In The News

Housing (second strongest driver of the U.S. economy only behind the consumer)-PragCap

Housing (second strongest driver of the U.S. economy only behind the consumer)

By Comstock Partners

The predictions about the end of the housing market mess have been greatly exaggerated. Most of the housing market pundits were predicting that the end of the downturn should have been years ago. Actually, the market is continuing to decline and, as time goes by, the problems with shrinking home owner equity, continuing risky and poor loans being granted by Government Sponsored Entities, a weak jobs market, and excess inventory are not encouraging for a recovery near term.

During the period from 2005-2007, consumers took an average of $600-$800 bn per year from the equity in their homes, and spent it! This was based on the belief that home values were only going to go up, until they didn’t! As a result of falling prices, this impetus to the economy has disappeared.

The number one problem in housing is negative equity (where the mortgage on the home is greater than the value of the home) and is getting worse as the home prices continue downward. Most of these problem mortgages are in the same areas that we continually read about such as Florida and California (each having around 2 million homeowners underwater). However, there are many other areas that also have problems with homes underwater. Arizona has about 630,000 homes underwater, while New Jersey, Maryland, and Virginia all have over 300,000. As you can see, the homes that are underwater actually are spread fairly evenly across the country.

President Obama has attempted to halt the slide in home prices by giving a break to homeowners that are current on paying off their mortgages but only if they have their mortgages with either Fannie Mae or Freddy Mac. Federal officials are making major changes to this “Home Affordable Refinance Program” to let more underwater borrowers qualify for refinancing. These homeowners are able to modify their loans and pay a reduced rate depending upon their current incomes.

These programs, that are initiated to prevent home prices from continuing to decline, will probably be as ineffective as previous “tax credits” for homes and “cash for clunkers” for automobiles. However, this housing program has even more problems as the total number of homeowners that could benefit from this program only come to between 1 to 2 million, while the total amount of mortgages underwater are about 11 million (or 25% of all homes with a mortgage). And if you take into consideration the homeowners that are “effectively underwater” (or have less than 5% equity in their homes) the number could be as much as 40% of the homeowners across America. These homeowners will all be underwater next year if the value of their homes drops by another 5% (and this is more than just possible, it is actually probable).

The problem with the housing market is secular and structural, and not just a typical, business cycle downturn that has occurred in the past. In fact, the past recessions post WW II were usually led out by a housing rebound. If the housing sector doesn’t improve the U.S. economy will have difficulty reviving. The current rebound from the financial crisis of 2008 is the slowest on record, mostly due to the deleveraging of household debt driven by homes purchased during the housing bubble from 2002 to 2007. The fourth quarter seems to be shaping up as a fairly strong quarter for the economy, but that is now over, and we believe there will be a disappointing start to 2012. You have to keep in mind that there are still 6 million fewer jobs than we had in 2007, before the “Great Recession.” And in order to bring the unemployment rate really down (not by losing participants in the labor force) we will need about 50% more than the 200,000 increase in jobs registered last month.

The FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the U.S. It is the largest insurer of mortgages in the world, insuring over 34 million properties ($1.1 trillion). They specialize in insuring highly leveraged loans or loans where the buyer puts 5% or lower as a down payment. However, the FHA has become much larger and riskier as they have grown their portfolio by almost 400% since the financial crisis in 2007 and over that time period houses have fallen substantially. In fact, the FHA agency’s independent auditor recently warned that there is a 50% probability of needing a bailout next year. The audit found that the FHA’s reserves were less than one quarter of a percentage point. The reserves are $2.6 billion vs. guaranteeing a $1.1 trillion mortgage portfolio. Legally the housing agency is required to keep a 2% cash buffer, a target it has not met since 2008. If this decline in housing continues the FHA will join the other GSEs and add to the size of the next potential crisis.

Another problem with housing presently is the continuing lack of job creation. When jobs are created more people buy homes, and when workers are laid off, “For Sale” signs go up. And jobs are also a structural problem that is being treated as a cyclical problem. It will take a long time to replace the construction jobs lost as more and more homes were being built from 2002 to 2007. We will also have trouble replacing the manufacturing jobs lost over the past few decades.

Housing inventories, which had been a significant roadblock to a housing recovery, did decline in September, but we believe this drop was similar to the drop in the labor force (workers giving up trying to find a job) that continues to make the unemployment rate look better than it should have. As the robo signing scandal has created a false lull in foreclosures, the backlog has increased substantially, but will be coming on the market shortly. We also believe that many homeowners who have been trying to sell their homes have given up and taken them off the market since there are so few potential buyers. The latest Ned Davis Research shows the potential number of homes to be absorbed at close to 10 million homes. We believe that this overhang of houses will not be absorbed for the next few years and this will continue to accelerate the deflationary bear market we expect. We also expect that prices will overshoot on the downside after such an incredible extreme to the upside. You have to keep in mind that home prices vs. median family income reached an all time peak in 2003 and they are still above that level now.

Even when you get a little good news on the housing front, you can’t trust it. The organization that once said that the housing boom would never burst, The National Association of Realtors (NAR) said this past week that the market collapse was much worse than originally reported. They made a drastic statistical error by overstating the sales of previously occupied homes from 2007 to 2010 by 14% (over 3 million homes).

Housing (second strongest driver of the U.S. economy only behind the consumer)-PragCap

Housing (second strongest driver of the U.S. economy only behind the consumer)

By Comstock Partners

The predictions about the end of the housing market mess have been greatly exaggerated. Most of the housing market pundits were predicting that the end of the downturn should have been years ago. Actually, the market is continuing to decline and, as time goes by, the problems with shrinking home owner equity, continuing risky and poor loans being granted by Government Sponsored Entities, a weak jobs market, and excess inventory are not encouraging for a recovery near term.

During the period from 2005-2007, consumers took an average of $600-$800 bn per year from the equity in their homes, and spent it! This was based on the belief that home values were only going to go up, until they didn’t! As a result of falling prices, this impetus to the economy has disappeared.

The number one problem in housing is negative equity (where the mortgage on the home is greater than the value of the home) and is getting worse as the home prices continue downward. Most of these problem mortgages are in the same areas that we continually read about such as Florida and California (each having around 2 million homeowners underwater). However, there are many other areas that also have problems with homes underwater. Arizona has about 630,000 homes underwater, while New Jersey, Maryland, and Virginia all have over 300,000. As you can see, the homes that are underwater actually are spread fairly evenly across the country.

President Obama has attempted to halt the slide in home prices by giving a break to homeowners that are current on paying off their mortgages but only if they have their mortgages with either Fannie Mae or Freddy Mac. Federal officials are making major changes to this “Home Affordable Refinance Program” to let more underwater borrowers qualify for refinancing. These homeowners are able to modify their loans and pay a reduced rate depending upon their current incomes.

These programs, that are initiated to prevent home prices from continuing to decline, will probably be as ineffective as previous “tax credits” for homes and “cash for clunkers” for automobiles. However, this housing program has even more problems as the total number of homeowners that could benefit from this program only come to between 1 to 2 million, while the total amount of mortgages underwater are about 11 million (or 25% of all homes with a mortgage). And if you take into consideration the homeowners that are “effectively underwater” (or have less than 5% equity in their homes) the number could be as much as 40% of the homeowners across America. These homeowners will all be underwater next year if the value of their homes drops by another 5% (and this is more than just possible, it is actually probable).

The problem with the housing market is secular and structural, and not just a typical, business cycle downturn that has occurred in the past. In fact, the past recessions post WW II were usually led out by a housing rebound. If the housing sector doesn’t improve the U.S. economy will have difficulty reviving. The current rebound from the financial crisis of 2008 is the slowest on record, mostly due to the deleveraging of household debt driven by homes purchased during the housing bubble from 2002 to 2007. The fourth quarter seems to be shaping up as a fairly strong quarter for the economy, but that is now over, and we believe there will be a disappointing start to 2012. You have to keep in mind that there are still 6 million fewer jobs than we had in 2007, before the “Great Recession.” And in order to bring the unemployment rate really down (not by losing participants in the labor force) we will need about 50% more than the 200,000 increase in jobs registered last month.

The FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the U.S. It is the largest insurer of mortgages in the world, insuring over 34 million properties ($1.1 trillion). They specialize in insuring highly leveraged loans or loans where the buyer puts 5% or lower as a down payment. However, the FHA has become much larger and riskier as they have grown their portfolio by almost 400% since the financial crisis in 2007 and over that time period houses have fallen substantially. In fact, the FHA agency’s independent auditor recently warned that there is a 50% probability of needing a bailout next year. The audit found that the FHA’s reserves were less than one quarter of a percentage point. The reserves are $2.6 billion vs. guaranteeing a $1.1 trillion mortgage portfolio. Legally the housing agency is required to keep a 2% cash buffer, a target it has not met since 2008. If this decline in housing continues the FHA will join the other GSEs and add to the size of the next potential crisis.

Another problem with housing presently is the continuing lack of job creation. When jobs are created more people buy homes, and when workers are laid off, “For Sale” signs go up. And jobs are also a structural problem that is being treated as a cyclical problem. It will take a long time to replace the construction jobs lost as more and more homes were being built from 2002 to 2007. We will also have trouble replacing the manufacturing jobs lost over the past few decades.

Housing inventories, which had been a significant roadblock to a housing recovery, did decline in September, but we believe this drop was similar to the drop in the labor force (workers giving up trying to find a job) that continues to make the unemployment rate look better than it should have. As the robo signing scandal has created a false lull in foreclosures, the backlog has increased substantially, but will be coming on the market shortly. We also believe that many homeowners who have been trying to sell their homes have given up and taken them off the market since there are so few potential buyers. The latest Ned Davis Research shows the potential number of homes to be absorbed at close to 10 million homes. We believe that this overhang of houses will not be absorbed for the next few years and this will continue to accelerate the deflationary bear market we expect. We also expect that prices will overshoot on the downside after such an incredible extreme to the upside. You have to keep in mind that home prices vs. median family income reached an all time peak in 2003 and they are still above that level now.

Even when you get a little good news on the housing front, you can’t trust it. The organization that once said that the housing boom would never burst, The National Association of Realtors (NAR) said this past week that the market collapse was much worse than originally reported. They made a drastic statistical error by overstating the sales of previously occupied homes from 2007 to 2010 by 14% (over 3 million homes).

0114 2012 Will a new US President make any difference in helping create a housing recovery and revitalize our economy?

Here below is an excerpt of my upcoming FARJHO article to be published in March.

Governments who set up policies using those ill-advised primitive methods (e.g. the original HOPE for Homeowners proposal in 2008) have only destroyed people’s confidence in the equity sharing concept to solve the problems and let the mortgage foreclosure problems deteriorate further day by day. The Hope for Homeowners (H4H) Program is a loan program that was a part of the Housing and Economic Recovery Act of 2008. The guidelines for the product were released by FHA on October 1st, 2008.

In the original HOPE for Homeowners (H4H) offering, the Federal Reserve together with the HUD Team proposed a non-free market based arbitrary equity sharing scheme for debt principal reduction as (Ref 3)

100% if the property is sold after 1 year

80% if the property is sold after 2 year

70% if the property is sold after 3 year

60% if the property is sold after 4 year

50% if the property is sold after 5 year

There were few takers. Any further consideration by other national policy makers and economists of using equity sharing related concepts to solve our country’s severe housing-led economic problems on a large scale also quickly died with it too for now. The incompetence of these policy makers is indeed very unfortunate and lamentable.

The worrisome part is that even when the top level politicians change posts later on these same technical middle level managers may still be the ones that will continue to squat on the same positions at the Fed and at the HUD since these subject matters may be deemed too technical for the top level politicians or top level policy makers to mess around with.

Will a new President make any difference?

Mortgage Pre-Payment Privileges

Do you know your Mortgage Pre-Payment Privileges?

There are basically 3 ways to pay your mortgage off faster. Increase your payments, increase the frequency of your payments, or pay a lump sum. The advantage of pre-payment privileges is any additional funds you pay above your minimum mortgage payment will go directly towards your mortgage principal. By lowering your principal, you will save on interest and your balance at the end of your term will be lower.

We suggest you contact your existing lender or review your original mortgage commitment to find out what pre-payment privileges your current mortgage term will allow without any payout penalties. The norm in the mortgage market today is 15-20% payment increase yearly and up to 15-20% lump sum yearly (which most often can be paid throughout the year). Some lenders also offer a double-up payment & skip a payment option, or a higher % of pre-payment yearly.
Here are some examples of how you can save money by utilizing your mortgage pre-payment privileges;

Example: Karyn has a mortgage of $250,000 with a fixed interest rate of 5%. She has 3 years remaining on her 5-year term and 33 years left in her amortization. She currently has monthly mortgage payments.

INCREASING MORTGAGE PAYMENT FREQUENCY.
By going from monthly to accelerated bi-weekly payments, Karyn will;
- reduce her mortgage balance by over $4000
- reduce her overall amortization by over 5 years
- only pay an extra $107 a month

INCREASE MORTGAGE PAYMENT AMOUNT
By increasing her mortgage payment by 10% for the remaining 3 years of her term, she will;
- reduce her mortgage balance by almost $5000
- reduce her overall amortization by over 6.5 years
-only pay an extra $129 a month

LUMP SUM PAYMENT ONCE YEARLY
Let’s say Karyn got a bonus at work, so she paid off her personal debts and paid a lump sum of $1000 towards her mortgage principal only once during her remaining 3 year term, she will;
- reduce her overall amortization by 4 months
- save $3828 in interest

Or, what if Karyn could pre-pay $2000 over her 3-year term, she will;
- reduce her overall amortization by 7 months
- save $7583 in interest

As you can see, you can save money and time by utilizing your pre-payment privileges. Keep this in mind if you are considering getting a new mortgage as there are “no-frills” products out there that have greatly reduced pre-payment privileges in exchange for a lower rate. Or, if you are looking to reduce your personal debt load, you can look at refinancing your mortgage to pay off debt and then utilize your pre-payment privileges to pay down your mortgage faster thereby getting you debt free sooner!

Contact us today if you have any questions about mortgages. Martene Woodward or Jackie Woodward at 866-932-8412 or info@mortgagegirl.ca

Refinancing your mortgage

A REFINANCE is when a borrower pays out an existing mortgage with a new mortgage. People who refinance tend to do so to get a lower interest rate, lower their payments or to take cash out using equity in their home. You may be doing this at the renewal date when the mortgage is fully open or you may be breaking the existing mortgage term early in order to make changes to the mortgage.

We publish the best rates available on our website and receive a large number of calls from people asking how they can benefit from our low rates. First question we always ask is “will you have a payout penalty to break your existing term?” Most often they do know they will have a penalty but don’t know what that amount will be. Secondly, after determining what the client is specifically looking to do, we suggest they ask their existing lender 4 key questions:

 

• What is the payout penalty if you take your mortgage to a different lender?
• What is the payout penalty if you come back to the existing lender for a refinance at today’s best rates?
• What is the existing lenders best rate for the term you are looking for?
• What BLENDED RATE would the existing lender offer if you choose to refinance with them while avoiding payment of the payout penalty?

 

The answers to the above questions will help the Mortgage Girls develop a comparison for you to ensure it really is in your best interest to refinance your mortgage at this time.

What kind of costs can you expect when refinancing? Most of the time, you simply have to pay for the appraisal to confirm your home value and the legal fees for changing lenders, that is about $1000 give or take. We also have access to some lenders who will pay all the costs for you to move your mortgage to them.

In terms of qualifying for a refinance, it is pretty much like a purchase with a little less documentation. You will have to provide income confirmation to show you can support the payments,  as well as confirm your payment history on your existing mortgage and property taxes.

As always, if you have any mortgage related questions please do not hesitate to contact the Martene the MortgageGirl.

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