BUSH’S SUBPRIME FREEZE – My Initial Thoughts

I know it is a bit early to do too much analysis, and until the plan is formally revealed in detail it is difficult to assess the costs and or benefits of a new proposal, however, on the surface, the plan introduced today by President Bush to freeze adjustments to Sub prime ARM Loans seems to be a fairly good step in the right direction. But I wouldn’t go so far as to say that it is enough.

According to reports on CNN.com President Bush will unveil a plan to institute a 5 year freeze on Adjustable Rate Mortgage increases for certain home owners. If you have an ARM don’t get too excited just yet. Apparantly this freeze will only be made available to those Subprime Borrowers who are current on their monthly payments. Any homeowner who is more than 30 days late, or has been more than 60 days late within the past 12 months will be ineligible. The plan, as reported, is only eligible for those loans set to adjust in 2008, and will only be available to those borrowers who are deemed unable to afford payments at the adjusted rates.

So, what do I see that I like and what do I see that is insufficient? First, I like that we are making some progress. I typically don’t like to see too much involvement from the Government in business affairs, but I also understand that if the current trend continues we may be facing the worst economic crisis this country has had since the Depression. I am glad to see the various parties sitting down and putting something together.

That being said, talk about a messy operation to administer. Remember that loans, once written to a borrower, are then sold off to various servicing companies which in turn bundle those loans with similar loans in order to sell them on the securities market. Remember also that it is not uncommon for securitized mortgage notes are frequently divided up and sold to multiple investors. So, who makes the decisions for those homeowners who are affected? Do they re-enter the underwriting process? How do they determine who takes the biggest hit in terms of profits? Does anyone really think the investors are going to simply accept lower payments than what they are contractually entitled to receive? It just seems extremely complex to me.

Not to mention the fact that on the surface it would appear that with the freeze available only to those who are current, in other words, those who can make their payments, this new program really isn’t helping those most negatively affected—the people loosing their homes.

Here is what I don’t understand: When someone gets a sub prime mortgage it should be understood that they have 2-3 years in most cases to fix their financial and credit situation. It is also understood in the mortgage industry that the vast majority of those borrowers will not do much to improve their situations, meaning in 2 or 3 years they will need another sub prime loan. The problem isn’t that the interest rates are adjusting; the problem is that there are no more lenders offering sub prime loans to those people. Many of them still need to refinance to utilize equity to pay off higher interest credit cards. Just because their mortgage may not adjust for a while doesn’t mean that they don’t need to refinance. And, to be frank, our economy could use some of those people about now.

As I have said before, simply lowering interest rates will not fix the mess, and allowing sub prime borrowers to have a few extra years will no doubt save a few homes from foreclosure, but it will not help the economy get out of the mess we are in.

REVERSE MORTGAGES

Two different people have asked me in the past few weeks about Reverse Mortgages. To be completely honest, I don’t deal with too many of these transactions. Not too many Loan Officer’s do. First, they do not pay well, second, they are rather complex, and third most of the homeowners who would qualify for a reverse mortgage are not necessarily looking for any kind of financing. That being said, I am not totally unfamiliar. I have a handful of clients who have benefited from a Reverse Mortgage. Here is some information, in case you are curious.

I will be sending out a report to my Inner Circle with additional information regarding Reverse Mortgages. If you would like to be included in this mailing, just send me a quick email at jayhart@cottonwoodmtg.com

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

• All at once, in a single lump sum of cash;
• As a regular monthly cash advance;
• As a credit line account that lets you decide when and how much of your available cash is paid to you
• As a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home (but it does not have to be owned free and clear) and be 62 years of age or older.

Pro’s and Con’s

As with any loan program it is important to consider the ways in which a Reverse Mortgage may or may not benefit you or your loved ones. There are several key advantages, such as the fact that the lender can, in no way, force or even encourage a home owner to sell the home in order to pay off the reverse mortgage. In addition, homeowners are allowed to remain in the property for as long as they are living, regardless of the amount of interest accrued. In spite of these benefits, there are some disadvantages that are worth considering: Unfortunately, several senior home owners have made poor decisions with the sudden influx of money that they receive, reverse mortgage scam artists are common. In addition, the costs of obtaining a reverse mortgage may outweigh the advantages—particularly if the lender is charging an higher than normal interest rate.

As always, if you have additional questions, or would like more information, please contact me at jayhart@cottonwoodmtg.com

RECESSIONS and MORTGAGES IN UTAH

The other day I received an email asking me if we were in a recession, and if so how that would affect mortgages and interest rates. Let me first say that I am not an economist. I took two economics classes in college and struggled mightily to survive. That being said, I have spent the better part of the past decade studying those economic factors which affect home ownership and mortgage lending. To that end, allow me to respond to the question of our current “recession” as well as its potential effects on mortgages.

A Recession is most commonly defined as an extended period of time, typically at least two consecutive quarters during which period the Gross Domestic Product (GDP) has been in a state of decline. In other words, we are in a recession when to total market value of a nations output has been slowing for 6 months or more.

Periods of recession are marked by decreased consumer confidence, which leads to limited spending. More significant, corporate spending is also curtailed, as business leaders become more cautious and less willing to take risks or extend debts. During a recession savings rates decline while wage increases slow. Typically, a recession is accompanied by an increase in Government Spending.

How does that relate to the Mortgage Market today? Well, while consumer spending slowed in September and October of this year, the GDP grew 4% in the third quarter. That tells us that while we may not exactly be in a recession currently, we are most likely teetering on the edge. The Federal Reserve seems somewhat consigned to the fact that periodic decreases to the Fed Rate will hopefully generate increases in consumer credit that will offset some of those factors that seem to be leading to a recession.

So what am I looking for? Housing prices have been in decline throughout most of the country, though not in yet in Utah (except in certain markets in the state). This decline has created an opportunity for home sales to increase. An increase in Home Sales will most likely offset many of the factors leading to Recession. If, however, consumer confidence remains low—as many potential buyers fear values decreasing more—and home sales continue to slow, we can expect a recession to follow.

Luckily, it appears that employment rates continue to increase, which typically offsets recession forces; however, with so many Americans in the habit of relying on debt, including home equity for basic spending, I don’t expect increases in employment to do too much to help our housing market.

During the recessions of the early 70’s and the early 90’s low interest rates were able to spur growth which helped greatly. Unfortunately, in 2001 and 2002, with a recession looming, rates were dropped to unprecedented lows, creating the housing explosion that most of the country has been enjoying for the past several years. Now, we find ourselves in a situation where interest rates are already so low that there isn’t much room to go. In other words, I don’t expect drastic drops in interest rates.

If we are in a recession, or about to be in a recession, I would anticipate fear preventing many people from purchasing new homes, which means that unless some other sector (services, for example, such as healthcare) provides a sudden growth spurt for the economy, then we are in for a bit longer wait than anticipated. I wouldn’t be surprised if the housing market remains cold for at least the first 6 months of 2008. Which actually means that if you are hoping for large increases to your home values you may be waiting until the spring of 2009.

THEN AGAIN, I AM NO ECONOMIST. I am a Mortgage Expert. I only know what I read and what people much smarter than I have taught me.

Those members of my Inner Circle Email List will remember a similar report which I sent out well over a year ago. As always, if you are not a part of my Inner Circle, and would like to receive periodic emails with additional information, just email me at jayhart@cottonwoodmtg.com and let me know. Also, if you would like to receive a copy of the full report regarding RECESSIONS, drop me a line and I will email it to you.