The Pros & Cons of Mortgage Debt

Basics

Houses are generally the most expensive purchase most people will make. In order to swing it, most people take out a mortgage. There are a few different types to consider.

FHA loans: For first-time homebuyers with little savings, the Federal Housing Administration, or FHA, has a loan guarantee program that allows first-time homebuyers to buy a home with as little as 3% down. Borrowers do have to pay extra to have the loan guaranteed by the FHA.

VA loans: Similarly, the Veterans Administration (VA) guarantees loans to service members and eligible surviving spouses. Loans backed by the VA might not require a down payment if the sales price is equal to or less than the appraised value. No private mortgage insurance is required, as the VA insures the loan. Even if you have less-than-perfect credit, you can get a loan at competitive interest rates.

Mortgage Rates Rising: A Sign That The Economy & The Housing Market Are Improving...

Percentage of Retirees Holding Mortgage Debt At Alltime Highs...

Mountain of Consumer and Mortgage Debt Hold Retirees Hostage...

Sobering Stats Reflect The Magnitude Of Our Economic Malaise...

$23 billion of adjustable rate mortgages (ARMs) are expected to be reset from their initial interest rate in January 2011, the smallest monthly total that will be reset nationwide in 2011. The peak amount of resets this year will occur in August 2011 when $40 billion of ARMs will end their initial rate period, i.e., the length of time that the original ARM interest rate remains unchanged (source: Credit Suisse).


47 million Americans out of our population of 312 million (15%) are on Medicare today. An estimated 2.8 million additional Americans will turn age 65 during the 2011 calendar year and qualify for Medicare enrollment (source: Centers for Medicare and Medicaid Services).     


1.53 million Americans filed for personal bankruptcy (either Chapter 7, 11 or 13) in calendar year 2010, the 4th consecutive year of an increasing national total (source: American Bankruptcy Institute).


1,046,762 homes were seized by lenders in calendar year 2010 as a result of foreclosure, an average of 2,868 per day. There are 75 million homeowners in the USA, 24 million of which do not have any mortgage debt on their homes (source: RealtyTrac, Census Bureau).


50% of the 75 million homeowners in the USA have an outstanding mortgage balance on their primary residence that is more than 50% of their home's current fair market value (e.g., mortgage debt of more than $100,000 on a $200,000 home). (source: Census Bureau).


More than half of retirees surveyed (56%) were not debt-free when they retired (source: CESI Debt Solutions).

AARP Survey Results: More Despondent Respondents

A recent AARP survey regarding the financial effects of social and economic changes on Americans age 45 and over revealed:

• 28% of respondents reported having to stop contributing to retirement savings.
  
  
• 20% reported cutting work hours or taking a pay cut.
  
  
• 20% said they had problems paying for essential items, such as food and utilities.
  
  
• 20% reported having difficulties with health care-related expenses, with 33% of African American respondents reporting difficulties, compared to 29% of Hispanic respondents and 17% of white respondents.
  
  
• 33% said they put off or postponed getting needed health care or dental care treatments.
  
  
• 24% reported losing a substantial amount of equity in their home’s value that they will need for retirement.
  
  
• 17% of those aged 45-64 reported having trouble paying their mortgage or rent.
  
  

Source: AARP

Home Equity Loan Defaults Balloon

According to the American Bankers Association (ABA), lenders wrote off $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows.

So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter. Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar.

“People got 90 cents for free,” says Christopher A. Combs, a real estate lawyer. “It rewards immorality, to some extent.”

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.  

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12% in the 1st quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping.

New Record for 30-Year Mortgage Rate

Here we go again setting new mortgage-rate records!

Freddie Mac's weekly report said the 30-year fixed rate slipped to 4.44% for the week ended Thursday, the lowest since it began tracking the rate in 1971. Last week's rates stood at 4.49%, and a year ago it was at 5.29%. 

The 15-year fixed rate fell to 3.92% this week, the lowest since Freddie Mac began tracking it 1991, down from 3.95% last week and from 4.68% a year ago. 

Adjustable-rate mortgages also declined, with the 5-year rate falling to 3.56% this week, the lowest since 2005 when the lender began tracking it. 

Mortgage tracker Bankrate.com, which surveys large lenders across the country, said the average 30-year fixed loan sank to a record low for the fourth consecutive week, falling to 4.57% from 4.66% the previous week. 

The 15-year fixed rate, which is a popular option for refinancing, also fell to the lowest level in the history of Bankrate's 25-year old survey, dipping to 4.06%, from 4.11% the week before.

 While the 1-year adjustable-rate mortgage held steady at 4.8% for a fourth week, the 5-year adjustable-rate mortgage dropped to a record low of 3.92% from 3.95% the previous week.

20 Million Underwater Mortgages by 2012?

More than 14 million borrowers were underwater as of Q1 2010, and with a further 10.8% decline in house prices expected relative to Q4 2009 levels, another 6 million borrowers are likely fall into negative equity by the end of 2011, according to commentary by Deutsche Bank.

The presence of negative equity goes hand-in-hand with an increased likelihood of strategic default, as borrowers may sometimes not be willing to pay the mortgage when the house has lost substantial amounts of value.
  
The firm noted that, even when strategic default makes economic sense, many borrowers resist on moral and social grounds, as well as from fear of legal consequences.  The existence of recourse — when a lender is able to pursue a borrower's other assets — also acts as a disincentive against strategic default.  

Deutsche Bank noted 11 states are considered non-recourse — though not all explicitly forbid deficiency judgments on homes or on purchase loans. Underwater borrowers are more likely to default in non-recourse states. The greater the negative equity, the higher the cumulative default rate.

"Walk away or strategic default from a house with negative equity makes economic sense, especially in locations that have less expensive rentals," Deutsche Bank researchers said.

Many existing academic studies model homeowners' default decision based on the theoretical hypothesis that a borrower would exercise a default when it is in-the-money, i.e., when the borrower's house has negative equity.

Therefore, a homeowner with negative equity would default even though they can still afford to make their mortgage payments.

1 in 7 U.S. Homeowners Paying Late Or In Foreclosure

NEW YORK, May 19 (Reuters) - One in every 7 U.S. households with a mortgage ended the first quarter behind on payments or in foreclosure, although a peak in unemployment could mean repayment stress is easing, according to the Mortgage Bankers Association.

While the rate of new foreclosure actions has slowed, the stockpile of loans that are seriously delinquent or in foreclosure means a long path to recovery for the U.S. housing market.

"It's like shutting off the oil leak, but you still have a lot of oil in the Gulf to deal with," Jay Brinkmann, the MBA's chief economist, said in an interview.

Loans that are 90 days or more past due or in foreclosure represent a historically high 68% of all problem mortgages.

High unemployment is overwhelming efforts by lenders to alter loan terms to borrowers.

Goldman Sachs: "13 Million Foreclosures in the Next 5 Years"

Foreclosure Stat Snapshots

1) More than 1.5 million homes have been lost to foreclosure already, according to the Center for Responsible Lending.

2) Goldman Sachs is projecting 13 million foreclosures of ALL types during the next 5 years.

3) One in 10 homeowners are late with mortgage payments, according to the Mortgage Bankers Association.

4) Owners owe more than the home is worth in nearly 1 in 5 homes, according to First American Core Logic.

5) Banks are braced for record debt defaults in the 2010 New Year.

6) 7.5 million foreclosure sales will have taken place between 2006 and 2011.

7) The majority of those 7.5 million foreclosure sales, however, have not been completed yet, with 4.8 million foreclosure sales expected between 2009 and 2011.

8) In Florida, about 2 million of 4.6 million home mortgages were underwater, a rate of 45%. 

9) Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. 

10) If 1 in 5 of those 21 million households default, the losses to banks and investors could exceed -$400 billion.

As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

 
 

The Next Shoe To Drop?: Commercial Real Estate Defaults Double

Real Estate Econometrics LLC says commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4% in the third quarter as vacancies rose and rents declined.

Defaults climbed from 1.37% a year earlier and from 2.88% in the second quarter, the New York-based property research firm said today in a report.

Default rates in the first three quarters of 2009 have been the highest since 1993, the firm said.

“Mortgages originated in 2006 and 2007 are experiencing the most significant shortfalls in current cash flow relative to current debt-service obligations,” Sam Chandan, chief economist of the firm, said in the report.

Federal Reserve Chairman Ben S. Bernanke said in a November 16 speech that “the fallout” for banks from commercial real estate could slow the nation’s economic recovery.

Defaults on bank-owned commercial property mortgages posted the biggest quarterly jump from the previous quarter in six years of FDIC data analyzed by Real Estate Econometrics.

Two More Problems with Option ARMs

The Option ARMs we referred to in the previous post were most popular in bubble markets -- California, Nevada, Florida and Arizona -- where double digit home annual price increases put the cost of buying a home out of reach. That means the markets where they'll produce the most foreclosures are among the most vulnerable in the nation.

Home prices in many of the markets where option ARMs are most concentrated have fallen -30%, -40% or more.

When the loans recast, most borrowers will find themselves severely underwater.

"Because borrowers of [options-ARMs] are in a much worse position," said Westerback. "You'll see defaults rising very rapidly."

And most option-ARM borrowers will not be good candidates for refinancing or mortgage modifications because their loan-to-value ratios will be far too high. Under the administration's Making Home Affordable program, for example, mortgages with balances that exceed +125% of the home's value are not eligible for help.

But here's the kicker: "Upwards of 80% of were stated-income loans," said Westerback. These are the so-called "liar loans" in which lenders did not verify that borrowers earned as much money as they said they did, so lenders may not be able to modify mortgages because many of the borrowers' income could not stand up to the scrutiny.

And borrowers may not want to go through underwriting again because they could be held legally liable for deliberate inaccuracies on their original applications.

Add to those conditions the still fragile economy and high unemployment rates, and you have a recipe for disaster.

Home Starts Tumble and Mortgage Delinquencies Rise - WSJ.com

The Wall Street Journal reports the following today on page 1...

Overall, about 12.4% of American households with mortgages in October were 30 days or more overdue or in the foreclosure process, according to LPS. That's up from 12.3% in September and 8.6% in October 2008. In the latest month, about 6.9 million households fell into this category.

Meanwhile, more Americans who bought homes during the boom are falling into mortgage limbo. About 3.4% of U.S. households -- or about 1.9 million homeowners -- are 120 days or more overdue on their payments, but not yet in foreclosure, according to LPS Applied Analytics, a research firm in Denver. That is up from 1.5% a year earlier.

By JAMES R. HAGERTY and SARA MURRAY @ WSJ.com
http://online.wsj.com/article/SB125854971533953543.html