Underwater Mortgages Reach Epidemic Levels
Posted: August 11, 2009 at 6:00 am
Print
var addthis_pub = "admin247";
Email
Subscribe Free Newsletter Follow us on Twitter
Posit: Underwater mortgages hurt home sales and increase delinquencies and foreclosures.
People who have to pay their mortgage holder to sell their homes are less likely to be sellers. A home sold for $200,000 when it has a $250,000 mortgage is a home that the owner may not be able to afford to sell.
People living in homes with monthly mortgage payment that stretch their abilities to cover their living costs may stay in homes that they believe have a lot of equity and where a sale will eventually bring them a profit. That hope for a bonanza may encourage them to go through the agony of making large payments. People who have no hope of making money on their homes are more likely to be willing to abandon them or be kicked out.
Both of these trends make it more likely that the housing sales pace will continue to be slow and property values will not recover.
Real estate research firm Zillow says that 23% of mortgages are now underwater. The company adds that the number could be 30% a year from now. One of the major reasons for the trouble is that home values fell 12.1% year-over-year in Q2 to a Zillow Home Value Index of $186,500, resulting in a total 22.3% drop in value since the market peaked in mid-2006. Twenty-two percent of all transactions in June were foreclosures, a possible sign that people are not willing to fight until the end to save their houses.
The news is particularly bad for the federal government which has touted its program to keep people in their homes by helping them reduce their monthly payments. The program has been a failure, at least up until now. The reasons for that may point again to the fact the lower payments do not lower the principal amounts owed on home loans giving owners little hope that they will ever get any financial value for their property.
There have been some signs of a revival in the home sales market recently, especially in several of the hardest hit markets. Those signs may be false indicators showing only the most modest improvement in regions where home values are down 50% or more and the prices are now so low they they are creating a ripple of activity. The Zillow numbers say that the uptick won’t last.
Douglas A. McIntyre
Thursday, August 13, 2009
Wednesday, July 29, 2009
Fed Unveils Rules to Protect Borrowers
http://online.wsj.com/article/SB124837547483376651.html
WASHINGTON -- The Federal Reserve on Thursday proposed sweeping new consumer protections for mortgages and home-equity loans.
The proposals seek to overhaul the timing and content of disclosures to consumers, and to ban controversial side payments to mortgage brokers for steering customers to higher-cost loans.
View Full Image
Stephen Voss for The Wall Street Journal
Chairman Ben Bernanke at a meeting of Fed governors Thursday.
Fed staff, which drafted the proposals, based the new disclosures on extensive consumer testing. "I think the general thrust of this is to make more intelligent shoppers of households, have them make better decisions," Fed Vice Chairman Donald Kohn said at a public meeting Thursday with other Fed officials.
The moves come as the Fed defends its consumer-protection record. The Obama administration and key congressional Democrats want to remove the Fed's consumer-protection authority and place it with a newly proposed regulatory agency. It is unclear what would happen to the new Fed rules under such an agency.
The Fed has come under fire for failing to act until 2008 to rein in lending practices in the mortgage industry -- authority it has had since 1994. Critics also say it dragged its feet on tightening credit-card rules. The Fed placed new restrictions on the industry late last year.
MORE
Econ: Treasury Aims to Put Fed Official on FDIC Board
Under the new Fed proposals, consumers would receive more streamlined cost disclosures after applying for a mortgage loan. Buyers also would be presented with a one-page document, in question-and-answer format, warning about risky loan features such as negative amortization and balloon payments associated with adjustable-rate mortgages, or ARMs.
The Fed is also proposing that lenders provide clearer information on how borrower payments might change under ARMs. And it wants to revise how the annual percentage rate, or APR, is calculated in disclosures to reflect several routine costs that are passed on from the lender to the borrower, such as title insurance.
Full Disclosure
Under proposed rules, mortgage applicants would get:
A one-page Q&A document explaining risky features of a loan
Streamlined early cost disclosures
A revised annual interest rate that includes most fees and costs
A graph showing borrowers how their rate compares with rates of borrowers with excellent credit
In addition, side payments for steering borrowers to higher-cost or riskier loans would be banned.
Home-equity loan applicants would get:
A one-page document explaining the risks of the loan
Cost disclosures specific to their loan
In addition, lenders would have to notify borrowers 45 days before changing terms of a loan.
Fed Senior Counsel Kathleen Ryan said the change could lower costs for consumers by encouraging lenders to put downward pressure on such third-party fees.
The Fed proposal would effectively ban the side payments known as "yield spread premiums" by prohibiting payments to mortgage brokers or loan officers based on the loan's interest rate or other terms. It also would bar steering consumers to higher-cost or riskier loans in order to increase the broker's or loan officer's compensation.
The Fed had earlier proposed beefing up disclosures so that consumers would be aware of mortgage brokers' conflicts of interest. But Fed staff found through consumer testing that the disclosures added confusion. "We concluded disclosures would not be an effective remedy in this case," Ms. Ryan said in response to Fed Chairman Ben Bernanke's question about why the earlier proposal had been shelved.
The Fed is also seeking to replace a stack of generic information given to home-equity loan applicants with a one-page document giving clear information about the risks of such loans. Within three days of receiving an application, lenders would have to furnish consumers with tailored cost information that would enable the consumers to shop for better deals.
Currently, consumers don't receive information about the APR or the credit amount of the loan until after the account is open, Fed staff attorney Lorna Neill said. "This is too late to use this information to shop around," she said.
The public will have 120 days to comment on both the mortgage and home-equity loan proposals before the new rules are finalized.
A spokesman for the National Association of Mortgage Brokers said his group was reviewing the proposal.
Write to Jessica Holzer at jessica.holzer@dowjones.com
WASHINGTON -- The Federal Reserve on Thursday proposed sweeping new consumer protections for mortgages and home-equity loans.
The proposals seek to overhaul the timing and content of disclosures to consumers, and to ban controversial side payments to mortgage brokers for steering customers to higher-cost loans.
View Full Image
Stephen Voss for The Wall Street Journal
Chairman Ben Bernanke at a meeting of Fed governors Thursday.
Fed staff, which drafted the proposals, based the new disclosures on extensive consumer testing. "I think the general thrust of this is to make more intelligent shoppers of households, have them make better decisions," Fed Vice Chairman Donald Kohn said at a public meeting Thursday with other Fed officials.
The moves come as the Fed defends its consumer-protection record. The Obama administration and key congressional Democrats want to remove the Fed's consumer-protection authority and place it with a newly proposed regulatory agency. It is unclear what would happen to the new Fed rules under such an agency.
The Fed has come under fire for failing to act until 2008 to rein in lending practices in the mortgage industry -- authority it has had since 1994. Critics also say it dragged its feet on tightening credit-card rules. The Fed placed new restrictions on the industry late last year.
MORE
Econ: Treasury Aims to Put Fed Official on FDIC Board
Under the new Fed proposals, consumers would receive more streamlined cost disclosures after applying for a mortgage loan. Buyers also would be presented with a one-page document, in question-and-answer format, warning about risky loan features such as negative amortization and balloon payments associated with adjustable-rate mortgages, or ARMs.
The Fed is also proposing that lenders provide clearer information on how borrower payments might change under ARMs. And it wants to revise how the annual percentage rate, or APR, is calculated in disclosures to reflect several routine costs that are passed on from the lender to the borrower, such as title insurance.
Full Disclosure
Under proposed rules, mortgage applicants would get:
A one-page Q&A document explaining risky features of a loan
Streamlined early cost disclosures
A revised annual interest rate that includes most fees and costs
A graph showing borrowers how their rate compares with rates of borrowers with excellent credit
In addition, side payments for steering borrowers to higher-cost or riskier loans would be banned.
Home-equity loan applicants would get:
A one-page document explaining the risks of the loan
Cost disclosures specific to their loan
In addition, lenders would have to notify borrowers 45 days before changing terms of a loan.
Fed Senior Counsel Kathleen Ryan said the change could lower costs for consumers by encouraging lenders to put downward pressure on such third-party fees.
The Fed proposal would effectively ban the side payments known as "yield spread premiums" by prohibiting payments to mortgage brokers or loan officers based on the loan's interest rate or other terms. It also would bar steering consumers to higher-cost or riskier loans in order to increase the broker's or loan officer's compensation.
The Fed had earlier proposed beefing up disclosures so that consumers would be aware of mortgage brokers' conflicts of interest. But Fed staff found through consumer testing that the disclosures added confusion. "We concluded disclosures would not be an effective remedy in this case," Ms. Ryan said in response to Fed Chairman Ben Bernanke's question about why the earlier proposal had been shelved.
The Fed is also seeking to replace a stack of generic information given to home-equity loan applicants with a one-page document giving clear information about the risks of such loans. Within three days of receiving an application, lenders would have to furnish consumers with tailored cost information that would enable the consumers to shop for better deals.
Currently, consumers don't receive information about the APR or the credit amount of the loan until after the account is open, Fed staff attorney Lorna Neill said. "This is too late to use this information to shop around," she said.
The public will have 120 days to comment on both the mortgage and home-equity loan proposals before the new rules are finalized.
A spokesman for the National Association of Mortgage Brokers said his group was reviewing the proposal.
Write to Jessica Holzer at jessica.holzer@dowjones.com
Subscribe to:
Posts (Atom)
