It was Congress’ fault. It was the banks’ fault. It was the credit agencies’ fault. It was the American homeowners’ fault.
Even today, the debate continues as to why the 2008 mortgage crisis happened. While people pass the buck around and point fingers at those who they believe contributed to the problem, first-time homebuyers interested in financing their dream home walk into their lender’s office wary of the mortgage products offered to them. They don’t want to find themselves in massive debt or lose their home.
A Look Into The Mortgage Crisis
Before you can understand the 2008 mortgage crisis, you have to go back to 1998. During this time, regular financial institutions and investment banks had different legislation under the Glass-Steagall regulation.
Regular banks were not allowed to engage in risky types of investment ventures. Yet in 1998, this legislation was repealed, as regular banks now had the go-ahead to offer new lending products to homeowners.
In 2001, interest rates had reached an all-time low in the housing market. More people were looking to give up renting apartments and finally move into a home. So lenders found a way to increase the housing market and — in essence — increase their profit margins. Banks introduced subprime mortgages to homeowners.
Subprime mortgages were geared toward lower-income families who may have difficulty making payments following a regular repayment program. Subprime mortgage products consisted of adjustable-rate mortgages (ARM), option-ARM, interest-only loans, negative amortization loans, and piggy-back loans.
Most of the products sold to homeowners were ARMs and option-ARMs that allowed the homeowners to make low payments for several years before the adjustable rate kicked in.
This arrangement was appealing to low-income people as they went out and purchased homes that were outside their financial means. Banks encouraged underwriters to push out more subprime loan policies, as this action leads to predatory lending tactics that were no longer regulated by the government.
Underwriting standards became relaxed as fewer lenders performed background checks on the borrower’s income and credit rating.
Mortgages became a prime investment. Banks sold off the loan to interested investors who had to carry the risk that it would not be fully repaid. Home prices skyrocketed during a housing boom.
Mortgage Lending Crashes As The Recession Begins
Then 2006 rolled in and the mortgage world came crashing down. Those homeowners with subprime mortgages were only making the barest minimum payments.
These payments most often didn’t pay off the interest to the loan, as the remainder of what was owed increased the overall balance of the original loan. Then the adjustable-rate kicked in as homeowners had to make higher payments on higher loan balances.
Those people who struggled to make the minimum payment could not make this higher loan payment as they defaulted on the loan. People found themselves deeply in debt.
Home prices that were rising reached their peak and could not go any higher as supply surpassed demand. People desperate to sell their properties decreased the sale prices while unable to refinance their existing mortgage loan.
By 2008, investors all over the world watched as their securities backed by mortgages bought from banks decreased in value at the massive number of defaulted subprime loans. Investors took a financial hit and they greatly reduced the number of loans they bought from banks. Banks began to lose money on the defaulted mortgages. Several private lenders went under.
Mortgage Crisis In A Nutshell
Many factors contributed to the mortgage crisis. People bought homes beyond their financial means. Banks offered risky mortgage products that homeowners couldn’t make payments on. Banks engaged in predatory underwriting tactics that lead to people buying more homes and investors buying these risky mortgages.
The government repealed many laws that would have regulated banks and mortgages. The credit agencies failed to properly screen people to ensure they weren’t a credit risk.
Take Out A Mortgage Before Federal Stimulus Ends?
The housing market has held back the U.S. economic recovery for the past five years. The housing market appeared to have finally hit rock bottom last year and started to improve. New home sales in March were higher than any other point in the past seven years. The Federal Reserve has helped spur the housing recovery by keeping interest rates at an all-time low.
Some experts believe that the housing recovery will be self-sustaining, but others feel it will evaporate if the Fed stops the stimulus. Should you take out a mortgage before the stimulus ends? There are several factors that you will need to take into consideration before you decide. You want to make sure that you will be able to afford a mortgage before you take one out.
Deciding Whether to Take Out a New Mortgage
The previous housing crisis arose because many people took out loans that they couldn’t afford. Of course, the Housing and Economic Recovery Act and lenient lending practices didn’t help. However, the housing collapse would have been avoided if more people didn’t default on their mortgages.
You will want to avoid making the same mistake that many homeowners made before the housing bubble collapsed. Too many people took out loans that they couldn’t payback. However, the record low-interest rates can also be a great opportunity if you can afford a loan.
The average mortgage interest rate is currently at 3.41%. This is extremely low relative to the rates that have been charged over the past 30 years. However, the rates are starting to increase as well. They reached a historic low of 3.30% in November and started creeping up in the last few months. They will probably rise more in the coming months if the housing recovery continues, but the rates will probably rise a lot more if the Fed stimulus package ends.
Another factor you will need to consider is housing prices. Housing hit a historic low in 2011. However, prices recovered nearly 10 percent at the beginning of 2012. Most experts expect that housing prices will increase between 8 and twelve percent between now and 2014.
These indicators suggest that this could be the perfect time to take out a mortgage, as long as you can afford it. The Federal Reserve has given mixed messages about whether or not they plan to keep up the stimulus. You may want to try taking out a loan or refinance an existing mortgage before they announce that they intend to end it.
However, the important thing is to make sure that you can afford the mortgage. You should ask your bank what you would be paying on a mortgage each month and see if it is something that you could work into your budget. Many people have been able to receive mortgages with lower monthly payments than their rent.
This can be an ideal opportunity for you if you take a fixed-rate mortgage on a house you can afford. However, you may want to be a lot more careful taking out a variable mortgage because your rates will almost certainly increase a lot more if the stimulus comes to an end.
Federal Government Mortgage Assistance Programs
The federal mortgage assistance programs – Hope for Homeowners, Making Home Affordable, HAMP, HARP, and HOPE all fall under the “Making Home Affordable” umbrella. The federal programs provide help to struggling homeowners in two ways – by either refinancing the existing mortgage or by modifying the existing home loan.
Refinancing The Home (HARP)
You can qualify for the making home affordable refinance program option if:
- Your existing mortgage is owned by Freddie Mac or Fannie Mae
- The loan-to-value ratio of your first or primary mortgage does not exceed 125%
- Your mortgage payments are current and regular
The borrower can still qualify for this Obama’s making home affordable refinance program option even if he or she is upside down on the mortgage, but has the required loan-to-value ratio. The HARP program is meant for homeowners whose mortgages have depreciated in recent times, and the collateral fails to provide enough financial guarantees for the existing mortgage.
Modifying The Loan (HAMP)
This home affordable modification program option is meant for borrowers who’ve fallen behind on their mortgage payments or are not able to afford the monthly mortgage payments due to various reasons. If you’re currently paying an adjustable rate on your mortgage and the rate has increased, the modification makes it possible to obtain a fixed rate of interest and do away with the ARM.
Another advantage of the HAMP option is that it helps in restructuring your existing mortgage by extending the loan term, decreasing the net rate of interest, and even reducing the monthly mortgage installment amount. It’s one of the best options to save your home if you’re currently facing a foreclosure, or likely to face it shortly. For getting your HAMP:
- The mortgage loan balance should be less than $729,750
- The monthly payment for your main or primary mortgage (in case you’ve taken a second mortgage or a home equity line of credit – HELOC) should be more than 31% compared to your gross monthly income
The main objective of availing a HAMP is to modify or restructure the terms and conditions linked with your current mortgage and make the monthly mortgage payments more affordable.
Eligibility For Home Affordable Modification Program
To become eligible for HAMP, the applicant:
- Should own and occupy the home
- Should have obtained the current mortgage on or before January 1, 2009
- Should have less than $729,750 owed on the existing mortgage (for a single unit home)
- Have a monthly gross income more than 31% of the proposed modified loan’s total monthly installments, including the property tax and insurance
Has to provide a convincing financial hardship letter containing at least 3 critical factors explaining why it’s difficult, if not impossible to make the monthly mortgage payments and remain current with the existing mortgage.
If you want to modify your existing loan and get the HAMP benefits, there are refinance institutions that can help you become eligible for it. An effective hardship letter and proper documentation can help you get a reduced interest rate – as low as 2%, and even extend your term up to a maximum of 40 years. Their attorneys can help you work out your home loan modification.
Deciding Which Option To Take
It’s very important to decide which option is the best for you depending upon the current status of your mortgage. The refinance option gives an opportunity to completely overhaul your existing mortgage by paying off your home loan and obtaining a new “refinanced” loan with a reduced rate of interest and affordable monthly payments.
The modification option provides the same benefits of reduced interest rates and affordable payments, however, a new loan is not taken out and your existing home loan is restructured to make it affordable.
Mortgage Trends to Look After in 2013
When you are trying to assume the condition of the real estate market in 2013, paying attention to mortgage is important. About mortgage, a major change is going to be implemented in a few weeks from now, that of a new law, which should come into effect.
Real Estate Pricing Trends
Understanding real estate pricing trends in 2013 and especially the condition of the mortgage market is largely dependent on the anticipated changes this new law is supposed to bring. The new law is the Budget Control Act of 2011, which has been pre-planned for generating more tax income by levying more taxes on various income groups.
Among the various proposals mentioned in the Budget Control Act, there is a particular proposal, which places a ceiling on the mortgage interest reduction rate. Agencies like the National Association of Realtors apprehend that if the proposed measures are to go into effect, home values can get decreased by a major 7-15%.
There is a lot of confusion about these proposed changes though and the law is facing strong opposition from various interest groups, so it remains to see which way the law will take in the future.
In discussion are the write-off mortgages and the write-downs mortgages. These two essential elements of mortgage calculations are going to play a major role in 2013, as the experts are suggesting. What are the differences between write-offs and write-downs?
The write-offs are essentially direct Federal Government solutions and they involve substantial tax breaks on loan modifications, especially the home loans. The write-downs, on the other hand, originate from the lenders of mortgages like the banks and the federal government has a little direct role to decide their formulations.
Read also: The Fiscal Cliff. What, Where, Why?
Fiscal Cliff Solution
A proposed fiscal cliff solution is that of winding off the entire mortgage write-off system so that more revenue is generated from the homeowners.
In write-downs, mortgage lenders waive 10-20% of the mortgage loan burden from underwater homeowners, trying to recover their debts. Homeowners, struggling with mortgage debt, will, of course, want to see the two options brought into effect, but there is little chance that something like that could happen.
The present Federal funding for mortgage principal write-offs is due to disappear on December 31. This funding originated according to the Mortgage Debt Relief Act of 2007, which allowed struggling homeowners to avoid the Federal Taxes on any residential mortgage principal, which has been forgiven by the lender as a part of the modifications on a home loan.
However, this legislation is due to expire very soon, and that could easily be sinking news for many homeowners, who could face high tax bills from the IRS on the taxes that have accumulated on the erstwhile amounts of mortgage loan forgiveness.
However, this development is not yet certain as there is constant support from both Democrats and Republicans to prolong the write-offs, to provide support for the struggling homeowners.
As for write-downs, the whole situation seems gloomy as well, as there is not much the Government and President Obama could impose to force mortgage lenders to streamline write-downs, however, some steps are being taken. For instance, the Federal Government has already tripled the financial incentive amount to mortgage institutions to 63 cents up on a dollar.
This has supposedly convinced top lenders to implement a $10 billion mortgage forgiveness debt for the underwater homeowners struggling to save their homes. This $10 billion is from the $25 billion foreclosure agreement between the largest bank and mortgage lenders and the attorney generals of all the 50 states.
What remains to be seen whether the implementation of policies provides some relief to struggling homeowners.
Federal Government To Intervene In Home Mortgages
The Federal Government has taken note of the plight of thousands of homeowners who have pending mortgage payments on the loans they have taken for the purchase of homes. With many people losing their jobs, default on mortgage repayments has become common throughout the country.
A good majority of them have been on the verge of losing their homes. The Government’s intervention is intended to help these people get their loan terms modified, and to keep their homes by paying the installments as per the modified program.
The Government’s Program
The Federal Government has brought out schemes and incentives for both lenders and borrowers, for renegotiating the mortgage terms with viable conditions. Lenders who agree to the Government’s proposal receive an incentive, which is fixed at the time of starting and paid every year during the pendency of the mortgage.
Similarly, the homeowners also receive a grant, by way of reduction of capital, for 5 years. This can also be termed as an incentive to the defaulting borrower. He might otherwise remain indifferent.
It is no doubt that for a third party, the incentive is good enough for the lender and borrower to start negotiations for the revision of mortgage terms. However, since the values of property have been going down very steeply, lenders find that the incentive is not attractive enough for them to proceed.
For homeowners, it is beneficial as it helps to avoid foreclosure and keep their homes. The situation as of now is, only a very small percentage of those involved have taken advantage of the incentive program.
Strengths and Weaknesses
The Home Affordable program of the Government is subject to certain conditions. The program, though not very attractive to lenders, still helps hundreds of homeowners save ownership of their homes. With a high limit of loan balances, it has helped many homeowners to benefit from this scheme.
All loans, which were taken before 1 Jan 2009, are eligible for the program. The revision could even start by the end of 2012. Owner-occupied properties, even if they are more than one, are covered by the program. Even non-defaulters are helped to renegotiate because the lenders get incentives for that also.
The main weakness is the lender’s skepticism about the program. Borrowers are required to produce proof of income, like salary slips and tax returns. They are expected to submit an affidavit about financial hardship. The entire process is found to be extremely slow-moving at the Government level.
Federal Shutdown Impact Not Severe
While there is talk that the shutdown has ended, the impact it has had on various markets is still being determined and for stocks and capital ventures, the impact may have been more severe. For the housing market, the biggest impact was a slight drop in consumer confidence.
However, the repercussions, on the whole, have been very mild so far, outside of a few individual cases of people being impacted or seeing their home purchases and sales being stalled indefinitely.
Consumer Confidence Drops
Nationwide consumer confidence has dropped dramatically, reaching its lowest point since 2008, according to Gallup polls. However, for many markets, this drop in confidence has not necessarily transferred into a drop of purchasing, particularly within the housing market.
While the stocks and commodities markets may follow the trends at the federal level, the housing market has been resilient enough to avoid following the drop in investments.
While stocks saw some dramatic drops, the housing market has not seen any dramatic impact and as the shutdown comes to an end it is less likely to demonstrate any massive problems.
Lack of IRS Slows, Does Not Stop, Purchases And Sales
Some individual home buyers, and sellers, have felt firsthand the impact of the partial shutdown. With agencies like the IRS, and HUD being furloughed, some home sales have been left hanging. While this can be extremely frustrating and unnerving, there is little chance that the delay will spoil the entire deal.
Because the shutdown impacts both buyers and lenders, there is a much more mutual understanding of the impact and lenders are not eager to cancel deals that would otherwise be completed without the shutdown.
For the next few weeks, furloughed agencies will be scrambling to catch up. The IRS and other agencies will first process matters that were immediately halted by the shutdown, for the IRS this means clearing income and tax requests and allowing mortgage applications to be finalized.
However, the fact that the shutdown did not extend for a month or even longer as was initially predicted means that there will be less of a backlog of work and the IRS should be able to process pending requests as well as new ones with no significant delay.
What To Do?
If you are in the process of buying a new home, keep in contact with your broker, especially if you were waiting on the IRS reports. Your broker may wish to resubmit any requests to ensure that your request did not slip through the cracks.
For new and potential buyers, there is no reason to hesitate in purchasing your home. Any effects of the shutdown will be negligible or long resolved by the time your application is finalized.
Read also: Review of First Direct Mortgages