Americans Falling Behind on Mortgage Payments

I really believe that part of this problem that has been caused by the Federal government. Many Americans were lead to believe that in order to get bailed out they needed to get into foreclosure. Much of the talk back in September and October was about saving the butts of investors that were screwed by mortgage bankers. As it turns out, the plan to save homeowners--Mortgage Modification Plan--Making Homes Affordable--is not going to help speculators, or those who bought second home for "investment purposes".

A record 5.4 million American homeowners were either behind on their payments or in foreclosure at the end of 2008.

That translates to almost 12% of mortgage holders. The biggest increases in loans 90-days past due were in Louisiana, New York, Georgia, Texas and Mississippi. No California or Florida. I guess they beat everyone to the "punch" in these states.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Is Principal Reduction or Refinancing the Answer to the Subprime Mortgage Crisis

The article presented below--Matters of Principal--is well written and thought provoking. The article addresses the current situation in the subprime mortgage market and proposed bailout of homeowners by the Obama administration. The authors make the case that refinancing won't work, and that the it would be cheaper and more effective for the Federal government to write down the principal on these distressed mortgages.

The reasoning behind the article is compelling and I can't say I disagree. I can say I think the approach the Obama administration is taking is more realistic and the best way to go in the current political and economic environment.

I believe most Americans are honest and they will ride out the drop in the value of their homes and make their mortgage payments. It is clear to me that a simple refinancing of the mortgage that allows them to continue to pay a more affordable amount each month--is the best answer.

What leads me to believe that honest Americans will keep paying even though the value of their home is substantially under water? I did it myself and I watched my neighbors do it while I was living in Texas. I bought a house in 1982 and then the price started dropping. It took more than 13 years before the house returned to my original purchase price. After 20 years, it was worth about 2.6 times my original purchase price. Here is the most important point--I only put five percent down when I bought the house. So, I didn't feel like I was losing much of anything while I lived there. I stayed because I needed a place to live, I liked where I was living, and I was honest.

At the end of 20 years my home was worth more than 40 times what I put down. My return on investment was excellent. This in spite of the fact that it was under water for 13 of those 20 years. The bad news--the home was located in Dallas Texas , not South Florida. Imagine how I would have been feeling in 2006 after owning that place for more than 20 years. The good news -- it has not dropped in value like a lead brick in the last few years. I no longer live in the house, rents have gone up in the last five years.

It is true that I could have walked away and rented cheaper. I didn't.

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Matters of Principal

By JOHN D. GEANAKOPLOS and SUSAN P. KONIAK

TO stanch the hemorrhage of foreclosures, we don’t need another bailout. What we need is a fix — and the wisdom to see what is in our own self-interest.

An avalanche of foreclosures is coming — as many as eight million in the next several years. The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won’t fix the problem.

For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we’ve made to support the banks.

For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures. Typically, a homeowner fights off eviction for 18 months, making no mortgage or tax payments and no repairs. Abandoned homes are often stripped and vandalized. Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure.

The taxpayers need not and should not be responsible for making up the difference between the payments due bondholders before a loan is modified, and those due after modification. Why? Because the bondholders and the banks, the ultimate beneficiaries of homeowner payments, will be better off if mortgages are modified correctly and foreclosures stopped. The government “owes” them nothing more than that.

Why is writing down principal, which the Obama plan rejects, so critical to stopping foreclosures? The accompanying chart, courtesy of Ellington Management, an investment firm in Old Greenwich, Conn., tells the story.

It shows that monthly default rates for subprime mortgages and other non-prime mortgages are stunningly sensitive to whether a homeowner has an ownership stake in his home. Every month, another 8 percent of the subprime homeowners whose mortgages (first plus any others) are 160 percent of the estimated value of their houses become seriously delinquent. On the other hand, subprime homeowners whose loans are worth 60 percent of the current value of their house become delinquent at a rate of only 1 percent per month.

Despite all the job losses and economic uncertainty, almost all owners with real equity in their homes, are finding a way to pay off their loans. It is those “underwater” on their mortgages — with homes worth less than their loans — who are defaulting, but who, given equity in their homes, will find a way to pay. They are not evil or irresponsible; they are defaulting because — for anyone with an already compromised credit rating — it is the economically prudent thing to do.

Think of a couple with a combined income of $75,000. They took out a subprime mortgage for $280,000, but their house has depreciated to a value today of $200,000. They’ve been paying their mortgage each month, about $25,000 a year at a 9 percent rate including principal and interest. But the interest rate is not the problem. The real problem is that the couple no longer “own” this house in any meaningful sense of the word.

Selling it isn’t an option; that would just leave them $80,000 in the hole. After taxes, $80,000 is one and a half years of this couple’s income. And if they sacrifice one-and-a-half years of their working lives, they will still not get a penny when they sell their home.

This couple could rent a comparable home for $10,000 a year, less than half of their current mortgage payments — a sensible cushion to seek in these hard times. Yes, walking away from their home will further weaken their credit rating and disrupt their lives, but pouring good money after bad on a home they do not really own is costlier still.

President Obama’s plan does nothing to change the basic economic calculation this hard-pressed family and millions of others like it must make. The Obama strategy — which involves reducing their interest rate for five years and giving them, at most, $5,000 for principal reduction over five years — will still leave them paying much more than the $10,000 it would cost to rent.

And five years later, after the Obama plan has run its course, this couple will still not “own” this house. Those who accept an interest modification under that plan are likely to realize at some point that they are essentially “renting” a home and paying more than any renter would. Many of those families will re-default, and see their homes foreclosed.

Bondholders today anticipate making as little as $70,000 on a foreclosed home like that in our example. But consider how much might change simply by writing down the principal from $280,000 to $160,000, 20 percent below the current appraised value of the house. The homeowner might become eligible to refinance the $160,000 loan into a government loan at 5 percent, which would be impossible on the $280,000 mortgage.

Even if the couple couldn’t refinance and still had to pay the original rate of 9 percent, the payments would be reduced to $14,400 a year, considerably less than the $25,000 now owed, and no longer wildly more than renting would cost. And the couple would have $40,000 of equity in the house: a reason to continue to pay, or to spruce up the house and find a buyer. Either way, the original bondholders would have a very good chance of making $160,000, instead of the $70,000 expected now. Everybody wins.

If writing down principal is such a good idea, why aren’t banks and servicers (the companies that manage the pools of mortgages that have been turned into investment vehicles) doing it now? Many banks are not marking their mortgages down to the foreclosure values the market foresees, hoping instead that we taxpayers will buy out mortgages at near their original inflated value —another government bailout. Reducing principal would force them to take an immediate markdown, but a smaller one. The servicers, meanwhile, are afraid that bondholders, their clients, will sue them if they write down principal — a real prospect because the contracts that allow servicers to modify securitized mortgages put restrictions on the kinds and number of modifications they may make. Moreover, making sound modification decisions is costly; servicers don’t want to spend the money and lack the personnel to do the job.

Beyond all that, the servicers have a conflict that all but guarantees they will not modify loans to maximize bondholder value. Once a homeowner is in default, the servicer must advance that homeowner’s monthly payments to the bondholders, getting repaid itself only when the house is sold or the loan is modified. So cash-strapped servicers want to foreclose prematurely or do a quick-and-dirty modification (without due diligence and thus without considering principal reduction) to get their money back fast.

Paying servicers, these conflicted agents, $1,000 per mortgage to reduce interest payments, as the Obama plan provides, is a bad use of scarce federal dollars. Last October, on this page, we proposed that Washington pass legislation that would remove the right to modify loans or decide on foreclosure from the servicers and give it to community banks hired by the government. These community organizations would have the power to modify mortgages (including reducing principal) when doing so would bring in more money than foreclosure — particularly loans that are now current but are in danger of delinquency. Those now current would be presumed ineligible if they default before the trustees arrive to modify. Our plan is simple and would require little government spending, somewhere from $3 billion to $5 billion over three years, as opposed to the $75 billion or higher price tag for the Obama plan.

We know there are some who will be outraged at the idea that their neighbors might get a break, while they — so much more responsible — get nothing. To these outraged folks we say, you would benefit too. It is not just your home values and your neighborhoods that will deteriorate if you insist that your underwater neighbors not get relief; it is your tax dollars and that of your children that will be needed to make up for the plummeting value of those toxic assets held by banks, which we taxpayers now guarantee and may soon own outright. It is your job that will be at stake when your neighbors can no longer afford to buy goods and services, causing more companies to cut jobs. So you need to act responsibly again, for your own sake and for the welfare and future prosperity of the entire nation.

John D. Geanakoplos is a professor of economics at Yale and a partner in a hedge fund that trades in mortgage securities. Susan P. Koniak is a law professor at Boston University.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Beware of Foreclosure Rescue Scams - Help Is Free!

I am posted this as a public service announcement for Homeowners. I am seeing ads on television offering assistance to distressed homeowners--for a fee. I am also seeing stories on the news channels with horror stories where unsuspecting homeowners are paying fees to these scam artists and getting nothing in return.Beware of Foreclosure Rescue Scams - Help Is Free!

* There is never a fee to get assistance or information about Making Home Affordable from your lender or a HUD-approved housing counselor.
* Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!
* Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
* Never make your mortgage payments to anyone other than your mortgage company without their approval.

Source of this Informtion: FinancialStability.gov

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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• Systemic Risk Defined--Too Big to Fail


• Ray Dalio on the current state of affairs in the market


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• Who Caused the Financial Crisis?


• Option ARM--The Toxic Mortgage


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HomeOwner Wealth Dropped $2.4 Trillion in 2008

The value of homes in the U.S. dropped $2.4 Trillion in 2008.

8.3 million homeowners now owe more than their house is worth.

Source First American CoreLogic.

If you would like to see more tiny houses go here (this is not an ad or promo).

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking syndication and writing assignments.

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• Option ARM--The Toxic Mortgage


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Help for Homeowners--Are you smarter than a Fifth Grader?

I am doing my best to figure out who is in and who is out in the new mortgage plan announced by President Obama. Are you qualified if you meet any one requirement? Or, is it a more like an equation--if this, then that. For example, if your ratio of income to mortgage payment exceeds 31 percent you are in? Or is it, if your ratio exceeds 31 percent, and your house is only down a little bit, and you made a substantial down payment when you bought the house you are in?

I did figure this out---the key words throughout the announced information so far are "you may be". So you may be eligible but you might not find out until March 4. Sooner or later I will figure this one out, "This initiative will also include borrowers who show other indications of being at risk of default."

The Obama Administration’s Homeowner Affordability and Stability Plan will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to stay current on their mortgage payments, while attempting to prevent the destructive impact of foreclosures on families and communities. It will not provide money to speculators, and it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments. Just as the American Recovery and Reinvestment Act works to save or create several million new jobs and the Financial Stability Plan works to get credit flowing, the Homeowner Affordability and Stability Plan will support a recovery in the housing market and ensure that these workers can continue paying off their mortgages.

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Who the Program Reaches:

The housing plan President Obama unveiled today could directly help up to 9 million people.

Focusing on Homeowners At Risk: Anyone with high combined mortgage debt compared to income or who is “underwater” (with a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default. Eligibility for the program will sunset at the end of three years.

Reaching Homeowners Who Have Not Missed Payments: Delinquency will not be a requirement for eligibility. Rather, because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

Common Sense Restrictions: Only owner-occupied homes qualify; no home mortgages larger than the Freddie/Fannie conforming limits will be eligible. This initiative will go solely to supporting responsible homeowners willing to make payments to stay in their home – it will not aid speculators or house flippers.

Special Provisions for Families with High Total Debt Levels: Borrowers with high total debt qualify, but only if they agree to enter HUD-certified consumer debt counseling. Specifically, homeowners with total “back end” debt (which includes not only housing debt, but other debt including car loans and credit card debt) equal to 55% or more of their income will be required to agree to enter a counseling program as a condition for a modification.

How the Program Works

The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. This program will bring together lenders, servicers, borrowers, and the government, so that all stakeholders share in the cost of ensuring that responsible homeowners can afford their monthly mortgage payments – helping to reach up to 3 to 4 million at-risk borrowers in all segments of the mortgage market, reducing foreclosures, and helping to avoid further downward pressures on overall home prices. The program has several key components:

Shared Effort to Reduce Monthly Payments: Treasury will partner with financial institutions to reduce homeowners’ monthly mortgage payments.

1. The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower’s monthly mortgage payment is no greater than 38% of his or her income). Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.

1. To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.

“Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.

Responsible Modification Incentives: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current.

Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time under the modified loan, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance on the mortgage loan. As long as the borrower stays current on his or her payments, he or she can get up to $1,000 each year for five years.

Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be

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Government Help for Homeowners--Access to Refinancing Case 1

What help is available for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability and Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

Case 1-Access to Refinancing

In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.

Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.

Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.
* How do I know if I am eligible?

Complete eligibility details for all programs will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

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Obama: I wanna help Homeowners--Is this you?

There could be some interesting angles here. For example, if you are a small business owner do you use income or adjusted gross income? I like the parts where incentives are being offered to modify loans and to mortgage servicers. This might actually provide some motivation for action.

Wouldn't it be the patriotic thing to do to refinance mortgages?

Wide-ranging $75 billion plan will use government money to subsidize rates and insure servicers against falling home prices.

The Obama plan calls for:

* Helping borrowers who owe more than 80% of their home's value to refinance and reduce their monthly payments.

* Creating a $75 billion homeowner stability initiative to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to bring payments to no more than 31% of a borrower's income.

* Providing multiple incentives to servicers to modify loans and to proactively help at-risk borrowers while they are still current in their payments.

* Creating a $10 billion fund to protect investors and servicers against further home price declines.

* Requiring all financial institutions receiving government funds to participate in a standardized loan modification program, while seeking to have all federal agencies that own or guarantee loans also apply the guidelines.

* Allowing judges to modify mortgages during bankruptcy, a measure the financial industry has strongly opposed.

* Providing more Treasury Department backing of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and expanding the number of mortgages the agencies back.

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Obama: Aid 9 million homeowners

Wide-ranging $75 billion plan will use government money to subsidize rates and insure servicers against falling home prices.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: February 18, 2009: 10:05 AM ET

NEW YORK (CNNMoney.com) -- President Obama is unveiling a $75 billion multi-pronged plan Wednesday that seeks to help up to 9 million borrowers suffering from falling home prices and unaffordable monthly payments.

The long-awaited foreclosure fix marks a sharp departure from the Bush administration, which relied mainly on having servicers voluntarily modify troubled mortgages.

Obama, meanwhile, will make it easier homeowners to afford their monthly payments either by refinancing the mortgages or having their loans modified. The president is vastly broadening the scope of the government rescue by focusing on homeowners who are still current in their payments but at risk of default. And he puts billions of federal funds into enticing servicers to modify the loans of those who've already stopped paying.

The program contains a mix of carrots and sticks for mortgage servicers and investors, both of whom have been seen as resistant to modifying loans. The program would not only give servicers $1,000 for each modification, but would give them another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.

But the administration is also wielding a big stick. It will work with Congress to amend bankruptcy laws to allow judges to modify mortgages, a step community advocates say is badly needed but that the financial industry abhors.

"In the end, all of us are paying a price for this home mortgage crisis," Obama was expected to say in a speech Wednesday. "And all of us will pay an even steeper price if we allow this crisis to deepen -- a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit."

The Obama plan calls for:

* Helping borrowers who owe more than 80% of their home's value to refinance and reduce their monthly payments.
* Creating a $75 billion homeowner stability initiative to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to bring payments to no more than 31% of a borrower's income.
* Providing multiple incentives to servicers to modify loans and to proactively help at-risk borrowers while they are still current in their payments.
* Creating a $10 billion fund to protect investors and servicers against further home price declines.
* Requiring all financial institutions receiving government funds to participate in a standardized loan modification program, while seeking to have all federal agencies that own or guarantee loans also apply the guidelines.
* Allowing judges to modify mortgages during bankruptcy, a measure the financial industry has strongly opposed.
* Providing more Treasury Department backing of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and expanding the number of mortgages the agencies back.


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