December 21, 2024

Borrowers Chose Strategic Default On Reverse Mortgages

September 7, 2010 by Leave a Comment

When reverse mortgages were last reviewed, it was predicted that many unqualified borrowers would wind up defaulting, despite the fact that a reverse mortgage has no payment due. 

As originally conceived, reverse mortgages were designed to fulfill a legitimate borrowing need.  Reverse mortgages were developed for elderly Americans who had a mortgage free home with substantial equity and wanted to cash out their home equity to supplement their retirement income without having to sell the house or face large mortgage payments.

In theory, the HECM made sense by allowing homeowners to remain in their homes and monetize their equity.  The lifetime HECM payment, along with other retirement income and savings would allow for a more comfortable lifestyle.  The only theoretical loser on the HECM program would be the FHA if property values dropped.

The HECM is available to all those 62 or older who have sufficient equity in their homes.  HECM program lends without regard to credit or income and is strictly  asset based lending.  Do these lending criteria remind anyone of  past  disastrous mortgage programs, such as  sub prime, ALT A or Pay Option ARMs??

A HECM does not require that the homeowner escrow for taxes  or homeowners insurance.  A known risk factor for default is a non escrowed loan.  The homeowner can face foreclosure  for not properly maintaining the property or for non payment of taxes or insurance.

Many homeowners taking out reverse mortgages were taking the maximum loan allowed upfront (instead of taking a monthly draw) and using the proceeds to payoff existing debt.  This choice left the elderly homeowner with little equity and no monthly cash payment to supplement retirement, a recipe for financial disaster.

The reason why borrowers are taking most of their available cash out upfront is because they are using the proceeds to pay off mortgages, consumer debt, medical bills, credit cards, etc.   Borrowers run up large amounts of debt when spending exceeds income, a situation likely to continue  after the borrower taps the last dime of equity from his home.  Since the HECM was the last option available, what happens in a couple of years when the borrower is again overwhelmed by debt?

Based on the credit profile and debt levels incurred prior to his approval of a HECM, what are the odds that the borrower’s finances turn around after his refinance?  My guess is that within a few short years, the borrower is in heavy debt again, unable to pay the property taxes or maintenance on the property and thus facing a potential foreclosure.  Since HUD will not be throwing senior citizens out of their homes, expect a mortgage modification program for reverse mortgages and further losses to the taxpayer on another mortgage program gone bad.

It now appears that, as predicted, many elderly reverse mortgage borrowers cannot afford to pay the property taxes due on their homes or are strategically chosing default since the decline in property values wiped out whatever equity they had left.  The end result is the predicted and ridiculous situation of borrowers defaulting on mortgages that do not have payments. 

This situation was confirmed in an audit report by the Office of the Inspector General.

HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With Maximum Claim Amounts of Potentially More Than $2.5 Billion

We performed an internal audit of the U. S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) program because we found that an increasing number of borrowers had not paid taxes or homeowners insurance premiums as required, thus placing the loan in default. Also, we noted that HUD had granted foreclosure deferrals routinely on defaulted loans, but it had no formal procedures.

We found that HUD’s informal foreclosure deferral policy and its reversal had a negative effect on the universe of HECM loans and loan servicers (servicers).  As a result, four servicers contacted were holding almost 13,000 defaulted loans with a maximum claim amount of more than $2.5 billion, and two of the four servicers said they were awaiting HUD guidance on how to handle them. Further, the servicers had paid taxes and insurance premiums totaling more than $35 million for these 12,958 borrowers…

Since unreported defaulted loans were only obtained from 4 of a total of 16 HECM servicers nationwide, more defaulted loans may exist. Further, as HUD could not track these loans, it did not know the potential claim amount. In the event of foreclosure of the 7,673 loans for which HUD was aware and 12,958 loans of which it was not aware, HUD could lose an estimated $1.4 billion upon sale of the properties.

Filed Under: FHA Defaults, Housing, loan modification, Mortgage Defaults, Reverse Mortgages, Strategic Defaults Tagged With: ,

Can The Unemployed Afford A Mortgage Payment?

September 15, 2009 by 10 Comments

Government Determined To Keep Unwilling Homeowners In Homes

The FDIC announced a new initiative to reduce foreclosures on home mortgage loans held by failed banks that were acquired by another institution.   This new FDIC program goes far beyond previous government mortgage assistance programs such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

Whereas the HARP and HAMP programs require income verification and attempt to lower a monthly mortgage payment to a level that is reasonable in relationship to a homeowner’s income, the new FDIC forbearance plan will attempt to help homeowners who are currently unemployed.

FDIC Encourages Forbearance To Unemployed

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses.

FDIC Plan Likely To Help Few Homeowners

The objectives of the FDIC’s forbearance plan are well intentioned.  Allowing an out of work homeowner time to find a new job may prevent an unnecessary foreclosure and eliminate the need for a costly foreclosure by the bank.  From a practical standpoint, the FDIC plan may ultimately benefit very few homeowners for the following reasons:

  • The program is only available to those homeowners who have mortgages with failed banks that were acquired by another institution under a loss-share agreement with the FDIC.
  • Under the forbearance agreement, the bank will accept only a portion of the regular mortgage payment.  The FDIC is asking for only a 6 month forbearance.  Given the prospects of a “jobless economic recovery” and the difficulty in finding new employment, the FDIC appears wildly optimistic about a quick change in fortune for an unemployed homeowner.   Banks do not want to foreclose, but very few banks now offer a forbearance plan to the unemployed since they do not expect them to quickly find a new job.
  • The mortgage foreclosure prevention plans currently in effect have had dismal success rates and these programs are limited to candidates who have income.  The HARP program, expected to help millions of homeowners had at the end of July approved only 60,000 refinances.   The government loan modification program (for those not qualified under HARP) has been plagued by very high re default rates ranging from 17% to 45%.
  • The FDIC recommends that the lender establish an “affordable payment” for six months, allowing for reasonable living expenses.  Many homeowners with jobs are struggling to make their mortgage payments.  Many states pay only a fraction of previous earnings in unemployment benefits.   Unless the homeowner has put aside some savings, unemployment compensation will usually cover only basic needs, leaving nothing for a mortgage payment.  It is likely that any payment (other than zero) will be too high for unemployed homeowners.
  • Recent statistics on the “cure rate” for delinquent mortgages show a stunning decline.  The cure rate is the percentage of borrowers who are able to catch up and bring a delinquent mortgage current again.  As of July, the cure rate for prime mortgage loans plummeted to 6.6% from an average of 45% during  2000 to 2006.  Some of the delinquent borrowers had lost their jobs but many were still employed.  This is a sea change in attitudes towards home ownership.   Many of those financially able to catch up apparently saw no benefit in doing so; either the burden of home ownership outweighed the benefits or there was no perceived benefit in continuing to make payments on a home with large negative equity.   Many homeowners may view foreclosure as the best “program” for getting back on their feet since they could potentially enjoy years of “rent free” housing before the bank ultimately forecloses.

Trapped Homeowners Want Out

Heavy Load

Heavy Load

Courtesy: laprogressive

Many Americans are apparently rethinking the “dream” of home ownership and acting accordingly by relieving themselves of the costly burden of mortgage payments, taxes and maintenance on what has become a depreciating asset.

While the government says “yes we can”, impoverished homeowners are saying “no we can’t”.  Perhaps this is why the massive government initiatives to prevent foreclosures are failing.   Trapped homeowners are doing what’s best for them and walking away, while the government vainly attempts to impose home ownership on those who now reject it.

Filed Under: FDIC, Housing, Layoffs, loan modification, Mortgage Defaults, Mortgages, Uncategorized Tagged With: , ,

How The Government Encourages “Ruthless Defaulters”

July 28, 2009 by Leave a Comment

The Delusion of Lenders

The old banking rule of lending only to those who had the capacity to repay was gradually relaxed and then completely abandoned over the past two decades.

New techniques such as loan securitization spread the risk far and wide, theoretically reducing the risk by spreading the risk.    No income verification for mortgage loans became routine since home price appreciation seemed to further diminish the risk – a defaulted mortgage loan could be fully recovered by seizing and selling the collateral.  Risky unsecured credit card lending seemed to have limited risk, as well, since a troubled borrower could simply borrow more to make loan payments that were beyond his income ability.

It all worked fine until it didn’t and economic historians will be debating for decades what went wrong.   The short answer is, of course, that loans extended to those without the ability to repay will eventually default.

The government’s answer to cure defaults by over indebted consumers is to encourage banks to extend more credit to postpone the day of reckoning.  Unfortunately, the government’s “solution” won’t work this time since it is the day of reckoning.

Businesses and the average American consumer have the good sense to realize that borrowing more when they can’t afford the debt payments they have now is total lunacy.  The result is stricter lending by the banks and reduced demand for loans.  Consider the reduction in bank lending taking place:

Loans Shrink as Fear Lingers

Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.

The slow pace of lending has created political heat for the Obama administration. On Friday, Rep. Spencer Bachus (R., Ala.) pressed Treasury Secretary Timothy Geithner to “tell me why we didn’t really see that multiplier effect” from banks funneling their TARP money into lots of loans.

The disturbing part of the above article is that politicians view tougher lending standards as an economic negative when, in fact,  it is extremely positive.

Bankers, businesses and consumers see the new economic reality and are cutting debt and rebuilding balance sheets –  essential actions for a sound economic recovery.  Those encouraging more lending and borrowing should consider the following chart.

Debt VS Savings

Debt VS Savings

Courtesy: Credit Writedowns

Debt Burdens Double

With income growth declining and debt burdens already intolerable for many,  what rational lender would seek to lend and what rational borrower would seek to borrow?  The debt burden for many has reached levels where default is the only option – more credit would only lead to a larger future loss to a lender.

Growth in debt that is commensurate with growth in income promotes sound economic growth.  Unfortunately the debt burden has expanded far in excess of income growth, with debt to income ratios doubling since the 1980’s.

hhdebttoincome43

Household Debt To Income

Courtesy:  continuations.com

Debt Repudiation And Unintended Consequences

Ironically, the biggest impediment to future bank lending is the growing trend of debt repudiation directly sponsored and encouraged by a government concurrently seeking to encourage more lending.

Consumers having trouble paying their debts can now chose from a long list of government programs for debt forgiveness, loan modifications, rate reductions, 125% loan to value mortgages and more programs on the way.  Their is no  longer any shame or embarrassment associated with defaults and bankruptcy.  Defaulting on debt has become a rational choice for many with little repercussions.

How does a banker factor into his risk adjusted lending rate “defaults of convenience”?  The problem of debt repudiation is large and will get larger as described by the New York Times.

When Debtors Decide to Default

Those on the front lines of the debt industry say there is a small but increasingly noticeable group of strapped consumers who, like Ms. Birks, are deciding they will simply stop paying. After loading up on debt eagerly provided by the card companies during the boom times, these people now find themselves trapped in an endless cycle where they are charged interest on interest and fees upon fees while the lenders get government bailouts.

The lending industry term for these people is “ruthless defaulters.” In a miserable economy where paychecks, savings and expectations are all diminished, their numbers will surely grow.

Collectors are noticing a shift not only in ability but in willingness to pay. “With all the bailouts the government is giving everyone, no one has any personal accountability about their own debts,” said Roger Knauf, who runs a trade group of debt-buying firms.

Much of the blame for the excessive debt that consumers took on can be placed on fee crazed bankers who did not properly evaluate risk.  As loan losses continue,  expect bankers to act like bankers again and to continue tightening their lending standards to avoid future defaults.

Lending will remained constrained and intelligent consumers will continue to borrow less and save more – the exact strategy necessary to work off the insane debt binge this country has been on for decades.

Biggest Fool Still Borrowing

Unfortunately, there is still one drunken fool at the party,  relentlessly expanding the borrowing insanity that has put the world on the brink of economic ruin.  Uncle Sam needs to sober up and rethink the flawed theory that unlimited credit equals unlimited wealth.

US Deficits and Debt Increases

US Deficits and Debt Increases

Courtesy: Wikepedia

Filed Under: Deleveraging, Government spending, loan modification Tagged With: , ,

High Risk Mortgage Lending Still Being Promoted By GSEs

July 13, 2009 by Leave a Comment

Sufficient Income Key To Sound Home Ownership

In an effort to prevent delinquent home owners from losing their homes to foreclosure, the Department of the Treasury recently issued guidelines to lenders.  Under the Making Home Affordable mortgage modification program, the Treasury stated that the mortgage loans for at risk home owners should be modified to result in a front end debt ratio of 31%.   A front end debt ratio is the percentage of gross monthly income that is spent on housing costs, typically principal, interest, taxes and insurance.

Historically, a front end debt ratio of around 31% was considered to be an affordable portion of a borrowers gross income to allocate to housing.   A housing debt ratio in this range allowed the borrower sufficient remaining income to cover other living costs and debt payments.

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency, Joint Statement of June 23, 2009

On March 4, 2009, Treasury announced guidelines under the Program to promote sustainable loan modifications for homeowners at risk of losing their homes due to foreclosure.

Under the Program, Treasury will partner with lenders and loan servicers to offer at-risk homeowners loan modifications under which the homeowners may obtain more affordable monthly mortgage payments.

The Program guidelines require the lender to first reduce payments on eligible first-lien loans to an amount representing no greater than a 38 percent initial front-end debt-to-income ratio.6 Treasury then will match further reductions in monthly payments with the lender dollar-for-dollar to achieve a 31 percent front-end debt-to-income ratio. Borrowers whose back-end debt-to-income ratio exceeds 55 percent must agree to work with a foreclosure prevention counselor approved by the Department of Housing and Urban Development.

The OCC guidelines corresponded to comments by the Secretary of HUD, Shaun Donovan, who had previously supported lowering the debt ratios of at risk homeowners to 31%.  In response to the question as to why so many home owners re default after having a mortgaged modified, Mr. Donovan stated the obvious – if a mortgage payment was excessive compared to income, default was much more likely.

What it showed was that where there’s actually a reduction in payments, there’s long-term success for those homeowners. People do much better when you lower payments and make them affordable than these other so-called modifications, which actually keep payments the same or increase them.

So I saw it, and in fact, if you look at the report, some of the language in it directly supports the way that we’re setting up our plan to create a standard that is truly affordable for borrowers. 31 percent debt-to-income ratio is the right standard. It’s widely accepted, and if we can get to that level, as we do in our plan, we believe that that sets us up, based on the results of the study, for long-term success for homeowners.

Someone Should Tell The GSEs

The HUD Secretary’s comments make sense and reflect previous sound underwriting guidelines that existing prior to the housing lending mania of the bubble years.  If mortgage lenders had not abandoned traditional income requirements, borrowers would not have been approved at debt ratios that virtually guaranteed future defaults.   The Treasury and HUD are promoting sound lending policies when they recommend a conservative debt ratio.

The problem is that some one forgot to tell Fannie Mae (FNM), Freddie Mac (FRE) and especially the FHA what HUD and the OCC have proposed as a safe debt ratio.  (See Why Does The FHA Approve Loans That Borrowers Cannot Afford.)   We now have the absurdity of lenders being required (at taxpayer expense) to modify mortgages to a 31% debt ratio while it is extremely common to see new mortgages being approved at debt ratios of  50% or higher.   When a borrower is paying out half of pre tax income for housing expenses, there is usually barely enough left for other debt payments, living expenses, home repairs, etc.   A reduction in income, a major unexpected home repair bill or any other unexpected expense can be enough to tip the borrower into default.   Yet, the automated underwriting systems of Fannie, Freddie and the FHA are routinely approving  risky mortgage loans at debt ratios far in excess of 31%.

The government’s obsession with increasing housing sales and refinances has resulted in a bizarro world situation.    Mortgages are being approved with unaffordable payments, the borrower falls behind and then the payments are modified lower under the Making Home Affordable program.  It’s not surprising that the Federal Reserve has had to become the buyer of last resort of mortgage backed securities – who else would want to buy them?

Disclosures: No positions.

Filed Under: FHA, Housing, loan modification, Making Home Very Affordable, Mortgage Basics Tagged With: ,

Profile Of A “Making Home Affordable” Homeowner – Everyone Should Do It

July 7, 2009 by Leave a Comment

Overburdened  Homeowner Subsidized

Home Sweet Home?

Home Sweet Home?

Loan modification programs have been seen as the answer to preventing foreclosures and allowing the housing market to stabilize.  The programs have become progressively more aggressive as foreclosures continue to mount and housing prices continue to slide.  The current government program, Making Home Affordable, has a dual approach whereby a homeowner not eligible for refinancing (at loan to values up to 125%) can then attempt to have the mortgage modified to lower payments.  Eligibility requirements are quite simple – if the borrower has suffered a hardship (such as reduced income), is having trouble making the payment or simply bought more house than he could afford during the exuberance of the housing mania, relief in the form of lower payments may be available.

Here’s an actual example of a borrower granted mortgage concessions under the US Government’s Making Home Affordable program.

Home owner purchase the home in 2005 for $153,000 with a stated income mortgage, 100% financing.

Home owner refinanced a year later and received $30,000 cash with a stated income $190,000 mortgage at 7.125%.   The home is now worth about $165,000.

Home owner works at a grocery chain and earns $43,000 with limited prospects for increased income.  Credit card debt amounts to $22,000 with monthly payments of $315.

Home owner’s current housing expense and other debt payments result in front end and back end debt ratios of 46/55.   A back end debt ratio is calculated by dividing borrower’s total mortgage payment, taxes, insurance and all other minimum monthly debt payments divided by gross income.  After debt payments and payroll taxes, home owner is left with about $950 per month to cover all other expenses.  Home owner is 45 years old, has minimal savings and a negative net worth of around $50,000.

Home owner is not eligible for the Making Home Affordable refinance program since the debt ratios would still be too high even with a rate reduction to the current prevailing mid 5% mortgage rate.

Homeowner therefore applies for a mortgage modification.  The basic requirements are that you are having trouble paying your mortgage and your front end debt ratio exceeds 31%.   The front end debt ratio is the monthly mortgage payment, taxes and insurance divided by gross monthly income.  Homeowner is approved for a mortgage modification that lowers the rate to 2% fixed for two years, with an increase to 3% in year three, 4% in year four and then fixed in year five at the prevailing conforming rate.   No principal reduction of the loan was granted.   The initial rate reduction lower the home owners debt ratios to 31/40, a ratio that should allow debt payments to be handled without undue stress.

Comments – Who Won and Who Lost?

If the homeowner decides to sell the home, $30,000 cash would be required at closing due to negative equity, commissions due, etc.  Since the homeowner has no cash, a sale of the home would have to be a short sale, with the mortgage holder (or taxpayer) taking the loss.

The homeowner in this case received a mortgage rate that is unavailable to the best A+ borrower.  In addition, there were no closing costs to receive the 2% rate.  The average homeowner pays thousands in closing costs on a refinance.

The taxpayer winds up paying, one way or the other,  for the cost of the mortgage subsidy.

The subsidized 31% debt ratio puts the loan modification  homeowner in a vastly better off position than millions of other homeowners with much higher housing debt ratios who are unable to get a loan modification or a refinance.

The homeowner cited would never have been a homeowner if not for the 100% financing, no income verification programs that prevailed during the housing/mortgage bubble years.

Not everyone was victimized by the liar loans and sub prime lenders.  The homeowner in this example has nothing to complain about.   Besides the $30,000 cash received on the refinance and a zero investment in the property, the homeowner also has a super low 2% government subsidized mortgage rate .

As property values continue to decline, expect ever more costly, aggressive and futile  government efforts to reflate the burst Humpty/Dumpty housing bubble.

Filed Under: Bailout, Have Nots, Housing, loan modification, Making Home Very Affordable, Mortgages, Uncategorized Tagged With: , ,

Elderly Americans Last Refinance – Reverse Mortgages

July 6, 2009 by 1 Comment

Reverse Mortgages – More Easy Lending

As originally conceived, reverse mortgages were designed to fulfill a legitimate borrowing need.  Reverse mortgages were developed for elderly Americans who had a mortgage free home with substantial equity and wanted to cash out their home equity to supplement their retirement income without having to sell the house or face large mortgage payments.

Almost all reverse mortgages are purchased by HUD and insured by the Federal Housing Administration (FHA).  FHA insured reverse mortgages are known as “home equity conversion mortgages” (HECM) and they provide the following advantages to elderly homeowners:

  • Provides supplemental cash income to elderly homeowners.
  • Does not require a monthly payment.
  • Allows the homeowner to remain in his residence until death or sale of the property.
  • Should the borrower decide to sell and move, the  amount of the loan repayment cannot exceed the value of the house.
  • HECM allows the borrower either a monthly lifetime payment (based on value of the home and age at time of mortgage closing) , a lump sum payment, a line of credit or a combination of the above choices.

In theory, the HECM made sense by allowing homeowners to remain in their homes and monetize their equity.  The lifetime HECM payment, along with other retirement income and savings would allow for a more comfortable lifestyle.  The only theoretical loser on the HECM program would be the FHA if property values dropped.

HECM Program – Theory VS Reality

The disadvantages for a borrower of a reverse mortgage are as follows:

HECM rules require a borrower to make a full draw at closing to obtain a fixed rate mortgage.  Most borrowers take the adjustable rate option and a line of credit.  The adjustable rate HECM presently has a low borrower rate of around 3.1% based on a lending margin of 2.75% and a LIBOR index of only .32%.  At some point rates will rise again and rates on the HECM could rise dramatically – the lifetime cap on the loan is over 13%.  Borrowers could see their credit lines reduced and their equity vanish quickly with higher interest rates.

Borrowing money without having to make a loan payment equates to compounding interest working against the borrower since the loan balance increases each month along with interest charges.  Borrowers who later decide to pay off the HECM and sell their homes may find that most of their equity has been lost due to accrued interest.

The HECM is a very complex product.  Despite the fact that HUD requires a potential borrower to receive financial counseling, it is unlikely that most borrowers fully understand the type of mortgage they are taking out.

The HECM is available to all those 62 or older who have sufficient equity in their homes.  HECM program lends without regard to credit or income and is strictly  asset based lending.  Do these lending criteria remind anyone of  past  disastrous mortgage programs, such as  sub prime, ALT A or Pay Option ARMs??

The fees on a HECM are very high and include an upfront and monthly mortgage insurance payment to the FHA, loan origination fees and other closing fees.  Total fees over the life of the loan can reach 12%.

A HECM does not require that the homeowner escrow for taxes  or homeowners insurance.  A known risk factor for default is a non escrowed loan.  The homeowner can face foreclosure  for not properly maintaining the property or for non payment of taxes or insurance.

The most striking feature regarding the use of reverse mortgages by elderly Americans is the large amount of equity that is being extracted upfront, leaving them with only a small future monthly cash payment as can be seen in Exhibit 3 below.

HECM CASH PAY BY YEAR

HECM CASH PAY BY YEAR

Courtesy: HUD.GOV

The reason why borrowers are taking most of their available cash out upfront is because they are using the proceeds to pay off mortgages, consumer debt, medical bills, credit cards, etc.   Borrowers run up large amounts of debt when spending exceeds income, a situation likely to continue  after the borrower taps the last dime of equity from his home.  Since the HECM was the last option available, what happens in a couple of years when the borrower is again overwhelmed by debt?

HECM – Loan Of Last Resort

The number of reverse mortgages has increased tremendously as other borrowing sources have disappeared.  Many of the reverse mortgage borrowers are retirees with limited income who would not qualify for a traditional mortgage loan under current underwriting guidelines.  In the past, many of these borrowers would have taken out a stated or no income verification mortgage.   The  large increase of HECMs starting in 2005 correlates to the time period during which no income verification loans were being discontinued.

Reverse Mortgage Volume

Reverse Mortgage Volume

Here’s an actual example of a HUD approved HECM.  Borrower has a home worth $525,000 and owes $290,000 in mortgages and other debt which will be paid off with a $350,000 HECM.  Homeowner is left with about $60,000 at closing.  Borrower has an abysmal credit score of 510 and  is 90 days past due on his current mortgage.  Income is unknown since HUD doesn’t care about the borrowers income.

Based on the credit profile and debt levels incurred prior to his approval of a HECM, what are the odds that the borrower’s finances turn around after his refinance?  My guess is that within a few short years, borrower is in heavy debt again, unable to pay the property taxes or maintenance on the property and thus facing a potential foreclosure.  Since HUD will not be throwing senior citizens out of their homes, expect a mortgage modification program for reverse mortgages and further losses to the taxpayer on another mortgage program gone bad.

More on this topic

Smarter planning would probably eliminate the need to borrow when retiring.   Bob Adams writes an informative and thoughtful blog on the challenges of successful retirement – a site worth bookmarking.

Filed Under: FHA, FHA Defaults, Housing, loan modification, Mortgages, refinance, Reverse Mortgages Tagged With: , , ,

Bonds Sell Off, Credit Ratings In Doubt & Mortgages ReDefault

June 6, 2009 by Leave a Comment

Every day there are many great posts on the web.  Here are some  from the past week  that merit a full read.  The listing order  is random.

Ok, I’m Done With Being Nice

Karl Denninger does not play nice in his counter point to a NY Times article about “mortgage relief” tax dollars going to those who were fiscally irresponsible and should have never owned a house in the first place.  The really galling part of the Times story was their tacit approval of the sense of entitlement exhibited by those who deserve nothing.

Bond Binge Hangover

With a lot of hysteria over the increase in long interest rates recently, this is a good measured analysis that looks at the history of rates and the implications for investors holding bonds.

Obama’s Deficits Put US Credit Rating At Risk

The huge US deficits and debt won’t matter until it does matter.  No one doubts that the US will pay on obligations, but what will they pay with?  Markets perceptions of risk can change quickly, upsetting any perceived economic recovery.

The State Vs. Federal Schism

The growing budget deficits on a State level have been getting some serious notice lately but have not reached the crisis stage.  How exactly does the Fed monetize this problem?  If the States have to cut budgets enough to match spending with drastically declining tax receipts, this will more than wipe out any stimulus spending at the Federal level.

A Tale of Two Depressions

Some great charts with not so great implications for the world economies.  The policy response this time is different but will it make any difference?

Fed In Foreclosure, Mortgage Rates Battered

Some discussion on the Fed’s losing battle to manipulate rates lower by buying treasuries and mortgage debt.  Investors are not amused and are voting  with an avalanche of sell orders in the long government debt markets.  So what does the Fed do next?

Filed Under: Federal Reserve, Interest Rates, loan modification

Mortgage Mod And Foreclosure Scams: Saying Goodbye To The Mortgage May Be Better

May 28, 2009 by 3 Comments
Home Sweet Home?

Home Sweet Home?

FDIC Advice Good But Too Late

The FDIC Consumer News is warning homeowners to avoid falling prey to loan modification and foreclosure rescue scams.  Many financially distressed homeowners are  preyed upon by firms that “guarantee” financial salvation, take the homeowners last few dollars and deliver nothing in return.

Foreclosure Rescue and Loan Mod Scammers Prey on Stressed Homeowners

Many homeowners having difficulty making their monthly mortgage payments are being targeted by criminals who charge large upfront fees and falsely “guarantee” to rescue a home from foreclosure.

Try to deal only with lenders, businesses and other organizations you already know or that have been recommended.

You don’t need to pay a lot of money for help or information.

“But scam artists will demand a large upfront fee, often thousands of dollars, and they do very little to actually help the homeowner,” said Robert W. Mooney, FDIC Deputy Director for Consumer Protection and Community Affairs.

Be especially suspicious of unsolicited offers that arrive via phone, e-mail or a knock on your door.

“Some companies have falsely advertised or represented that they are part of a government-endorsed mortgage assistance network

Be particularly wary of any organization that says it guarantees foreclosure relief or that it has a near-perfect success rate.

“Also be wary of anyone who promises to pay off your mortgage or repair your credit if you ‘temporarily’ sign over to them the deed to your home, because you may be permanently losing your home to a thief.”

Ironically, the job of the con men engaged in loan mod and foreclosure rescue schemes is made easier due to widely advertised government mortgage relief programs.  The lure of “something for nothing” from a government program that the con men claim to be affiliated with is one of their most successful sales tactics.

The FDIC advice comes very late for many people who would have been far better off financially had they never purchased a home beyond their means to begin with.  None of the government mortgage agencies require a potential homeowner to evaluate the true financial obligations and risks of home ownership.  Many homeowners currently obtaining government mortgages are being approved with debt ratios that almost guarantee a future default and are not in the home buyer’s best interest.

One Option For Distressed Homeowners The FDIC Does Not Mention

The FDIC offers those in financial difficulty some good advice in their newsletter but what is not mentioned is whether the homeowner should consider becoming a renter. In addition, many of the government loan mod and Hope programs, etc. have done little to put homeowners in a better financial position and many default soon after they were “helped”.

For a homeowner struggling with the mortgage, constantly spending in excess of income and living a financially depraved existence, why not look at the benefits of becoming a renter?  In many locations, renting is cheaper than owning.

Although not mentioned by the FDIC,  government makes walking away from the mortgage an easy option.  A mere two years after a bankruptcy or three years after a foreclosure,  current FHA guidelines allow a borrower to apply for mortgage financing.

Do The Math

Here are  a couple of web sites that can tell you whether it makes sense to own or rent.

payorgo.com

youwalkaway.com

More On This Topic:

Loan Modification Scams and Fraud Widespread – Mortgage Servicing News

Filed Under: Deleveraging, FHA, loan modification, Mortgages Tagged With: , ,

Second Mortgage Investors Facing 100% Losses

April 10, 2009 by 1 Comment

Extinguished

Risky Lending

Second mortgage liens have always been considered risky lending.  Investors in second mortgages are about to find out that the risk was higher than anticipated.

WASHINGTON, April 6 (Reuters) – The U.S. Treasury will soon finalize details on a plan to extinguish and modify second-lien mortgages as part of its overall housing program, a senior Treasury official said on Monday.

The second liens — home equity loans that were often written in tandem with a primary mortgage during the housing boom years — have been an obstacle to refinancing and modifying loans to make them more affordable.

The official, speaking to reporters on condition of anonymity, said assistance would be provided and also guidelines that “comprise a clear path for the reduction of second lien debt.”

He said these range from extinguishing them to keeping them in place as a part of mortgage modifications done under a $75 billion program the Obama administration is implementing to make failing mortgages affordable to home owners.

Under the “old rules” obtaining a second mortgage was not easy.  There were tough restrictions on loan to value levels and the borrower needed sterling credit.   Investors are now discovering why the old rules made sense as they face total losses on second mortgages approved during the lending boom.

Mortgages Secured By Negative Equity

During the peak years of the housing boom it was common for second mortgage lenders to allow borrowing up to 100% of a home’s value.   As housing prices cratered over the past three years, the collateral backing these high risk second mortgages was vaporized leaving lenders  with an essentially unsecured note.

It has become somewhat of an open industry secret that second mortgage investors  do not even bother trying to foreclose or collect since recovery would be minimal.   The second mortgage lien remains on title, however, preventing homeowners from selling or refinancing unless they can come to a settlement with the second mortgage lender.

It now appears that most of the underwater second mortgage investors will be forced to recognize a 100% loss of investment based on legislative decree.

Many Losers, Some Winners

The end result of the second mortgage easy lending fiasco is a total loss for many second mortgage investors.  Most of the companies that specialized in second mortgage lending are no longer in business.  Many future applicants looking for a second mortgage loan will be out of luck as lenders abandon second mortgage lending.

Every disaster, however, seems to have some winners. Those homeowners who borrowed to the max and used second mortgage money for cars, furniture or exotic vacations and such are no doubt smiling at the prospect of having their debt extinguished.

Filed Under: Banking Industry, Deleveraging, loan modification, Second mortgages Tagged With: ,