700 Billion Dollars can’t be traced!

 

Officials: tracking bailout money is difficult

Why didn’t Treasury mandate  that banks that borrowed from TARP use that money to help  home onwers  with sub prime loans? A report card for each FI that received TARP funds should be as simple as this:

No of home owners with  sub-prime loans from the FI : s

No of home owners with sub-prime loans from the FI and who got refi from TARP funds  : n

TARP funds received from Treasury: t

Total home loans of the FI outstanding before TARP: o billion

Total home loans refinanced by FI usign TARP funds: r billion

Balance: TARP funds received – loans refinanced  = t-r

If balance is > zero then either ask for the balance paid back to treasury or let the FI continue to work with eligible home owners with sub-prime loans and where eligibility is based on reduced principal and reduced interest. No 85% loan-to-value ratio shall be used as that pretty much eliminates all sub-prime borrowers from the eligibiity -t he group that actually needs assitance and who are victims of predatory lending.

Even the above complexity could have been avoided if Govt simply lent to eligible sub-prime mortgage borrowers directly via Fannie or Freddie or some  other Govt entities would have offered 100% trackability to the funds.

Govt could have bought tourbled mortgages from lenders at discount rates and forced some of the  lenders to take capital loss.  Too late now. But then only first half of 700B is spent. There is still chance to do it idfferently than the first time.

Treasury’s new plan – 4.5% interest loans

 We have new idea from treasuy – lower interest rates for home buyers

Rate plan puts homeowners, buyers on hold

Washington’s New Tack: Helping Home Buyers

Will Someone Please Tell Our Government You Can’t Legislate High Asset Prices?

Barron’s: Laing’s Mortgage Relief Plan Could Actually Work  –  ideas in this article/proposal  echo what has been said all along in this blog since summer.  The proposal lays out rather well the advantages of redoing mortgages for all at lower monthly payments.

If this is limited to new buyers only then it is not a good idea.  Home values need to go back to 2000 levels. By increasing the buyers in the market the system would keep the home prices at current levels artificially. In some markets we may see small increase in home values as people who can afford to buy can now afford to bid higher on a given property in case they see loosing to another buyer. Did we not hear of bidding/overbidding in 2005? This need to be prevented.

If any thing the plan needs to be limited to refinancing. To avoid discrimination it can be offered to all home owners. However, if there are limitations in availability of funds then limiting this to those who bought between 2003-2007 makes sense as they are the most in need. Not only  lower rates but reducing principal would be good thing as effectively their purchase price is reset to pre-2004 days. A systematic way to revalue home price that will result in lower property tax should go in step with the package. We can’t have people continue to pay higher property tax based on 2004 or 2005 home price levels. In many areas transactions are virtually zero giving room for counties to argue that the base value hasn’t changed and therefore giving them opportunity to continue to extract higher property taxes. They are continuing to spend money on programs that collectively  a given neighborhood/county can’t afford.  Counties/Cities  budgets and staff need to go back to 2000 levels. That is why bail out money of any kind should not be given to counties/cities directly. The best way to recover out of this situation is direct help to home owners as that ultimately flows into neighborhood.

In general loan modifications is the right remedy involving lower fixed interest rate for conforming , jumbo loans.  4.5% still represents good rate  and return compared to T-Bills. So 4.5%, though on the surface of it looks like subsidizing,  it is not the case. It is a fair rate. Even lower  can be made to some buyers in some markets though uniform rate makes for less complication and less legal challenges if any.  In addition to lower rate, a secondary consideration that should go into the package is the principal reduction based on current value of house.  Value appraised through loan modification  process should be legalized as new home value so that it becomes basis for property tax.  Lenders should be given incentive to forgo part of the principal through such measures as tax break on the loss or subsidization of the loss.   Preservation of home owners equity should be part of such modification.  The equity paid so far represents investment by home owners and that should have similar status as that of deposit in a bank that is protected by FDIC upto 100K (supposed to go to 200K per new laws). Many buyers  who made downpayments and subsequent principal payments using their life savings should have some sort of protection for their investment as much as the lenders have protection from FHA/Fed.   In case not all equity can be preserved in loan modificaiton then  home owners should be given incentives for lost equity. Incentives such as tax credit or option to deduct the loss from income of one year or over multiple years.

For instance , if the initial purchase price is 800K, payments made by home owner is 100K,   current  value is 700K then  the remaining loan balance should be  700K-100K=600K. This allows for preservation of equity for home owners.  Reworked loan balance should be refinanced  at the reduced and subsidized rate.  It is possible to consider instead of 100% preservation of equity may be 80%.  Principal reduction should be based on initial purchase price and can be reduced  proportionally between lender and home owner. Difference between 100% equity preservation versus some other limit  will make  small difference to the overall numbers.

Loan to Value Ratio – Refinance Challenge

Home owners trying to get refinance will often come across loan-to-value requirement (LTV). This requirement, either self-imposed or otherwise,  basically limits refinance  to cases where  required loan is less than 85% of current market value of a home.  

For example, if the current value of home is 500K then the loan is limited to 425K. For those home owners who have enough equity then this should be fine. However, there are millions of home owners that bought after 2004  that will not have enough equity. Their LTV can be higher than 85%.  All of those  home owners will face it difficult to  refinance. 

For example,   if a home owner bought  house for 625K in 2004 and paid up 125K so far and has  500K remaining mortgage then that owner  is eligible to refinance upto 425K using the 85% LTV rule.  The remaining 75K has to be paid up at the time of refinance - a tall order given the tough economic situation we are in now. Even 401K balances have halved or evaporated over the last few months to tap into. So it is difficult for home owners to find funds to bring the outstanding loan to a level where it can be refinanced. 

It is important that any payments made by home owners be protected upto 200K by Housing administration of the Fed just like bank deposits are protected by FDIC.  Homeowners can’t be asked to come up with new money to bring LTV below 85%.  It must be made illegal for lenders to refuse refinance under the pretext of  85% LTV rule. 

For instance,  assume mortgage loan amount is 750K on a house originally worth 1Million with the remaining 250K paid by buyer as downpayment.  Further assume that current market value of the house is 700K. This represents 300K loss on the property.  Assuming  the loss is split between the two investors in the house -the home owner and current lender then one has to see what protection/insurance each one has against loss.   In the case of   home owner the insurance/protection  must be upto 200K as provided by FDIC for deposits.  Any loss above that can be passed onto home owner.   Assuming the loss of 300K is split in the ratio of original investment 750K/250K,  home owner has a loss of 100K while the lender has a loss of 200K.   Since home owner is protected upto 200K  home owner gets to keep 200K  of his original downpayment and that is the equity that should be considered at the time of refinance.  Since that is about 28% of current market value of the house he/she more than well qualifies for any standard measure for orginating loan.

 Refinance refusal based on LTV shall be made illegal in cases where current owners have equity on the original purchase price.  This is a country of equal opportunity and fairness. No one shall be denied the opportunity to refinance using the 85% LTV rule. If any thing  Washington lawmakers or individual states like CA should make such rule illegal and force lenders to offer refinance to those home owners who have paid at least 10% based on the initial purchase price.  For those who have not paid as much   FHA loan rules that allow as low as 3% downpayment to obtain loans shall be applied in the refinance case as well.  

Current refinance practices by lenders is outright illegal. Lenders overall over the years have played  with home buyers and they continue to do now.  For weeks lenders sat on the 400B that moved from treasury to FIIs. Now they started lending but seem to limit to selected cases.  Much of the affected home owners from 2003 are not yet seeing the benefit.  People who bought homes prior to that or some  others are getting refi. While they should – the stimulus package was meant to take care of those in need and that is the folks who bought after 2003 -the ones who got trapped in the ponzy scheme perpetrated by vast network of lenders, brokers.  There is no need for blaming any one here as no body undertsood the impact then.  If people were not approved for loans in 2004 we would not have home prices at the levels we have seen and continue to stay at high levels in many markets.

Structured loan Modification Plan (SMP) – who can get?

The way it is structure it appears as if the the plan is focused more on exclusion than on inclusion.  Read the preconditions:

• Conforming conventional and jumbo conforming mortgage loans originated on or before January 1, 2008
• Borrowers who are at least three or more payments past due and are not currently in bankruptcy
• Only one-unit, owner-occupied, primary residences; and
• Current mark-to-market loan-to-value ratio of 90 percent or more.

who would qualify based on 90% loan-to-value ratio ?

People who bought between 2003-2007 are down 20-50% .  This pretty much excludes any body who bought during that time and these are the ones that actually need help.

Some body needs to wake up and put some sense into these type of measures. Wonder what they were thinking in coming out with something like this involving so many people from Fannie, Freddie and 20 odd lenders as the news says. After all the work done by folks from these organizations we have a plan that will not help any one in need.

It is totally a waste program. Probably invented to get public coverage with no substance.

Hoping new administration  can make 4.5% loans available to all who need refinance including options to reduce principal.

Immigrants and H1B visas – solution to housing problem?

Immigrants to save Housing?

-1Million houses (the inventory) waiting to be bought

-65K /year H1B visas

How many years will it take for immigrants arriving at 65K/year rate to take up the available inventory? Who is going to provide them jobs and money? Can those jobs be offered to people who are already here?  Can that money be loaned to people already here?

Some are hoping that people living outside can buy up housing inventory and help prices go up.  Is n’t that what happened from 2003 or so ? Didn’t International FIIs loaned  money into US system?  Didn’t they loose and cause the housing bubble?  If   individual investors from other countries were to pump money into US  housing sector then they stand to loose and potentially contribute to unsustainable prices. These kinds of solutions , ideas and false hopes seem to lack vision and strategic thinking. 

Right approaches need to focus on  ways for  improving job market,  making loan modification available to all existing home owners that have sub prime mortgages as well as others that are facing foreclosure. This will ensure that home owners  are not forced to loose and sell thier homes to some one else (whether that some one else is already in the country or will be in the country via H1 or  outside the country ).  Nation building needs to look inside and use the most important resources the country has – human resources.  Visionary measures need to focus on how to help millions of home owners who own mortgages that are under water with loan modification and lower interest.  Home prices need to fall to 2000 levels. However the fall should be purposely engineered so that home owners are not affected and so they can focus on the work they do rather than worry about the fall.  Getting  focus back  work and job creation rather than housing prices on a daily basis will help significantly.

Loan Modifications in Vogue

Good Yahoo article on loan modifications being practiced by lenders:

Some Loan Modifications Are Better Than Others

Per the author of the above, these are the options used by lenders in loan modifications

1. Reduce loan balance
2. Reduce interest rate
3. Freeze  interest rate
4. Extend loan term
5. Add outstanding dues to principal

The above list is in the order that would benefit the borrower the most with 1 being the most benefecial.

One interesting find from the Yahoo article -   modification service agents commission is based on principal. Naturally  if principal is reduced then their commission also reduces.  Shouldn’t the fee structure disclosed to borrower during modification discussions? Without such disclsoure borrowers are at the mercy of preying lenders/agents as they were during the sub prime days. Those doing modification may find the following blog useful:

DIY loan modification

In general, it is not clear as to how loans that have primary and secondary mortgage would be dealt with in the modification process.  If primary lender’s  outstanding loan is above water then the lender may not care to modify.  

Loan modification involving principal reduction , lower interest rate   is the right thing to do in the interest of home owners and the nation.  As  reasoned on this blog  – resetting home values  to levels that are based on 2000 or such cut off date is a way to undo the  wrongs done by the subprime ponzy schemes.    Predatory lending has gone on a large and systematic scale  engulfing  cautious and not so cautious, rich and not so rich and virtually all.  Even money managers who should know what is going on got caught unaware in this tsunami  – Villehuchet who managed investments to the tune of  1B for his affluent clients lost out in  Madoff’s pyramid scheme. There is no exception.  The need of the hour is not finding names to blame and  put behind bars but  solutions/regulations  to avoid repeat of what happened.

Besides ensuring home loans are affordable another important consideration is preservation of home owners  equity.  Millions of home owners have built equity using their life savings.  Preservation and access to equity will help them with  their children’s education or retirement or for use during hard economic times such as now where some of them have lost jobs or about to. 

As said here many times before, home devaluation supported by Fed on the lines similar to currency devaluation is the best option as it doesn’t have the same impact as currency devaluation and yet covers millions of folks   

 A commenter on the above article echoes home value reset view of this blog:

‘After careful review of this housing crisis and speaking to many involved with the schemes of cheating people for profit, it is the opinion of this author that every house purchased after the collapse of the tumultuous greed of individuals be reset to the prices of today’s selling point…’