inflation-fighting.
But, allow the entire housing market to sink?
What's the real bailout story?
Ever feel like you're not getting the real story about the bailout and its possible effects? Hopefully the following will help you get started in your search for the truth.
I started trying to inform friends and family members about what I've been finding out, however, e-mailing, and then re-sending to others is getting pretty time consuming, so, here we are at blogspot.
The first info (and best ongoing info) that I've gotten on the bailout comes from the Land Title Insurance industry. I'll give you as much direct info as I can, and then give my thoughts as to the ramifications.
My first exposure was in a continuing Education class for my title and escrow license, at which, lenders and real estate agents also attended for continuing education credits.
I requested a copy of the slideshow presentation that was given, to distribute, and further investigate. I'll try to post a copy of the slideshow, if not, I'll give a summary in the next posting.
I started trying to inform friends and family members about what I've been finding out, however, e-mailing, and then re-sending to others is getting pretty time consuming, so, here we are at blogspot.
The first info (and best ongoing info) that I've gotten on the bailout comes from the Land Title Insurance industry. I'll give you as much direct info as I can, and then give my thoughts as to the ramifications.
My first exposure was in a continuing Education class for my title and escrow license, at which, lenders and real estate agents also attended for continuing education credits.
I requested a copy of the slideshow presentation that was given, to distribute, and further investigate. I'll try to post a copy of the slideshow, if not, I'll give a summary in the next posting.
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