Millions of Americans still trapped in debt-logged homes ten years after crisis

EAST STROUDSBURG, Pennsylvania - School bus driver Michael Payne was renting an apartment on the 30th floor of a New York City high-rise, where the landlord's idea of fixing broken windows was to cover them with boards.

So when Payne and his wife Gail saw ads in the tabloids for brand-new houses in the Pennsylvania mountains for under $200,000, they saw an escape. The middle-aged couple took out a mortgage on a $168,000, four-bedroom home in a gated community with swimming pools, tennis courts and a clubhouse.

“It was going for the American Dream,” Payne, now 61, said recently as he sat in his living room. “We felt rich.”

Today the powder-blue split-level is worth less than half of what they paid for it 12 years ago at the peak of the nation’s housing bubble.

Located about 80 miles northwest of New York City in Monroe County, Pennsylvania, their home resides in one of the sickest real estate markets in the United States, according to a Reuters analysis of data provided by a leading realty tracking firm. More than one-quarter of homeowners in Monroe County are deeply “underwater,” meaning they still owe more to their lenders than their houses are worth.

The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve.

But the Paynes and about 5.1 million other U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn.

As of June 30, nearly one in 10 American homes with mortgages were “seriously” underwater, according to Irvine, California-based ATTOM Data Solutions, meaning that their market values were at least 25 percent lower than the balance remaining on their mortgages.

It is an improvement from 2012, when average prices hit bottom and properties with severe negative equity topped out at 29 percent, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts.

"These are the housing markets that the recovery forgot," said Daren Blomquist, a senior vice president at ATTOM.

Lingering pain from the crash is deep. But it has fallen disproportionately on commuter towns and distant exurbs in the eastern half of the United States, a Reuters analysis of county real estate data shows. Among the hardest hit are bedroom communities in the Midwest, mid-Atlantic and Southeast regions, where income and job growth have been weaker than the national norm.

Developments in outlying communities typically suffer in downturns. But a comeback has been harder this time around, analysts say, because the home-price run-ups were so extreme, and the economies of many of these Midwestern and Eastern metro areas have lagged those of more vibrant areas of the country.

“The markets that came roaring back are the coastal markets,” said Mark Zandi, chief economist at Moody’s Analytics. He said land restrictions and sales to international buyers have helped buoy demand in those areas. “In the middle of the country, you have more flat-lined economies. There’s no supply constraints. All of these things have weighed on prices.”

In addition to exurbs, military communities showed high concentrations of underwater homes, the Reuters analysis showed. Five of the Top 10 underwater counties are near military bases and boast large populations of active-duty soldiers and veterans.

Many of these families obtained financing through the U.S. Department of Veterans Affairs. The VA makes it easy for service members to qualify for mortgages, but goes to great lengths to prevent defaults. It is a big reason many military borrowers have held on to their negative-equity homes even as millions of civilians walked away.

A poor credit history can threaten a soldier's security clearance. And those who default risk never getting another VA loan, said Jackie Haliburton, a Veterans Service Officer in Hoke County, North Carolina, home to part of the giant Fort Bragg military installation and one of the most underwater counties in the country.

“You will keep paying, no matter what, because you want to make sure you can hang on to that benefit,” Haliburton said.

These and other casualties of the real estate meltdown are easy to overlook as homes in much of the country are again fetching record prices.

But in Underwater America, homeowners face painful choices. To sell at current prices would mean accepting huge losses and laying out cash to pay off mortgage debt. Leasing these properties often won’t cover the owners’ monthly costs. Those who default will trash their credit scores for years to come.

DREAMS DEFERRED

Special education teacher Gail Payne noses her Toyota Rav 4 out of the driveway most workdays by 5 a.m. for the two-hour ride to her job in New York City's Bronx borough.

“I hate the commute, I really, really do," Payne said. "I’m tired.”

Now 66, she and husband Michael were counting on equity from the sale of their house to fund their retirement in Florida. For now, that remains a dream.

The Paynes’ gated community of Penn Estates, in East Stroudsburg, Pennsylvania, is among scores that sprang up in Monroe County during the housing boom.

Prices looked appealing to city dwellers suffering from urban sticker shock. But newcomers didn’t grasp how irrational things had become: At the peak, prices on some homes ballooned by more than 25 percent within months.

Today, homes that once fetched north of $300,000 now sell for as little as $72,000. But even at those prices, empty houses languish on the market. When the easy credit vanished, so did a huge pool of potential buyers.

Eight hundred miles to the west, in an unincorporated area of Boone County, Illinois, the Candlewick Lake Homeowners Association begins its monthly board meeting with the Pledge of Allegiance and a prayer.

Nearly 40 percent of the 9,800 homes with mortgages in this county about 80 miles northwest of Chicago are underwater, according to the ATTOM data. Some houses that went for $225,000 during the boom are now worth about $85,000, property records show.

By early 2010, unemployment topped 18 percent after a local auto assembly plant laid off hundreds of workers. At Candlewick Lake, so many people walked away from their homes that as many as a third of its houses were vacant, said Karl Johnson, chairman of the Boone County board of supervisors.

“It just got ugly, real ugly, and we are still battling to come back from it,” Johnson said.

While the local job market has recovered, signs of financial strain are still evident at Candlewick Lake.

The community’s roads are beat up. The entryway, meeting center and fence could all use a facelift, residents say. The lake has become a weed-choked “mess,” “a cesspool,” according to residents who spoke out at an association meeting earlier this year. Association manager Theresa Balk says a recent chemical treatment is helping.

Annual homeowner's dues of $1,136 are being stretched to pay for all the upkeep. But those fees may be a big deterrent for many would-be buyers at Candlewick Lake, said association board member Randy Budreau.

“A gated community like this, with our rules and fees, it may be just less attractive now to the general public,” he said.

source: news.abs-cbn.com

Is the 30-Year Fixed Mortgage Actually a Lot of Work?

I typically refer to the 30-year fixed mortgage as a set-it-and-forget-it type of mortgage because it’s fixed for the entire duration of the loan.

The mortgage rate in month one is the same as the rate in month 360. The mortgage payment never changes, though the total housing payment could vary thanks to things like taxes, insurance, and PMI.

Put simply, it’s a very easy mortgage to wrap your head around, and for that reason the most popular and common choice for homeowners here in the United States.

The same isn’t true elsewhere in the world, which is one of the reasons why the 30-year fixed has been questioned a lot lately by economists and mortgage pundits.


The latest opinion comes from Benjamin Keys of The Wharton School of the University of Pennsylvania, who analyzed how monetary policy makes its way into households via the mortgages borrowers hold.

During the most recent crisis, those with adjustable-rate mortgages actually “won” in a sense because their rates adjusted lower when the government stepped in and bought tons of mortgage-backed securities while lowering other borrowing rates.

Meanwhile, those with fixed rates didn’t benefit at all, and in fact were trapped in their mortgages because of equity issues, namely underwater mortgages.

This meant those who ostensibly took on more risk were rewarded when the wheels fell off. And those who were seemingly prudent in their mortgage choice were punished because they were unable to refinance until HARP came along.

Does that mean we should all go with ARMs instead of fixed-rate loans and hope the government takes care of the rest?

Is an ARM the Hands-Off Mortgage Solution?

Keys noted that there is an “automatic transmission of monetary policy through adjustable-rate mortgage contracts.”

In other words, the ARM adjusts with the greater economy and the borrower doesn’t have to go out and refinance or lift a finger.

Their lender will just adjust their payment as the index changes, whether it’s up or down. Of course, lately it’s been a one-sided argument, with ARMs generally falling at the reset, instead of climbing.

This has actually led to debt reduction and new spending, with borrowers who selected ARMs choosing to pay down higher-APR like credit cards while also purchasing new cars.

Effectively, the economy was stimulated via these ARMs because it freed up cash for households to inject back into the economy through other channels.

Mortgage defaults in this group also dropped by some 36% thanks to the reduced monthly payment.

To summarize, borrowers with ARMs didn’t need to do anything to obtain lower payments, despite the fact that most probably assumed they’d have to refinance out of the ARM once it adjusted (higher).

At the same time, their neighbors with fixed-rate mortgages set at 6% were probably shaking their heads, wondering how they wound up paying more.

Additionally, they had to keep a close eye on interest rates to ensure they weren’t paying too much, and then make the decision to refinance or not. That meant a lot of work (and worrying), ironically.

Interestingly, Wharton researchers found that regions of the country that had more ARMs recovered faster during the Great Recession, saw more auto sales, and increased local employment.

Could the Opposite Happen?

The problem is ARMs can move both up and down, and everyone (including Wharton) expects rates to go up the next time around.

The big question is how things will play out when that happens. Will the borrowers who elected to take out ARMs get burnt and require a bailout?

Will home prices go down more in the areas where ARMs were more popular?

If so, might the 30-year fixed prove to be the winner it was expected to be prior to the most recent housing crisis? And as such, should it be left alone?

All to be determined…but there’s a good takeaway here. Monetary policy can dictate whether ARMs adjust higher or lower, so in that sense the Fed has the ability to provide direct stimulus to homeowners, without tax rebates or mass refinancing programs. That’s a pretty powerful thing.

But if homeowners keep opting for the 30-year fixed, it’ll be difficult for the Fed to do a whole lot, and these homeowners might just find that their mortgages are a lot more work than they expected.

source: thetruthaboutmortgage.com

Is Minority Homeownership on the Rise?

Last year the national homeownership rate increased in three consecutive quarters for the first time since 2009. Many observers hailed it as a sign that the homeownership rate, which measures the percentage of homes that are occupied by the owner, has reversed course and now will continue to increase.

Less noticed, though, were signs of improvement in minority homeownership rates. Hispanic homeownership rose to its highest level since the third quarter of 2012. African-American homeownership rose and fell during the year and white-only homeownership—though still 20 to 30 points higher than minorities—ended 2015 lower than it has been in many years.

A Growing Minority Population

Some forecasters see the tide of minority homeownership changing for the first time since 2007. The coming decades will see rapid growth in minority households, particularly Hispanic households. Over three-quarters of household growth from 2010 to 2020 and 88 percent of the growth from 2020 to 2030 will be among minorities.

In both decades, the largest segment of that growth is predicted to be Hispanic households. From 2010 to 2020, whites are the second largest group at 23 percent. But in the following decade, whites are expected drop to 12 percent and the broad “other” category (Asians, American Indians, and people of other or more than one race) takes their place at 24 percent, followed by African Americans at 20 percent.

Out of the 22 million new households from 2010 to 2030, 9 million will be homeowners. More than half of the new homeowners are likely to be Hispanic, 11 percent black, and 29 percent people of other races. A 2014 study by the Urban Institute projects that Hispanics will account for 55.5% of new homeowners from 2010 to 2020.[1]

How Higher Prices Help Minorities Qualify

Though conventional wisdom maintains rising prices make it harder for some minorities to buy homes, a new study by two economists at the Federal Trade Commission suggests that higher prices mean better times for minorities.

This is, the economists argue, because they are accompanied by a loosening of lending standards. Rising values alter lenders’ judgments about acceptable levels of risk and rates of return. “This variation may then translate into changes in the outcomes experienced by minority borrowers relative to non-minorities,” the study said.

The study found that as the rate of home price inflation within a metropolitan area increases, the gap between African Americans and whites shrinks, suggesting that, in times (or places) in which real estate is booming, mortgage lending appears to be more equal than in times (or places) in which real estate is declining. A 10 percentage point increase in the rate of house price inflation, for example, tends to be accompanied by a 0.5 to 1 percentage point decrease in the gap between the African American denial rate and the white denial rate, on average. These magnitudes amount to approximately 5–10% of the overall mean black–white denial difference.

Could the levelling of the African American homeownership rates last year reflect changing lending standards? Lending standards, especially for the FHA loans widely used by minority buyers, have loosened significantly since November 2012, before the recovery began and October 2015. Median FICO scores are down from 704 to 654, loan-to-value rations are down from 95 percent to 81 percent, and debt-to-income ratios are up from 28/41 to 29/46.

Outlook: African Americans Face Barriers

While the number of African American homeowners will rise—their 11 percent share of new homeowners actually will exceed whites’ share by 2020—the black homeownership rate will decline fairly dramatically and the gap between the black and Hispanic population will widen. This trend has percent, versus 47 percent for Hispanic households. By 2030, only 40 percent of African American households will own their homes.

The declining African American homeownership rate does not just reflect differences in age—it reflects a failure of policy and market trends to address the African American homeownership gap, according to the Urban Institute.[2]

In every age group, current trends and policies are widening the ownership gap between African Americans and other groups. This gap reflects two fundamental factors:

First, African American homeownership was particularly battered in the housing crisis, sharply reducing household wealth among African American families and dramatically lowering the long-term prospects for recovery for black homeownership at all ages.

Second, African Americans continue to lag other races and ethnicities in employment, wages and income.

These factors together contribute to a bleak homeownership forecast for African American families without dramatic changes in policy.

source: totalmortgage.com

You Can Get Interest-Only Mortgages from Mortgage Brokers Again

Party like it’s 2006! Mortgage brokers are now able to peddle interest-only mortgages to qualified borrowers nationwide.

Oh wait, that last part about being qualified isn’t really reminiscent of 2006, but I’ll get to that in a moment.

This week, United Wholesale Mortgage announced a new offering, interest-only mortgages, those which happen to fall outside the ever-important Qualified Mortgage (QM) rule.

That means they’re pretty hard to come by these days, especially via a smaller bank that isn’t dealing in jumbo loans to wealthy clientele.


UWM also happens to be a wholesale mortgage lender, meaning they work with mortgage brokers who connect with homeowners.

 Here We Go Again?


Both mortgage brokers and exotic loans types like interest-only mortgages were blamed for the most recent housing crisis, but this time things seem to be a little different, at least for now.

The lender, which claims to be “one of the nation’s largest and fastest-growing wholesale lenders,” has some pretty tough requirements attached to the loans.

For one, you need a minimum FICO score of 720, so there certainly won’t be any subprime interest-only stuff floating around.

And perhaps more significantly, you need to bring at least 20% for a down payment, as the max LTV is 80% on this new program.

That’s certainly important, given the fact that an interest-only loan only pays off interest, no principal. So if home prices are flat, or worse, fall, the borrower could wind up with little to no equity to serve as a buffer for the lender in the case of default.

The program also calls for a max DTI ratio of 42%, strangely one percentage point lower than the max DTI on QM loans.

So one might say it’s quite a bit different this time around, even if it’s still an interest-only mortgage.


Not Your Uncle’s Interest-Only Mortgage


During the lead up to the crisis, it was common to see IO loans with no money down that only required subprime credit scores. Obviously lending like that when home prices were peaking was a recipe for disaster.

Today, UWM sees the offering as a way for “savvy” homeowners “to save additional discretionary income.”

In other words, they can afford a fully amortizing mortgage, but they want to pay interest-only so they can put their money elsewhere.

There’s no problem with that, so long as the borrower is actually savvy and knows what they’re getting into. And also has a way to get out of it if things don’t pan out.

Brokers should get a competitive boost as well by gaining access to a wider product range to offer borrowers.

For the record, their IO product is just like the stuff that came before it – a 10-year IO period followed by a fully amortizing 20-year payback period.

That means monthly mortgage payments will jump once the initial 10 years are up, though if these borrowers are truly qualified, they should be able to handle it. Or simply refinance or sell before that time is up.

In any case, it’s definitely interesting to see lenders dipping their toes back into the interest-only pool, especially seeing that the Consumer Finance Protection Bureau refers to IO loans as “toxic.”

source: thetruthaboutmortgage.com

$10-billion settlement of foreclosure abuse cases said to be near

Banks and regulators worked late Sunday to finalize a nearly $10-billion settlement that would halt a much-maligned program to review foreclosures from the height of the housing crisis, according to four people familiar with the talks.

At least 14 banks are involved. Since the reviews began in late 2011, the banks have paid $1.5 billion to consultants examining foreclosure records -- but not a penny to aggrieved borrowers. Both bankers and regulators found that result untenable, officials have said.

The new agreement could be announced as early as Monday morning by the Office of the Comptroller of the Currency, the arm of the Treasury Department that regulates banks with national charters, four people familiar with the negotiations said.

The people spoke on condition of anonymity because the discussions were sensitive and incomplete. The principal negotiators included six big banks that provide customer service on 90% of all U.S. home loans: Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., U.S. Bancorp and PNC Financial Services.

Regulators were presenting the deal late Sunday to eight smaller mortgage servicers that had agreed to the reviews in 2011 but were less involved in the settlement negotiations.

The regulators were prepared to announce a settlement even if some of the smaller banks declined to accept it, three of the people with knowledge of the talks said, in part because of pressure from bankers wanting to report a settlement when they announced fourth-quarter financial results.

Other efforts to help troubled borrowers and address foreclosure abuses include a $26-billion settlement last February among five giant banks and a coalition of federal agencies and state attorneys general.

The reviews of individual cases were distinctive, however, because they represented a chance to gauge the extent of the legal shortcuts, lost paperwork and abusive fees that had prompted widespread complaints.

Consumer advocates fretted that abandoning that process could mean there would be no such definitive accounting of the foreclosure mess. And they called for detailed disclosure of how the consultants had conducted reviews and how the nearly $10 billion would be spent.

“Unlike the AG settlement, which had a huge amount of scrutiny, there’s been a real lack of transparency in the foreclosure reviews and this settlement,” said Paul Leonard, California director of the Center for Responsible Lending.

The proposed settlement includes $3.75 billion in cash payments to borrowers eligible for reviews, two people familiar with the proposed agreement said.

Under the original plan devised by the comptroller and the Federal Reserve in April 2011, 4.4 million Americans whose homes were in foreclosure proceedings in 2009 and 2010 could  request a free review. Only about half a million have done so.

Borrowers who never requested a review would get only a few hundred dollars under the proposed settlement. Those who requested reviews would get bigger payments. And those determined to have definitely or likely suffered harm from flawed foreclosures could be in line for much larger payments.

Another $6 billion in "soft" aid would assist delinquent borrowers, mainly through loan modifications, relocation assistance and short sales, in which homeowners are allowed sell their home for less than they owe on their mortgage. Some, but not all, of those borrowers are among those who had been eligible for the foreclosure reviews.  

 

Payments will be allocated according to the share of the homes in foreclosure in 2009 and 2010. That would mean Bank of America, which at the time was the biggest servicer of the loans, would pay the most.

After the initial agreement was reached with the 14 banks accused of improper foreclosures, the Federal Reserve filed enforcement actions accusing the giant Wall Street investment banks Goldman Sachs and Morgan Stanley of similar abuses. Those cases are pending and it couldn't be determined if those banks would sign on to a similar settlement.

source: latimes.com