Entries Tagged 'Mortgage' ↓

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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Last October my husband and I spent a lot of time and money to purchase my hubby’s childhood home in Southern California from  his parents.  Everything went through at the moment we stepped on a plane for China.  So far it is going well.  Our entire family spent winter break at the house for over two weeks and now we have a wonderful family taking care of the home and we can visit whenever we want.  Since October, mortgage rates have dropped significantly so I was shopping around for a refinance.  Today we will be doing the signing with the same lender we are with now for a Fannie Mae to Fannie Mae streamline loan.  Our interest rate is going from 5.875% to 4.875% and we will be saving over $200 a month on interest.

Personally, I did not know that there was an option of the Fannie Mae to Fannie Mae streamline loan, but I talked to my lender in January about refinancing and they said that we qualify for a streamline loan  Basically, there is no need for a new appraisal and  broker fees were waived since we are just doing the refinance with  the same bank.  Some fees cannot be avoided, such as a new title search and title insurance.  They also ran a new credit check, but the process was very easy overall since they had pretty much all of our information.

After running a bunch of calculations on the costs I determined that it was still worth it to refinance because we would be saving over $80,000 on interest over the lifetime of the loan with the 1% difference in the rate.  We will recover our costs in a little less than 2 years and since we intend to keep the home for a long time it is not a bad deal.

Also, since we only paid our old loan for 3 months, we are not really stretching out the loan by all that much.  Now if we apply the extra money we are saving towards the principal every month, we will pay off the loan six years early so I consider this a good move for us.

I am not sure if interest rates will move even lower, but 4.875% is a rate I am willing to stick with for a while and if it really goes down to 3.5 I could just refinance again.  If you are interested in finding out about the Fannie Mae to Fannie Mae streamline refinance you can check out this product matrix at Fannie Mae.

The basic requirements are these:

1. Your loan must be originally fully documented and underwritten by Fannie Mae guidelines.  It has to  be held by Fannie Mae right now.

2. You cannot have late payments within the 30 days you are applying

3.  You have to submit to a credit check, and your credit score needs to be 720 - 740 if your loan is more than 90% of the value, and 660 - 680 if your loan is less than 75% of the value.  Basically, your credit score has to be fairly good.

There are also a bunch of variations on the requirements based on the type of property and loan to value calculations that you have to read the Product Matrix to figure out.  I think this could be helpful to people who have homes that lost value dramatically because they really do not do an appraisal.  I would have been okay with an appraisal since we just bought the home 3 months ago and prices haven’t slid 20% in 3 months, but I know a lot of people who bought in 2006 or 2007 who have lost 20% to 30% and can’t take advantage of the great rates now.  My suggestion is to ask your lender if you qualify for a streamline, and you may be able to save thousands of dollars.

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A year ago I wrote this article about the government’s plan to freeze mortgage rates and how ridiculous it was. I also suggested that people should just walk away from their gigantic loans and buy something cheaper. A lot has happened since then. There were countless attempts by the government to revive the housing market with very little success, and many people did walk away from their underwater loans and buy cheaper homes. Yesterday, a report released by the Comptroller of Currency showed that more than 50% of borrowers who received loan modifications end up defaulting again anyway.

When I read the news I thought to myself, “well, what did you expect?” Many of these loan modifications either changed the loan term from 30 years to 40 years or lowered the interest rate, but the borrowers still owe a gigantic debt on a depreciating asset. There is no incentive for them to pay the debt if they can find a place to live in for even less money than the reduced mortgage payment.   Seriously, who would want to pay a $400,000 debt on an asset that is worth only $200,000?

Additionally, all of these loan modifications encourage bad behavior.  The borrowers probably think that if they don’t pay they will be bailed out again because bailouts are all the rage right now.  Everyday the news is reporting some kind of government action to deal with foreclosures.  So if you already got free housing for 3 to 4 month and then got a modification on your loan, then you have another 3 to 4 months until a foreclosure comes.  That’s 6 to 8 months of no housing payments even if there is no second modification, and that seems like a good financial incentive to default.

Another driver in re-defaulting is the worsening economic state of the world.  In November the United States lost 553000 jobs, and perhaps a lot of people no longer have the amount of income they had when they received the loan modification.  For now, I think the unemployment situation is only going to get worse.

I think the lesson in this is that the government should stop messing with the free market and let foreclosures happen naturally.  These modifications and bailouts are just prolonging the pain for everyone involved.  I suppose that more than 40% of these borrowers are still paying for their modified loans,  but they really  may be better off by renting and saving for a down payment on a cheaper home.  Home prices have come down more than 25% in many parts of the country, and it is slated to go down even further.  It would take a while for a foreclosure to come off someone’s credit report, but that might be the perfect time for that person to build up a sizable down payment.

I think home prices will go down for at least another 4 to 5 years and recover if the government stops with the interventions.  If they continue to manipulate the market through interest rates and loan modifications then it may take the housing market a longer time to recover precisely because the bad apples will still be hanging on.  For example, if a person gets a foreclosure now then  it would take seven years for it to come off their credit report.   So in seven  years this person would be a prime borrower again.  However, if he hangs onto the mortgage through various bank and government deals and then redefaults after two years, then it would take nine years from now for that person to become a prime borrower again.  The sooner people get foreclosed on, the sooner they can rebuild their credit and become suitable homebuyers again.  The housing market will only recover when the demand returns, and I truly believe that  all of these government polices to prevent foreclosure will simply stall the recovery of the housing market.

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When I left for vacation I mentioned that we still haven’t closed on the house, yet.  Well, on the day we left I got a call right before the plane was about to take off that said that our money was received and everything was fine.  So now we are officially homedebtors.

Right now my in-laws are still living in the home and we will be visiting for the holidays and also my sister-in-law’s upcoming wedding.  My in-laws won’t leave until next year and we are working on finding a caretaker who could keep the home occupied for at least a year.  The caretaker will be responsible for the maintenance and any utilities they use.  There are a few families that know my in-laws who are interested right now since it would be a good deal for them, but we are still going to have a formal application process to screen them. Since my in-laws may return after a year abroad the caretaker is just temporary.

We did not buy this home as owner-occupied/primary residence since we don’t intend to move down there for quite a while, and that raises a few issues.  First of all, our homeowner’s insurance is simply Dwelling Fire, which means that nothing inside the home is protected.  This is not a big deal since we are not living there.  Second, if we do sell the home in the future we will have to pay capital gains taxes.  In the past people could avoid this by moving into the home for two years, but the laws have changed so that starting from 2009 this isn’t the case anymore.

Overall, the situation isn’t that bad because we have 30% equity in the home right now based on a recent appraisal and the mortgage is 15% of our gross income.  Since we already itemize on our taxes we can claim the mortgage interest deduction, and that cuts down the mortgage a bit more.  We plan to keep the home for a very long time and possibly pass it onto our kids so I’m not too worried about the value going down a bit more.  We are also planning to pay off the mortgage in 13 years instead of 30 by adding extra principal onto every payment, so  we now have 155 more payments to go.

There is a possibility that we will move down there in a few years if the hubby gets the job he wants down there, and if that’s the case then we would have a nice house to live in.

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