NRVLiving - Real Estate. Simplified.

Loan Modifications Perpetuate The Problem, and Don't Use The Benefit Of Experience

Inman News posted information last week a new plan whose focus was to streamline the loan modification process. 

I'm admittedly behind on this post, and it's been rehashed across the web.  Essentially, if (1) you're at least 90 days delinquent on a home that is your primary residence and on which you owe at least 90% of the home's value AND (2) either Fannie, Freddie or one of their participating loan companies must own the loan, then under the loan modification program you can restructure your loan to as much as 38 percent of your gross income. 

Forgoing the in-depth analysis and critique from economists and Harvard-types for a moment, I have a problem with this.  I'm struggling with the issue of personal responsibility, and Government subsidy of these loans doesn't resolve the problem.  The problem is poor decision-making on the part of consumers and lending institutions and the real estate industry.  I'm not sure modification or "streamlining" resolves the issue of personal responsibility, and on the flip side I don't know that allowing millions of loans to default and further crippling the housing and financial sector makes a lot of sense either.  I have no answer for this, but struggling with the issue.

Bloodhound writes (emphasis mine):

The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”

The government is offering loan servicers $800 for every homeowner they get into the plan.

Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.”

I can see Schiff's point.  Desperate lenders will have an incentive to push people into what appears to be an even worse problem. 

As I said, I'll leave the bulk of the analysis to economists and people who have a better grasp of the larger picture.  I know that locally, Blacksburg and Christiansburg lenders haven't gone crazy with out of control loan terms.  Rates are low, borrowers are bringing money to the closing table and deals are getting done.  Mark Weddle says it's "Back To Basics" and he's right ... you can still buy and sell in today's market.

It was eery watching this video, reposted on Jim Duncan's blog, this morning.  Take the 10 minutes to watch what Peter Schiff has to say, and then tell me you didn't raise your eyebrows in surprise at how history has played out these last several months.

No ... the photo has nothing to do with the post.  I took the photo, and I liked it.  That's all.

Look A Little More Closely

On Saturday's NRVLiving Real Estate Show (which, coincidentally, we don't have an electronic  copy of - argh), we spent a good bit of time discussing HR 3221 - the Housing and Economic Recovery Act of 2008.  This bill was introduced in July 30 2007, tweaked and massaged and - as evidenced by its 694 pages and 237 Amendments - added to several times until it was signed into law exactly one year later by President Bush on July 30 2008.

So what it is it?  According to the House Committee on Financial Services, the bill is designed to respond to the housing crisis and prevent a repeat of problems.  A good idea, yes, but look a little closer ... when you dig into it, there are some highlights that every American should be aware of, regardless of whether you're a homeowner or not.  Some of the key points include:

• Conforming loan limits have been raised to $625000.  recently, the conforming loan lmit - those loans that would be eligible for purchase by either Freddie Mac or Fannie Mae - was capped at $417000 previously.  In high-priced areas, as loans have been harder to come by, fewer homeowners have been able to qualify for these loans ... I'm sure the hope is that this will stimulate this section of the market.
  
• The one that most folks have likely heard of is the FHA Foreclosure Rescue.  Under this section, the Federal Housing Administration will take on as much as $300 billion in new mortgages.  Lenders will be able to write down qualified mortgages to as much as 85% of the appraised value, and then the borrower can then refinance into an FHA-backed, 30-year fixed mortgage at 90% of the appraised value.  There's a catch, of course - borrowers will have to share 50% of all future appreciation with the Federal Housing Administration.
  
• The First-Time Homebuyer Tax Credit will apply to homes purchased on, or after, April 9 2008 and before July 1 2009.  If you're a first-time buyer though, don't get too excited.  It's not really a credit, but an interest-free loan for $7500 that you'll be required to pay back.  If you own the home for 15 years, you'll pay it back during that time period, at $500 per year.  If you own the home for LESS THAN 15 years, and there's enough gain at the time you sell, you'll pay the remainder back at that time.  You have to qualify, of course - single home buyers must make less than $75000, and married couples less than $150000.  When the median salary is much less than that in the New River Valley, I'd think a lot of first-time buyers would want to take advantage of this.
  
  
• This next one is important, though, and one about which I expect a lot of people are going to be surprised.  It used to be that when you sold a home, if it had been your primary place of residence for two of the last five years, any money you made on the sale of that home was yours to keep, tax free.  $100000 profit?   Yours to keep, thank you very much!  Under HR 3221, however, the Capital Gains Exclusion Rule comes into play, and hits American homeowners right in the wallet.  It works based on a formula (congrulations, elected officials, for making it SIMPLE):
  
  
  Profit from sale * (# of days home was primary residence / # of days you owned the home)


So, say you bought a Blacksburg home for $300000 on January 15 2004, you lived in it for four years, and moved out January 15 2008.  On January 15 2009, you sold it for $500000, making your capital gains $200000.  Under the old system, you'd have $200000 in your pocket, tax free.  Now, with the Capital Gains Exclusion Rule, it looks like this:

          200000 * (1460 / 1825) = $200000 * .80 = $160000

$160000 of your profit will be exempt from capital gains, but there's $40000 left over the federal - and state - government would like a piece of.  The federal capital gains rate is 15%, while the VA rate is 5.75%, so 20.75% - or $8300 - of that money you'll never see.

Good idea?  Bad idea?  According to GovTrack.us, the cost per American is $4 between 2008-2012.  It seems to me that, while things like first-time buyer credits and lender write-offs might help stabilize and boost buyer confidence in some areas, things like the Capital Gains Exclusion Rule are just going to piss people off.  And, at $8300 as in the example above, cost far more than just $4.

You can find the whole text here.  Photo credit.

If you enjoyed this post, why not leave a comment and subscribe via RSS or email here to be sure you don't miss the next post?

In Health & In Wealth ... Unless We Can't Pay The Mortgage

Thanks to Darla for pointing me to this page.  Looks like another byproduct of the mortgage mess might be a rise in divorces ...

If you enjoyed this post, why not leave a comment and subscribe via RSS or email here to be sure you don't miss the next post?

Absolute Auction - 1313 Oak Drive, Blacksburg

May 17th, 12 noon, @ 1313 Oak Drive, Blacksburg

• 3976 Square feet, 5 bedrooms and four bedrooms
   
• Cherry cabinets, slate and hardwood floors, vaulted ceilings, wrap-around porch, on-demand hot water heaters
• Remodeled in 2006
• Tax Assessed Value - $650300 for two parcels totaling .78

This is a really gorgeous section of town, and a private little community that has some of the most beautiful homes anywhere.  It's sad to see this one go to foreclosure, but it's an opportunity for someone else.   

Here's what it used to look like, and it was awful inside - pretty amazing transformation.

View Larger Map