Option ARMs and Reverse Mortgages

Today’s Wall Street Journal featured a very interesting article on how Bank of America is using reverse mortgages to save senior borrowers. The cases include situations where Bank of America has taken a significant write down to allow the borrowers to stay in their homes. But not all borrowers may receive the same treatment as the borrowers highlighted in the article. As the story notes, most borrowers who received the modified reverse mortgage had taken out option ARMs.

Option ARMs (Option Adjustable Rate Mortgages) have become “the new subprime mortgages,” leading many borrowers into foreclosure. 32% of option ARM borrowers were delinquent or in foreclosure last month, compared with 48% of subprime mortgage borrowers. Unlike subprime mortgages, option ARM mortgages generally went to borrowers with good credit, including seniors with significant equity in their homes looking to refinance. The option ARMs have also proved difficult to modify, since the low interest rates on the loan often cannot be lowered any further. Lawsuits have been filed by borrowers claiming they were misinformed of the loan’s complicated structure, which in many cases can lead payments to balloon after a few years.

As a result of the lawsuits, as well as the settlement of a suit against Countrywide, which was since acquired by Bank of America, Bank of America has agreed to modify option ARMs and subprime mortgages where possible. While it appears that Bank of America has so far only issued about 20 reverse mortgages to borrowers with option ARMs, it looks like a good start to fixing a significant problem. Borrowers with option ARMs from Bank of America may want to talk to their servicer or the bank about a modification, perhaps with a reverse mortgage.

Fannie and Freddie to Aid Mortgage Banks

In a move that is designed to help the housing industry, the Wall Street Journal reported today that Fannie Mae and Freddie Mac are working on a program to help smaller banks get the short term credit needed to help them make home loans. This would come in the form of Fannie Mae and Freddie Mac making advance commitments to buy home loans that meet a certain criteria. The program builds on a pilot program already underway between Freddie Mac and NattyMac and Provident Lender Associates LP.

While it seems that much of this plan has yet to be announced, any assistance to small banks appears to be welcome. Another column in the Wall Street Journal pointed out that there are over 8,000 mortgage lenders nationwide (not counting reverse mortgage lenders). When one considers that the majority of mortgage loans tend to be completed by the three major banks- Wells Fargo, Bank of America, and JP Morgan Chase. These three lenders alone account for 52% of new home mortgages, up 15% from the 37% market share for the top 3 lenders in 2007. An increase in market share for the top lenders likely doesn’t bode well for the industry though. As a result, it will be interesting to see if the plan with Freddie Mac and Fannie Mae will help revitalize the mortgage industry by helping the smaller lenders.

Taking in a Renter to Help Pay the Mortgage or Increase Income

An article in the Wall Street Journal today focused on a noteworthy new phenomenon: more homeowners are taking in renters. In some cases, homeowners are taking in renters in homes they still live in as a way to help make ends meet. In others, homeowners are becoming landlords, renting out homes they are unable to sell. This seems to be a popular option when the homeowners are forced to make a quick move- especially in the distressed real estate market. While to qualify for a reverse mortgage, a single family residence cannot be a rental property, nor can any portion of it be a rental property, renting out a home may be a good option for those who do not qualify for a reverse mortgage, but need the income from their home. In addition, multi-family homes with separate apartments may be rented and still qualify for a reverse mortgage as long as the homeowner continues to occupy the home.

There are some additional costs that come with being a landlord. Landlord insurance is about 25% higher than homeowners insurance, and landlords who use property manages may wind up paying them 3-12% of the rent. However, a tenant can be a good source of income, helping homeowners be able to continue to afford mortgage payments or break even on a property. When homeowners need to relocate in a short time frame, taking on a tenant helps alleviate the financial burden of paying for two mortgages at once (or a mortgage and rent).

Pending Home Sales Improve in July

Pending home sales improved for the sixth straight month in July to a level of 97.6 on the National Association of Realtors (NAR) index. While the index has improved dramatically from January, when it was around 80, levels still are nowhere near what they were during the housing bubble. In 2005, the pending home sales index neared 130.

Although pending home sales have increased, some of the factors behind the increase include falling home prices, low mortgage rates and the Obama administration’s $8,000 tax credit for first-time home buyers. But with the tax credit expiring towards the end of the year and home prices beginning to go back up (or decrease less rapidly), some question whether the rise in pending home sales will be sustainable.

(Reference: The Wall Street Journal print edition)

Wall Street Journal Publishes Front Page Article on Website on Reverse Mortgage Fraud

This morning the Wall Street Journal published an article on reverse mortgage fraud on the front page of their website. It is likely the article will make it into tomorrow’s print edition. The article focuses on the allegedly growing number of reverse mortgage scams, but a closer look at the cases in the article indicates that they appear to be more cases of elder abuse than problems with the reverse mortgage program.

In the case that leads off the article, the borrower was defrauded by the title agent, who defrauded 10 borrowers by taking their money and never giving it to the lender. The title agent, Garry Martin, pleaded guilty to stealing $5 million from over 50 borrowers in mortgage-related frauds. But as the perpetrator of the fraud was a title agent, not indicating a problem with the product at large.

The other two cases mentioned were examples of elder abuse or simple fraud. In one, the son took the mother’s payments. In another, the son took out a reverse mortgage in the name of a deceased mother. He even gave the funeral director an incorrect social security number and birthdate so that the death certificate could not be found by those with the correct information. In both of these cases, the fraud extended far beyond a reverse mortgage.

Reverse mortgages have a lot of protection built in to protect borrowers from fraud, and loan officers in most states and specifically trained in order to discover and prevent fraud. Fraud occurs with almost any financial product, but 29 suspected fraud cases out of 165,000 reverse mortgage loans still indicates a pretty safe product- with fraud only occuring at a rate of 0.02% of the time.

More information is also available at reverse mortgage fraud and scams.

Concerns with Appraisals Captivate Major Papers

Appraisers are under pressure to inflate property values.

Over the last two days, both the New York Times and the Wall Street Journal have published lengthy articles on the effects of the new Home Valuation Code of Conduct on appraisers. The Home Valuation Code of Conduct, which went into effect May 1, has made lenders responsible for ordering appraisals and negotiating with appraisers. As a result, appraisal companies are complaining that they are being paid less to do more work. In addition, appraisers are often required to travel farther to appraise homes, raising questions as to whether they are familiar enough with the area to provide a valid appraisal. A case highlighted in the Wall Street Journal article was that of a homeowner in Palm Beach Gardens, FL where the appraiser drove 44 miles to evaluate the home and came back with an appraisal that was around $70,000 less than the second appraisal. Furthermore, while the fees the appraisers are being paid have been decreasing, the cost to the consumer has risen by $100 in the past year, with most of the proceeds going to middle men.

Another concern raised by the industry is that being hired by lenders puts more pressure on the appraisers to return with a value that makes the deal possible. Appraisers need to keep the lenders happy to stay employed. If they demand fees that are higher than another appraiser or produce an unfavorable result, the lender may look elsewhere. As a result, some feel that the legislation risks putting ethical appraisers out of business.

Appraisal issues are common in reverse mortgages, and many of the issues raised in the article extend through both the conventional and reverse mortgage industries. As appraisals travel farther, there are more opportunities for mistakes. As appraisers worry about their fees and costs ride, the burden on consumers grows. Thus while the legislation has attempted to curb price inflation in appraisals and reduce the conflicts of interest, it appears to have arguably caused more problems than it has solved. Some in Washington are trying to get the legislation postponed until 2011.

The Changing Conception of Ownership vs. Renting

A wonderful article in the Wall Street Journal this week focused on changes in buying vs. renting as outgrowths of the American Dream and supported the position that the Obama Administration should turn to helping renters, rather than putting all of its money into revitalizing the housing market. The idea is an interesting one. Before the Great Depression, homeowners were either very wealthy or people who built the house themselves. The vast majority of Americans rented.

Now, home ownership has become synonymous with the American dream. A noteworthy quote mentioned in the article is, “‘A man is not a whole and complete man unless he owns a house and the ground it stands on.” – Walt Whitman. But this change was only completed as the federal government stepped in to dramatically assist and subsidize lenders with the creation of government programs such as the Home Owners Loan Corporation and the Federal Housing Administration. I would also argue that the change occurred partly due to class issues, as wartime and the Great Depression led to the ascendancy of the self-made man and decreased the emphasis on Old Money. Regardless, the change to a society that glorified home ownership was not made until the 1930s, and has still not occured in many European countries, where most rent.

It is true that the Obama Administration has spent a lot of money to try to help stimulate the housing market and keep homeowners that are behind on their mortgages in their homes. The aptly named “Save the Dream” fair in Atlanta this past weekend seems to aptly illustrate this idea that the dream of owning a home is a fleeting one. A report by the National Foundation for Credit Counseling in June found that 1/3 of Americans believe they will never be able to own a home, and 42% of those who owned a home in the past but do not own one currently believe they will never be able to own one again. This is hardly optimistic data for those seeking to restart the home ownership market.

In New York City (and I imagine in other urban areas as well), there are programs in which the government assists low-income families with finding apartments. I believe there are even cases when rents are subsidized, depending on the circumstance. Assisting landlords and tenants may be the best way to help combat the housing crisis. Landlords in default or distress can cause problems for tenants, who may find themselves evicted. In cities where property values are high, many renters can be stuck with rents that amount to more than half their salaries.

Helping renters will help individuals save money, perhaps leading them on the path to home ownership, while, in the meantime, improving their present situation. Although programs such as the reverse mortgage program and the HECM for Purchase program are wonderful ways to help homeowners, the point that renters should be attended to as well (and perhaps instead) of simply focusing on homeowners is a valid one that has been long overdue.

House Likely to Propose a Bill to Extend the Estate Tax

The Wall Street Journal announced today that the House of Representatives is likely to propose a temporary measure to extend the estate tax, rather than allowing it to be repealed. Under a bill signed by former President George W. Bush, the estate tax will be repealed on January 1 if no action is taken. The House proposal is expected in light of the difficulty Senate Democrats and Republicans have had coming up with a permanent rate structure.

The conversations about the estate tax bill are interesting in light of recent discussions about possible ways for the proceeds from a reverse mortgage to be used as an estate planning tool. One way, using a reverse mortgage to pay for a life insurance policy in an irrevocable trust to be paid to the heirs upon the death of the borrower, was mentioned as an option in order to pass on money to heirs without having to pay taxes. Check back for more on these conversations.

Housing Market Rebound Freezes Out The Previously Well-Off

A front page story in the Wall Street Journal this morning highlighted an interesting trend; high-end homeowners are being left behind in the housing market rebound. Stimulus programs, such as the $8,000 new homebuyer tax credit and low mortgage rates, are dependent upon income and home values. The jumbo mortgages necessary to take out a high-cost home have come with higher rates and lenders requiring an increasingly large portion as the down payment (20-30% of the property value). All this comes at a time when prospective buyers have had an even harder time selling their homes, making coming up with money up front difficult. As a result, while the market has begun to turn upwards for many first-time buyers and lower value homes, the market is still stagnant for those in the upper and upper-middle classes.

While it is perhaps unsurprising that stimulus programs might choose to target those with lower incomes, the recession has hit those with higher incomes as well. Many of the people affected by the stock market crash and financial fraud scandals are those who were making upwards of $150,000/year. After losing their jobs and/or the majority of their 401Ks, some members of this group are taking pay cuts in order to land new jobs. As home values decline however, this group also is beginning to have a hard time making mortgage payments and qualifying for relief. Jumbo mortgages are currently the type of mortgages with the highest default rate.

The government should do something to make sure that the upper middle class and upper classes are not completely cut out of the stimulus programs–at least so far as real estate is concerned. Their homes are taking some of the largest hits in a distressed market, to the point where selling is not possible without losing hundreds of thousands of dollars. And in markets such as California, some are extremely upside down on their mortgages. While they may be well off in comparative terms, they could still lose their homes (and many are), could still lose their jobs and source of income (and many have), and they still should be granted some form of relief.

The Difficulties of Mortgage Modifications on the Front Page of the WSJ

The front page of today’s Wall Street Journal featured a touching article about the difficulty of getting a mortgage modification. We have stated the facts in this piece many times, including the crucial fact that 9% of 45 million American homeowners were delinquent on mortgage payments in the first quarter of 2009. Yet, only about 500,000 loans have been modified thus far, leaving at least 3.5 million people without a much needed modification. It has also been stated often that a modification is hard to come by. While the article goes into more specifics, the stories of piles of paperwork and miles of red tape are already widespread.

Given what is clearly a problem, I wonder if there is not some solution that would do a better job of solving these issues. If a customer has applied for a mortgage modification, is getting stuck in red tape, and there is already a glut of houses on the market, why not order a temporary halt to the foreclosure until the situation can be resolved? It is hard to believe that it is a best practice to penalize a customer for the bureacracy surrounding the new programs that Obama has created (as well as existing ones that are seeing a surge of interest).

As the article pointed out, there are many parties with stakes in a foreclosure. The lenders and investors care about the outcome of an overdue loan as well. However, harried bankers and servicers need to be given the time to adequately resolve these claims. Unfortunately, as more and more homeowners head into foreclosure, time appears to be sorely lacking.