Mortgage Archives - Page 3 of 4

Congress Considering Scrapping Mortgage Aid Programs Due To Ineffectiveness

Over the past year or so I've written quite a bit about the Obama administration's Making Homes Affordable program, as well as other mortgage modification programs.

The programs were conceived of and put into place to help homeowners buy homes and prop up a floundering real estate market, in addition to helping homeowners already in their homes – to be able to stay there. The Home Affordable Modification Program aimed to help homeowners facing foreclosure to stay in their homes.

End Or Revamp The Mortgage Programs?

While the heart of those programs may have been in the right place, the management of the programs hasn't been as good as could have been hoped, and now some members of congress are calling for the programs to be either killed or completely revamped.

A handful of foreclosure prevention measures run by the Obama administration are so ineffectual, inefficient and complicated that, according to Republicans in the House of Representatives, the programs should be killed outright.

The House is scheduled to vote this week on getting rid of a refinance program for Federal Housing Administration loans and another program, scheduled to begin next month, that would help homeowners with delinquent payments.

The House Financial Services Committee is expected to vote Wednesday morning on ending two other measures: One of them is a massive effort that was designed to adjust up to 4 million mortgages but so far has tackled just half a million successfully. The other is the Neighborhood Stabilization Program, which steers money to communities hit hard by foreclosures.

Republicans point out that the programs thus far haven't reached the goals that were set out for them, and because they're so complicated and convoluted, the programs really haven't helped as many as they should have. Given recent economic developments, they also say we just can't afford the program anymore. Democrats don't think they should be killed, and some like Barney Frank suggest that the program should be funded by the big banks.

The Treasury Department and many Democrats argue, though, that the programs – though flawed – are fixable, and consumer advocates say the measures offer the last, best hope for many struggling families.

“It's all we have,” said Hazel Mack-Hilliard, the director of the mortgage foreclosure project with Legal Aid of North Carolina. “To have nothing and just say let the lenders do it, that's worse than nothing.”

The bills' chances of becoming law are slight, because Democrats control the Senate and the Obama administration supports the programs. But Republicans say their effort will shine a light on inefficient programs that they say aren't working and, in the worst cases, do more harm than good.

Mortgage Programs Hurt More Than Help?

Ending the ineffective programs would save the government a few billion dollars. While that is a worthwhile reason to end the program in my opinion, others are saying that another reason to end it is that it just isn't effective, and in the end what it mostly does is string people along and give them false hope. Too many homeowners have been strung along for months only to then be told they didn't qualify, or that they didn't send in the correct paperwork – even though they had.

Neil Barofsky, the special inspector general for the modification programs through the Troubled Asset Relief Program, told Congress last week that “HAMP has been beset by problems from the outset and, despite frequent retooling, continues to fall woefully short of meeting its original expectations.”

He blamed the Treasury Department for refusing to adopt “meaningful goals and benchmarks” for the program, but he stopped short of saying the Home Affordable Modification Program should be shuttered altogether.

The program was setup to fail from the start because it had no meaningful goals or benchmarks, and in many cases the banks had more incentive to foreclose, than to modify mortgages.

At this point it sounds like the bills to terminate the mortgage programs will have enough votes in the House, but the Senate and President Obama have signaled that they won't agree to end the mortgage programs. If the programs aren't ended, however, let's hope they are re-tooled and started off fresh – and that they're not just delaying the inevitable for some struggling homeowners.

What do you think? Have you had experience with HAMP or HARP programs? Were you helped by them, or did you get strung along? Did you end up getting denied a modification or refinance despite following the rules? Do you think the programs should be ended?

Number Of Underwater Homes Declines, But Foreclosures Are Up

By Mr. Money 2 Comments

A while back we wrote several posts about how millions of homeowners (more than 11 million of them) were finding themselves in a situation where the values of their homes had dropped, and they found themselves underwater in their homes – with negative equity. In other words, their homes were now worth less than they paid for them. We asked if it was morally ok to stop paying the mortgage on an underwater home, in addition to exploring the tax implications of defaulting on your underwater home.

My wife and I unfortunately bought at the height of the market as well – back in 2006 – and if we hadn't put down 20% on our new home, we'd be underwater now as well. We've lost over $40,000 of equity in our home. While that stinks, at least we weren't buying our home as an investment, and we weren't banking on it going up. We were simply buying our home as a place to live.

Since I wrote those posts, what has been going on in the market? Have the number of underwater homes improved?

Number Of Underwater Homes Declines

The 3rd quarter of 2010 saw the number of homeowners were were underwater in their mortgages fall. But what was the reason?

The number of U.S. homeowners who owe more on their mortgages than their homes are worth fell in the third quarter, but the decline stemmed from banks getting more aggressive on foreclosures, not from home values going up, according to trade-industry data released Monday.

The total of so-called underwater mortgages fell to 10.8 million at the end of September, down from a peak of 11.3 million at the beginning of the year, according to CoreLogic, a real-estate data firm. The latest total accounts for nearly 22.5% of U.S. homeowners with a mortgage.

So the number of underwater mortgages fell from11.3 million earlier this year to 10.8 million – or 22.5% of homeowners. But the reason wasn't necessarily a good one. Home values have not gone up. Instead, it's because the banks have become more aggressive in moving forward on foreclosures.

Foreclosures Are Increasing

It's amazing to me that this many people have gotten themselves into these types of situations where they end up getting foreclosed on. If you were able to afford the house when you bought it, shouldn't you still be able to afford it now that the value has gone down?

Or is the problem more of one where people ended up buying homes they couldn't afford at inflated prices – because the prices were being artificially propped up by the homebuyer tax credit?

The drop in underwater mortgages hardly reflects a rebound in the housing sector because home prices didn't rise in the third quarter. Rather, the number of underwater homes declined as banks took back those homes and wiped out the debt through foreclosure.

Home prices, meanwhile, appear to be declining again after tax credits that spurred sales produced modest price gains during the first half of the year. Home values could drop by an estimated $1.7 trillion this year, a 40% increase from a year ago, according to Zillow.com, a real-estate website. Most of the decline is expected in the second half of the year.

The figures underscore how fragile the housing market remains. As home prices fall, more borrowers will sink underwater. Another 5% decline in prices would leave an additional 2.4 million homeowners underwater, according to CoreLogic.

The Real Estate Market Is In Trouble

So it really seems like our housing market is on the verge of catastrophe. Things are pretty bad.

The underwater problem could also weigh on housing markets because homeowners without equity are less likely to act like traditional homeowners and spend money on their homes. While the homeownership rate during the third quarter fell to 66.9%, according to U.S. Census Bureau data, the effective homeownership rate, which excludes underwater homeowners, is just 56.6%, according to CoreLogic.

That problem is particularly acute in boom-to-bust markets such as Las Vegas. The official homeownership rate stood at 58.6%, but after excluding borrowers with negative equity, the rate fell to just 14.7% in August 2009, according to the New York Fed study.

While the homeownership rate has fallen back to 1999 levels, homeowners' equity as a share of household real estate is lower by one third and is below 40% for the first time since World War II.

Some markets, like Las Vegas, are a lot worse than other markets, particularly because they had such huge housing booms a few years back, with people buying homes, getting sub-prime financing or no down payment loans. Now that they're finding themselves underwater, a lot of those folks are deciding that staying in those homes just isn't worth it.

What do you think of the crisis that we're having in real estate? Do you think it will continue getting worse over the next couple of years, and that we'll see a return of stricter bank lending standards? Will more and more people begin defaulting and being foreclosed on? What are you thoughts?

Mortgage Rates Are Low, But Are The Homes Affordable? [Infographic]

By Mr. Money 3 Comments

My wife and I are currently thinking about upgrading our home because the prices in our market are so much cheaper than they've been for years, it almost seems like it would be a bad idea not to jump in and buy the home of our dreams. After all, it'll probably never be this affordable again, right?

When I was looking around the web this week I saw a post over at GoBankingRates.com talking about how just how much the home prices have gone up over the past few decades. It seems like they've been going up at an ever exponentially increasing rate. In fact, median home values are 7 times higher than they were 70 years ago, when the first housing census was done in 1940. That means in 1940 the median home value was $30,600 while in 2010 it is $219,700. That's quite a jump.

But here's where the numbers get even crazier. From GoBankingRates.com:

Between 1950 and 1960, the median price of a home rose from $44,600 to $58,600–an increase of roughly 23 percent. However, from 2000 to 2010, the average home price went from $119,600 to $219,700, which is a jump upwards of 84 percent over a similar 10-year period.

So while mortgage rates are nearing all time lows this year, we're still seeing record numbers of foreclosures and people going into default. The reason? So many of those people are still buying homes that they can't afford, and since the unemployment rates are hovering around 10%, many people have lost their jobs, and even if they could afford these homes in the first place – once they've lost a job it becomes unmanageable.

When home prices go up on average over 84 percent over a decade, the home prices are getting to a point where they're not really realistic anymore. In my opinion there needs to be a correction, and I think the real estate market may be in it for the long haul now.

Current State Of Home Affordability Infographic

Here's an infographic from GoBankingRates.com that looks in depth at our current housing situation. Lot's of interesting data here. (click to enlarge)

Find the best bank rates at GoBankingRates.com. via: Credit Score Blog

Renting Vs. Buying A Home: Which Is The Best Choice?

By Mr. Money 2 Comments

When my wife and I bought our new home in 2006 we were moving from a neighborhood that was undergoing significant changes. Not only was the neighborhood starting to have more crime and lack of homeowner pride, we also discovered that there was a new 4 lane highway going in within throwing distance of where our townhouse sat. It was a scary prospect, and we didn't want to have to put up with the sounds of loud cars rushing by our house every day. So we decided to pack up and sell our house fast. The only question now was whether we would buy something right away, or whether we would rent.

In our culture home ownership has almost been deified, to the point where if you don't own your own home, something is wrong. You might say that some of that cult of home ownership also helped to bring about the recent real estate and economic meltdowns (remember how they were pushing home ownership on a whole lot of people who couldn't really afford it?). From CNN:

Modern America has long paired the “American Dream” with home ownership. The idea of staying put, paying property taxes and periodically mowing the lawn belonged to citizens who were somehow more American than the poor saps who could only afford to rent the place they called home.The notion isn't accidental. Ownership and the American Dream are deeply linked in government policies that favor mortgages over rent payments, dating back before Herbert Hoover was elected president in 1929.

While I still think that home ownership is in many cases a good thing and can be a blessing, if you're not careful it can also become a curse. You need to make a careful examination of the facts in your own situation before you jump headlong into purchasing a home.

Questions To Ask Before You Rent Or Buy A House

Some things you might want to consider before making a decision on whether to buy or rent:

Do you have a nice emergency cushion saved up? At our house this meant having at least 3-6 months of expenses saved up – that would not be used for a down payment. That would need to be saved separately.
Do you plan on being in the house for more than a few years? In most cases you would probably need to be in the house for at least 5 years to break even with costs associated with the loan and closing.
Are you able to put down a sizable down payment? 20% is a good goal to have because it can help you to avoid paying private mortgage insurance.
Do you have any outstanding debts – especially high interest credit card debt? Pay that debt off first!
If you were to rent, how much would it cost in your area? Is it enough less than buying after added ownership costs that it will be worth your while?
Do you expect to be downsized or let go any time soon? Is your job stable?
Have you put together a zero based budget, and determined what your cash flow plan is?
Do you know how much of a home you can afford? Dave Ramsey suggests not buying a home more than 25% of your income.
Do you feel you understand the complete costs of home ownership? Don't forget all the fees, property taxes, association dues, etc.

Another good resource for helping you to make a decision on whether to rent or buy are rent vs. buy calculators like the one found at dinkytown.net or the New York Times: Rent Vs. Buy Calculator vs. Rent Vs. Buy Calculator

Conclusion

Buying a new home is a huge decision, it will be one of the biggest purchases you probably ever make. It will pay to carefully weigh your options and ask yourself all of the important questions before you just jump into something. If you don't, the homebuying blessing can quickly turn into a curse. Remember, there is absolutely nothing wrong with renting, and for many people renting is actually the better choice.

What do you think about renting a home instead of buying? Have you ever made the choice to rent instead because it seemed to be the more logical choice? Have you ever bought a home and regretted it later? Tell us your thoughts in the comments.

Nearly Half Of Homeowners Leave The Making Home Affordable Loan Modification Program

By Mr. Money 7 Comments

I recently wrote about the Making Home Affordable Loan Modification program that the Obama administration passed. The program was put in place to help homeowners to get some help in tough situations where they were having a hard time making their regular mortgage payments. If they were able to prove that they needed help and their mortgage was more than 31 percent of their income, the interest rates on their loans could be substantially be reduced, and in some cases principal reduced.

Government Modification Program Effectiveness Questioned

Since the program started over 1.3 million homeowners have enrolled in the program in order to get some help and get their mortgage payments reduced. The problem is, the program just hasn't been as effective as hoped, and the tide of foreclosures has continued.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have fallen out.

The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday's report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say.

More than 2.3 million homes have fallen into foreclosure since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year.”The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody's Analytics.

So of the 1.3 million who enrolled in the mortgage modification program, almost 50 percent of the people have fallen out of the program either because they couldn't keep up with their reduced payments, didn't file their paperwork correctly, or some other reason. Many have complained that the program is a complete mess with neither the government or the banks knowing which end is up.

Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork.

The banking industry said borrowers weren't sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

So everyone is blaming everyone else for the problems the program has had. Borrowers blame the banks and the government. The banks blame the consumers and the government. The government blames them both. My guess is that the program was ill conceived from the get-go, and it was destined for failure. At this point only $490 million has been spent out of a potential $75 billion the government has made available to help stem the wave of foreclosures.

Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government program have been cut loose through July, according to the Treasury report. That's about 48 percent of the those who had enrolled since March 2009. And it is up from more than 40 percent through June.

Another 421,804, or roughly 32 percent of those who started the program, have received permanent loan modifications and are making their payments on time.

RealtyTrac reported that the number of U.S. homes lost to foreclosure surged in July to 92,858 properties, up 9 percent from June. The pace of repossessions has been increasing and the nation is now on track to having more than 1 million homes lost to foreclosure by the end of the year. That would eclipse the more than 900,000 homes repossessed in 2009, the firm says.

To me it makes sense that only 32 percent of homeowners who entered the program have been able to get permanent modifications. After all, many of them only entered the program because they didn't have enough income to make payments. Where is the money going to come from even if the payments are reduced?

What do you think about the Making Home Affordable Loan Modification program? Do you think it was destined to fail? Have you tried to take part in the program only to get the run around? Tell us your thoughts on the MHA Modification program in the comments.

Tax Implications Of Strategically Defaulting On Your Underwater Mortgage

By Mr. Money Leave a Comment

A while back I wrote about how millions of homeowners are finding themselves underwater in their mortgage. In other words, they are finding that they owe more on their home than it is currently worth. It's frustrating to have to pay more on your home than you could get for it if you sold, and many are deciding that their best option might just be to strategically default on their mortgage. Why keep paying if your home isn't worth what you thought it was? Why throw good money after bad?

There is a heated debate as to whether strategically defaulting is OK to do morally, but plenty of people are accepting it as a viable alternative. For those that decide to go down that road, are they considering all the implications?

Tax Implications Of A Strategic Default

One thing a lot of people don't realize is that if you strategically default on your home mortgage, and the bank forecloses, you may be liable for the taxes on your forgiven debt.

In many states, any part of a mortgage that the bank forgives is reported as taxable income.

In some states, you’re off the tax hook if the bank forecloses on your original mortgage. But you could still be taxed on a home equity loan or a loan you refinanced.You’ve probably heard that the government has temporarily stopped taxing people who lose or give up their homes. That’s the Mortgage Forgiveness Debt Relief Act (otherwise known as “The Don’t Kick ‘Em When They’re Down Act”). But it doesn’t apply to every mortgage. You can be foreclosed and get a tax bill, too.

The majority of people going through foreclosure have no choice. They can’t afford the payments any more. But a growing number of homeowners are choosing “strategic default.” They’re not broke. They owe more than the house is worth and decide to stop throwing good money after bad. Many considerations come into the default decision — moral, reputational, financial, credit-score, and what the kids will think. Taxes matter, too

So if you default on your mortgage loan, even though you're able to pay the bank – and the bank forgives part of your loan, you could be getting a big tax bill.

You’re generally taxed on debt that a lender forgives. For example, say that you default on a $350,000 first-mortgage loan. The bank sells the property for $250,000. If the bank has the right to pursue you for the remaining $100,000 but doesn’t, that “forgiven” amount is taxed to you. States with these rules are called “recourse” states.

The Debt Relief law wipes out the taxes due, but only for certain types of loans.

In some states — called “non-recourse” states — a bank that forecloses generally does not have the right to chase you for additional money. As a result, the unpaid debt ($100,000, in this example) is not taxed as income. You get away scot free.

So which states are non-recourse states where you'll be off the hook for taxes?

Non-Recourse States: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington.

In other states you may be liable for taxes due if the bank forgives part of your principle balance after selling your property.

Other situations in which you won't be liable for taxes due include when you are bankrupt or insolvent.

Tax Forgiveness On Forgiven Debt Doesn't Cover All Loans

There is an asterisk on the tax free status for the non-recourse states. The tax free laws only cover three types of loans:

The original mortgage from when you bought or built the home
The balance of the original mortgage at the time you refinanced.
A cash-out refinancing or home equity loan when the proceeds were used to improve the home.

If you borrowed against your home in order to pay off a credit card, or to buy a car for example, you will be liable for taxes on those amounts.

If you do have part of your mortgage balance forgiven, the bank will issue you a 1099 for taxable income, which you can use when filing your taxes.

What do you think about the tax implications of strategically defaulting on your mortgage? Do you think most people consider that they may have to pay taxes on the forgiven amount of debt? Tell us your thoughts in the comments!

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