July 24, 2008
Come On And Rescue Me
Sound the horns. The House passed a bill yesterday that will give $300 billion in housing aid. The funds will help out folks having trouble making their mortgage payments. There just needs to be one more approval - by the Senate - to make this bill a reality.
Assuming the Senate does pass the bill, up to two million homeowners may be able to stay afloat with new, more affordable fixed-rate loans. Here’s a rundown on who qualifies.
1. Applicants must live in their homes.
2. Applicants must be spending at least 40% of their gross monthly income on total household debt.
3. Applicants must have gotten loans between January 2005 and June 2007.
4. Applicant debt must not be more than 95% the appraised value of the home.
(Note: You can’t apply just to get a more affordable loan. Only those who are either in default or up-to-date, but in need qualify.)
Here’s a little snippet from CNNMoney.com.
This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home’s current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender.
But lenders won’t sign off on a workout unless they think that they’ll lose less money on that than they would by allowing a home to go through the costly foreclosure process.
Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home’s current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.
To bring this article home, I thought I’d check up on how many homeowners in the LAX area have foreclosed and could have used some help from this upcoming bill. These stats are from the second quarter of 2008.
Playa Del Rey: 5 foreclosed homes
Playa Vista: 8 foreclosed homes
Westchester: 12 foreclosed homes
Oh, and here’s some music to help set the mood.
siguy100 said:
I read that link to the CNNMoney.com article and from the other facets of the “rescue aid” it seems like it’s a real loose-loose situation for all involved. Now, this is my initial reaction, so I am more than open to point-counterpoint.
Now this is LA, so most banks will be taking a HUGE loss on any property. Then, if someone qualifies (a big if) and they are approved for the new loan, there are additional terms:
1) insurance premium = 1.5%/yr
2) 3% of principal to FHA when sold, PLUS at least 50% of profits from the sale (see article for breakdown)
So even if you are appreciating at 6%/yr (which is the historical average, I believe. Correct me if I’m wrong) you would, after paying out 50% +, be realizing a negative return after you figure in annual inflation.
The people who are going to do this I would think would eventually realize the situation and then try and put the house back on the market to unload it, thus flooding the market even more and driving down house prices, etc.
Am I way off base here?
July 24, 2008 10:51 AM
siguy100 said:
lose-lose: my bad
July 24, 2008 12:39 PM
Christina Chan said:
Hmmm… Siguy100. You’re not actually going to make me do the math on this, are you?
Well, in some areas of Los Angeles, the drop in year over year value isn’t so significant. For instance, June sales values for 2008 in Westchester were actually up 1.5% from 2007. I would guess the value of this bailout would depend on many factors, like how much they bought their home for and how the local market is doing.
Perhaps for some, especially those who intend to stay very long-term, the benefits are real if they can substantially lower their payments and keep their home. Going into foreclosure or putting a home on the market might not necessarily be the case.
Anyone else have a thought?
July 24, 2008 1:00 PM
Senor Frog said:
Well, my only comment is I think it sucks that the majority of good hardworking tax paying Americans have to pay to bail out creepy shady lenders and stupid buyers. I do not like subsidizing stupidity and greed.
July 24, 2008 1:03 PM
Christina Chan said:
To Senor Frog. Well, that can be a whole other debate entirely. That’s a good point and thanks for your comment.
How do we handle this real estate crisis then? I’d be interested in hearing what you all think.
July 24, 2008 1:11 PM
siguy100 said:
Thanks Christina. I’ll try to stick with round numbers on this one
Well, my thoughts were more along the lines of the areas in LA that are really tanking right now. I’m looking to become a first-time buyer, and the areas that are available to me are in the under 400k category. So looking in the valley (Studio City, VV, NoHo) there are a whole bunch of places that are coming on the market that were purchased in 05-06 for 500-700k and are now either foreclosed, or short listed for under 400k.
Trying to put myself in the shoes of the sellers and be objective, I would think that someone who is really in trouble with a 600k (that is worth 350k now) would refinance and then wait 5 years before they sell and then would give 50% profit share to the FHA. If I owned a home, why would I continue to do so at 1/2 the appreciation? How much do we really see prices going up in the next 5 years? I see people doing this to save and repair their FICO score and then cut their losses and sell out.
On the flip side. There are people who are planning to live in their homes forever and just want to keep it.
I personally see this bailout as a bandaid that will be insufficient and drag out this situation for a lot longer. The government should cap the interest rates that banks are allowed to charge for a certain period. It will allow the people who are in trouble to at least know there is a ceiling and be able to set up their worst case scenario, it will reduce the interest for the people who really got screwed and are paying 12%+, and it will weed out those who got the ninja/pick-a-pay, if the time period is long enough, because their rates will adjust.
I’m sure that the solution is far more complicated than what I am proposing and would encourage more lively debate!
July 24, 2008 3:37 PM
Christina Chan said:
Are you thinking about those with variable rate loans, siguy100? This bill would make a fixed rate loan available to folks who qualify.
If anyone else has a thought, feel free to add.
July 24, 2008 4:47 PM