Thursday, December 6, 2007

Talk about closing the barn door...

Today, (Dec. 6, 2007), the federal government, led by President Bush, announced help for people holding sub-prime mortgages who face losing their homes.

The government, using the bully pulpit it has always had but seems reluctant to use against business interests (especially oil-type and car-type business interests), has negotiated a freeze in the conversion of teaser-rate sub-prime mortgages to higher interest rates. This, it is hoped, will stem the tidal wave of foreclosures against people who cannot afford, and probably could never afford, their houses.

Even the city has gotten into the act. Mayor John DeStefano Jr. and Aldermanic Chairman Carl Goldfield each has announced a probe of sub-prime mortgages' effects in the city. They want to find out how many people are facing foreclosure and how many are circling the bowl. Then, they may see what they can do about it. The answer is probably nothing.

My question is the following: Where were they a year and a half ago when the specter of this financial disaster began to haunt them. Ebenezer Scrooge's three ghosts had nothing on the financial hardship that was marching toward this segment of the market.

Please read the article below. I wrote this article in the summer of 2006 for the Norwalk Hour and its weekly papers. I was not the only voice howling into the wind on this back then, although I think I was one of the first. I am not blessed with omniscience, and neither are the economists I quoted in the piece.

So please read the article and then ask the following question: Where were the feds, the mayor, the alderpeople 18 months ago when there was still time to derail this train? If I could see it, if the economists could see it, why couldn't they? And if they could see it, why didn't they do anything about it?

Article starts here
By Leonard J. Honeyman

First, there was the mortgage and it was good. Starting in the 1930s, people buying homes could pay off their houses over years instead of plunking down the whole price at once.

Then came adjustable-rate mortgages, a boon for people who moved fairly often or those who didn’t qualify for the typical 30-year fixed-rate mortgage. In the 1980s came home equity lines of credit and then interest-only and payment-option mortgages and reduced documentation and piggyback loans and even loans that let you decide how much you wanted to pay each month.

Today, there is a list of choices rivaling a diner’s menu.

The problem, according to experts, is that making a wrong choice from the menu of dozens of loan choices could leave a borrower with serious financial indigestion.
Mix in a real estate market in which home prices are flattening out or even declining in some places and interest rates that are rising from 40-year lows and you have the chance that some homeowners may end up in foreclosure or selling a house and still owing a large chunk of money, according to the FDIC and other economists and bankers.

“Widespread marketing of nontraditional products could be raising the risk profile of some mortgage lenders and consumers,” according to the Federal Deposit Insurance Corporation’s FDIC Outlook.

House prices have been leveling off and will continue to fall as supply increases and demand decreases. People who have been counting on continued inflation in home prices to keep them ahead of rising interest rates should make sure they know where the lifeboats are, said Nicholas Perna, an economist and consultant for Webster Bank.

Some of those for whom those risks didn’t pan out end up in Larry F. Ginsberg’s office.

The look on their faces is one of desperation, hoping for some way to save their homes or at least get some more time to sell their homes so lenders don’t take them, said Ginsberg, a Stamford lawyer who handles bankruptcies and foreclosures.
The good news, Ginsberg said, is that his foreclosure-defense caseload hasn’t increased as a whole. But he’s seeing more foreclosures of those nontraditional loans, especially adjustable-rate mortgages and negative-amortization loans.

Foreclosures in Fairfield County aren’t increasing because the county is so affluent that negative economic trends get here later than other parts of the nation and even the state, he said. In Wilton, for example, there were two in the last 180 days.

According to the Mortgage Bankers Association of America, serious delinquencies, which include foreclosures, fell in the first quarter of this year as much as half a percentage point in southern Connecticut from the first quarter of last year.

A number of bankers and economists agreed that the risks are greater for first-time home buyers, those with poorer credit scores and immigrants who aren’t familiar with the myriad of choices and the confusing mortgage language.

The non-traditional loans aren’t just a scam. For people who know how to use credit and for those whose financial picture is bright, negative-amortization loans, ARMs, and interest-only loans may save them money, said Any Crews Cutts, deputy chief economist for Freddie Mac, a quasi-governmental corporation that buys mortgages from banks.

For example, a homeowner with an interest-only loan can save around $800 a month in the first year and more in subsequent years, according to, an Internet mortgage-calculation site. The trick is to remember that the money is still owed and must be paid, either at the end of the mortgage or when the house is sold.

“What has changed, however, is how these loans have been marketed and used in recent years. Lenders have targeted a wider spectrum of consumers, who may not fully understand the embedded risks, but use the loans to close the affordability gap,” said the FDIC. A study by Harvard’s Joint Center for Housing Studies also confirms the trend of borrowers using interest-only loans and pay-option loans to purchase homes they might not otherwise be able to afford.

There is still no problem as long as there is sufficient equity in the house to cover any rise in interest rates or any hike in the amount owed. Equity is what’s left over when the amount owed on the house is subtracted from its value.

So you’d think that borrowers would be as careful not to max-out the equity in their homes as they may be not to max-out credit cards, but you’d be wrong, said Todd Martin, an economist who is a consultant for Peoples Bank.

For example, fully 43 percent of people who bought their first homes in 2005 borrowed every nickel of that purchase, according to the National Association of Realtors.

In addition, nearly nine of 10 Freddie Mac-backed mortgages that were refinanced in the second quarter of this year resulted in new mortgages with loan amounts that were at least 5 percent greater than the original, Cutts said.

Much of that money is going into paying off other financial obligations, including credit cards, car loans, as well as home improvements and money to start a business.

“Because rates on home equity lines of credit have risen to 8.25 percent or higher, borrowers who are looking for an inexpensive way to finance home improvements or business investments, or to consolidate high cost debt, are turning to cash-out refinance, Cutts said. “These borrowers are often willing to refinance into higher rates on their first…mortgages,” she said.

That’s true even though the interest rates for the new mortgages are 8 percent higher that the previous loans, she said.
So what? For the well-financed homeowner with plenty of equity in the home and good future job prospects, the answer is probably not much.

“Banks have given the consumer a long rope to hang themselves, but I don’t believe the average borrower is digging a hole for themselves.” Cutts said. Consumers have gotten very smart about options. On average, there is a solid amount of equity, with enough money to cover the payments easily, she said.

“Where I see the problem is first-time home buyers not realizing the water heater breaks and has to be repaired. Trying to afford an unaffordable house” carries more risk than some homeowners can handle, Cutts said.

“This is a time for people to be cautious,” economist Perna said. “Remember, it’s very difficult to refinance if you don’t have any equity in your home. People should behave as if they were bound to be blindsided by something,” he said.

Fully 41 percent of the people who face foreclosure get into trouble not because they are spendthrifts, but because their income is reduced and they can’t pay their loans, according to Freddie Mac figures. Illness claims another 18.9 percent.

Those are the people who end up in lawyer Ginsberg’s office, trying to keep their homes after receiving notice of foreclosure.
Ginsberg agrees that the lack of equity is the biggest stumbling block. People take out a 100 percent mortgage and then “there is a loss of job and you miss three payments and there you are,” he said. In today’s market, the house won’t appreciate in value quickly enough to provide a cushion, he said.

Since most of his clients are referred by friends or other attorneys, Ginsberg said he often could do little but buy more time for the homeowner to sell their house and reduce their debt, or to hold off the inevitable a bit longer.

The experts say that potential mortgage borrowers should know what they are getting into and how easily their dream can turn into a nightmare. Those sleepless nights, however, can be avoided.
If a borrower sees trouble coming because of a job loss or an illness, the first place to go is to the lender, said Chris Dannen, vice president and residential lending sales manager for Peoples Bank.

He said his bank and others don’t want to own real estate so they will work with any reasonable borrower to find a way that the client can keep the home, even to restructuring the loan. But the key is to seek help before foreclosure, he said.

All the experts interviewed said potential borrowers should get advice from reputable sources before taking out the loan. Those sources include the Connecticut Department of Banking, the state Department of Housing, the Connecticut Housing Finance Agency and the local housing agencies. The U.S. Department of Housing and Urban Development has literature and often runs seminars in home ownership and mortgage lending, especially for lower-income people. On line, the Home Loan Learning Center, a page erected by the Mortgage Bankers Association, is a good place to start.

The most important bit of advice, they all say, is the most basic. If the offer or the deal or the mortgage seems to good to be true, it probably is."

Article ends here

Again, why was nothing done back then?

Until next time...

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