The Home Crowd

From The Consumerist -

Bobo and Joy Dickson bought a house had been headed for foreclosure, but JP Morgan Chase apparently didn’t get the message that the former owners had moved out and the new owners were in residence. So, naturally, they hired a firm to drill the Dickson’s locks and take everything they owned

Wow, that’s terrible. I mean.. these people have heard of memos right?  Maybe an email or two?  I get that it’s probably in the best interest of asset companies to sneak in while you’re out to avoid confrontation, but ouch!  Lawyers are involved, so I imagine they’ll go from foreclosing on a home to virtually giving it away to a family whose possessions and photo albums they’ve just trashed.

How could you go wrong after that?  Why ,they’ll call him Bobo the Triumphant, or Bobo the Great!  It’s a cheap shot I know, but I’ve spent the last 3 days moving HQ from sunny Orange County to sunny San Diego and my compassion is still packed away in the garage somewhere.

Ideal Investment Corner points us towards a recent article by the Wall Street Journal about the “Buy and Bail” phenomenon. In short, it’s a process of homeowners who are upside down on their mortgages who are facing a potential foreclosure, buying a second home to be their primary residence by showing their lender that they intend to rent out their current home. However, after the loan on their new home is secured with their good credit, they allow the old home to go into foreclosure, take the hit on their credit but yet are able to remain in a home.

The Upside: - The opportunity to be one step ahead of your impending credit ruin, and avoid years of apartment dwelling by getting into a home you’re actually able to afford.

The Downside: - Your credit gets hammered for the foreseeable future, you could get sued for mortgage fraud, and you could also have a lien placed against your new property for stiffing your lender with the bill.

From the Wall Street Journal,

The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is “certainly fraudulent and unfortunately on an uptick,” says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn’t have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

photo credit: respres

But don’t expect this to become a commonplace option to foreclosure. Lenders are busy closing loopholes and Fannie Mae is working on changing regulations to require users with the intent of renting a second property to prove that they could afford both mortgage payments regardless of actual or eventual renters.

From the Wall Street Journal, via Ideal Investment Corner

An online petition is web-circulating from angryrenter.com, adding “signatures” of those who oppose the federal housing bailout. Their issue, of course, is having to foot the bill via taxes to bail out reckless lenders and homebuyers.

-From angryrenter.com,

But did you know that renters are 32 percent of American households? And that homes in foreclosure are less than 2 percent?

So why is Congress rushing to bailout high-flying borrowers and their lenders with our tax dollars?

Unfortunately, renters aren’t as good at politics as the small minority of homeowners (and their bankers) who are in trouble. We don’t have lobbyists in Washington, DC. We don’t get a tax deduction for our rent and we don’t get sweetheart government loans.

What is the bailout plan at this point?

- From CNN Money.com,

First, the lender writes down the principal to 90% of appraised value. That’s the amount the FHA would guarantee - that is, the amount that the government would pay the lender if the borrower defaults on the new loan.

So, in the example above, the new loan would be written down to $180,000.

The remaining $20,000 - 10% of appraised value - would be the borrower’s equity stake.

In addition, the lender must pay the FHA 3% of the loan amount ($5,400) to participate and up to 2% in closing costs ($3,600). So on top of forfeiting $20,000 in equity to the borrower, the lender pays $9,000 to the government up front.

The $29,000 the lender forfeits is 14.5% of the appraised value of the home, which means the lender is accepting in essence payment for no more than 85.5% of the home’s value. In addition the lender has agreed to forgive the $20,000 in additional debt above appraised value from the original $220,000 loan.

For their part, while borrowers will get a 10% equity stake in their homes, they will have to pay for their participation in the program as well.

If the interest rate on a 30-year fixed rate mortgage is 6.50%, the borrower in this example will have a monthly mortgage payment of $1,138.

On top of that he will also have to pay a 1.5% annual premium to the FHA based on the principal balance of the loan, which will decline over time. That computes to $225 a month extra in the first year since his initial loan balance is $180,000.

Add to that property taxes (we assumed $167 per month) and home insurance (we assumed $50 per month), and his total housing payment every month would be $1,580.

The borrower will also be on the hook for an exit fee when he sells his home. The exit fee would be equal to the greater of 3% of the original FHA loan amount or a declining percentage of the net proceeds from the sale of the home. The percentage is 100% in the first year and falls to 50% by the fourth year and beyond.

Let’s assume he sells the house after five years for $200,000. He would have paid down his principal balance to $168,500, leaving $31,500 for disbursement.

But he’s not keeping the whole $31,500. He owes an exit fee to the FHA - in this case 50% of his net proceeds or $10,000. Since the house in this example sold for the same amount as its appraisal value five years earlier, the only net proceed is the borrower’s 10% equity stake, or $20,000. So the borrower would pay half that to the FHA and walk away with as much as $21,500.

If the borrower sells his house below the appraised amount, he would still owe the FHA at least 3% of the original FHA-insured principal, or $5,400.

And this plan, they’re estimating it to only apply to 28% of at-risk homeowners.  Everything that’s been hitting the fan, will continue to hit the fan for a lot of people.  Doesn’t seem as if there’s a happy medium for homeowners, lenders, renters and the economy.

But it seems as if taxes are raised, many renters who’ve been reluctant to gamble with creative mortgages, and homeowners without mortgages are going to be very upset by having to pay for the bailout.

And not often are we seeing the term “Accountability” thrown around enough.

• The homebuyers - You knew what you were getting into with a creative mortgage, if taking a huge hit from the bailout means you get to keep your home and don’t have the stain of foreclosure on your record, consider yourself lucky.
• The lenders - They bought the loans, they knew what they were, yet the housing market always goes up right.  Well, it stopped.  Deal with it.  Take the hit.  This bailout may take a big chunk of their profits, but backs up the difference.  And the lenders, well, the economy needs them to make the whole world go ’round, so expect them to get traditional mortgages back in style pretty soon
• The loan writers - For the most part, good hardworking people, same as you and I.  But there’s also many who are also good and hardworking, yet wrote bad loans that they either knew or suspected were bad loans.  Time to find a new career.  Some people were getting home loans that couldn’t even qualify to purchase an automobile.  Time to put and end to that and the ‘honor’ system of reported income.

(angryrenter.com spotted at the Zillow Blog)

In a great article by Neha Grey at Divine Caroline, Neha compares what your home buck gets you here vs. abroad. Below you have a French Chateau, which $500,000 would get you a quarter ownership or that same 500K would get you a very plain home in L.A. suburb downey.

Hmm, Downey or France? I’m familiar with both. Downey is a decent place, very dull, the people are rude, and the food is terrible. France matches all these qualities plus some.

That first pic reminds me of every Bond villain or any supervillain from the movies though. All had exquisite palatial estates in far off exotic countries. Now that I know what these evil geniuses paid for their homes, I’m less likely to believe that they weren’t so much criminal masterminds as they were disgruntled office workers who cashed out their 401K’s and moved overseas.

The depressing facts (6 more eye opening and hair pulling examples) from Divine Caroline.

This was featured on the front page of the San Jose Mercury News a couple of days ago. There’s a non-profit housing developer in San Jose which developed a 17 unit condo property blocks away from San Jose State Univ. aimed at the affordable housing crowd. Problem is, out of those 17 available ‘affordable’ units, only one has been sold in the eight months since ‘for sale’ signs went up. I’m not even sure if that’s counting the amount of time this project has been up for pre-sale.

Wait, what? The ‘affordable’ homes are supposed to be snatched up really quick, right? Well, yeah, in most markets they are, so long as they’re “Affordable”. These condos started out expensive, and have just received a price cut to “not as expensive”.

Two-bedroom condos at Villa Almendra once priced at $535,000 now are offered at $450,000. The units come with new appliances, two-car garages and granite countertops.

(From the San Jose Mercury News)

Now, of course, to qualify for affordable housing in santa clara county, the household (up to four) can’t earn an income of more than $84,900 annually. And with loan incentives, the mortgage payment can be brought down to a little over $2,300 a month. That is of course, before HOA fees, taxes, insurance, etc.

So, ‘Affordable’??? Not even close. However, many would be quick to point out that the San Jose/Silicon Valley area is one of the most expensive markets in the U.S. And right you are, if not THE most expensive metropolitan area in the country. From this I bring in the home cost-per-square-foot factor into the mix. Right now, the average cost-per-square-foot for the average home in this country is somewhere around $130 per square foot. In the major housing markets it has traditionally been more.

(From the Wall Street Journal)

And there it is! The writing on the Wall. San Jose checks in at $437 per square foot for a home, well above the $394 San Francisco and $286 New York,NY per-square-foot figures. Now you’d figure that an ‘affordable’ housing project would be considerably below that $437 magic number.

Well, according to the developer’s latest promotional material (http://www.nhssv.org/files/villa%20almandra.pdf), the average price per-square-foot was originally $412. With no sales, they dropped the price to $390 per-square-foot on average. From what the San Jose Mercury News article said, they’ve apparently dropped the price again. And on top of that, but has offered a free Prius to one of the next 8 buyers.

However, now the developer has opened up the sales to anyone, not just those who qualify into the ‘affordable’ category. So if you’ve got an available $2,300+ a month to live in a duplex/triplex condo, you’re in luck, because anyone who may have considered these properties previously, just stuck with commuting or found something actually affordable.

What should this project have been? A higher-density project instead of 6 separate duplex/triplex condo buildings sharing a double-loaded parking alley. Whose kids are realistically going to play on that 5 foot strip of front yard anyhow?

No word yet if the lone property owner is left holding the bag, covering the entire HOA responsibility for the whole project, paying landscapers for the upkeep.

Very often, in both my professional and personal life, I find myself crunching numbers.  For one, out of necessity, and second, out of curiousity.  Recently, I have found a great resource in Yahoo’s Finance section.  The mortgage calculator works just as how you’d expect, you drop in the figures, and the calculator pops out the appropriate information.

So thinking about buying that 350,000 dollar home?  Well crunch the numbers, add in taxes, home insurance, and get a clear figure in your head before making the big leap.

Yahoo Finance Mortgage Calculator

As you look over your results, you’ll notice your estimated mortgage payment, as well as a comprehensive payment schedule, and also what your home will cost you total (principal + interest).  Now, if you find that simple tool useful, there are many others on the Yahoo Finance page which help out with financial planning, College Saving, Taxes, Insurance, Loans and Retirement Planning.

But if you’re mainly interested in the real estate aspect of the calculator tools, then I also recommend moreso than the Mortgage Calculator, the  “How much home can I afford” calculator.  This calculates home affordability in a more “traditional mortgage’ sense.

Yahoo Finance’s Home Affordability Calculator

These tools, combined with real estate searches such as through various real estate sites and those in the similar vein such as Zillow, can save you some time pounding the proverbial pavement as you’re able to do your homework during the evenings and weekends.

The site however, is run by Yahoo, which therefore means I find it pretty reliable.  That is, unless microsoft succeeds in buying out yahoo.  In which case, your results and reliability may vary.