Here's A Conundrum for You
Monday, June 15, 2009
When we look at the so-called subprime mortgage crisis - if we look at it deeply enough - what we see suggests a difficult principle that we might call the "true cost" of debt.
Let's say that the "true cost," for lack of a better term, is today's real price for borrowing money at a fixed rate, with no bells and whistles and shortcuts written into the loan. Thus, if the markets are pricing, say, the ten-year Treasury note at about 3.8% and demanding a 2% spread over that if fixed mortgages are to be acceptable to investors, then about 5.8% is the moment's true cost of financing a home purchase.
Trouble is, we often reach the point where 2% over the 10-year note isn't affordable for a great many buyers, so we - viewing their problem with compassion, and with a desire to make further origination fees - develop loan programs that, one way or another, fudge on the "true cost" principle. (We also have to deal with hikes to the 2% spread when investors shun fixed-rate mortgages.) The early VA and FHA loans, writing in the value of government guarantees, seemed to lower the "true cost" for borrowers. The early adjustable rate mortgages were first invented because there was no way borrowers could afford the true cost in the early 1980's (when a fixed-rate loan bore an interest rate of about 18%).
We developed loans of temporary expedience, based on the reasonable idea that interest rates would come down some day. For example, I once had a loan whose effective rate (far from the true cost) was 13%. That was the interest rate my monthly payments were based on. But the true cost at the time, as I mentioned, was about 18% - so the unpaid interest ("negative amortization," a term only its mommy could love) was folded back into the loan, which grew rather than being paid down.
There isn't room here to trace the history of the many loan programs that we've developed with the specific intention of overriding the "true cost" principle somehow and allowing a borrower to afford a loan - at least temporarily - but readers will realize that this was indeed the way most subprime programs operated.
The conundrum that I see before us now is simple... and we may have to come back to it repeatedly as we follow what is and is not working in today's loan market. Specifically: what do we have if a government program alters an existing loan to give a borrower, temporarily, a lower monthly payment but maintains the existing loan balance? Sounds like another evasion of true cost to me. So, in fact, does any other of the many ways the government is currently trying to make today's loans (and therefore homes) even more affordable than they already are. A salient example - thankfully retired, at least temporarily - was the $7,500 tax break that you get today but have to repay over the coming fifteen years.
Clearly, the true cost represents the real value of a home today. Could it be that we continue to create the same old credit problems - excessive foreclosures, tentative and temporary home ownership, and currently, debilitating fears of entering a real estate transaction at all - with our manipulations of true cost? And could it be that the only genuine answer is for real estate values to come down to what may be considered their true value, given current conditions in the credit markets, rather than trying to lower the true cost from the financing end, a task that seems always to employ smoke and mirrors, eventuating in generally unforeseen future problems and crises? Or - who knows - perhaps we could invent a new standard home mortgage and let the 30-year fixed-rate fade. Hmmm.
by: Bill Fisher
Labels: current market, loan modification
posted by Dylan Kramer @ 7:14 AM,
Loan Modification Case Study from the Debt Advisory Alliance
Thursday, May 7, 2009
This video is a short case study showing how the Debt Advisory Alliance successfully helps homeowners avoid foreclosure and obtain a loan modification to keep their home.
Labels: loan modification
posted by Dylan Kramer @ 8:46 AM,
The Fix Is In!
Wednesday, March 4, 2009
The "fix" is in.
Today the details of the Obama Loan Modification and refinance plan were released. You can get full details at www.financialstability.gov. There will be the full details of the plan. We have broken down the big issues here. If you have any questions, let us know.
First on refinancing. There is good news for the homeowner who is upside down is unable to refinance due to a negative change in property value. If your loan is owned by Fannie Mae or Freddie Mac, you are now eligible to refinance. In fact, if a lender has already turned you down for a refinance here, directly from the website here is the way to figure if this refinancing option is open to you:
Do I qualify for a Making Home Affordable refinance? Answer these questions:
- Is your home your primary residence?
- Do you have a Fannie Mae or Freddie Mac loan? If you don't know contact:
- Fannie Mae, 1-800-7FANNIE (8am to 8pm EST).
- www.fanniemae.com/homeaffordable
- Freddie Mac, 1-800-FREDDIE (8am to 8pm EST)
- www.freddiemac.com/avoidforeclosure/
- Are you current on your mortgage payments?
- "Current" means that you haven't been more than 30-days late on your mortgage payment in the last 12 months.
- Do you believe that the amount you owe on your first mortgage is about the same or less than the current value of your house?
This program will help a portion of the market that is unable to get help today.
Second is Loan Modifications. The news is not as good here. In a nutshell if you are behind, your loan is a Fannie Mae or Freddie Mac loan and you can prove your income, you can get your loan modified within the following parameters.
- Fixed Rate loan no higher than the going rates for a 30 year fixed (about 5.5% as of today)
- Interest Rate Floor. Lenders will not be required to lower your interest rate below 2.0%
- The option (which all lenders will take) to capitalize (fancy word for add) any back payments, taxes etc. to the balance of the modified loan. (This will make borrowers more upside down than before)
- Payments will be moved to 31% of your documentable income for PITIA (principal, interest, taxes, insurance and association fees)
The challenges here are many but essentially, the lender can put off a loss by capitalizing the arrears making borrowers further indebted.
Anyone who "fudged" or got a stated income loan will have a tough time qualifying even at 2.0%.
Lenders will be swamped, so good luck trying to get through the process.
This program may help a small portion of the borrowing public. The bottom line though is we are sure that not enough homeowners will be eligible and that the rules are not tight enough for us. Combine that with the threat of the bankruptcy cramdown which will drive rates higher very soon and we have a recipe for more problems, not solutions.
Labels: government announcement, loan modification
posted by Dylan Kramer @ 11:17 AM,