SHOCKING MORTGAGE REVELATION!!!

In news that will SHOCK the country, people that made poor financial decisions over the last 24 months continue to make poor financial decisions (and they are still not paying bills on things they still can't afford). In a Reuters article whose conclusion is just entirely too predictable, the government is reporting that borrowers that stopped paying their mortgages once, are doing so again!!! Shocking, I know.

OK, so that's my poor attempt at blogging sarcasm, but you get the point. Why would anyone expect "loan modifications" to be successful? Sure, they may help some fraction of the folks that are having a tough time and were legitimately scammed by predatory lenders, but the simple fact is that there were WAY TOO MANY people buying homes that should have never bought a home in the first place (most of them are not bad people, they just were not ready to take on the responsibility of owning a home). So, as I've predicted many times in the past, loan mods just won't work for most loans because the people that should have never bought a home in the first place still own a house they still can't really afford!!!

Since when did renting gain such a stigma? There is nothing wrong with renting a place and making it your home. We (the politicians especially) got a little caught up in this whole home ownership/american dream thing and we are now paying for it in the financial, real estate, business and every other market you can name. In what many of you may see as a bit of a stretch (but, I honestly believe it), Americans forgot that the American Dream revolves around EARNING things and not being given things (that whole sense of entitlement thing). What happened to saving for a 20% down payment before buying a house? If someone can work hard and save 20% (or even 10-15% fo that matter), they're not only putting a lot of "skin in the game" but they've also demonstrated financial management skills (i.e. they are likely to be very good credits). If we'd adhered to this very basic standard alone, we would not be in the mess that we are in! It sounded great that you could buy a house with only your good name and your word (stated income or "liar's" loans as they're now called), but it was all too obvious what would happen (people would stretch the truth...or simply lie to get what they wanted - a house they could not afford). Now, since we have not learned our lesson, let's give people something for nothing yet again - e.g. freebies to show them that defaulting on a loan ACTUALLY HAS A REWARD!!!!

So, let me summarize why this is such a silly policy:

1) people that should have never bought a house still own houses
2) the resultant homeowners STILL have no skin in the game (formerly known as a down payment); and, most importantly,
3) defaulting borrowers ARE BEING REWARDED for defaulting!

It's quite easy to see that people are going to continue to default until they stop getting freebies. I have several friends who are thinking of defaulting on their mortgages just so they can renegotiate with the bank! If this kind of silly policy continues, the downward cycle we are now in will only last longer and be more painful than it has already been. I really hope that does not happen. Wake up, Washington!!!

Let's wise up!

Early Christmas Present from the Fed: Refinance NOW!

As you may or may not know, mortgage rates have plummeted over the last couple of days on the news that the Fed is going to be buying $500 billion (about 10% of the entire market) worth of mortgage backed securities. So, now could be the best chance you will have in the next couple of years to refinance your mortgage. PLEASE consider locking yourself into a fixed-rate mortgage. You will sleep better, I assure you.

Here is a run down of what's happening from our friends at Bankrate.com.

Fed will buy $500 billion in securitized home loans
By Holden Lewis• Bankrate.com

Mortgage rates plunged after the Federal Reserve announced that it would buy up to $500 billion of securitized home loans.

Rates on 30-year, fixed-rate, conforming mortgages fell well below 6 percent after the Fed announced Tuesday morning that it would buy up to a half-trillion dollars' worth of mortgage-backed securities over the next year to year-and-a-half. Bankers and brokers say rates fell as far as 5.25 percent, at least for a while. Last week, the 30-year fixed averaged 6.33 percent in Bankrate's weekly survey.

The rate reduction is exactly what the Fed intended: "This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the central bank said in its announcement.

"It's pandemonium around here right now," says Bob Walters, chief economist for Quicken Loans. "This is going to have a major effect on refinancing opportunities and it should absolutely translate into increased home buying."

Walters offers a hypothetical example of a California house that has lost $175,000 in value over the last couple of years. In 2006, a borrower would need a $500,000 mortgage to buy the house; today, a borrower would need $325,000.

Two years ago, the average rate on a 30-year fixed was about 6.5 percent. At that rate, the principal and interest on a half-million-dollar loan was $3,160 a month. Now, if someone borrowed $325,000 at 5.5 percent, the monthly principal and interest would be a more affordable $1,845.

The Fed's action helps not only buyers, but also homeowners with adjustable-rate mortgages who want to refinance into fixed-rate loans.

Government gift
The mortgage and real estate industries look upon the announcement as a gift from Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

"Wow," says Jim Sahnger, mortgage broker with Palm Beach Financial Network, in Stuart, Fla. "I don't know who invited Bernanke and Paulson to Thanksgiving, but I'm glad they did! They showed up with the equivalent of a 50-pound bird and all the fixin's today, ready for the table."
He suggests that borrowers apply for loans and lock rates quickly, in case rates rise again or home values continue to fall. Declining home values can endanger owners' ability to refinance. Sahnger advises homebuyers to talk to mortgage brokers or loan officers early in the process, to identify "any issues you need to deal with prior to writing a contract," such as errors on credit reports.

Ryan Kennelly, a mortgage banker for Residential Mortgage Services, Inc., of Bedford, N.H., says the Fed's action is huge, for two reasons. "First, with lending institutions getting the much-needed support of the U.S. government, they (lenders) will ease some of their most restrictive lending rules -- opening the door to more consumers to get loans," he says, adding that more qualified borrowers means more home sales.

Second, Kennelly says, "this news also couldn't be better for current homeowners who want to stay in their homes but can no longer afford the payments due to their adjustable-rate mortgage increasing. By interest rates coming down, combined with lenders easing some of their qualification requirements, more and more homeowners in this situation will be able to refinance."

Dan Green, a mortgage broker for Mobium Mortgage in Cincinnati, calls the Fed's purchase plan "an explicit safety net for lenders, and that should encourage more lending."

The Fed's decision to cut mortgage rates won't help people who can't refinance because they owe more than their houses are worth. And people who already are two or three months' behind on their home loans probably won't get much out of it, either, says Dean Baker, economist for the Center for Economic and Policy Research, a Washington think tank.

Lack of transparencyBaker worries about lack of accountability or transparency: The Fed and the Treasury have not disclosed details about their purchases under the Troubled Asset Relief Program, setting a precedent for secrecy about the Fed's purchases of mortgage debt under the plan announced Tuesday. "We don't know who they're going to be buying bonds from, or how much they'll pay -- or if they'll overpay," Baker says, adding that if the Fed pays a dollar for a security that's worth 20 cents, "that's the same as handing (the seller) 80 cents." Baker adds: "I think it takes a lot of gall to do something like this."

Green says that there is an element of moral hazard in the Fed's action: In the future, borrowers might expect a bailout from the unintended consequences of this action. Nevertheless, the Fed's buying binge might be the best way out of a dilemma. "On moral hazard, some say it led to the bubble. It may now lead the economy back," Green says, koan-like.

Yields fall, mortgage rates do too
By buying mortgage-backed securities, the Fed will be taking direct action to reduce mortgage rates. That's because mortgage-backed securities behave like bonds. When bond prices rise, their yields fall. A wonkish detour into the behavior of bonds will illustrate this point.

A bond is an IOU. Let's say you lend someone $100 and the borrower gives you a piece of paper, promising to give you $105 a year from now. That paper is a $100 bond with a 5 percent yield. The yield is equivalent to an interest rate. Now assume that the government stepped in and offered to give the borrower a better deal: $102 now in exchange for $105 a year from now. The bond's yield would be roughly 3 percent. That's how the bond's yield gets lower as the price gets higher.

The Fed says it's going to be that buyer who pays a higher price for the bond, causing the yield to drop. As the yields on mortgage-backed securities fall, consumers generally see mortgage rates fall, too.

By pledging to buy up to $500 billion in mortgage-backed securities over the next 12 to 18 months, the Fed is signaling that it's ready to buy a big share of the conforming mortgages underwritten during that period. That could keep bond yields and mortgage rates down. So far this year, Fannie and Freddie have issued about $857 billion in mortgage-backed securities, and the issuance pace has slowed dramatically in recent months.

What happened to personal accountability?

The $700 billion bailout package has raised a lot of eyebrows on Main Street. After all, isn't it Wall Street's fault for making all these risky investments that went bad? If so, why on earth would the government want to use taxpayer money to bail them out? Well, I've listened to a lot of radio commentary and read a whole host of opinons and articles on the topic and I am disheartened by one key thing that is missing in all of these pieces; where is the personal accountability in all of this?

Let me make this a bit more clear for you if you are having trouble following me. If you were walking down the street and a drug dealer popped out and offered you some drugs for free, would you take them? You know it's bad for you even if it is free. You know this decision is not likely to have a good outcome for you, but you decide to give it a shot anyway because everyone else is doing it and the dealer tells you it's good for you and you can handle it.

Is it the dealer's fault that you decided to take something you knew was bad for you? Now we all know that the dealer is a bad guy and should be punished for breaking the law and dealing drugs. But, aren't you also somehwat responsible for your bad choice? Shouldn't you shoulder some of the blame?

By now, you know where I am going with this. Sketchy mortgage brokers and slick Wall Street types told you that you could afford that $500,000 house even though you had not saved for your down payment and you only made $50,000 per year. After all, all your friends and neighbors were doing it, right? Even though it was available to you, you knew it did not make sense that you could get such a loan. But, you took it anyway. Then, when your house rose to $700,000 in value, another slick mortgage broker told you take take a second mortgage for $200,000 so you could put in a pool, go on that nice vacation and buy that expensive car. Or maybe you could just refinance your first mortgage and "Pick Your Payment" so that you could cover the new GIGANTIC mortgage (at least for 12-24 months until the payment adjusted). Hey, you deserve it and everyone else is doing it. Never mind that you couldn't affored the first mortgage payment much less the second mortgage payment.

Now that all of these loans are going bad (not really a shocker, by the way), banks and mortgage companies are going under and the securities issued to allow these silly loans are defaulting, people are trying to blame everyone but themselves. Greedy CEOs, lying mortgage brokers, etc. are the only ones to blame. It's not my fault that my payments are TWICE AS MUCH as my income!!

Why don't people start to take a little responsibility for their decisions and actions. Sure, there are plenty of cases of legitimate fraud, lying, cheating and stealing and the corporations that profited from all of this mess should also be severely punished. But, if that were the only problem, we would not be in this mess. The bottom line is that Americans have spent more than we make for over a decade now (think negative savings rate) and it is catching up to us. So, here is who I blame (in my opinion):

1) Individuals: if you are not diligent enough to read your own loan documents and understand them, then you probably shouldn't be taking on the debt required to buy a house, car, etc. While the small print is mind numbing for sure, the Truth in Lending Disclosure is actually pretty easy to read (shows the costs of the loan and your payments over time). If your paycheck was only $2,000 per month, you can't afford a $4,000 per month payment (now or 24 months from now)! It really is that simple! Spend less than you make (that's called saving, by the way) and don't get duped into believing it's OK to do otherwise.

2) Congress/Federal Reserve: The knuckleheads in Congress and the Fed have promoted easy money for so long now that we all believe we are entitled to it. When a number of Congressmen raised the issue that Fannie and Freddie might be a disaster in the making (in 2004 and 2005), most folks in Congress buried their heads in the sand. "We are meeting our housing objectives" (this is code for people that can't afford homes are getting loans for them - this is also known as "subprime" and the initial shoe to drop in this mess). Even Alan Greenspan (who shoulders a good chunk of the blame for his easy money and 1% interest rates) noted that Fannie and Freddie were a potential ticking time bomb. No one in DC listened and now they want to spend $700+ billion to try to fix the problem (I'm skeptical this will work, by the way).

3) Wall Street/Ratings Agencies: We were all convinced that the smart guys on Wall Street had invented a way to make risky borrowers less risky. Somehow, through financial alchemy, Lehman Brothers, Bear Stearns, UBS, etc. all convinced us that you could take a bunch of risky loans, wrap them up into a nice little bow, slap some insurance on them and call them AAA quality. Then, the ratings agencies, who were being paid to provide ratings on these securities (no conflict there), called them "Investment Grade" which allowed pension funds, retail investors and others to buy them up. As if that weren't bad enough, the investment banks et al decided to borrow 30 TIMES their equity capital to buy these toxic securities (for every $1 of capital they had, they would borrow $30 and buy these bad securities). When it came time to borrow more money as loans came do, the investment banks imploded.

So, what can we learn from all of this? First of all, people need to take responsibility for their own decisions and the consequences for those decisions. If you bought more house than you could afford, you have to live with the consequences of that decision. If you are spending more than you make on your credit cards, that too has a consequence for you. Just because you got a great 0% APR offer (think free drugs - see above) that doesn't mean it's a good decision to load that card up. I fear that the government bailout only reaffirms the dangerous and increasingly pervasive cultural phenomenon that individuals are not responsible for their own decisions. If there is always someone to bail you out when you make a bad choice, then is it really all that bad a choice to make in the future? The corollary to this is that good decisions are not rewarded, but rather penalized (think higher taxes). Until we return to the basic economic principals of freedom, individualism and true capitalism, I fear there is going to be a lot of economic pain in our great country.

Housing Crisis Over? Mixed Data Suggests....

P2P-Loans.com has recently noticed a number of smart folks writing about the end of the housing crisis. In two separate articles in the WSJ ("Opinion: The Housing Crisis is Over" and "Is Housing Slump at a Bottom?"). These articles make very valid points with regard to housing starts, low interest rates, etc. What these articles fail to debate in any material fashion is that housing prices relative to disposable income are still extremely high!

This chart from Ned Davis Research (the line graph at the bottom of this page is most relevant) demonstrates that we remain at very high price levels relative to historical data. Ultimately, the value of housing is a function of affordability. When it's all said and done, this is the single most important factor that drives demand for new housing and the price of such housing. For example, the data in the chart suggest that in 2001 (yes, interest rates were in the sub 7% range for 30-year fixed mortgages then as well) the Median New Home Price / Disposable Income ratio was near its 30-year average, which is where it had been for the better part of 15 years. In fact, the ratio had been even lower before that, however this is likely due to the artificially high interest rates of the 1970's and early 1980's.

This dynamic has served to dramatically reduce demand for housing in conjunction with tougher lending standards (fewer buyer approved for new mortgages) and skitish buyers (when will prices stop falling). As a result, housing inventories have spiked to record highs. Accross the US, housing inventories are more than double typical levels, and are as high as 4-5 years worth of inventory (versus a long-term average of 5-6 months) in formerly hot markets such as Florida and California.
According to a recent post at Seeking Alpha, housing inventories are beginning to come down, but remain well above historical averages. Seeking Alpha points out that, at the current sales pace, inventories of new homes will be "back to normal" by the end of 2009. Simply put, we will be in a supply/demand imbalance for the next two years (and this is assuming that the market doesn't overshoot to the downside, which it's been known to do in prior busts - think about when many tech stocks were trading at less than cash value in 2003). The data is similar on the inventories of resales as well. In my estimation, this means we still have a ways to go before calling the end of the housing crisis. I hope I am wrong.

On a side note, the government is trying to push through a MASSIVE bailout program. Generally, when the government makes a move like this, they are too late to the party. Thus, this single fact alone could lead one to believe we are at the end of the housing crisis.

Tax Payer ALERT! The Gov't Wants To Bail Out Troubled Homeowners

Is there a tax-payer funded (err... "government sponsored") bailout coming for honeowners? Momentum appears to be building for a broad-based program to bail out folks that bought homes in the boom times and can no longer afford to make their payments (e.g. are approaching or are already in foreclosure proceedings). This has been a topic of much debate. For those that made smart, sound financial decisions (e.g. didn't borrow more than they could afford to pay back, and read the fine print on their mortgage documents, etc.), this seems like it might be unfair since the taxpayers will potentially be bailing out these folks. But, as the outline below reflects, the current debate in Congress revolves around structuring a compromise that enables any eventual program to pay for itself. P2P-Loans.com is encouraged by some of the provisions being discussed (especially the payment of insurance premiums to the FHA and a sharing in any equity gains to homeowners upon a sale). We would hope that the equity gain sharing is substantial and not a pittance given any gain will be made entirely on the backs of tax payers (errr...the "government-sponsored" program). Generally speaking, the government has a terrible track record on projects like this (they underestimate the total costs, botch the execution and mess up a market-based system that works pretty well in the long run).

Here is a summary (from an article at Money.com) of what's being debated (P2P-Loans.com will report back on this issue once a program is passed):

While critics worry that an FHA rescue plan could amount to a bailout, supporters say it's not since everyone involved - lenders, borrowers and mortgage investors - would make a sacrifice.

Lenders get 100% backing from the FHA if a loan goes south. In exchange, the lender takes a "haircut" - reducing the principal owed and converting adjustable-rate loans to fixed-rate mortgages.

Borrowers get to keep their homes, but they would pay a premium to the FHA for the mortgage insurance and they would have to give a small portion of their equity to the FHA when the house is sold. They would also have to show they can afford the newly refinanced loan.

Mortgage investors - while they would sacrifice some future income from loans that have been reduced - would have more confidence investing in the new loans since the refinanced loans will be affordable and the borrower therefore will be more likely to pay them back.

Rebate for the Rich? Stimulus Plan Has Something For the Wealthy, Too!

P2P-Loans.com came accross this Fortune magazine article and thought our readers might like to know more about the stimulus plan (even if you don't qualify for the rebate check, READ ON). In a previous blog post, we wrote about the tentative stimulus plan (at the time of our posting it was not a done deal) and what it might mean to taxpayers. But, we didn't know about the details (and impact) of the change in the conforming mortgage amounts (discussed in the article below). The bottom line is that if you are an owner of an expensive home, but do not qualify for the tax rebate, this could be a huge money saver for you!

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A gift from the Beltway

High-income folks like me don't qualify for rebate checks. But we're getting so much more.

By Allan Sloan, senior editor at large
(Fortune Magazine) -- I won't be getting an economic-stimulus tax rebate check, but I'm not complaining about it. Not only am I fortunate to make too much money to qualify for a rebate, but I'm getting something far more valuable than the maximum $1,200 my wife and I could have gotten. Thanks to a relatively little-noticed portion of the stimulus package, we'll be able to refinance our house more cheaply than we otherwise could, or presumably sell it for more.

This means that higher-income couples like us who don't qualify for rebates because we have adjusted gross income of more than $174,000 ($87,000 for singles) are arguably getting a better stimulus deal than the 130 million taxpayers to whom Uncle Sam is sending payments.

Let me take you through it. The stimulus package raises the maximum size of a "conforming" mortgage to $729,750 from the previous cap of $417,000. A conforming mortgage is a mortgage that can be sold to Fannie Mae (FNM) or Freddie Mac (FRE, Fortune 500), and it carries a lower interest rate than "jumbo" loans that exceed those limits. Similarly, the maximum mortgage that can be insured by the Federal Housing Administration has also risen to $729,750. For people in high-home-price areas, including mine, these maximum mortgages are now high enough to matter.

Doing the math
Being able to borrow $417,000 on the cheap doesn't help much when you're hoping to sell or refinance your house for, say, $750,000. But a $729,750 limit works out just fine. This higher limit translates into cheaper refinancing or a higher sales price, because the lower interest rate means buyers can presumably afford to pay a higher price.

If we assume a 5% down payment, we're talking about houses in the $450,000 to $765,000 range becoming eligible for these loans. The range rises if people make larger down payments or put second mortgages on top of these loans.

We're talking major money here, folks. In today's market, the interest difference between a conforming loan and a non-conforming loan for a 30-year fixed-rate mortgage is a whopping 1.27% a year, according to Keith Gumbinger, a vice president at HSH Associates, a mortgage research firm. So a $700,000 conforming loan at 6.01% would carry almost $9,000 less annual interest than a nonconforming loan (at 7.28%).

Gumbinger says that's an artificially high difference caused by the current freeze-up in credit markets. "The spread was about 20 basis points [20-hundredths of a percent] before things got ugly in June," he says. So even if normalcy returns - alas, that doesn't seem imminent - having a $700,000 conforming mortgage would cut a borrower's interest costs by $1,400 a year. Call it $1,000 a year after taxes if you itemize. That's worth much more than a one-time $1,200 nontaxable rebate payment.

READ THE REST OF THIS ARTICLE ON FORTUNE.COM...

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GOOD NEWS - Your Home's Value is Falling! (huh?)

The rapid decline in housing values has been a bit shocking for many folks and has resulted in a lot of lost wealth (did we ever really have that money to begin with)? According to Standard and Poor's Case-Shiller index, home prices have dropped an average of 14% since March 2007 and more than 30-40% from the peak in some areas (viva Las Vegas condo living). But, there is a silver lining in all of this morass - your property taxes should be falling, too! In Florida, for example, property taxes have soared along with home prices. A $500,000 home in Tampa, Orlando or Miami, which is a 3-4 bedroom home in a reasonably nice area (hardly a mansion) will set you back some $10,000 in taxes per year (yes, you are renting your home from the government despite being told you are a "homeowner" - but that's another posting)! That same house would have cost you $200,000 and $4,000 per year in taxes a recently as 2002 and is now worth $400,000 or less (if you can find a buyer).

But, there is a catch! It's not the "true value" of your home that matters when it comes to taxes, it's the assessed value. This is where it gets tricky - places like California have wierd laws such as Proposition 13 and Proposition 8, which serve to confuse the heck out of homeowners. I have a friend that had to take his local property appraiser to court TWICE! in order to get his property taxes reduced. He won on both occasions, but it was not without a fight. In this time of strapped municipal budgets and a slowing economy, I would encourage you to do your homework and be sure that your property is assessed at the proper value since your government is more likely to leave your values too high. With prices expected to continue to fall over the next 1-2 years (especially in once hot markets like Florida, Las Vegas, California, etc.), now is a good time to make sure you aren't paying your local government too much of your hard-earned money.

If you'd like to learn more about your state's property tax system, go grab a six-pack and get hammered because you must be crazy...just kidding. You can visit http://www.assessor.com, which offers quite a bit of information on this topic as well as links to many local property appraiser offices. If your office is not on this page, head to www.P2P-Loans.com and use the Google search box at the bottom of the page. Enter "'your county name' property appraiser website" and you will most likely see your local site pop up.