A Neighbor's Foreclosure Affects Home Value

Many prospective reverse mortgage borrowers have questions about appraisals, and while statistics show that consumers’ valuations of their homes are beginning to fall more in line with the reality, there is still generally a gap between what a borrower thinks their home is worth and what an apparaiser thinks it is worth.

The NYTimes wrote an article on Friday highlighting how a neighbor’s foreclosure can dramatically affect home values. The article cites a report from the Center for Responsible Lending in Durham, NC, stating that about 69.5 million homes will have their home values decline this year due to the foreclosure of a neighbor. These homes will lose an average of $7,200, leading to a suspected loss of over $500 billion nationwide. Meanwhile, Credit Suisse projected that about 9 million homes will go into foreclosure from 2009-2011, leading to a ripple effect of declining prices on neighboring homes.

As Bill Tennant pointed out two weeks ago in his blog post on appraisals, one of the leading factors in an appariser’s valuation of a home is the recent sales of comparable homes in the vicinity. As the Center for Responsible Lending’s report shows, many borrowers are likely to take a greater hit due to the foreclosure crisis than they expected on the value of their homes. The Center for Responsible Lending predicted that borrowers will face a drop of 1.3% of their home’s value if they live within 300 ft. of a foreclosed home, and 0.6% of its value if they live between 300 and 500 ft.

A Slow Rebound to the Housing Market?

A professor of economics and finance at Yale, Robert Shiller, wrote in Sunday’s New York Times that he does not expect the rebound of the housing market to be very swift. He wrote about why the housing market often does not follow typical cycles of supply and demand, tending to lag. The article is especially interesting for its use of historical examples, such as the 15-year long burst housing bubble in Japan and the 7-year market drought in the US in the early 90s.

It is also true, as Shiller points out, that it takes individuals longer to make housing transitions than stock transactions. The decision to move can have a long chain reaction, including new schools, doctors, and houses of worship. When the decision is made by a couple, it requires the consent of both parties. Then there is the sheer amount of stuff that needs to be packed, moved, and unpacked. Even renters don’t rejoice in the task.

Such a viewpoint, supported by historical fact, serves to move the debate about the rebound of the housing market from its current waiting game (Is this the bottom? No wait, is THIS the bottom? Or is it THIS?) to one of settling in for the long haul. Frankly, despite all the articles debating whether we should be optimistic or pessimistic in regards to the market (for example: http://www.reversemortgageguides.org/news/housing-market-declining-and-improving-at-the-same-time) , settling in for a long term slowdown of the housing market appears to be the wisest course of action.

Obama's Homeowner Relief Program Still Excludes Many

While the Obama Administration’s Home Loan Modification Program was supposed to help homeowners who have lost their jobs and are having trouble making their mortgage payments, the NYTimes wrote an article today highlighting the many people whom the banks have been unwilling to help because they have never been late on a mortgage payment before. Some of these homeowners are upside down on their mortgages–others are having trouble simply due to the circumstances of the recession.

Although it is often dangerous to make generalizations solely based on the case highlighted in the story, it is extremely plausible that banks are unsure how to handle customers with good payment histories who are now running into financial difficulties. The banks and government programs seem to be waiting for people to get into a lot of trouble before bailing them out, rather than helping prevent those problems in the first place.

Furthermore, the number of subprime and Alt-A mortgages refinanced in May fell 11 percent from April, according to research by Alan White at the Valparaiso School of Law. Given the record number of homeowners behind on their mortgage payments or facing foreclosure, this statistic is problematic and disturbing.

Many of those affected include seniors. The woman profiled in the article, Eileen Ulery, is 63, old enough to qualify for a reverse mortgage. However, her property is upside down, meaning she would be likely to face a shortfall.

While I agree that on a scale of priorities we should be helping those whose circumstances are most dire first, it does not seem to correlate that homeowners who have been responsible are being penalized. Bank of America Home Loans is quoted in the article as saying they are still putting the programs in place for those not facing a severe threat of foreclosure. I would hope that those programs are as inclusive as possible, and put together soon so that these individuals do not end up in a dire situation before they can get help.

Financial Counseling May Help Homeowners Avoid Foreclosure

A recent New York Times article focuses on Fannie Mae’s HomeSaver Advance Program, a now-deemphasized program that gave borrowers up to 15,000 in unsecured personal loans to cover missed mortgage payments. However, 70% of the borrowers who took out these loans defaulted. This instance helps highlight the importance of financial counseling. The article closes with the example of a New York City program that makes foreclosure avoidance loans available to borrowers who have undergone counseling. This program has given out 15 loans so far, none of which have defaulted.

Reverse mortgage counseling has come under fire recently, and several states have been debating whether to pass legislation requiring counseling before all reverse mortgage transactions. It is often argued that counseling is necessary in order to ensure that the senior borrower understands the reverse mortgage transaction, but if one looks closely, it appears that counseling has the potential to do a lot more than that. As counselors at the NRMLA Orlando Road Show explained, the purpose of counseling is partly to make sure that the borrower will still have enough money to live on after the reverse mortgage. The financial counseling portion of the reverse mortgage counseling process is perhaps underestimated, but it articles such as the one referenced above help show that financial counseling may be another way to help homeowners avoid foreclosure–and ensure that the steps they take in the short term will not penalize them in the long run.

Housing Market Declining and Improving At the Same Time?

The construction industry is not doing well, but does that mean the market is down?

Alright, it’s 10am CST. I have already read five conflicting headlines with respect to the housing market today:

1. ”Housing Starts Hurt by Steep Drop in Apartment Building” – NYTimes

2. “Sales Drop 10%, But Home Depot Tops Forecasts” – NYTimes

3. “Builder Sentiment High on Affordability” – HousingWire.com

4. “Housing Starts Declined in April” – Wall Street Journal

5. “Signs of Optimism — Home Prices Rise” – Union-Tribune

So which is it?

These headlines, all from reputed publications, perhaps indicate the extent to which the market is saturated with housing news, as well as the vast amount of confusion in regards to which the direction the housing market is actually heading in. While it would certainly be easy to write about any one of these pieces, doing so would only steer your opinion in whatever direction the story I discussed took.

The data can be used to defend any viewpoint: Home Depot is doing well, Lowes is doing poorly. Housing starts for apartment buildings are on the decline. Housing starts for single family homes are stable. Housing prices are rising in some areas. The market still has not rebounded in others. The question is, which indicator do you deem to be the most important?

Or should we simply be acknowledging that it is too early to predict the rise or fall of the housing market with any certainty?

Countrywide becomes Bank of America Home Loans

The Countrywide name will soon be gone for good. The WSJ announced that Bank of America, which recently acquired Countrywide, will discard the Countrywide name. Countrywide will now be rebranded as Bank of America Home Loans.

Bank of America acquired Countrywide, a home mortgage lender, last July for $2.5 billion (the initial $4 billion deal was revalued due to Bank of America’s falling share price by the time it was completed). Bank of America Home Loans will continue to be based in Calabassas, CA, where Countrywide is based.

Note: I saw an article announcing this information on the nytimes website last night, but it does not appear to be up today.

Predicting Rates as Science

The Expanding Universe

Mortgage and Reverse Mortgage rates clearly fluctuate all the time. Several articles today, however, focus on predicting rates and financial performance as a “science.” An article on mathematical models of mortgage rates was in the science section of the NYTimes, along with another much longer article on Quants, comparing stock market performance predictions to quantum physics and string-theory.

Putting predicting rates in the same hard science category as Einstein’s unifying theory seems slightly ridiculous. Although both are theoretical, the recent stock market crash has proven that its impossible to predict the behavior of the markets with a high degree of certainty. The bursting of the housing bubble came as a surprise, much like the bursting of the .com bubble but with much much more damaging consequences.

Yes, many people foresaw that the markets were overextended, but they did not know when, how, or how dramatically they would fail. Thus the models (especially the long-term models) were generally unable to prevent people from losing a large amount of money last year. While that does not make them worthless, it does prevent models from being seen as an accurate predictive measure.

Greater than 50% accuracy may be enough for a model to perform well on Wall Street, but a much higher degree of certainty is necessary for a theory to gain any support in the scientific world. Models prediciting mortgage rates and stock market performance may be scientific in nature and are certainly highly mathematical. However, they should not carry the same weight and are not in the same category as the science behind developing a new cancer drug or determining Einstein’s constant for the expansion of the universe.

Eventually the mortgage rates and the stock market will dramatically rebound. If the models actually met a scientific standard we’d know when that’s going to happen; sadly, we don’t.