125% Refinance: Pricing You IN for a Decade or More

Astute readers have no doubt have learned by now of yesterday’s announcement by HUD Secretary Shaun Donovan that the federal government’s “Making Home Affordable” plan will now allow mortgages owned or guaranteed by Fannie Mae and Freddie Mac to be refinanced with loan-to-value ratios of up to 125%.

I won’t go into all the details of the announcement since you can find good coverage of the changes over at the P-I or Rain City Guide. Instead, I thought it would be interesting to see what the long-term financial picture might look like for someone who plans to take advantage of this program.

Let’s take a look at some hypothetical home borrowers who currently owe $400,000 in various mortgages with difficult terms or high rates, and whose home is presently worth $320,000. They jump on the new FHFA Home Affordable Refinance Program and refinance into a single 30-year fixed-rate loan at a 5.75% interest rate with a 125% loan-to-value ratio.

I hope that our hypothetical couple doesn’t want to move any time in the next 13 years, because under a relatively optimistic home value appreciation scenario that’s how long it will take before they will be able to sell without bringing money to the table:

125% Loan-to-Value Home Refinance

Note that the home sale proceeds line assumes paying 6% of the sale price to real estate agents, as well as an additional 2% to account for excise taxes and other costs of selling. You can also download the spreadsheet I used to create these charts and tweak the values yourself.

With the home value appreciation tweaked to a slightly less rosy scenario, it takes 17 years before our couple can break even selling their house:

125% Loan-to-Value Home Refinance

According to a 1993 study by the Census Bureau (pdf) only ~10% of home owners stayed in one house for over ten years. A 2001 study (pdf) by the NAR-funded Joint Center for Housing Studies put the median length of home ownership at 8.2 years. Refinancing one’s home into a 30-year loan for 125% of the house’s value will most likely lock the borrower into their present home for a period of time longer than 90% of people usually stay in their homes.

If the goal of this new 125% loan-to-value program is to financially imprison people in their current homes for a decade or more, then it looks like it could be a rousing success. However, I’m not sure how many currently struggling home borrowers would really consider that to be much of a “help.”

0.00 avg. rating (0% score) - 0 votes

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

145 comments:

  1. 1
    SeaBuyer says:

    But what if they don’t take advantage of the program? Wouldn’t they have to stay put for an even longer period?
    I know a few people who bought at the peak and have 30-year fixed mortgages right now and didn’t put any money down. They are seriously under water.
    Don’t you think this program will let them reduce their payments unless they decide to walk away or am I missing something?

  2. 2
    The Tim says:

    RE: SeaBuyer @ 1 – Yes well their choice really boils down to:

    • Try to convince the bank to agree to a short sale and get out now.
    • Walk away.
    • Bring money to the table and sell now.
    • Refinance and price yourself in for 10+ years.

    If we’re ranking the desirability of the options on a strictly financial basis, I’d put them in roughly the order above.

  3. 3
    Kary L. Krismer says:

    I’m fairly certain this isn’t a program that allows them to borrow more than what they do already (subject maybe to loan costs), so it’s not locking them into anything they aren’t already locked into. It’s just allowing them to lower their payments.

    What I don’t know is how buyers with 80/20s would qualify for this. I doubt they can do this, but if this would allow someone to convert from an 80/20 to a single loan, I’d suggest that would be a very good thing, because it would reduce their potential liability in the event of a foreclosure situation (in Washington–in California it might increase their liability).

  4. 4

    RE: The Tim @ 2

    The Tim, your first three options apply if the home owner wants to sell. If a home owner wants to take advantage of the 125% LTV refi, I don’t see how it locks them into the home any more than if they do not refi. In fact, the program encourages borrowers to opt for a shorter term to try to reduce the amount of time they are under water. And even if the borrower opts for a 30 year (vs a shorter term) with a lower interest rate, they can reduce the balance quicker by applying the savings from the refi towards principal. (I agree w/SeaBuyer)

  5. 5

    RE: Kary L. Krismer @ 3 – If the program has the same guidelines with exception to the expanded LTV, folks w/an 80/20 are still (pretty much) screwed. HARP does not allow 2nd mortgages to be included in the refinance–even if they were used for the purchase of the home.

    This is unlike a “regular” refinance where a “purchase money second” can be included and the refi will be treated as “rate-term” vs. cash-out. (When refi’s are not from the original purchase, paying them off causes the refi to be treated as cash-out with different u/w guidelines and more expensive pricing).

  6. 6
    Matt the Engineer says:

    Interesting. Does this only apply to refi’s or could you use this program for a new home? If so, the couple could sell their home at year 1, and take 125% out on their new house as well – paying off their previous loan. This gets us into some very interesting financing possibilities…

  7. 7
    The Tim says:

    RE: Rhonda Porter @ 4 – My point is just that when most people think of staying in their current home, they think about it under a relatively short timeframe. To most people, staying in a home for 10 years is a really long time. A lot can change in 10 years.

    Yes, if someone does not want to sell or otherwise leave their home, this program can save them some money. But statistically, the vast majority of people will want to move in under ten years. Choosing this option rather than pursuing a short sale or walking away denys them that choice.

  8. 8
    jon says:

    The hypothetical owners are already underwater. The real comparison should be where there are and where they would be after refinancing. Their payments would be lower after refinancing. You could also compare where they would be after walking away,which would be in a rental. They would be better off for a short time, but once inflation kicks in and interest rates go up, and population catches up to the current short term oversupply, they will find themselves in a smaller house and/or less desirable location than if they just stay put and ride it through.

  9. 9
    Kary L. Krismer says:

    Am I correct in saying you assume over 10 years by assuming there will be no appreciation for the next 7 years? Let’s assume no appreciation for 100 years, and then they’ll be locked in for a lifetime.

  10. 10
    Tyler says:

    RE: Kary L. Krismer @ 3

    If people can convert an 80/20 into a single government backed loan, then it spells disaster for the tax payers. I think the best thing to do (financially) if you are underwater is to convert and then walk.

  11. 11
    patient says:

    Let’s not kid ourselves, the only reason for this program is to stem losses for the banks. It is to enable owners without suffiicent funds to keep up with payments of ending teaser rates and to encourage people with sufficient funds to stay so that the banks get a steady flow of profit from the loans instead losses from short sales and foreclosures. I’m convinced this is a terrible deal for these segments and that they would be much better of by not getting hooked and gutted like fish on this debt prison.

  12. 12
    SeaBuyer says:

    RE: The Tim @ 2

    Agreed, but I guess that my point really was:
    If the homeowner doesn’t plan on moving, this program is an opportunity for them to reduce their payment.
    And if they change their mind a year from now and decide to walk away, they can still do it even if they took advantage of the program.

    As for 10 years being a long time, I think this recession is going to change the 90%/10% statistic. People used to move because RE was an investment. Not the case anymore so I think more an more people will buy RE as a home, not an investment, and therefore intend to be there longer on average.

  13. 13

    RE: Tyler @ 10 – the only way an 80/20 can be converted to a gov. backed loan is if the LTV qualifies for FHA and has a 97% LTV. It does not qualify for the HARP program unless they ammend current guidelines (see my previous comment #5).

  14. 14
    The Tim says:

    RE: Kary L. Krismer @ 9 – Sorry, perhaps this version of reality would be more to your liking:

  15. 15
    Kary L. Krismer says:

    RE: patient @ 11 – I agree it’s to help the banks, but of a different reason (giving them cash for loans–the government gets the new loan). But I just don’t see how it’s possibly a bad deal for anyone, at least in Washington state. Maybe if the loan has a pre-payment penalty it would be a bad deal, but hey, Tim says they’ll be underwater for 10 years, so what’s that matter? As long as the numbers pencil out as being a savings after accounting for loan costs, what could the problem possibly be? If they’re going to walk, they could still walk. I don’t get it.

  16. 16
    Kary L. Krismer says:

    RE: The Tim @ 14 – Well when I have a problem with people predicting the future even a year out, I’ll obviously have a problem with people predicting the future 7 years out. The result is entirely dependent on the assumption. If I assume 5% appreciation a year, in 15 years they’ll have a ton of equity, because the property value will have close to doubled. The result is driven by the assumption.

    How about my poll for the June 2009 NWMLS results? Let’s see how good people are at predicting the past! Then we’ll decide how good we are at 10 years out.

  17. 17

    Maybe the interest rates are lower, maybe the monthly payments are lower, but why would anyone in their right mind borrow 125% of the value of their home? Pardon my ignorance, but isn’t that part of the problem in the first place, where people were getting zero down loans?
    I suppose it’s a good thing if it allows people to continue to stay in their homes at lower rates or smaller monthly payments, but..it just strikes me that encouraging people to borrow 125% of the value of their homes is bad policy, and doesn’t help the homeowner nearly as much as it helps the banks.

  18. 18
    what goes up must come down says:

    Kary I believe your bias is showing.

  19. 19
    what goes up must come down says:

    just to add it seems people keep talking about appreciation what if you take out one of these loans and your house keeps decreasing in value — what happens then.

  20. 20
    Scotsman says:

    Pretty rosy assumptions there, Tim, at least according to some. I’d say this is just another round of denial that kicks the can a bit further down the road before it eventually goes in the gutter.

    “”What makes me very pessimistic is not seeing any leadership or awareness on parts of government on what has to be done, which is deleverage $40-to-$70 trillion,” Taleb said.”

    That’s trillions, folks, three to five times the U.S. GDP. Gazing into my crystal ball I boldly predict worsening economic conditions ahead, and that the break even point in Tim’s example at the head of this post is……. never. Further, I predict it won’t be long before folks realize that financing 125% of the market value of their house (no longer a “home”) is a really stupid idea.

    http://www.cnbc.com/id/31706523

  21. 21
    HMD says:

    “If the goal of this new 125% loan-to-value program is to financially imprison people…”

    I believe that has been the goal the from the beginning.

  22. 22
    patient says:

    RE: Kary L. Krismer @ 15 – It’s a bad deal since every month for several years you will be paying for more than your home is worth. It’s simialr saying that you don’t get why it would be a bad deal for a renter to pay 25% over market rents for years. It’s simply a huge waste of money. When you get to these kind of large and likely long lasting under water situation it does make sense to think of getting rid of the home.

  23. 23
    jon says:

    By Ira Sacharoff @ 17:

    Maybe the interest rates are lower, maybe the monthly payments are lower, but why would anyone in their right mind borrow 125% of the value of their home?

    They took out the original loan when the value of the house was higher and interest rates were higher than they are now. So their choices include the following:

    1. continue their existing payments
    2. refinance the original amount and lower their payments or increase their rate of amortization
    3. walk

    2 is clearly preferable to 1, but was 2 not available to people who were underwater before this change. They would need legal advice to know if state law makes also taking option 3 harder at a later time, but if they had previously refinanced, then most likely taking option 2 would not make also taking option 3 any more problematic if the need arises.

  24. 24
    waitingforseattletocool says:

    RE: The Tim @ 14

    Your “relatively optimistic” scenario assumes the value of the home will be 91% of the value today after 10 years.

    Am I calculating correctly?

  25. 25
    tomtom says:

    By Kary L. Krismer @ 16:

    < Well when I have a problem with people predicting the future even a year out, I'll obviously have a problem with people predicting the future 7 years out. The result is entirely dependent on the assumption. If I assume 5% appreciation a year, in 15 years they'll have a ton of equity, because the property value will have close to doubled. The result is driven by the assumption.
    .

    Every sort of financial planning involves making predictions of the future – inflation, market returns, home appreciation, etc. Nature of the beast.

  26. 26
    Civil Servant says:

    Can someone confirm that the new program omits qualification on the basis of “need” or hardship? From the FHFA press release: “Alternatively, if you can afford your current monthly payment, you may consider using the savings to get ‘above water’ much quicker.” To a suspicious mind like mine, this would present a ripe opportunity for fraud. Just find a crooked appraiser to say you’re deep underwater and then, hey hey, lower interest rates are yours for the asking. I’d love to be reassured that there are checks in place to make sure this doesn’t turn into a wholesale land grab. Who among those who can afford their current monthly payments *wouldn’t* prefer to pay less and/or to pay off the loan earlier?

    Relatedly, there was a feature on “Marketplace” last night about Bank of America’s loan-mod program. One guy ended up in a 40-year mortgage that started at 2.25% (!!) and gradually went up to 5.25%.

    http://marketplace.publicradio.org/display/web/2009/07/01/pm_loan/

  27. 27
    deejayoh says:

    Does anyone know if there are any changes to the recourse provisions for the loan if someone participates in this program?

  28. 28
    ray pepper says:

    Some will be happy. But, for the masses no way….Mtg Cramdown is inevitable with “give back” penalties for selling within a given time frame to the bank.

    The short sale/foreclosure parade will roll on relentlessly until further notice!

  29. 29
    Scotsman says:

    RE: deejayoh @ 26

    Great point- that may be the ultimate goal of the program- “secure” that debt. It won’t help in the end though.

  30. 30

    THIS NEW MORTGAGE PROGRAM REMINDS ME OF GEORGE ORWELL’S NEWSPEAK: HAVE YOU NOTICED EVERYTIME “Y” HAPPENS, AN UNLIKELY OUTCOME “X” MUST FOLLOW

    The recent deflationary COLA/CPI not-withstanding (“Y”), we must now ready ouselves for (“X”)
    hyperinflation in house prices? Therefore, its logical to lock in a 125% upside down loan or forever be locked out of real estate?

    I think George Orwell’s “Newspeak” in the book “1984” makes more sense….LOL

    My gut says no wage increases, no consumerism and higher unemployment; no house price inflation. Now there’s some common sense actuals you can hang your hat on.

    If you’re in housing debt and praying for this mythical hyperinflation in i.e., housing,
    perhaps the Orwellian “Newspeak” makes sense to you?

    I checked the “1984” book websites: in part:

    “…Newspeak – The official language of Oceania. Newspeak is “politically correct” speech taken to its maximum extent. Newspeak is based on standard English, but all words describing “unorthodox” political ideas have been removed. In addition, there was an attempt to remove the overall number of words in general, to limit the range of ideas that could be expressed.

    The most important aim of newspeak was to provide a means of speaking that required no thought what-so-ever. It uses abbreviations or clipped conjunctions in order to mask or alter a word’s true meaning. For example, words such as Miniluv and joycamp, allow the speaker to speak without actually being force to think about what they were talking about.. or at least, not as much as if they were required to use complete phrases such as “Ministry of Love” or “Forced Labor Camp”. These words just roll right off the lips before the speaker can even contemplate what he is really saying.

    Reducing the number of words also removes any literary value to writing, because there would only be one distinct way to present any particular concept. It would be impossible to write a book like Common Sense , Uncle Tom’s Cabin, or even 1984 in Newspeak. Not only would the correct words for certain concepts not be available, but a lack of adjectives would cause the writing would be completely bland and unemotional, which in itself would keep people from reading at all.

    Here is the official definition from the Merriam-Webster dictionary:

    new•speak (‘nü-“spEk, ‘nyü-), noun, Usage: often capitalized. : propagandistic language marked by euphemism, circumlocution, and the inversion of customary meanings. Etymology: Newspeak, a language “designed to diminish the range of thought,” in the novel 1984 (1949) by George Orwell. Date: 1950…”

    The rest of the URL:

    http://www.newspeakdictionary.com/ns_frames.html

  31. 31
    Scotsman says:

    June’s real unemployment rate, U-6, is out. 16.8% At least that’s what the government says. Shadow Stats may have a different idea. I boldly predict continued softness in housing prices, and no price inflation since, generally speaking, people have to be employed to buy houses. That may change though- the future is uncertain.

    16.8 % unemployment.

    Here are the numbers, along with the definitions of the various groups:

    http://www.bls.gov/news.release/empsit.t12.htm

  32. 32
    anony says:

    RE: Ira Sacharoff @ 17 – Not everybody thinks on a 10 year time frame. In fact I would guess that most underwater homeowners don’t. This will help some people to pay less now, plus keep the thing they want now (the house), and they will take advantage of it. Maybe the Tim won’t, or patient, or Ira, but I bet there are some takers. The taxpayers will save money because we don’t have to take back the cruddy house and write off the balance, not yet at least.

    Keep in mind this won’t allow people to borrow 125% of their home value unless they owe that much already (minus cost of the refi). It is a refinance, not a new purchase, and not cash out. I don’t see how this is going to change anybody’s ability to walk away later. Many probably will walk eventually if Tim’s 1st graph proves to be predictive.

    Civil Servant, why would they need a crooked appraiser to say they are seriously underwater? I don’t think this will change things so you have to be underwater to refi. They can still refi if they are above water, just like before.

  33. 33
    Lake Hills Landlord says:

    RE: deejayoh @ 26

    99% sure you are cooked if you sign up for this. Sure, you get lower payments for a few years, but you also lose your ability to walk away without threat of wage garnishment, etc.

    Say no to debt slavery to your government.

  34. 34
    anony says:

    By Lake Hills Landlord @ 32:

    RE: deejayoh @ 26

    99% sure you are cooked if you sign up for this. Sure, you get lower payments for a few years, but you also lose your ability to walk away without threat of wage garnishment, etc.

    Say no to debt slavery to your government.

    Can anybody confirm this or provide a link? Does this change make it more likely the lender will garnish wages, ect. if the borrower walks away? That would be a huge game changer for anyone considering this.

  35. 35
    patient says:

    RE: anony @ 33
    ” I bet there are some takers” Of course there will be. I didn’t buy a rotten 1500 sqft 50 year old rambler with no view, neighbours with wild dogs and 10 rusty cars parked in from for half a million $$$ in 2006 but some did. It doesn’t make it a good idea. It remains to see how many will go for this program, mortgage applications the next couple of months should be telling.

  36. 36
    what goes up must come down says:

    hello anony like I asked before what if the house CONTINUES to decrease in value okay today you end up with a lower payment but next year now your even more underwater

  37. 37
    SeaBuyer says:

    RE: what goes up must come down @ 35

    Then if that happens, which is even likely, homeowners can reevaluate their situation and walk away at that point.
    For now, there’s the hope for some prices will stabilize. Plus moving is such a pain and then you have to find a rental. People just have a natural tendency to put things off if they can.

    I won’t be surprised if this plan is a big hit.

  38. 38
    anony says:

    By what goes up must come down @ 35:

    hello anony like I asked before what if the house CONTINUES to decrease in value okay today you end up with a lower payment but next year now your even more underwater

    Looks like you answered your own question. I agree, more depreciation means they would be deeper underwater, provided the depreciation was more rapid than any amortization on the loan refi, but that would happen whether they did the refi or not.

    I’m not saying it a good idea from the homeowners perspective, just that I think people will jump on it. Understand that this isn’t meant to benefit the homeowner, it is meant to benefit the lender, and it will work to a degree IMO.

  39. 39
    SeaBuyer says:

    RE: anony @ 37

    Completely agree with you.

  40. 40
    Scotsman says:

    RE: SeaBuyer @ 38

    I’m guessing there won’t be that many takers. The people who would benefit from this have most likely already been burned once- that’s why they require a program with the 125% bump. My bet is the conversation around the dinner table is more along the lines of “how do we get out of this mess,” not “what can we do to prolong it?” Remember, the underlying problem here is that folks bought homes they couldn’t really afford in the first place. There has already been a big shift toward saving, reducing debt, and getting back to a sustainable lifestyle. Additional concerns about the economy going forward, the solvency of social security and retirement security, etc. are on the front burner. If you look at participation rates in past similar “rescue” programs they have been very low, well under expectations. It’s mostly political posturing with very little real impact.

  41. 41
    Gerald says:

    RE: Kary L. Krismer @ 9 – Kary’s debate philosophy: “Why resort to rational argument when you can go right to hyberbole?”

  42. 42
    Gerald says:

    RE: Scotsman @ 39 – “I dunno, there are a lot of monthly payment people out there, so it may be surprising how many sign up for what may seem like even a modest payment reduction. You read lots of comments on the blogs from people who have no concern for the value of their property, focusing only on whether they can make the monthly payment. Possible financial hardship in the future due to unforseen circumstances? They say, nah, won’t happen to me. Then we read about them in the sympathetic news article and they are referred to as “unlucky” or “unfortunate”. Never “irresponsible” or “short-sighted”.

  43. 43
    patient says:

    I’m also wondering if the target for this program is just froth on the top. I.e owners deeply under water that can afford a fixed 30y at 5.5% but can’t afford their current loan. I would think the bulk of the people who can’t afford their teaser rate ending can’t afford a 30y fixed on their bloated loan either so the impact even if all of the target group would go for it might be rather insignificant.

  44. 44
    DrShort says:

    By Gerald @ 40:

    RE: Kary L. Krismer @ 9 – Kary’s debate philosophy: “Why resort to rational argument when you can go right to hyberbole?”

    I really like this site and I appreciate the various points of view — especially the ones I tend to disagree with. I’d hate to see petty BS cause important contributors to this board to leave. I’ve seen happen on lots of other internet sites, so try and lay off the personal attacks.

    Just sayin’…

  45. 45

    RE: Scotsman @ 30

    YES SCOTSMAN

    Even Obama brought this politically incorrect topic up today. It really must be difficult to push even more growth debt, when 2009’s IRS revenue should be about 1/2 of 2007’s with recent [last 10-15 years] growth debt like America has never seen in its entire economic history. But “growthfriend” [newspeak] won’t hurt us.

    You mentioned Social Security, I’d add Medicare too, its already spending more than it takes in this year and in about 5-10 years should be bankrupt to most economist’s estimates. “Growthfriend” won’t help either, most of growthfriend’s growth is unskilled labor that speeds Medicare’s default [low wages consume tax base, don’t add overall]. See the proof:

    http://www.wnd.com/index.php?fa=PAGE.view&pageId=98406

    Well here’s the answer: I’ll call it a newspeak type title: “healthform”. So what if our 1st contract Medicare will be in default soon…..let’s start a new new “growthfriend” debt contract with absolutely no money left to pay for it…..

    All this default and new debt will never cause “treasurygrowth” [newspeak for treasury debt hyperinflation making mortgage interest rates sky-rocket and house prices plummet even more in the next few years]. See Dr Roubini for a better explanation [no newspeak there]:

    http://www.rgemonitor.com/roubini-monitor/257210/us_job_report_suggests_that_green_shoots_are_mostly_yellow_weeds

    But I’m just being an Orwellian party pooper…LOL

  46. 46
    deejayoh says:

    I heard an idea today that makes more sense to me: Convert the debt to equity. The bank reduces the principle for the owner, but at the same time takes back a % share of ownership of the asset.

    So if the bank reduces the loan principle from $400k to $300k, it gets a 1/3 share in the ownership of the home (or maybe 25%, depending on what you use as the denominator). Makes sense to me. If the home price goes up, we both win – if it goes down… That only seems fair – all the proposals thus far attempt to push all the risk to the homeowner or to the taxpayer while keeping the bank “whole” – until the debt goes bad again

    This way, you have cleared the bad debt off of the bank’s books and given the homeowner the opportunity to stay in the home – and the risk is shared.

  47. 47
    Matsayswhat says:

    Ouch, is the current going rate really 5.7% or is that what is being offered?

    I just locked in 4.7 at the end of may, that seems like a big increase.

  48. 48
    Kary L. Krismer says:

    By patient @ 22:

    RE: Kary L. Krismer @ 15 – It’s a bad deal since every month for several years you will be paying for more than your home is worth. It’s simialr saying that you don’t get why it would be a bad deal for a renter to pay 25% over market rents for years. It’s simply a huge waste of money. When you get to these kind of large and likely long lasting under water situation it does make sense to think of getting rid of the home.

    It’s the same deal they have now, only better. Unless they’re stupid enough to walk away, it’s their best option. It’s literally a no brainer, unless maybe they have to come cash out of pocket to do the deal, or the loan costs are high.

  49. 49
    Kary L. Krismer says:

    By Gerald @ 40:

    RE: Kary L. Krismer @ 9 – Kary’s debate philosophy: “Why resort to rational argument when you can go right to hyberbole?”

    Give me a break. This whole thread is based on the assumption it’s a bad deal because you’re going to be underwater for 13 years. And you only get there by assuming two years of depreciation followed by 5 years of no change.

    I might as well come up with a scenario where we’re going to have 10% appreciation every year, and from that I’ll conclude that everyone who doesn’t buy 10 houses today is a complete moron. It makes as much sense. It’s an assumption driven conclusion.

  50. 50
    Kary L. Krismer says:

    By patient @ 22:

    RE: Kary L. Krismer @ 15 – It’s a bad deal since every month for several years you will be paying for more than your home is worth. It’s simialr saying that you don’t get why it would be a bad deal for a renter to pay 25% over market rents for years. It’s simply a huge waste of money. When you get to these kind of large and likely long lasting under water situation it does make sense to think of getting rid of the home.

    Very short sighted analysis. I have almost $100,000 in the bank because for many years I paid a mortgage on a piece of property that I owed more on than it was worth. My ability to get a mortgage today is better because I didn’t walk away then, and that was over 20 years ago.

  51. 51
    patient says:

    RE: Kary L. Krismer @ 48 – Nope, it’s based on the fatc that every payment you make on a loan that is bigger than the value of the home is overpaying compared to market value. The waste has already started the day you went under water, by prolonging it with a refi you continue wasting dollars. It really as simple as that.

  52. 52
    Kary L. Krismer says:

    By what goes up must come down @ 18:

    Kary I believe your bias is showing.

    Yep, my bias against predictions that are completely worthless.

    If there were some analysis here about loan costs that were out of line, or other terms that were bad, or something else that made the owner worse off than what they are, that would be one thing. But the whole conclusion that this is a bad deal is based on assumptions about where prices are headed in the future, and an assumption where we don’t have any significant inflation for 7 years. That’s certainly possible if we get deflation, but extremely unlikely otherwise.

  53. 53
    Kary L. Krismer says:

    By patient @ 50:

    RE: Kary L. Krismer @ 48 – Nope, it’s based on the fatc that every payment you make on a loan that is bigger than the value of the home is overpaying compared to market value. The waste has already started the day you went under water, by prolonging it with a refi you continue wasting dollars. It really as simple as that.

    Good thing you’re not a financial adviser. That’s the worst analysis I’ve ever heard.

  54. 54
    anon says:

    I don’t get the problem.

    This seems like a reasonable deal for people who can afford their mortgages, who plan to stay in their home for the foreseeable future and who would like to refinance at a better but can’t because they are underwater. The homeowners get more affordable payments, continue reduce the principal, keep their credit rating in good shape, and their lives aren’t disrupted. The bank doesn’t have to foreclose so they win too.

    If the homeowner’s situation changes in a few years, deal with it then. Maybe they will owe a smaller amount of principal, have more money to bring to the table, maybe house prices will be better than predicted. If prices are worse, they probably won’t be any worse off than they would be pulling the plug now. Who knows what might happen? In any case, no need to panic.

  55. 55
    patient says:

    RE: Kary L. Krismer @ 52 – How do you know I’m not?

  56. 56
    patient says:

    RE: Kary L. Krismer @ 52 – If you overpaid with debt you will continue to overpay as long as you have the mortgage. No really deep analysis, real simple.

  57. 57
    tomtom says:

    By Kary L. Krismer @ 48:

    we’re going to have 10% appreciation every year, and from that I’ll conclude that everyone who doesn’t buy 10 houses today is a complete moron.

    This was pretty much conventional wisdom from ’04-’07.

  58. 58
    Shaq says:

    By jon @ 8:

    You could also compare where they would be after walking away,which would be in a rental. They would be better off for a short time, but once inflation kicks in and interest rates go up, and population catches up to the current short term oversupply, they will find themselves in a smaller house and/or less desirable location than if they just stay put and ride it through.

    ROTFLMAO

  59. 59
    Scotsman says:

    RE: Kary L. Krismer @ 52

    You’re kidding, right? Or do you live in a world where everything is the opposite of the reality the rest of us struggle against? If you don’t know what you’re talking about, and in this case you clearly don’t, you might try being quiet.

  60. 60
    Hugh Dominic says:

    RE: deejayoh @ 45
    Yes, I heard Taleb say that on CNBC – he is a smart guy (if not very telegenic) and the idea does have merit…

  61. 61
    deejayoh says:

    By Hugh Dominic @ 58:

    RE: deejayoh @ 45
    Yes, I heard Taleb say that on CNBC – he is a smart guy (if not very telegenic) and the idea does have merit…

    yep – that was where I heard it

  62. 62
    deejayoh says:

    By Shaq @ 56:

    By jon @ 8:

    You could also compare where they would be after walking away,which would be in a rental. They would be better off for a short time, but once inflation kicks in and interest rates go up, and population catches up to the current short term oversupply, they will find themselves in a smaller house and/or less desirable location than if they just stay put and ride it through.

    ROTFLMAO

    If you believe in hyperinflation you shouldn’t even consider walking away. You should double down and buy another house.

  63. 63
    Scotsman says:

    RE: Kary L. Krismer @ 49

    Good for you. But had you handled the situation differently, you might have $200,000 in the bank. Or more.

    Homes have historically been a terrible long term investment. But they are the only investment or “savings” account most people have. So the fact that they paid $250,000 over 30 years to end up with $100,000 in their “savings”, even though it was an crappy “investment,” makes it look like a good deal. Unbelievable. Stick to the law, because your competence as an “investment adviser” is bottom tier.

  64. 64
    Mariner22 says:

    Whether people will refi while significantly underwater (assuming they aren’t jobless or for some other reason, ineligible) depends on how much they believe valuation will return when the “crisis” passes. Unfortunately for the optimists there is a a pretty recent example of bubble prices – Tech Stocks.

    Intel peaked (split adjusted) around $70, yet trades for <$17 almost 10 years later.
    Microsoft peaked at $60 and now trades for $23 and change 10 years later.
    Cisco peaked in the 60s and now trades for $18.50.

    What makes anyone think the days of NINJA loans by WAMU to anyone with a pulse are ever going to return? What makes anyone think people will stretch and buy homes with 5:1 or even 10:1 loan to income ratios ever again? This will never happen again.

    You will never have Bellevue cab drivers making $30,000 a year buying million dollar condos. You will never have farm laborers buying $500,000 homes in Modesto.

    The world is different, or should I say, back to reality. I do not know if housing prices in Seattle will sink all the way to the traditional appreciation rate just above inflation, but anyone counting on a return to bubble pricing better ask themselves how the tech bubble survivors have done over the past decade.

  65. 65
    Gerald says:

    RE: DrShort @ 43 – I’m sorry, but it’s not petty BS to call somewhat out when they’re making a point in bad faith.

  66. 66
    Gerald says:

    RE: Kary L. Krismer @ 48 – Nope, you don’t get a break for that. If you have problems with Tim’s assumptions, offer alternative that you think are reasonable. You didn’t, you chose hyperbole. i stand by the comment.

  67. 67
    anony says:

    RE: deejayoh @ 45 – So the part homeowner would owe 300K on a house worth 300K but he only owns 200K of it. He could only sell once he pays down his principal to 200K minus transaction cost (his proceeds from the sale) or the home value increases to 450K + costs or somewhere in between?

    Is that right? In the first case the bank gets its 100K back from the proceeds, in the second it would pocket a 50K profit. In the depreciation case the homeowner couldn’t sell for a long, long time.

    The homeowner would still be stuck there for who knows how long unless they chose to walk. Might be just as popular though, and more attractive to the lender.

  68. 68
    deejayoh says:

    RE: anony @ 65 – well, seems better than under the hold/refinance scenario – home is worth 300k, the owner is out the entire amount and the bank is out nothing.

    and say the home value comes back to $400k, then everyone is even (assuming the 25% bank-owned scenario, which now that I think about it makes the most sense)

  69. 69
    Matsayswhat says:

    Kari,

    As my friend and I sometimes joke, “there are a lot of bears on Seattle Bubble”… Not to over generalize, but it’s the way a lot of the posts and comments skew. I understand what you’re trying to say though, and at least partially agree.

  70. 70
    Matsayswhat says:

    By Scotsman @ 61:

    RE: Kary L. Krismer @ 49

    Good for you. But had you handled the situation differently, you might have $200,000 in the bank. Or more.

    Homes have historically been a terrible long term investment. But they are the only investment or “savings” account most people have. So the fact that they paid $250,000 over 30 years to end up with $100,000 in their “savings”, even though it was an crappy “investment,” makes it look like a good deal. Unbelievable. Stick to the law, because your competence as an “investment adviser” is bottom tier.

    Your over generalization makes for a very poor arguement. There are so many factors that might be different depending on the economy, location, etc that you can realitvely easily show via math that sometimes a home might be a bad investment, sometimes it might be good.

    I think you would have been better off saying “Homes are on average a terrible long term investment”.

  71. 71
    ray pepper says:

    RE: Kary L. Krismer @ 47

    I cannot agree with “stupid enough to walkaway” statement.

    You just have not seen what I have touched in Az, Nv, and Ca the last 3 years. In nearly every situation the families were almost “stupid to stay.” It takes a lifetime for a family to pay off 200k-400k upside down. They now live without the pressure of high payments, taxes, insurance, and upkeep.

    The families I know (4) walked awhile back, have been saving like crazy , and still have no desire to buy. They email me it was the best decision of their lives for things have gotten worse and their homes are worth less now then when they walked.

    Don’t judge…Support the decisons made by families after hearing all the facts. Maybe because I visit GROUND ZERO every 4 months in Sacramento, Vegas, Reno, and Phx do I understand this.

  72. 72
    Scotsman says:

    RE: Matsayswhat @ 68

    Not true. I can show you lots of math, covering a wide variety of time periods, that show without exception that excluding the recent (never to be repeated) bubble years, homes as an investment barely beat inflation. And I can show you that having your “investment” funds tied up in a home carries a very high opportunity cost.

    I don’t think this site is a “bear haven” as some sites are. The vast majority of folks here are neither bearish or bullish, but seek to understand where the housing market is headed. And to fully grasp that, one needs to have some appreciation of the economy and its major trends in general.

    I would trade a healthy, growing economy for what we have and where we’re headed any day. While the current situation will present some great opportunities, I’m unwilling to wish suffering upon others so that a few, including myself, might grab some benefit.

  73. 73
    joerenter says:

    off topic. Today’s post has made it to “Naked Capitalism” a worthy site. Good work Tim.
    http://www.nakedcapitalism.com/

  74. 74
    Matsayswhat says:

    By Scotsman @ 70:

    RE: Matsayswhat @ 68

    Not true. I can show you lots of math, covering a wide variety of time periods, that show without exception that excluding the recent (never to be repeated) bubble years, homes as an investment barely beat inflation. And I can show you that having your “investment” funds tied up in a home carries a very high opportunity cost.

    I don’t think this site is a “bear haven” as some sites are. The vast majority of folks here are neither bearish or bullish, but seek to understand where the housing market is headed. And to fully grasp that, one needs to have some appreciation of the economy and its major trends in general.

    I would trade a healthy, growing economy for what we have and where we’re headed any day. While the current situation will present some great opportunities, I’m unwilling to wish suffering upon others so that a few, including myself, might grab some benefit.

    I agree that it would be unwise for anyone to have their investment funds or savings completely tied up in their home (though you could also make the arguement that there aren’t a lot of wise places to put it right now anyway with low interest rates, inflation, etc). I think maybe I just disagree with the wording of your original statement.

    Maybe I’m off with my “bear” comment. I’m admittedly an optimist so I suppose a little bias in that direction is natural.

  75. 75
    Scotsman says:

    RE: Matsayswhat @ 71

    “Maybe I’m off with my “bear” comment. I’m admittedly an optimist so I suppose a little bias in that direction is natural.”

    We’re in the same camp- I’m definitely an optimist, and it’s hard when things are falling apart. But I’m a pragmatist too- we’ve all got to play the hand we’ve been dealt and get on with it, not just wish things were different, or long for the “good ‘ole days.” And that attitude somehow gets me labeled a bear or even a jerk. Try to see me as at least a brown bear, not a grizzly. ;-)

  76. 76
    B&W NIkes says:

    RE: deejayoh @ 60 – inflation not hyperinflation. hyperinflation will lead to immobilizing the financial environment making walking away a good choice. High inflation will make everyone miserable, but may make a fixed monthly housing cost something of a blessing. Almost everyone buys property with an eye on the inflationary trends and anecdotal evidence of the last several generations. Over a longer term view I’m not aware of any substantial period of time where deflation was the norm across the board, but there have been very volatile adjustments periodically.

    It ends up informing everyone’s analysis differently, but 100 years ago movie tickets were less than a dime, a sardine sandwich at the PignWhistle was a quarter, and a Ford Model T was about $800 (a little bit more than the average annual salary of the time).

  77. 77
    deejayoh says:

    RE: B&W NIkes @ 76 – Right. I should have said inflation. Indeed inflation is the norm, but not much in evidence today. And despite all the “fed is printing money” claims, precious little of that has made it’s way into consumer or company pockets. It might as well be floating on a barge offshore or have been burned up by the Joker.

  78. 78
    ray pepper says:

    40% off sale? Hmm. I’ve seen 72%.

    http://www.cnbc.com/id/31713614

  79. 79
    David Losh says:

    The 125% loan program has worked in markets that are appreciating in value. People will walk in depreciating times.

    You can save up $200K within five years if you try. $200K can buy you a house for cash even today. The only reason to have a long term mortgage is to pay off the house with inflated dollars. If we, in fact, have a bout of stagflation, or deflation, you will be paying off your principle balance with real dollars.

    It would be better to walk, declare bankruptcy, save money, and buy for cash.

    The 125% will depend on what you believe. In my opinion the jury is still out. There is a slight case for future inflation.

    In terms of holding property long term it will depend on where you are in your amortization schedule whether it makes sense to keep the property. If you amortized for five years of front end interest payments or more it may be worth holding on. If you refi and start amortizing all over again you’re losing real dollars.

  80. 80
    The Tim says:

    Well I expected that this post would generate some good discussion, and I was not disappointed—even on the day before a 3-day holiday weekend. Thanks, everybody!

  81. 81
    David Losh says:

    RE: deejayoh @ 77

    The printing money thing has been bothering me for the past couple of weeks. If I understand what happened correctly the government is simply covering losses.

    If that’s true that the printed dollars are covering for or replacing paper losses then those dollars are going into a black hole. Even if those dollars are added to bank, or investment, reserves they won’t be coming back.

    In my opinion that’s why there is so much emphasis on these new loan programs. These programs just keep the dollars churning.

    What if it stops? What if we all stop paying these ridiculous debt terms?

    I’ve thought of this for a long time. The banks made the loans based on a value they appraised. The banks first fought for the quick foreclosure terms, then fought for tough bankruptcy laws. OK they got those.

    The recourse the banks have is the asset. If the asset isn’t worth what the bank, and the bank appraiser, said it was worth whose fault is that? If banks gave credit cards to every one in the country and the economy collapses whose fault is that?

    Should we all pay higher prices so banks can charge higher interest? We see now banks are happy to get 5% or 6% interest. What about all those loans with higher interest rates?

    How long can we go on propping up banks who want more interest, more fees, and more profits to show the stock holders?

  82. 82
    jimh says:

    The choice is easy. A good amount will end up filing ch.7 bankruptcy. Having worked in the past for a bk atty, as well as in real estate, provided you take the right steps post discharge you can get a home loan within 6-12 months. It’s not going to be for the rock bottom rate, but you can generally get to within a point to two points of whatever the current prevailing mortgage rate is within a year of discharge provided you take the right steps going forward. Of course you will pay a higher down payment percentage than a ‘normal’ borrower, but its not excessive.

    In regards to how long it takes for housing prices to recover and owners being able to sell with positive equity I think it really depends on how much inflation there is and how quick. If theres a lot of inflation from continued printing of dollars then prices will move up sooner than a decade. If they don’t inflate the depression happens. So we’ll get no or minimal growth with a good amount of yearly inflation – stagflation. There is no way the govt will raise taxes or cut spending by the required amount to get balanced so they’ll inflate the debt away they are creating and sell the public on all the ice cream it can eat – for free! Except the price of that action will show up in a deflated currency and loss of wealth as savings get eaten away by inflation.

    Savings rate is now at around 6% whereas before this thing hit it was a negative rate of savings. No way we get sustained 3% or more growth with that much savings. Consumer spending is, or was, 2/3 of the economy. The only way for the govt to get people to start really spending and stop saving will be to stoke inflation so people start spending their savings and buying stuff again instead of saving and causing a flat or slow growth economy that doesn’t generate enough jobs for the new workers entering the workforce and unemployment continuing to increase.

  83. 83
    ray pepper says:

    RE: The Tim @ 80

    3 day weekend? Who gets the weekend off?

  84. 84
    Scotsman says:

    RE: David Losh @ 79

    “You can save up $200K within five years if you try. $200K can buy you a house for cash even today. The only reason to have a long term mortgage is to pay off the house with inflated dollars.”

    Ya made my day, David. This comment would leave most people in shock, and yet it is so true. Even if you needed $350K and it took you 10 years, if you started in your early 20’s, where would one be by the time you had kids, etc? How many people can imagine being 35 with no house payment? How much different would your life be? But just getting started on such a program seems impossible to most who spend it all on “stuff” and have nothing left to show.

    And now they’re at the public trough, looking for a 125% loan to bail them out once again. It won’t be any different this time around though.

  85. 85
    PublicEnemy#1 says:

    When it comes to collapsing housing markets, Ray is right. I have seen Reno, Sacto. and Vegas myself and the sheer number of developments that have gone, or are going, bust is staggering. Toll Brothers has just plain given up in Vegas. They dumped almost all their models into a separate LLC and now just have regular agents flogging them for that elusive commission. A couple of years ago they employed 300+ people in the Las Vegas market. They are down to probably 15 now.

    They were heavily invested in a “master planned community” in Vegas called Providence. A community that, from the looks of it, is going to sink by the end of the year. Toll Brothers sold off all the lots they had in two subdivisions off to a real estate investment entity. Toll completed 15 out of 50 lots in one subdivision. Of those, 7 are for sale right now and 2 more just received notice of default. The agents are trying to flog homes that sold in 2007 for $800K for $500K now. How long before the neighbors who bought at $800K just say to heck with it and buy one of the foreclosures for half price?

    Even at $500K they are sitting, and will continue to sit. The last foreclosure in there just went pending. It was listed for around $375K, as I recall. IndyMac was the owner of record and “bought” it for $692K. The original owner also put in an inground pool and spa at some point so add another $20K to the cost of that home.

    Toll’s other subdivision had a section of detached and semi-detached (shared garage wall). Of the detached, 6 were built and 4 are for sale currently. Of the 10 semi detached, 4 are for sale. People paid $530K in 2007 for these crappy homes. Buyers are grabbing them now for just over half of that, when they actually buy one (last sale was in March). If you bought for twice what the neighbor paid, what’s the incentive to keep paying? Model is the same, lot size is the same, lack of view is the same, HOA fees are the same, etc.

    The devastation in Vegas, Sacto, Reno, etc. is SCARY to see!

    Don’t get me wrong, I can see the appeal of Seattle and PDX over the Sacto. valley and the deserts, but if you think Seattle will be spared because of the Olympics and Mt. Rainier, think again. It only gets worse come September when the Spring bounce effect wears off, unemployment continues to climb, and people realize they should have dropped the price in March and unloaded the albatross.

    SEVEN banks were closed by the FDIC today, bringing the (close to) mid year total to FIFTY TWO! Any bets on the year end total?

  86. 86
    The Tim says:

    By Matsayswhat @ 47:

    Ouch, is the current going rate really 5.7% or is that what is being offered?

    I just locked in 4.7 at the end of may, that seems like a big increase.

    I just pulled this from Bankrate.com:

    The 5.75% rate in the post assumes that the borrower will most likely not be getting the best rate possible due to the fact that they’re refinancing into a 125% loan.

    Edit: Actually it looks like I was far too generous. According to the pricing matrix on the Fannie Mae website (pdf) a borrower with a credit score of 720 or higher doing a 125% loan-to-value refi would take a 1% hit on their interest rate. If their credit score is lower, the interest rate could be as much as 3% higher than the going rate. Ouch!

  87. 87
    Kary L. Krismer says:

    By Scotsman @ 63:

    RE: Kary L. Krismer @ 49

    Good for you. But had you handled the situation differently, you might have $200,000 in the bank. Or more.

    You’re right–I sold a bit too soon! ;-)

  88. 88
    Kary L. Krismer says:

    By patient @ 56:

    RE: Kary L. Krismer @ 52 – If you overpaid with debt you will continue to overpay as long as you have the mortgage. No really deep analysis, real simple.

    Actually, if you hold on to the property long enough, the lower interest rate is in effect the same as if you bought it for less. It’s only if you sell before paying if off that the original difference would remain.

    Perhaps you better try thinking a bit deeper. ;-)

  89. 89
    Braden says:

    Tim, if everyone took your advice (it isn’t advice but is taken as advice) tomorrow all the banks with mortgages would fail and the government would possibly collapse. People need some incentive to stay in their home despite it being underwater or eventually everyone is going to walk away, which would spell disaster. Many of the poeple only have foreclosure as an alternative. I know a lot of people that are thinking about walking away from their homes, but it is you and I who pay for it in the end.

  90. 90
    Kary L. Krismer says:

    By Scotsman @ 59:

    RE: Kary L. Krismer @ 52

    You’re kidding, right? Or do you live in a world where everything is the opposite of the reality the rest of us struggle against? If you don’t know what you’re talking about, and in this case you clearly don’t, you might try being quiet.

    No, I’m not kidding. NO ONE HERE HAS STATED A SINGLE REASON WHY ANYONE TAKING ADVANTAGE OF THIS PROGRAM WOULD BE HARMED..

    So rather than being quiet, perhaps some of you should put on your thinking caps and actually come up with a reason that makes sense. The focus of this forum on price is getting to be absurd. Normal people simply don’t have such a single minded focus.

  91. 91
    Scotsman says:

    RE: Kary L. Krismer @ 90

    Kary, you’re loony. There were several posts that described the harm quite clearly. Do the math, see for yourself. You just can’t ever acknowledge that you might be wrong. Good luck with that.

  92. 92
    Kary L. Krismer says:

    RE: PublicEnemy#1 @ 85 – There would be very few people in Vegas, Phoenix, etc., that would qualify for this plan, because they’d need something like 150+%.

  93. 93
    Kary L. Krismer says:

    By Scotsman @ 91:

    RE: Kary L. Krismer @ 90

    Kary, you’re loony. [I don’t think much of you either, so you can save comments like that.] There were several posts that described the harm quite clearly. Do the math, see for yourself. You just can’t ever acknowledge that you might be wrong. Good luck with that.

    Point one out specifically. Just because some of you would prefer the walk away option doesn’t mean they’re harmed because they could still do that. How are these people harmed?

  94. 94
    David Losh says:

    RE: Kary L. Krismer @ 93

    My comment targets the reasons why this program is simply a churning mechanism.

    First a refinance costs you a point, at least, that takes time of a year or two to even out. Second you have the way amortizing a loan works. You start out paying almost all interest. Over time the payment begins diminishing the principle balance. After five years or more the front end interest is diminished.

    Much more importantly, the only reason you take a thirty year loan is to capitalize on the inflated future dollars. Fixed living expense is only a factor if the cost of rents keeps going up. If you end up paying $2K in real, present day, stagflation dollars for a place you can rent for $1K, you are in fact paying real dollars for a depreciating asset.

    The first rule of Real Estate may be location, location, location, but the core value is what the property will rent for. If rents keep going down the core value of the property goes down.

    There is a lot more to say about the formulas of future dollars, amortization schedules, and declining property values, but this is simply a case of churning loans to keep house prices artificially high.

  95. 95
    Kary L. Krismer says:

    RE: David Losh @ 94 – Doesn’t all that go to just the issue of refinancing? I think people refinance way too often, and I agree the benefit is lost if you sell too soon after refinancing. But those are issues applicable to all refinancing, not just this program.

  96. 96
    cheapseats says:

    I saw a good comment on the WSJ about the GM bankruptcy (and the GM mgmt). But I think that it is relevant n RE as well.

    “Bankruptcy is temporary, stupid is forever.”

    As to this post, I think that it will likely achieve what I believe to be its intended purpose.
    To help a few people stay in their house and scatter some probable near term foreclosures out over a longer period of time.

  97. 97
    cheapseats says:

    I tend to agree with Kary though that I don’t really see why you coudn’t walk at a future date if you took the 125% re-fi.

    However, in my opinion if you are even thinking about walking, I would think hard before I plunked down cash on the refi costs. But if you are in the camp that thinks RE will rebound in the next year or two, re-knock yourself out.

  98. 98
    ElPolloLoco says:

    By PublicEnemy#1 @ 85:

    The agents are trying to flog homes that sold in 2007 for $800K for $500K now. How long before the neighbors who bought at $800K just say to heck with it and buy one of the foreclosures for half price?

    That’s an interesting point. Instead of “walking” away and renting for the next 10 years or whatever, why don’t I just buy the house next door that’s identical to mine, and stop making payments on the old house? No change in lifestyle; I don’t care about the credit hit since I’m still living where I want to; and I don’t even have to rent a U-Haul.

    That seems like the smart way to “refinance,” given a coinciding drop in home prices and interest rates. (And a good story for the bank about buying the house next door for your elderly mother-in-law.)

  99. 99
    Rojo says:

    lets hear from somebody who is walking away from a mortgage that they can afford. Don’t want to hear that my cousin’s friend’s neighbor’s friend who lives in vegas is walking away from a mortgage that he can afford!
    All the advice people are giving to walk might also do people harm in ways we don’t quite understand yet. It is also irresponsible – it is like saying, go ahead commit a crime, since there will be some many doing the same this, there might be mass pardon given.
    There are people out there hurting, given irresponsible advice even with a disclaimer doesn’t make sense – not say the legal ramifications on this website and person who own it!

  100. 100
    David Losh says:

    RE: Kary L. Krismer @ 95

    No, the premise to this refinance plan is that you have already lost equity. That’s a big difference from just getting a lower payment.

    Losing equity, paying refinance fees, and having an extended period of paying down a principle balance for a property you know has already lost value seems like a very bad combination.

  101. 101
    Rojo says:

    RE: ElPolloLoco @ 98
    How could you qualify for two house mortgages while living in one unless you have dual income and are 10-15% in debt-to-income ratio currently. I would think people in this situation are probably professional with two 6 figure incomes coming in. I doubt these people would like to take a hit to their credit and risk legal action when they have great careers to focus on. $100-200K might not be too much of a setback where their income potential is 4-5 Millon over a 20 year career!
    Just thinking out loud!

  102. 102
    David Losh says:

    After reading the other blog comments from Rhonda’s article it sounds like this is a dead program already.

    Come to think of it 25% over 100% financing was a very low per centage to compensate for the rate of decline we have had the past two years.

  103. 103
    ElPolloLoco says:

    RE: Rojo @ 101 – Admittedly I’m still in the $30K/year cabdriver -> $1,000,000 condo mindset.

    It’s also worth noting that this is basically what people like Donald Trump do for a living. When they name a wing of the courthouse after you and people still lend you money, you must be doing something right.

  104. 104
    Braden says:

    buying a second home before foreclosing on the first was becoming popular before the fed started cracking down on it. It is called ‘buy and bail’ and is considered mortgage fraud.

  105. 105
    Racket says:

    By Scotsman @ 84:

    RE: David Losh @ 79 – How many people can imagine being 35 with no house payment? How much different would your life be? But just getting started on such a program seems impossible to most who spend it all on “stuff” and have nothing left to show.

    .

    I bought my first house on a 30 year loan when I was 22 I paid $175k for In 2001 and refi’d into a 15 in 2003.

    So I have 2 options at this point. I can leverage my equity, and use it to buy another house and rent out my current house for the mortgage payment.

    Or,

    I can pay it off.

    So what do I get when I pay it off? Well for one I can’t write off the interest any longer. I live in the same crappy starter house I bought when I was 22.

    What can I get when I do option #1? I can get a really nice house with very little cash from savings (to use on other investments). I can upgrade neighborhoods. I can get a bigger house.

    With sub 6% interest rates and being at an age where I still can work hard and earn money I decided to do option #1. Because I guarantee you if you hand me $100 I can hand you $106 back and have some profit to boot.

    With both mortgages I would be at about 50% D2I that is with house #1 vacant. Roughly 35% with #1 occupied.

    I really feel at this point I can flip a coin, but I decided to upgrade my quality of life.

  106. 106
    cheapseats says:

    “Because I guarantee you if you hand me $100 I can hand you $106 back and have some profit to boot.”

    Hey I’d take that guarantee!

  107. 107
    fwiw says:

    Racket@105
    if you can truly do this:

    rent out my current house for the mortgage payment.’

    then good for you and rock ‘n’ roll. Be sure of that point though because rents ARE falling and ‘landlording ‘is is a tougher racket than most understand. Best of luck with your choices they are good ones to have.

  108. 108
    Kary L. Krismer says:

    By David Losh @ 100:

    RE: Kary L. Krismer @ 95

    No, the premise to this refinance plan is that you have already lost equity. That’s a big difference from just getting a lower payment.

    Losing equity, paying refinance fees, and having an extended period of paying down a principle balance for a property you know has already lost value seems like a very bad combination.

    I view it more this way. What the government is doing to lower interest rates was politically unpopular to those who were locked in because they’d lost equity. This reduces the number of those people. But this will be politically unpopular with people who don’t want any government interference in the market.

    So to summarize. 1. Politically popular with people who can refinance. 2. Politically unpopular with those you can’t or don’t need to.

    As to your comments though, I view refinancing as being something you do after making some calculations to see if it pays off over X number of months. The equity you have in your home isn’t one of the variables that gets plugged in, other than if you are thinking about walking, that would affect the how long you’re going to stay variable.

  109. 109
    Kary L. Krismer says:

    By Braden @ 104:

    buying a second home before foreclosing on the first was becoming popular before the fed started cracking down on it. It is called ‘buy and bail’ and is considered mortgage fraud.

    I’m not sure how that would be actionable, because you plan on paying the new loan, and didn’t plan on not paying the old loan when you got it.

    I could see that if you filed bankruptcy too, the new lender might have a non-discharge claim, but that would be relatively irrelevant given the prevalence of non-judicial foreclosures. I’m not sure of current practice, but when I was practicing few banks ever requested reaffirmation agreements from debtors on home loans. The ones that did were almost always out of state, although I do recall Sea-First having done it once for some odd reason.

    Maybe there’s a criminal statute involved, but again I don’t see it because you’re planning on paying the new loan.

  110. 110
    Kary L. Krismer says:

    By David Losh @ 102:

    After reading the other blog comments from Rhonda’s article it sounds like this is a dead program already.

    Come to think of it 25% over 100% financing was a very low per centage to compensate for the rate of decline we have had the past two years.

    Well the biggest problem is that most the people that need it probably have 80/20s.

    As to the second comment, being 20-25% off the peak is close to the limit, but the thing is the peak was very short lived. We were only over $470k for three months, so only a few people bought in that time frame.

  111. 111
    David Losh says:

    RE: Kary L. Krismer @ 108

    You are seriously missing the point of Real Estate. Either as an investment tool or the family home the point is that property prices exceeded value and banks lent on those inflated prices.

    Let me say that again to be clear: Banks lent on over inflated prices. Banks ignored the value of the Real Estate and lent on over inflated prices. The prices were made up by Comparative Market Ananlysis and even today Real Estate agents, banks, lenders, appraisers, and investors are going back to that same old sales gimmick.

    Real Estate, the value of the land, has a value that is set in stone.

    None of the NWMLS, National Association of REALTOR, sales gimmicky data changes the fact that property prices far exceed Real Estate values.

    How can I be more clear about that?

    The majority of the sales taking place today, in this Spring season are over priced. The problem may be less than it was two years ago, but these loans today are a problem to be dealt with next year and the years after.

  112. 112
    Scotsman says:

    RE: Racket @ 105

    Where would you be in 5 years when home prices have bottomed and you’ve been saving over a third of your income every month, assuming you didn’t buy now?

    50% D2I if your renter flakes? It sounds like you’ve got reserves, but still….

    It’s nice to have choices, eh?

  113. 113
    ray pepper says:

    “Bankruptcy is temporary, stupid is forever.”

    A very fitting post for the times we are in…………

  114. 114
    JimN says:

    RE: cheapseats @ 97
    “I tend to agree with Kary though that I don’t really see why you coudn’t walk at a future date if you took the 125% re-fi.”

    There was some discussion about refi’s potentially not being “non-recourse” loans, as the orginal mortgage might have been. If this is the case, you will have lost the “put option,” ie. the ability to walk away from a non-recourse loan. Anyone considering this need to look at this closely to make sure this is not the case.

  115. 115
    Racket says:

    By Scotsman @ 112:

    RE: Racket @ 105

    Where would you be in 5 years when home prices have bottomed and you’ve been saving over a third of your income every month, assuming you didn’t buy now?

    50% D2I if your renter flakes? It sounds like you’ve got reserves, but still….

    It’s nice to have choices, eh?

    That making a huge assumptions that housing prices have a significant drop in them. Houses can be purchased easily for 20-30% under market for savvy buyers.

    So hypothetically if I purchase a house at this type of discount, and we do experience another drop then my “good deal” turns into an “ok deal”.

    Now if I wait 5 years after all the dust settles on the foreclosure markets, and house prices stabilize (not having to compete with distressed properties). And the type of property that I want can’t be had for the same discount. I’m screwed. And what if I am forced to buy it at at 12% interest rate?

    The house that I have an offer in on has a TAV of $780K I am looking at picking it up in the mid 4’s so I have some room to drop.

    I feel like I have hedged my bets a little bit.

  116. 116
    Kary L. Krismer says:

    By JimN @ 114:

    RE: cheapseats @ 97
    “I tend to agree with Kary though that I donâ��t really see why you coudnâ��t walk at a future date if you took the 125% re-fi.”

    There was some discussion about refi’s potentially not being “non-recourse” loans, as the orginal mortgage might have been. If this is the case, you will have lost the “put option,” ie. the ability to walk away from a non-recourse loan. Anyone considering this need to look at this closely to make sure this is not the case.

    That would be a big issue for people in California. I don’t think it has any real application in Washington, that I’m aware of. I don’t think I’ve ever seen a non-recourse home loan here (although they generally become non-recourse if the lender non-judicially forecloses).

  117. 117
    Kary L. Krismer says:

    RE: Racket @ 115 – Beyond the assumption that property values will be flat for 5 years (after dropping for 2), I also have a problem with the assumption that someone will save 30% of their pay or save $200,000 in five years. Sure there are some people that can do that, but it’s a very tiny percentage of the population, probably under 1%. We might as well assume that the best advice to give a potential buyer is to wait for prices to drop another 50% and also win the lotto.

  118. 118
    Softwarengineer says:

    RE: deejayoh @ 46

    DO WE THE PEOPLE WANT TO BUY BAD INVESTMESTS?

    If we didn’t already have like $13 Trillion in debt which will possibly bankrupt us with likely hyper-inflation in future treasury rates increases because of chronic debt increases I might I agree with you.

    And if you’re a rentor looking for future bargains; you don’t want more government -propped treasury hyper-inflation either, raising prices.

  119. 119
    Softwarengineer says:

    RE: Kary L. Krismer @ 50

    THAT WAS THEN, THIS IS NOW

    20 years ago there were only like 200Million in America people for banks to service. 20 years ago we still had a manufacturing base well above our current 9%.

    I bought in about 20 years ago too and it was the bottom of the 80s Seattle Bubble [a perfect time to buy], IMO we haven’t even got close to the bottom yet, Dr. Roubini agrees with me too.

    But I do agree with you on one salient point: who cares if you fold at the poker table with the right timing; if you really want a house and have like 50%-100% down, I see very little risk, albeit not the best investment strategy. 20% or lower down today, I see very high risk with extremely bad investment strategy.

  120. 120

    RE: The Tim @ 86 – Tim, the hit is higher then that…all the price hits are accumulative.

    Table 2 begins w/LTVs 105% or higher; there is a 2% hit to fee unless the home owner opts to have their mortgage amortized for a term shorter than 30 years; then the hit is 1.5%.

    Table 3 is the credit score portion where if you have a 720 or higher, you will not be hit up to 125%LTV. 719 and lower are hit and the lower the mid-credit score and higher the LTV, the harder you’re hit….up to 3% starting at <620 with LTVs 70.01+

    So if your LTV is 70.01+ and you have a <619 mid score, you're hit at least 5% to fee…suddenly the refi probably doesn't make much sense (and this is assuming the bank would actually do the refi–I'm betting they won't).

    Credit scores 620+ with LTVs <97 are better candidates for FHA financing (depending on their credit history).

    This program isn't going to work for many. When I hear some of the stats from our elected officials about how many people HARP has helped, I laugh. I've done one "HARP" refi for a past client… and I've had refi clients who have 740+ credit and 40%LTV where they receive a response from automated underwriting that states they qualify for the HARP program–the benefit for the client if they elect to do the HARP refi is their appraisal may be waived. I'm sure these folks, who do not need this program, are being factored into the figures of how many people were helped by HARP…folks who didn't need help at all. I'd like to see stats of who has been helped by HARP with LTVs greater than 80%.

  121. 121

    The Tim, did my last long comment go into some spam or moderation bin?

  122. 122
    deejayoh says:

    RE: Softwarengineer @ 118 – I am not sure I am getting your interpretation. In the proposal I heard and was trying to summarize, there was no role for “We the people”. Just between the lender and the mortgage holder. And since you are converting Debt to Equity, there is less overall debt, not more.

  123. 123

    RE: Rhonda Porter @ 120

    I too had a post disappear this morning. I think July 3rd is designated as ” delete posts by wise, brilliant people day.”

  124. 124
    Racket says:

    By Softwarengineer @ 119:

    RE: Kary L. Krismer @ 50

    Dr. Roubini agrees with me too.

    Does Dr doom’s opinion only count, since he agrees with you?

  125. 125
    David Losh says:

    RE: Kary L. Krismer @ 117

    I can save $200k in five years. My wife wouldn’t be happy about that, but it’s a doable deal.

    You are refusing to see Real Estate as the investment instrument it is. It’s all numbers. There are zoning code and land use changes. There are development plans by government and private corporations. Every aspect of Real Estate is real and tangible.

    We have had a global contraction of the financial markets. Without a global economy pushing the value of United States properties we will end up with a massive over supply of housing units. By massive I mean millions of housing units no one wants, let alone needs.

    Add to that the contraction of the credit markets here and you have over priced properties selling today for far beyond current or future value. Any loan made today is being made on an over priced asset. In two years those mortgages will be just as worthless as the mortgages traded today.

    It is over, done, finished, a complete waste of every one’s time to try to convince people that the credit market will come roaring back and Real Estate will follow. If you buy today you need to buy what you like and plan on keeping it until you pay down the principle in order to sell it again.

  126. 126
    deejayoh says:

    By Ira Sacharoff @ 123:

    RE: Rhonda Porter @ 120

    I too had a post disappear this morning. I think July 3rd is designated as ” delete posts by wise, brilliant people day.”

    you forgot “good looking” on that list, which probably explains why all my posts seem to be showing up

  127. 127
    patient says:

    Kary, you are always talking about what a terribly bad idea it is to walk away. Here’s a question for you, for arguments sake let’s say that you have a $400k mortgage on your home, two years from now there are numerous homes on your street similar to yours for sale at $200k. Now, a well educated and pretty old guy as you are I’m sure you have at least half a million in your retirement account and a of other invetments as well. Would you not think walking away from your mortgage or short sell and buy one of the $200k home cash and live debt free for the rest of your life as a pretty sound financial decision? I do. ( I have no idea what kind if any mortgage you have and I don’t want to know, the amount was just for arguments sake ).

  128. 128

    RE: Ira Sacharoff @ 123 – thanks for the compliment, Ira! :) I see my comment was fished out– thanks The Tim.

    HAPPY 4TH OF JULY

  129. 129
  130. 130
    Andy says:

    Forget all this B.S
    Home prices will fall 30- 50 % more; we all know it
    However, I’m finding that the rate of decline is slowing; it might take 2-5 years before this market truely bottoms
    Dammit; real estate is just not worth it
    I’m in Chelan, WA;
    Trashy people here really think that there crappy home here are worth so much; the landscape is like the surface of the moon
    Is Chelan the next vegas???

  131. 131
  132. 132
    Softwarengineer says:

    RE: Andy @ 131

    YOU AND DR ROUBINI HUM THE SAME TUNE

    I know what you mean by high priced dumps. When they built Bellevue with flats and 1 bathroom ramblers for the lower class single income household in the 50s, who would know it would become the land of two incomes no kids….

    Too bad they didn’t replace the 50s rusty pipe water supply and road infrastructure, before they upgraded all the home costs….that’s why when I moved out of Bellevue, I bought in an area with new water pipes and infrastructure….LOL

  133. 133
    Kary L. Krismer says:

    By patient @ 127:

    Kary, you are always talking about what a terribly bad idea it is to walk away. Here’s a question for you, for arguments sake let’s say that you have a $400k mortgage on your home, two years from now there are numerous homes on your street similar to yours for sale at $200k. Now, a well educated and pretty old guy as you are I’m sure you have at least half a million in your retirement account and a of other invetments as well. Would you not think walking away from your mortgage or short sell and buy one of the $200k home cash and live debt free for the rest of your life as a pretty sound financial decision? I do. ( I have no idea what kind if any mortgage you have and I don’t want to know, the amount was just for arguments sake ).

    Well walking away in that instance would possibly require filing a bankruptcy, which is a risk I wouldn’t want to take (even though the retirement funds you mention would be exempt from the reach of the trustee). I’d also have the bankruptcy on my record for 10 years and always have to answer that I’d had a house foreclosed.

    Let’s just say I’d done that 25-30 years ago, when my condo was underwater. Buying the place I bought in 2007 would have been tougher.

    Beyond that, I’m really not very big into breaking promises. That’s really what it comes down to. A contract is a promise.

  134. 134
    David Losh says:

    RE: Kary L. Krismer @ 133

    What you never address is that our economy is destroyed. If you are a Real Estate agent, how’s that going? Banks, mortgages, global finance, International Trade, software development, electronics, transportation, government programs, and the list goes on have been decimated.

    People need to have the ability to pay the very high price of properties then compare that price to the actual value.

    Promises? How about the promise that banks were doing business in good faith?

    We are a long ways away from the 1980s or 1990s.

  135. 135
    Kary L. Krismer says:

    By David Losh @ 134:

    RE: Kary L. Krismer @ 133

    What you never address is that our economy is destroyed.

    It’s not destroyed (yet). It’s been severely damaged, and may still collapse, but it’s still plugging along on some level.

  136. 136
    David Losh says:

    RE: Kary L. Krismer @ 135

    A car can be destroyed and still be drivable. It remains to be seen if it will be repaired and how well.

  137. 137
    Sniggy says:

    By David Losh @ 134:

    RE: Kary L. Krismer @ 133

    What you never address is that our economy is destroyed..

    It’s not that bad, goto Mill Creek Town center sometime and look at all of the overfull restaurants and lines at the high end grocery stores.

  138. 138
    David Losh says:

    RE: Kary L. Krismer @ 133

    Let me be more to the point.

    In my crystal ball I see a future where credit is a very bad thing. I can see a time within the next five years when mortgage payments will be about the same amount as rent. Home ownership will have taxes, insurance, and the costs of maintaining a home. Properties will be hard to sell and our equity will be built by wise purchases, home improvements and paying down the principle balance.

    That’s the way it has always been, until recently.

    I’ve been talking with some of the old timers in the real estate business. It is strange how our thinking has been distorted these past ten years. The fact is the bad old days are coming back. Sorry.

  139. 139
    Kary L. Krismer says:

    By David Losh @ 136:

    RE: Kary L. Krismer @ 135

    A car can be destroyed and still be drivable. It remains to be seen if it will be repaired and how well.

    No, a car can be damaged and still be drivable. If it’s destroyed it’s just a pile of metal, plastic and ash.

  140. 140
    nolaguy says:

    In every state, a refinance of a mortgage results in a new recourse loan – losing the option to “walk away” and could also subject yourself to other asset seizure and wage garnishment. For that reason alone, this refi plan is not a good idea for anyone that is underwater on their house.

  141. 141
    Kary L. Krismer says:

    RE: nolaguy @ 140 – As far as I know, you’re only describing California. In Washington anyway, there’s no difference in liability as to an original loan (“purchase money”) and a refinance loan. I suspect Washington is more typical than California, but I’ve never seen anything on that.

  142. 142
    Alan says:

    Arizona has the same law as California. Every state is different.

  143. 143
    The Tim says:

    By Alan @ 142:

    Every state is different.

    No two states are not on fire.

  144. 144
    MsAnnaNOLA says:

    RE: what goes up must come down @ 19

    Probably the value will continue to drop. Except the new loan default when they walk away will accrue losses to the govt. not the banks that got bailed out by taxpayers.

  145. 145
    fajensen says:

    It Depends maybe on how the fixed mortgage is structured: If it is made with standard bonds sold directly in the market – as it is here in Denmark – the home-owner is effectively short the amount of bonds that make up his fixed-rate mortgage. This means that when* interest rates rise, he/she/it will gain from the mortgage bonds losing value. It is then possible later to take a new mortgage at a higher interest rate (or even a variable rate one) and then use the proceeds to buy back the bonds in the market and close the original mortgage.

    *Interest rates WILL rise with every government on the planet running deficits like crazy that they need to sell bonds to cover. A deluge of crap will hit the bond market over the next 2-5 years.

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.