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.

 

Location is Everything in a Reverse Mortgage

This 2BR featured in the New York Times is on the market for $425,000.

This 2BR featured in the New York Times is on the market for $425,000.

Every week I read the New York Times “Property Values” column. The column features three properties throughout the country each week that are on the market for the price listed. “What You Get For… $250,000,” for example, vs. “What You Get For… $450,000.”  But having watched homes of different prices and sizes be listed each week, I have come to one clear conclusion: location is everything.

During one recent week, I watched some 3-5 BR homes discussed for under $300,000, but this week, the homes listed were 4BR, 2BR, and 1BR… all for $450,000.  Clearly location is at play. A 1BR in a high rise in Midtown Manhattan will almost certainly cost more than a 1BR in Lancaster, PA. A 3BR in Orange County, CA will likely go for more than one in Seattle, WA or Des Moines, IA.

When considering a reverse mortgage, location also comes into play because property values in some areas are higher than in others, as the above indicates. Some places have been hit dramatically by the burst of the housing bubble, while others have not seen their housing prices drop as steeply. Foreclosures and underwater mortgages are more common in California, Florida, Arizona, and Nevada than in most places in the Northeast.

It is a good idea to have a sense of how much your property is worth when using the reverse mortgage calculator and when evaluating your options. You may find that sales in your market are going strong and your home has not lost much of its value recently. However, you could also find that the reverse is true, is many are throughout the country.

 

This Week’s Reverse Mortgage Rates: August 11, 2009

This week’s reverse mortgage rates are below. The rates are effective for the week beginning August 11, 2009.

APR:

HECM CMT 300: 3.49

HECM CMT 325: 3.74

HECM CMT 350: 3.99

HECM LIBOR 225: 2.526

HECM LIBOR 250: 2.776

HECM LIBOR 275: 3.026

HECM LIBOR 300: 3.276

Expected Rates:

HECM CMT 300: 6.77

HECM CMT 325: 7.02

HECM CMT 350: 7.27

HECM LIBOR 225: 6.25

HECM LIBOR 250: 6.50

HECM LIBOR 275: 6.75

HECM LIBOR 300: 7.00

While the APR for both the HECM CMT and the HECM LIBOR remained mostly unchanged from last week, the expected rates for the HECM LIBOR and HECM CMT rose again this week. The increase was fairly significant, amounting to a tenth of a point on the HECM CMT and slightly more than a tenth of a point on the HECM LIBOR.

Reminder: The HECM CMT will cease to be offered on September 1st.

 

Auctioning off Mansions

An article in the New York Times today focused on a new phenomenon: The absolute auctions of multi-million dollar mansions. In an absolute auction, there is no minimum price, and the buyer agrees to accept the winning bid. The home chronicled in the auction was appraised at 14 million only two years ago, but sold in auction for 2.5 million last week, sending the home owner into personal bankruptcy.

The article was a sad story, as it highlighted the increasing interest in selling mansions at auctions–often pushed by creditors to do so or on the brink of foreclosure. The day before the home was auctioned, its belongings were auctioned. And still in the case of this homeowner, it was not enough to stave off financial disaster.  In a way, it seems that selling homes at absolute auction, while a way to get something for the home, doesn’t give always give the homeowners all the money they need. But it depends on the situation: another man was able to sell his home in an absolute auction, still cover the cost of his mortgage, and only take a $200,000 loss.  Nonetheless, the auctions are a sad phenomena of the weak market for luxury homes and the recession itself.

 

“Cram Down” Legislation Threatened

US Rep. Barney Frank (D-MA)

US Rep. Barney Frank (D-MA)

In the wake of a meeting between mortgage servicers and representatives of the US Treasury Department last week, US Rep. Barney Frank (D-MA), chair of the Financial Services Committee, threatened to revisit the “cram down” legislation that had failed in the Senate last year. The legislation, which passed the House last year and is supported by the President, would allow bankruptcy judges to rewrite mortgage contracts when homeowners file for bankruptcy.  While it remains to be seen what effect this would have on both the mortgage companies, and the borrowers, some believe that borrowers would be granted a great deal of relief from bankruptcy judges if the cramdown legislation were passed.

The problem is that there is no reason that a borrower should have to declare bankruptcy to get their mortgages modified or refinanced. And as more and more homeowners fall behind on mortgages, find themselves with motgages that are greater than the value of their homes, or both, the number of homeowners either unable or unwilling to make their mortgage payments will only increase.  We talked yesterday about the problem of upside down homeowners encompassing about 32% of homeowners. The category of homeowners potentially in need of a refinance or modification is even larger.

And so while there are times when it might be useful for bankruptcy judges to be able to rewrite mortgage contracts, hopefully the government and the mortgage industry can work together to make mortgage modifications a more workable reality before the “cram down” legislation becomes necessary.

 

Increasing Number of Homeowners Upside Down on Mortgages

At the end of June, 24% of homeowners were upside down on their mortgages. In other words, 24% of homeowners owed more on their mortgages then their homes were worth. When added to those with no equity remaining in their homes, the percentage climbs to 32%. Nevada, Arizona, California, and Colorado are the biggest offenders with rates of 40%, 37%, 33%, and 31% respectively of homeowners whose homes are worth less than their mortgages. In some of these markets, homeowners are walking away from homes where they may owe twice as much as the home is worth or more. And when the home is worth less than the mortgage, borrowers no longer qualify for some of the programs that might be able to help them, such as a reverse mortgage.

In response, some are urging the government to begin reducing loan balances to help borrowers cope with the problem. Lowering loan payments or rates will only make the mortgages drag out interminably, and still not recoup the home’s equity (unless it appreciates again over time back to levels that are higher than during the time of the boom).  If the government reduces the loan balances, borrowers will be inclined to continue to invest in their homes and stay in their residences, rather than walk away. This will reduce foreclosures, hopefully, as well as abandoned properties.

What do you think?

 

HECM Volume Increases in July; Top 10 Lenders Shaken Up

HECM volume increased dramatically this month. 9,830 HECMs were endorsed in July, up from 8,633 last month.  This is a good sign if 2009 HECM volume is to surpass the HECM volume in 2008.

The same 9 lenders continued to possess an increased market share despite one of them (World Alliance Financial Corp) going out of buisness last month.  One wonders if the increased number of endorsed HECMs from World Alliance Financial Corp (also known as Senior Lending Network) are a result of them trying to close out their pipeline as fast as possible.  World Alliance Financial Corp rose to the #3 spot this month from number 4 a month ago. It will be interesting to see if they remain in the #3 spot next month.

The top nine lenders are ordered below with rankings determined by the number of HECMs endorsed by the lenders YTD.  Financial Freedom only endorsed 10 HECMs last month, while Countrywide endorsed 8. One Reverse Mortgage surpassed Countrywide this past month in HECMs closed YTD. Countrywide was acquired by Bank of America back in January, and it will be interesting to see if the HECM volume attributed to them continues to decline as well (so far it looks as if it has).

Finally, it is important to note that only nine lenders were highlighted because several lenders, led by 1st AAA Reverse Mortgage Inc. are clustered under Urban Financial. This group has closed between 900 and 960 leads so far this year, but is still well under Urban Financial’s totals.

Top Nine HECM Lenders by Volume – June

1. Wells Fargo

2. Bank of America

3. Financial Freedom

4. World Alliance Financial Corp.

5. Countrywide

6. One Reverse Mortgage

7. MetLife

8. Generation Mortgage

9. Urban Financial

Top Nine HECM Lenders by Volume – July

1. Wells Fargo

2. Bank of America

3. World Alliance Financial Corp.

4. Financial Freedom

5. One Reverse Mortgage

6. Countrywide

7. MetLife

8. Generation Mortgage

9. Urban Financial

The complete lender list can be found here.

 

NCOA Offers Free Reverse Mortgage Counseling

Following in the footsteps of Money Management International (MMI), the National Council of Aging (NCOA) announced that they will also begin offering free reverse mortgage counseling through September 30, 2009. The counseling will be offered through NCOA’s  Reverse Mortgage Counseling Services (RMCS) network.

Again, although lenders cannot steer borrowers towards a particular counselor or set up the counseling session for the borrowers, free counseling is always a good option for seniors to be aware of.

Normally, the RMCS counseling would cost $125. It will be interesting to see if any other lenders will follow MMI and RMCS in offering free services in order to stay competitive.