(My friend and business associate, Peter Paredero, wrote this article for our local paper and I found it very informative - Tracy)
If you guessed another wave of foreclosures, you are correct! Consider how much equity you are losing in your home every time a foreclosure or short sale is sold in your neighborhood. The downward spiral of home values will not stop until we do something about it. As negative equity grows, fewer people are in a position to get out of a bad loan and more and more homeowners give up and decide on a strategic short sale or foreclosure and the cycle continues. It started with 100% financed, 2-year fixed loans given to W-2, wage earning employees who where allowed to claim more income than they actually made. As values dropped from this initial wave it put all of us in jeopardy. The ole’ “house of cards” theory…
HR6218, written by Representative Dennis Cardoza of California, is an example of a bill that seeks to stop the cycle. The bill is an attempt to refinance all Fannie Mae or Freddie Mac loans at today’s prevailing 30-year interest rates. Here’s the best part: it has zero qualifying parameters. No credit checking, no appraisal, no income requirements and you don’t even need to have reserves in the bank! Wow! Although the bill needs a major overhaul, at least we are starting to face the facts that continuing down the road of foreclosures will certainly not end without intervention.
Who’s losing their home? We are currently well past the first wave and pretty deep into the Alt-A and government (FHA) loans. In fact, it is not uncommon to hear of folks losing homes who, just a few short years ago, had never made a late payment in their life. It’s the generation that entered the housing market in the mid-90’s and later and witnessed a consistent up-tick on the value of their home. It’s anyone who took their loan-to-value up to 70 or 80% through a refinance to add the extra room, put in a pool, buy investment real estate and, yes, buy jet skis and quad runners. Irresponsible? Overly aggressive? Bad at math? You can decide for yourself, but the fact is that anyone buying or refinancing in recent years was in the wrong place at the wrong time.
How many “waves” are to come? Have you ever wondered how many 5, 7 and 10-year interest only loans where originated between 2004 and 2007? Even Alan Greenspan was telling us that short term money was the best value. How many people in our surrounding areas have these loans? How many are in the adjustment phase and why aren’t we hearing about them losing their homes? The answer is because they probably went from a 5.25% - 5.5% interest only loan that had a payment of $2,000 a month to an adjusting 25 to 30-year amortized loan with an interest rate of 3-3.5%. Due to the current incredibly low indices, they are only paying a few hundred dollars more a month. Now that they are amortizing, about $800 to $1,000 is finally paying down their principal. So, if every 6 or 12 months their loan adjusts to the index to which their note is attached, won’t we be seeing yet another wave of foreclosures once the economy picks up? I like to call it the “third wave,” but it will probably be wave number five or six.
We have spent the better part of the last three years figuring out whom to blame for this mess. We’ve pointed our fingers at the realtors, the loan officers, the banks, the consumer, the ratings agencies (who gave AAA ratings to collateralized debt obligations that they did not understand,) and finally Wall Street. I like to blame Wall Street, but that’s just how I roll… What are the benefits of a bill like HR6218? I doubt most people would disagree that it is a good idea to get every adjustable rate mortgage out of our housing market. It’s tough to get people spending again when they are in fear of their loan payment doubling in the years to come. It will also be a big help to people with 5.5% interest rates who can’t refinance due to negative equity in their home. Who would be hurt by this? I’ve heard various arguments on how it would affect the taxpayer; however it would be more of a cost to the banks. And to that I say, “Boohoo.”
For more information, visit www.cardoza.house.gov and click on "The Home Act H.R. 6218".
Peter Paredero, Senior Mortgage Consultant for Land Home Financial Services Inc. has resided in Pleasant Hill since 1994.
925 787-8746
pparedero@lhfinancial.com
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