Archive for the 'Refinance' Category

Date: July 21st, 2008, Filed under Auctions, Foreclosure, Refinance, bailout, short sales

Chicago, IL
By A.B. Dada
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On numerous housing bubble forums and blogs, I’ve noticed some people are recommending a tactic that may help stave off foreclosures while attempting to bring the market back to more realistic prices: the idea that the bank should re-appraise the property, and modify the loan downwards to the new market value. This would be the equivalent of a short-sale from the current owner to the current owner, with the bank eating the loss.

There are many reasons why this is a terrible idea, but parts of it do have merit. First of all, it would be difficult to keep EVERY homeowner who is underwater from asking for a reappraisal and a lowering of their principal owed. Banks would be overwhelmed, and finding the current true market value of a home is impossible except in a sale situation. Appraisers were, en masse, one of the cause of the bubble by their poor appraising and bad use of discretion in looking at housing value, not just prices.

One option that might work is the idea of a short sale auction with a preapproval amount for the current underwater homeowner. I’d say it would be important to limit these short sale auctions to homeowners who are already 90 days late on their mortgage, but have the income necessary to pay some sort of mortgage. Why 90 days late? It would keep homeowners who can afford their mortgage payment, but don’t want to, from taking advantage of a rewriting of the terms of the loan. 90 days late gives a homeowner a terrible hit on their FICO score, so those with clean reports will likely not run into default just to try to get a lower monthly payment.

The first step would be to verify what the homeowner really can afford, taking into account a fixed rate mortgage, outstanding debt elsewhere, and their income levels. Once a realistic figure, no more than 3X their annual income, is decided upon, the bank can then offer the homeowner a price that they can keep their home for. Let’s say that a homeowner who is underwater with a terrible loan package makes $50,000 per year, but their mortgage was based on a $250,000 home (5x income). The bank, after looking over every aspect of their debt and income, sets the new recalculation value at $150,000 maximum.

Then the home goes to auction. The current homeowner is allowed to bid up to $150,000 on their own home, preapproved for a mortgage rewriting. If anyone else bids over $150,000, the homeowner loses their home, and the bank makes a short sale. If no one else does, the homeowner keeps their home, gets a new mortgage, and the bank takes a loss.

I don’t like this option, but it is a possibility because it is no different than any other short sale or auction, it just allows the chance that the current homedebtor can stay in their house, saving the bank significant money in rehabilitation or tax liens or other costs.

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Date: December 13th, 2007, Filed under HELOC, Mortgages, Refinance

Zion, IL
By A.B. Dada
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This article is going to infuriate quite a few people I know. I’m not a fan of the HELOC, or what some call the Home ATM. A HELOC, or the Home Equity Line Of Credit, allows you to take a loan out against the equity you’ve built in your home. HELOCs have been very popular even without equity built through paying down a loan, just due to the Federal-Reserve created inflationary pressures that have caused housing prices to rise — giving people more equity in a home than they actually earned by paying their mortgages. Of course, many of these equity values are now falling, leaving some people with mortgages and secondary loans (HELOCs) that are valued over the current value of the home.

First of all, I do believe the HELOC can be useful for a few things: investing in a new business, paying down high interest debt permanently, and emergencies (health or other). HELOCs are terrible ideas for those who want to use the money to buy a new car, take a vacation, or spend on frivolous and unnecessary consumer goods. Let’s look at why that is.

I’ll make an example on an “average” $300,000 home. Let’s say you put down 20% (which is unheard of lately), so you need a mortgage of $240,000. At 6%, your mortgage payment will be $1439 per month. If you pay that amount each month, your mortgage payoff amount after one year is $237,052. So for the first year of payments totalling $17,268, you’ve added a whopping $2948 in equity for the year. Don’t forget to add taxes and maintenance to that $17,268 figure to see how much equity you get back in the first year of ownership.

After year two, your payoff amount is now $233,923. Two years of payments is $34,536, for an amazing return in equity of $6,077.

Year three brings a payoff amount of $230,601. Year four is $227,074. Year five is $223,330.

After five years, you’ve paid $86,340 in mortgage payments, and have $16,670 in equity you now own in the house, not including the $60,000 down payment you made.

Let’s say you want to take a vacation, and it happens to be $16,670 exactly. You take a home equity loan out (HELOC) for that amount, and pay it back at 7% interest. Or maybe it’s a new car, or a new home entertainment system. Whatever it is, you’ve spent that equity.

What has it cost you to take a vacation? Surely not $16,670. No, that vacation cost you $86,340, because that is what it cost you to get that equity level in your home. In addition to that cost, you purchased a depreciating asset (TV or car) or short term entertainment (a vacation) with no long term asset value. Either way, you surely don’t have anything worth $16,670 left to show for the HELOC you received. Even worse, you’re now paying the HELOC off in addition to your $1439 monthly mortgage that you have left for 25 years. If your HELOC is a 10 year loan, at 7%, your new monthly payment is $194 per month, which over 10 years is a payment total of $23,226. At the end of 10 years, you basically have returned that equity (and paid down your home loan), and you may or may not still have the asset you bought or memories of the vacation you took.

So for the asset or vacation you received worth $16,670 at the time, you paid $86,340 + $23,226 or $109,556 to get it. Does it sound worthwhile to waste your time, energy and future years of your life to pay $109,556 for an asset maybe worth $3000 after just a few years?

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