Entries Tagged 'Mortgage' ↓

According to a report based on new Census data, last year the homeownership rate amongst Asians fell 1.24% to 59.4% last year. This is worse than the decline of homeownership amongst all the other major ethnic groups.  Some economists quoted in the article were surprised at this development since Asians households in America generally have high income and low debt.   So why has this group dropped out of homeownership the most?

The article suggested that the effect may be regional because most Asians in America live in California, which is one of the states hardest hit by declining prices and the recession.  This is definitely a solid theory.  Asians are not immune to job losses and for many families the loss of even one job means that the  next mortgage payment is no longer affordable.  As I wrote in this article about Chinese/Asian  immigrants and real estate, Asians often ignore the basic debt to income ratio guidelines to buy a home because they figure they will save money on everything else.  If two people were paying 58% of their income on a mortgage then one job loss definitely puts the nail on the coffin.  California currently has one of the highest unemployment rates in the country, and since the Asian community is concentrated here in California we are affected as a whole.

Next I think the speculative mania during the housing bubble was much more intense amongst the Asian community.  This is just my anecdotal experience, but my whole family and Indian coworkers talked about real estate pretty much 24/7.  These people mostly had significant amounts of savings for a downpayment, great credit, and all they were seeing is that the real estate market went up 20%  a year while stocks were not exactly catching up.   This prompted a lot of people to buy real estate that they did not even need.  Some of them intended to flip the properties quickly, and some became landlords with the intention to flip a bit later.   Another thing that spread the fire is that Asians talk about personal finance amongst family and friends very often so more and more people jumped on the bandwagon.  There are also folks who used their homes as ATMs to buy more property because they figured that they were  making a sound  investment.  For the most part, the Asians I have encountered that did all of these real estate deals knew exactly what they were getting into, and they were all sure that they were being smart about their money.  The phrase I heard the most often were that “real estate prices in the Bay Area will never go down” and “real estate is the best investment”.  I know that many non-Asian people did the same thing, but I feel that the Asian community got into real estate much more because owning real property is high on their priority lists.

Now after the crash, I actually do not personally know any Asian families that lost their homes.  I do know several that are fairly underwater, but they are still faithfully paying their debt because they are still employed.  Believe it or not real estate is still a really hot topic for my parents and their friends.  Now they are all talking about scooping up cheap properties as rental properties.  Now what I hear from my mom is similar to the following, “this property sold for $400,000 in 2005!  Now it’s 70% off! Positive cashflow!!!”.   I responded to her, “mom, remember when I told you a few years ago that real estate could come down by 40% and you didn’t believe me?”  She then said, “It’s more than 40% down!!”   I guess the obsession will never end.      Anyway, I wish them luck, and I hope some of the decline in homeownership was voluntary and not due to foreclosures.

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On Friday the Federal Housing Administration Commissioner David Stevens admitted that the agency’s reserve funds has sunken below the legally mandated level of 2% of its insured loans.  However, the commissioner also said that the 75 year old agency will not need a taxpayer bailout. Is this remotely believable?   Lets look at some datapoints.

First of all, the FHA doesn’t make loans.  It simply insures lenders against losses on defaults.  This means that if a loan defaults completely, then the FHA is on the hook to make the lender whole.  The money it uses comes from mortgage insurance premiums that borrowers pay.  The current rate is 1.75% of the loan amount upfront, and some additional monthly insurance on 30 year loans.  The monthly mortgage insurance goes away when the borrower gains enough equity.  When you add it all together the premium is less than 3% of the loan.  The  borrowers will need a minimum downpayment of only 3.5%, and they can borrow up to $729k in high cost areas.  The problem with this whole scheme is that the lenders do not care if the FHA loses money because they will be compensated if things go wrong.  Since private insurers, Fannie, and Freddie tightened up their lending guidelines, the new subprime loans are practically all going to the FHA.  This has pushed the  mortgage loan  market share of FHA loans   from 2.7% in 2006 to 23% in the second quarter of 2009.

Basically, the FHA has taken on a vast expansion, and with that expansion it has taken on a lot more risk.  The 90+ late and foreclosure rate of FHA loans is now at 7.8% according to the Mortgage Bankers Association, and this is only expected to rise since those who take out FHA loans generally have very little downpayment, and their average credit scores are lower than the prime borrowers. Unemployment has not stopped rising and the economy isn’t totally recovered.    The FHA currently  insures about 5.2 million according to its website, and 7.8% means  that about 405,000 of these loans are practically lost.  Additionally, there are another 400 to 500k borrowers that have missed at least one payment.  Since the value of the FHA reserve funds are going to fall below 2% of the value of the insured loans, it is hard to imagine how the agency would cover all the losses when they come due unless all the loans that defaulted have balances much much lower than  the average loan.  It is pretty simple math when you think about it.

I really do not see how the FHA could build up its reserve fund in two to three years when the foreclosure rate of the loans it is insuring is not exactly decreasing.  The FHA is insuring many more loans than before, but those new loans are also defaulting and draining the reserve funds.  You have to remember that the insurance premium is very small, so in many instances the FHA is using the premiums from 20 to 30 homes to repay the lender for one default.  That is only sustainable if the default rate is very small, but a 30 day late rate of 17% is not exactly encouraging.

Anyway, the FHA does not expect to increase its insurance premium rates or downpayment limits, but it is requiring audits of the lenders that send loans to the FHA to prevent fraud.  I would have thought that those audits were already happening, but I guess not.  If the FHA really wants to decrease the amount of its defaults it would need to increase its downpayment limits so that people have more equity in their homes, but I don’t really see that happening.  Eventually this agency is going to need a bailout.  They may not call it a bailout, but I think it is pretty much inevitable unless the FHA changes course drastically.

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Apparently the Federal Reserve Bank of Boston conducted a study and found that lenders are hesitant to modify loans because it means losing money.  Lets see, if I were promised $10 for something last week, would I run out today  and  ask for $5 for the same thing?  Of course lenders would lose money on loan modifications and they  would not cut their profits if they did not have to!  It really does not take a study to see that lenders would try to delay or avoid loan modifications if they could.

One of the authors of the study says that the $75 billion Obama mortgage plan would have been more effective  if the money was given to borrowers rather than lenders.   That is probably true.  The Obama mortgage plan touted that they would help 3 to 4 million borrowers who are delinquent through modifications.  If you spread  $75 billion out to   3 million borrowers each person would get $25,000.  In some areas that money could probably pay off someone’s entire mortgage debt.  Of course this would be too obvious of a government handout and probably would be even less popular than the current ill conceived plan.  Who would not be pissed off if their financially delinquent neighbors just got a check for $25,000 for the sake of being delinquent?

The current plan gives incentives to servicers and lenders to modify loans, but that incentive is relatively small compared to an interest cut or principal cut on a big loan.   Also, if servicers really wanted to ramp up on loan modifications they would need to hire a lot more staff, and it is not profitable to do so.  Additionally, if a borrower is still paying their debt then there is really no incentive for a lender to change the rates voluntarily.  This new study also echos past data that a large percentage of those who get modification redefault very quickly.     As I have said before, this whole mortgage bailout  is simply prolonging the mess because it sort of give banks a lifeline to delay the processing of bad loans, and borrowers who have no capacity to pay back their loans simply delay their ability to repair their credit.  I am glad that now there is fairly concrete evidence that supports my conclusion.

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Today I read a headline “Echo boomers a lifeline for embattled housing market“.  At first I raised my eyebrow wondering what exactly an “echo boomer” is, and then I read this article and I thought it was hilarious.  Apparently echo boomer is another label for children of the baby boomers.  Haven’t we got enough labels already?

So the gist of the article is that a Harvard study said that  my generation is entering  a stage of peak home consumption and will shore up the housing market.   The problem with this conclusion is that they did not account for how many people in the “echo boom” generation already own homes, and how many already lost homes to foreclosure and cannot recover for seven years.  However, the study did acknowledge that the real income of my generation is much lower than the prior generation so the affordability of homes is much lower.  Additionally, younger workers are suffering more in the midst of high unemployment, so buying a home is even more out of reach due to the lack of jobs.

However, I agree that eventually our generation will be the ones that soak up the excess housing inventory on the market now, but that is almost the same as saying “the sun rises in the east”.    It will take time for homes to be affordable enough for my generation to buy en masse.  Some of my friends have an attitude of, “I am not going to be stupid like my parents and rush into home buying”, and even those who have parents with huge capital gains on their homes believe that it is still too expensive to buy a home at the current valuations.  Also I have seen a trend of frugality as being the “in” thing to do now so many are seeking a deal or just staying put.  Some are just saving money by living with their parents.

Anyway, I wouldn’t say that we as a generation is  a lifeline for the current horrible housing situation, but I think it is a good thing that this crisis is happening now while we are still young. We still have time to figure stuff out,  learn from our parents’ mistakes, and build up our assets.  Unfortunately,  many baby boomers who were most affected by this economic disaster may be running out of time to rebuild.

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There was a mini panic in the financial markets recently when the 10 year and 30 year U.S. Treasury yields rose significantly in one day.  The 30 year bond’s yield is now over 4.5%.  This is due to the fact that the central bank has been trying to push long term rates down by announcing that it is buying an additional $1 trillion of U.S. agency debt.  It seems like bond buyers are no longer taking this manipulation of yields, and they are demanding the interest on their investments.  What does this mean for little guys like you and me?

First of all, I am glad that this is happening because I am just sick of all the efforts to push down mortgage rates  when there is no good reason to push it down.  Higher mortgage rates will encourage people to borrow less money, and push down housing prices.  That is not a bad thing on both counts. People will buy houses when it is affordable and reasonable.  Many people are buying right now because housing prices have come down dramatically, and not because of the historically low  mortgage rate. New homebuyers may not be able to lock down mortgages under 5% any longer, but the dip in prices to come may just make up the difference. The only negative is for those who are waiting to refinance, because those below 5% rates are now gone.

Higher yields on treasuries may also make those in charge of the  U.S. government think a little bit before they issue more debt. They need to know that they cannot make every bond buyer pay extremely low rates and this endless borrowing needs to be controlled. If the U.S. government spent and borrowed less, then our taxes may be lower.  However, these higher yields will just mean that Americans will be paying more in interest for years to come with their tax revenues.  This is unfortunate, but bond buyers are investors who should not have to accept rates that do not match the risk of the investment.  For what it is worth, I think right now the yield on 10 and 30 year treasuries is still fairly low so the U.S. is still getting a fairly good deal.

Some other effects I am hopeful about is that perhaps short term rates will follow on the upward trend and savings rates will go up accordingly.  The worst scenario is that inflation is going up AND savings yields are still abysmal, and in a way that is sort of happening now.  Inflation isn’t tremendous this year, but I am noticing some small increases in gas and food prices.  Additionally, wage growth is fairly small all over the board due to the recession.

Anyway, the Obama administration tried to reassure  China that its holdings are safe by pledging that the U.S. will try to reduce its budget deficit and eliminate the market manipulations by the government.  I personally think that China’s worries are justified because actions speak louder than words.  If the U.S. is really trying to reduce its budget deficit then it shouldn’t pledge more and more borrowing and spending.   The fact that Geithner had to make such a trip to reassure Chinese leaders shows that the U.S. government is feeling insecure about its debt situation and that does not inspire confidence in the bond market. China really has no obligation to buy trillions of U.S. treasuries and China is free to invest its reserves however it wants.  If China’s reluctance to lend encourages the US to cut its borrowing and spending then it is a good thing for  United State citizens in the long run.

In conclusion, the stock markets are showing signs of recovery, so this will probably push bond yields higher since there will probably be less demand for bonds.   This is good news for everyone who has money in the stock market.  It is reasonable that bond yields are going up, and it is nice to see some market forces push back against the heavy hand of government intervention.

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