Archive for June, 2007

Do you have an exploding ARM?

Published by
Morgan
at June 30, 2007 in Consumer Mortgage Tips and Mortgage Musings. 2 Comments

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A recent Bankrate.com survey asked “What type of home loan do you have?” The study produced some alarming results:

  • 34% of respondents said they didn’t know
  • 57% said they had a fixed rate
  • 6% said they had an adjustable rate mortgage (ARM)
  • 3% said their loan was interest only
  • 0% said they had an option ARM(negative amortization loan)

Americans are amazingly ignorant when it comes to the type of mortgage they have.  How do we know this?  Consider the following:

This makes it highly likely that the people responding to the survey are thoroughly confused about the mortgage they currently have.  A 5-year fixed loan is not a fixed loan.  It is an adjustable rate mortgage with a fixed introductory period at a teaser interest rate.  This ignorance is going to affect millions of Americans as they are shocked to see their “fixed” mortgage suddenly jump in rate and payment.  Don’t be one of those Americans.  Here are some simple steps to determine if you have an exploding ARM mortgage.

  1. Get a copy of your mortgage note and look for the following items: “Adjustable Rate Rider,” “First payment change date,”  “Negative amortization disclosure” if you see any of those terms in your mortgage note you are in an ARM and need to do some more digging to determine when your payments will adjust higher.
  2. Look on your mortgage bill.  If it says anything about “Deferred interest” or “4 payment options” you have a negatively amortizing payment option loan.  You should seriously look at refinance options.
  3. If you receive a notice in the mail that your interest rate is about to change don’t ignore it.  Lenders are required to notify you 45 days in advance of interest rate changes.  If you receive one of those notices you still have time to refinance to protect you from escalating mortgage payments.

If the prospect of digging up your mortgage note and reading through pages of legalese seem daunting don’t put your head in the sand.  I will be happy to review a scanned copy of your note for you in strict confidence.  Alternatively, talk with someone you trust to review the note for you to point out potential areas of concern.  Remember what is at stake here: your mortgage payment will skyrocket if you have an adjustable rate mortgage.  Protect yourself and family by doing the hard thing now - educating yourself - so you don’t have to suffer future pain from missed mortgage payments and potential foreclosure.

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Thoughts on The Mortgage Cancellation Act of 2007

Published by
Morgan
at June 30, 2007 in Legislation. 2 Comments

Back in April Congressmen Robert Andrews (D-NJ) and Ron Lewis (R-KY) introduced a bill to the House of Representatives called The Mortgage Cancellation Act of 2007 which called for the elimination of IRS tax penalties on “debt relief income” as it relates to the sale of your home. This is a substantial change to the existing tax code aimed a providing people who sell their homes in a short sale situation relief from additionally-incurred income tax. The bill has been referred to the Ways and Means Committee for review. From the bill:

To amend the Internal Revenue Code of 1986 to exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain forgiven residential mortgage obligations.

Current IRS code requires debt relief to be taxed as gross income. If you sell your home but are unable to sell it for an amount more than the existing mortgage on the property your lender is supposed to issue a 1099 to you in the amount of the difference between the mortgage and the short sale amount. This dollar amount then becomes taxable as gross income and must be included in earnings calculations for the year in which the relief was provided.

The new bill will eliminate that debt relief as taxable income. From the bill:

(h) Qualified Residential Indebtedness-

`(1) LIMITATIONS- The amount excluded …with respect to any qualified residential indebtedness shall not exceed the excess (if any) of–

`(A) the outstanding principal amount of such indebtedness (immediately before the discharge), over
`(B) the sum of–
`(i) the amount realized from the sale of the real property securing such indebtedness reduced by the cost of such sale, plus
`(ii) the outstanding principal amount of any other indebtedness secured by such property.

`(2) QUALIFIED RESIDENTIAL INDEBTEDNESS-
`(A) IN GENERAL- The term `qualified residential indebtedness’ means indebtedness which–

`(i) was incurred or assumed by the taxpayer in connection with real property used as a residence and is secured by such real property,
`(ii) is incurred or assumed to acquire, construct, reconstruct, or substantially improve such real property, and
`(iii) with respect to which such taxpayer makes an election to have this paragraph apply.

`(B) REFINANCED INDEBTEDNESS- Such term shall include indebtedness resulting from the refinancing of indebtedness under subparagraph (A)(ii), but only to the extent the refinanced indebtedness does not exceed the amount of the indebtedness being refinanced.

A couple of thoughts on this bill:

In general I think it is a good idea. People who are forced to sell their homes at a value less than their mortgage are already in a bad spot - an extra kick to the shins with a nice additional tax liability is not helping anyone here. There is little chance of that tax being collected (if you’re in short sale you don’t have an extra $5,000 lying around for taxes) and it just makes a bad situation even worse.

I do have a couple of problems with it as written however.

  • The bill is written to apply to any residential property used as a residence by the taxpayer. I believe that this bill should be limited to primary residences only. People who have to short sale investment properties and second homes should not be the beneficiary of this legislation. If you are a real estate investor and have to short sale some investment properties you simply made bad investments and should not be entitled to tax breaks because of it. Wall Street investors don’t get special tax breaks when stocks go down - real estate investments should be treated in the same manner.
  • It is also unclear to me if the indebtedness incurred via cash out refinances would be included or excluded in this legislation. It appears as though cash out refinances that were used to improve the property would be included; but any other use of cash out would not be included. I think this needs to be crystal clear. I believe that cash out refinances that were not used to improve the property should not be included in this relief. Cashing out your home equity is a decision that you as a home owner make and need to understand the repayment ramifications that you incur when borrowing a large amount of money. Borrowing against your home value is not free cash.

What are your thoughts on the new legislation?

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Blown Mortgage’s Podcast Recognized

Published by
Morgan
at June 29, 2007 in Podcasts. 2 Comments

Our semi-regular podcast series was recognized by Inman News today in a post/how-to podcast guide by past show-guest Joel Burslem on the Inman News blog. It is an honor to be acknowledged for the hard work that goes in to these podcasts.

If you haven’t taken a chance to listen to them I highly recommend it. And not for selfish reasons - I’ve learned more about the industry from interviewing these professionals than from any other source out there. They are an amazing resource and I am indebted to them for their willingness to take time out of their busy schedules to share their knowledge and passion with me and all of the Blown Mortgage readers.

Click here for the podcast interviews.

I have some great podcasts already in the can waiting to go live from amazing guests. Stay tuned as they become available over the next two weeks.

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What the home price collapse looks like in a neighborhood

Published by
Morgan
at June 29, 2007 in Real Estate Musings. 1 Comment

As I’ve mentioned before, I live in Ladera Ranch, CA a nice community-known unfortunately as the home of Laurie Waring, a Real Housewife of Orange County-feeling the price crunch of the housing meltdown.

We hear a lot of numbers and statistics about price drops and foreclosures but I thought I’d share with you how the whole thing is shaking down in my neck of the woods for some man-on-the-street coverage aka what it looks like in real life. I should note Ladera is only suffering modest declines of 1-2% (as reported) nothing like inland California where foreclosure-villes are popping up everywhere.

In my “neighborhood” of Ladera Ranch here are some items that I have observed that point to the meltdown at my doorstep. For reference, I originally bought our home for $610,000 in 2005 putting down $122,000.

  • 8 months ago the home right behind mine (a bit nicer, but same model) sells for $697,000 - neighbors rejoice.
  • 5 months ago a neighbor a few houses over needs to sell their home (identical to mine) in a hurry for a new job opportunity and sells for $639,000 - the neighbors get pissed.
  • 4 months ago 4 homes go on sale in our neighborhood at $635,000 - one sells at that price; the other 3 are still sitting. Neighbors get concerned.
  • 3 weeks ago a neighbor refinances their home and gets an appraised value of $670,000 (apparently the appraiser is pushing value) with a high loan to value - I think are they under water? Probably.
  • 3 weeks ago a neighbor with a nicer home than mine lists for $635,000; although it is the same property type it has granite and travertine throughout with custom everything - neighbors wince.
  • 2 weeks ago a home goes on MLS in short-sale for $595,000 this home has a 4th bedroom and an extra 300 square feet - neighbors vomit.

Where do you price your home when there is a short-sale up for $595,000 with an extra bedroom and square footage? Much lower I imagine. Now the neighbors are just praying that the short-sale isn’t approved for that dollar amount so that we don’t look as bad-off as we actually are.

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Subprime 2nd mortgages not doing well for Countrywide

Published by
Morgan
at June 28, 2007 in Mortgage News/Insight.

I can’t imagine they’re making anyone else too much money right now either. Calculated Risk updates us on a bunch of asset backed securities made up of subprime 2nd mortgages originated by Countrywide Home Loans and it ain’t pretty. From the Fitch report:

The impact of the slowdown in the housing market has been particularly evident in highly leveraged subprime borrowers, and delinquency and losses to date for series 2006-SPS1 have been significantly higher than initially expected. After 12 months of seasoning, losses to date as a percentage of the original pool balance are 9.86%. Approximately 14% of the outstanding pool balance is delinquent.

High loan-to-value (LTV) subprime loans consisting of 1st and 2nd mortgage combos were a popular product during the refinancing boom. Cashing out home equity to 95-100% using an 80/15 or 80/20 combo loan was extremely popular and the loans were readily available down to the lowest credit graded borrowers.

It is no wonder that people with little or negative equity in their homes are letting their high interest rate 2nd mortgages go delinquent. What’s the incentive to pay them? Their credit? Hardly! With a mid-500 FICO you don’t stand to lose much by taking some mortgage lates on your 2nd mortgage. Let’s face it-with a 550 or lower FICO score you have either been through a horrific incident which dessimated your credit or you’ve been living on a shoe-string, trying to survive and don’t have much room for error. If your 2nd mortgage adjusts you probably don’t have much left in the paycheck to cover that change.

If you do have a subprime 2nd mortgage and you are incurring late charges and penalties contact your lender and attempt to negotiate a loan work out or forbearance period in order to get your finances in order and take the proper steps to improve your situation.

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Is lack of home equity tapping out consumers?

Published by
Morgan
at June 28, 2007 in Credit and Economy.

Um, duh?  Capital One announced today a plan to layoff 2,000 workers in an attempt to slash $700 million in expenses from its operating budget over the next two years.  Capital One said that pressure from the mortgage market was hurting its consumer credit business:

In recent months, Capital One has said the “challenging” mortgage industry would pressure its results this year, echoing the sentiment from other financial-services firms. It has expected to earn between $7 and $7.40 a share in 2007, compared with $7.62 a share in 2006. The company noted that the earnings outlook doesn’t take into account the impacts of the expected restructuring charges.

Consumers, who are running out of equity withdrawal options, are sure to tighten spending in all aspects of their lives - including discretionary purchases made on credit offered by firms like Capital One.

Capital One is also suffering as a result of its foray in to mortgage lending via the acquisition of GreenPoint Financial Corporation, an Alt-A lender that has already laid off 440 people.

Meanwhile, the North Fork deal gave Capital One a national mortgage-lending operation, GreenPoint Financial Corp., which specializes in offering “Alt-A” mortgages. Those loans are to people whose credit records are deemed good enough to forgo proof of their claimed income or assets.

However, there are growing concerns among investors that the credit problems in the riskiest “subprime” mortgage market are spreading to the market for Alt-A loans. A recent Standard & Poor’s report showed a sharp rise in late payments and defaults on those loans.

We all know about Alt-A and the problems there.  Could this be the first sign of the mortgage equity dry-up hammering consumer spending?  I would bet yes.  Capital One, one of the high fliers in consumer credit will probably begin to see earnings impacted by factors similar to the subprime mortgage market; namely delinquencies and charge offs resulting from borrowers unable to make credit card payments.

California Housing Forecast did an interesting piece on home owners paying off credit cards before making their mortgage payments.  If that is the case and credit companies are struggling - just imagine the unpaid mortgage lenders - ouch.

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PIMCO: Subprime loans are cheap hookers

Published by
Morgan
at June 28, 2007 in Wall Street. 2 Comments

Hey, I didn’t say it. Check the latest from PIMCO and Managing Director Bill Gross in his commentary titled “Looking for Contagion in all the Wrong Places.” Gross points to the recent Bear Stearns hedge fund soap opera as the canary in the coal mine for future troubles fueled by the subprime loan reset problem.

Here is Mr. Gross talking about collateralized debt obligations made up of subprime mortgage bonds rated by Moody’s and Standard & Poors.

AAA? You were wooed Mr. Moody’s and Mr. Poor’s by the makeup, those six-inch hooker heels, and a “tramp stamp.� Many of these good looking girls are not high-class assets worth 100 cents on the dollar.

He continues that the problem lies not with the valuation of the CDOs and paper-valuations but with the millions of homes and subprime mortgages that are attached to them. The homes empty, the loans set to adjust “skyward” are all the ingredients for a perfect asset-based financial derivative meltdown.

Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.

…

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems…

Mr. Gross continues with his assessment that these delinquencies and defaults will ruin the liquidity of the Wall Street firms tied to the CDOs. That reduced liquidity will impact their ability to lend on other credit and other financial derivatives. This will impact the U.S. economy in untold ways.

Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing.

PIMCO has been bearish on housing in recent commentary but this one is so strongly worded and well reasoned that it is almost chilling.  I highly recommend that anyone up in the air on whether the subprime meltdown will impact the economy and other credit grades read this paper.

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Welcome to the new blownmortgage.com

Published by
Morgan
at June 27, 2007 in Random Thoughts, Web/Tech and Weblogs. 2 Comments

Welcome to the new Blown Mortgage web site. We’re excited to have you here and we’re excited to be moved over to WordPress. We hope that this change will provide you with more tools, features and functionality that will make your experience with Blown Mortgage even better.

There are a few changes - we’ve moved a couple of items around and removed some of the less-frequently used ones to open up the layout a bit. We’ll be tweaking the layout here and there to provide the easiest-to-read and use format possible.

If you read us in a feed I apologize for the summary feed posts - this is not what I want AT ALL and I’m trying to get it resolved ASAP so that the full posts are in the feed as well. I don’t know why WordPress defaults to summary feeds and I’m trying to figure out where to correct that flaw.

We appreciate your feedback with everything we do here and this move is no different. Please leave your comments (both positive and negative) in the comments of this post. We’ll try to address all of the ones that we like!

I’m not a designer by any means so if you have suggestions for the logo or header of the site feel free to send designs my way - we might even do a contest if we get a couple good ones.

Stay tuned for more great things from Blown Mortgage; now I can get back to posting and answering emails!

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We’re easier to blame than good old economic theory

Published by
Morgan
at June 27, 2007 in Real Estate Musings.

Lawrence Yun, the National Association of Realtors head Economist had some interesting comments that were highlighted by our friends over at Housing Doom. Yun in an article titled “The Wrong Correction” blames the bloggers and mainstream media for over-hyping the housing market collapse and subsequent consumer inaction due to “unfounded” concerns.

Consumers are hearing a lot in the media about the correction in housing, and they’re understandably concerned about whether now is a good time to get into the housing market. This hesitancy is evident in home sales volume: Even though interest rates fell to 6.2 percent in early 2007 from 6.8 percent in August 2006, and the economy added 3.5 million new jobs, existing-home sales were down 8.5 percent in 2006, with further softening expected in 2007. The irony, of course, is that although declines in sales volume have hurt real estate practitioners, they may be a plus for consumers.

To a great extent, we can thank steady media coverage of the real estate market “correction� for unfounded consumer concerns.

I love being blamed for actually causing the housing and mortgage market meltdown. It makes me feel important; although we know it is completely false and inaccurate. Is this guy for real? I would say that being afraid of paying tens-of-thousands of dollars more for a home than it ends up being worth is definitely NOT an “unfounded” concern. It seems like good, common sense to me.

The mainstream media, bloggers and anyone else not classified as a “shill” had nothing to do with the housing market meltdown. It has to do with simple economics. Things like supply and demand, inflation, speculation, unsustainable growth, take your pick from the buffet - those are the causes.

Twist from Housing Doom said it best in a yet-to-be-published podcast with me (coming soon) that if the housing bubble bloggers caused the crash it would have been triggered a year ago. The mainstream media is only focusing on the story because the number of cases of disenfranchisement, home-price slashing and mortgage company meltdowns are growing everyday. What was a low din is now a loud roar; and its not the media’s fault. I blame everyone that pumped it on the way up whether that be shills, mortgage loan officers, real estate agents, pundits, consumers, government, the federal reserve, whomever - it takes a lot to get things this out of whack; it definitely isn’t just because of a few journalists and bloggers.

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Brad Inman, Publisher Inman News Interview

Published by
Morgan
at June 27, 2007 in Podcasts.

In this edition of the Blown Mortgage audio podcast series we speak with Brad Inman, Founder and Publisher of Inman News a leading real estate news service.

Mr. Inman talks with us about the current state of the housing market, the future of real estate marketing and the upcoming Inman Real Estate Connect conference in San Francisco.

Music licensed under the Creative Commons license, The Streets of Miami performed by Dokapi.

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