Tag Archives: mortgages

Underwater mortgages slow housing recovery in Chicago area

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Crain’s Chicago Business highlights an issue that is slowing the real estate market in the Chicago area: homeowners with underwater mortgages.

More than 506,000 Chicago-area homes—or one-third of the market—were underwater as of the fourth quarter, according to California research firm CoreLogic Inc. That’s up 7.6 percent from the previous year.

Underwater properties are bogging down a residential market that’s clawing back from its post-crash ditch. By opting to stay put, these homeowners are removing a substantial portion of potential saleable properties from the market, limiting choices for those who are ready to buy…

Rising prices ultimately will push more underwater homeowners to sell, Mr. Humphries says, but it’ll be a while before prices get anywhere near the levels seen in the market apex of just a few years ago. The S&P/Case-Shiller index of single-family homes, a closely watched barometer of values, in February stood 34 percent beneath its September 2006 zenith.

For buyers, meanwhile, the process of finding and closing on a home has become a scrum—and it’s likely to stay that way for a while. This spring, showings are drawing crowds and bidding wars, and fast sales are common, buyers and brokers say.

I wonder how much of this is tied to the psychology that people feel losses, such as the value they may have lost in their house’s value, more than equal gains. What tactics could be used to convince people that they might be better off getting out of the mortgage? I’ve seen one such argument: the value loss on a smaller house is likely to be less in absolute dollars and then homebuyers could benefit from larger drops in prices for larger houses.

What people see when they read home loan disclosure forms

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A new study uses eye-tracking devices to look at what people actually see when they read mortgage documents:

Choplin, along with Debra Pogrund Stark, a law professor at John Marshall Law School, and DePaul graduate student Mark LeBoeuf, conducted three eye-tracking experiments on 50 people to see if the various changes made to the government-mandated home loan disclosure forms made it easier for people to understand and retain critical information.

Their research found that the forms introduced in 2010 were generally better than the 2008 versions, so long as consumers are given the chance to read and digest what they’re reading. Their findings showed that people are much less likely to recall the initial interest rate, the maximum interest rate and the maximum monthly payment if they are distracted…

“The problem is if people are talking over it,” Choplin explained. “We believe mortgage brokers are initiating (the conversation).”

But even with silence and better forms, consumers still aren’t protected from potentially predatory lending, the researchers concluded.

That’s because they found that while better disclosure forms might alert consumers to changing interest rates and payment terms, none of the people in their study commented on how an adjustable-rate mortgage might affect the loan’s future affordability.

This sounds like an innovative way to use eye-tracking software. And it looks like the new forms do help some. But, perhaps they don’t go far enough in pushing consumers to ask the right questions about what it all may cost down the road. Simply seeing something on the page is helpful but doesn’t necessarily lead to comprehension and the next logical questions.

It would be interesting to then ask the mortgage brokers why they talk while people are trying to read the forms. A malicious answer is that the brokers don’t want people to consider them too closely. Or perhaps it is that the brokers, like a good number of people, have a hard time keeping silent for even more than 5 or 10 seconds. I’ve seen this in action many times myself – if you try to give a bill or form to sign a good look over, it seems to make the people waiting for you nervous even though the form is supposed to help you be better informed.

McMansions, housing markets, and the influence of banks

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An Australian architect argues homes should be valued on newer tastes rather than older interests in McMansions:

Recent sales and development figures have highlighted a trend towards smaller living spaces but the system for valuations in the capital seems biased towards larger average quality homes, Canberran architect Allan Spira said…

Mr Spira said building smaller, more affordable and sustainable homes will only be an option for “cashed up clients” unless the current system of valuations is changed.

“It’s time for the banks and their valuers to stop basing their assessments on the ‘McMansions’ of the past and start acknowledging the way of the future – smaller, smarter, better fitted out homes,” he said…

Mr Spira said most recently his clients struggled to get a $300,000 loan to build their three bedroom home in Wright.

Built across 127 square metres, he said it was “probably the most affordable and sustainable home in the suburb” but valuers CBRE based their calculations on inappropriate figures as no previous sales figures existed in Molonglo.

It might be hard to make a larger argument based on two cases. But, this argument does raise some larger issues:

1. Just when exactly do bankers and others know when the housing market has turned? In this case, the architect suggests people now want smaller homes compared to the McMansions they wanted a few years ago. It is easier to see change over the course of several years or a decade but it is harder to see this in the short run.

2. How much do banks and their choices about mortgages influence house purchasing and building patterns? Banks were partly blamed for the housing meltdown in the late 2000s but what percentage of blame do they deserve? I haven’t seen someone parse out the particular effect banking and mortgage choices have on what homebuyers are willing to do. This architect suggests homes aren’t being built because banks won’t provide financing for them but it is not clear how often this really happens.

You can get a no-money-down mortgage – if you are really wealthy and put your investments up as collateral

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No-money-down mortgages have been blamed for helping bring about the recent economic crisis but they can still be obtained – if you have the assets to obtain one.

It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.

In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.

While these affluent clients may be flush with cash, this strategy allows them to get into a home without tying up funds or making withdrawals from interest-earning accounts. And given the market’s gains combined with low borrowing rates in recent years, some banks say clients are pursuing 100% financing as an arbitrage play—where the return on their investments is bigger than the rate they pay on the loan, which can be as low as 2.5%. Some institutions offer only adjustable rates with these loans, which could become more expensive if rates rise. In most cases, the investment account must be held by the same institution that’s providing the loan.

These loans also provide tax benefits. Since borrowers don’t have to liquidate their investment portfolios to get financing, they can avoid the capital-gains tax. And in some cases, they can still tap into the mortgage-interest deduction. (Borrowers can usually deduct interest payments on up to $1 million of mortgage debt.)

Theoretically, this is how no-money-down mortgages could work since only signing up wealthier clients helps limit the losses a bank might incur if they default on the mortgage. Yet, it also sounds like another financial option that is only available to the wealthy who might even be able to make money by taking out a non-money-down mortgage. In other words, is this something that only helps the rich get richer (and possibly bigger houses)?

When banks say these loans are safer, how much safer? I suspect part of the safety of these mortgages is that there are relatively few new ones being offered to wealthy Americans. It would be interesting to hear about some cases where this has worked out well or not worked out as planned.

The rise of the zombie mortgage titles

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Here is what happens if a bank decides not to go through with a foreclosure and the owner is stuck with a “zombie title“:

Since 2006, 10 million homes have fallen into foreclosure, according to RealtyTrac, a number that in earlier, more stable times would have taken nearly two decades to reach. Of those foreclosures, more than 2 million have never come out. Some may be occupied by owners who have been living gratis. Others have been caught up in what is now known as the robo-signing scandal, when banks spun out reams of fraudulent documents to foreclose quickly on as many homeowners as they could.

And then there are cases like the Kellers, in which homeowners moved out after receiving notice of a foreclosure sale, thinking they were leaving the house in bank hands. No national databases track zombie titles. But dozens of housing court judges, code enforcement officials, lawyers and other professionals involved in foreclosures across the country tell Reuters that these titles number in the many thousands, and that the problem is worsening…

Banks used to almost always follow through with foreclosures, either repossessing a house outright – known in industry parlance as REO, for real estate owned – or putting it up for auction at a sheriff’s sale. The bank sent a letter notifying the homeowner of an impending foreclosure sale, the homeowner moved out, the house was sold, and the bank applied the proceeds toward the unpaid portion of the original mortgage.

That has changed since the housing crash. Financial institutions have realized that following through on sales of decaying houses in markets swamped with foreclosures may not yield anything close to what is owed on them.

It would be fascinating to know exactly how many of these homes there are – and what the best solution to this issue might be. I remember the stories of homeowners who thought it was easier to simply walk away from their homes but it sounds like the banks have caught on and realized they might not make much from that situation either. It sounds like we need some guidelines to determine who is responsible for the home if no one, the homeowner, the lender, and perhaps even the community, doesn’t want it.

New Halal subdivision planned for Sydney suburb

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A new 145-lot development in the western suburbs of Sydney, Australia is drawing reactions from residents:

Qartaba Homes is promoting its 145-lot subdivision at Riverstone, near Rouse Hill, as Australia’s “very first project of its kind for the Muslim community”, The Daily Telegraph revealed yesterday…

Many residents expressed their concerns that non-Muslims would be excluded from the site, while others said the developers were welcome to the land, which they said was flood prone.

Qartaba director Wajahat Rana said the company was happy to sell blocks of land to anyone…

University of Technology Sydney sociology professor Andrew Jakubowicz said the creation of religious enclaves was not a new concept: “The phenomenon of creating an environment where people of a particular religious faith feel comfortable is a very old Christian tradition, associated particularly with the Anglican church.

More on this from the Daily Telegraph:

While the company has insisted people from all religious backgrounds are free to take up the offer, it advises that the loans are “100 per cent Halal” and a “chance to escape Riba (interest)” because interest is a sin under Islamic law.

Qartaba Homes director Khurram Jawaid said it was the real estate deal of a lifetime, open to Australians of all faiths and backgrounds, but the state MP for Hawkesbury Ray Williams said the project was divisive.

“I can only imagine the repercussions if a developer were to advertise a new Judeo-Christian housing estate; they would be hung, drawn and quartered,” Mr Williams said…

Land parcels range from 400sq m to 800sq m and are being offered at $85,000 plus charges, including a booking deposit of 30-35 per cent and a 24-30 month interest-free payment plan.

Sounds like an interesting project. I wonder how a similar proposal might fare in the American suburbs. America has a history of ethnic neighborhoods, particularly in immigrant gateway cities, though the percent of the ethnic group living in that neighborhood may not have been anywhere near 80-100%. In the last few years, I have tracked some of the opposition to mosque proposals in DuPage County (see here and here for examples) but the controversy seems to have died out for the time being. I imagine a proposal for a Halal neighborhood would really raise NIMBY concerns from certain local and national groups.

Just curious: could a process of obtaining homeownership without having to pay interest be appealing to a lot of potential homeowners, particularly in tougher economic times?

Leader in Texas adverse possession movement hasn’t been successful yet

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The adverse possession advice being peddled through a Texas man’s website and e-book hasn’t exactly worked out yet:

If you direct your browser to 16dollarhouse.com and plunk down $9.97 for an e-book, you can still learn from Ken Robinson ( “poised, measured, insightful and wise” and an AMERICAN, all caps, as the site informs you) how to use adverse possession, a once obscure Texas law, to get a house on the cheap.

Be forewarned that Robinson’s legal theories haven’t worked out so well in practice. Earlier this year, he was evicted from his $350,000 Flower Mound McMansion after a judge decided that his claim to the house was bullshit. His disciples have fared little better.

Following news of Robinson’s scheme, officials in Tarrant County made the rounds evicting squatters who moved into homes after filing adverse possession claims. Eight of them were charged with theft or burglary.

David Cooper was the first to go to trial, which wrapped up today…

But Texas law also says you can’t steal people’s stuff and, in Cooper’s case, the house actually wasn’t abandoned. It belonged to a couple who were spending a lot of time in Houston, where the wife was undergoing cancer treatment. When it became clear that the home wasn’t abandoned, Cooper was arrested and charged with burglary and theft.

See more about the ruling on Robinson’s Flower Mound case here.

This would be an interesting protest movement that someone like Occupy Wall Street might want to take up: identify and then occupy Texas houses.

Neither Obama or Romney tackling issue of housing

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There are plenty of issues to talk about this election season but neither Obama or Romney have done much to address housing:

For existing homeowners and the government, though, housing remains an enormous issue. If new government initiatives are not implemented, it could take another three to five years for the market to fully recover, analysts estimate. And The Wall Street Journal reports that neither candidate has offered ways to remake failed mortgage giants Fannie Mae and Freddie Mac, which have already cost taxpayers $140 billion and face further losses.

Across the United States, nearly 10.8 million properties — 22 percent of homes with a mortgage on them — remain underwater, according to CoreLogic, a data analysis firm. The numbers of properties where owners owe more than their home is worth is shrinking, but analysts say the process can, and must, be sped up.

Both Obama and Romney, though, have been silent on the issue. Why?

“It turns out to be a lose-lose issue for both candidates,” John Vogel, a professor at Dartmouth’s Tuck School of Business, recently told MarketWatch. “And therefore gets ignored.”

For each candidate, the reason for staying mum on housing is different. Obama does not have the strongest record to run on. And Romney has found that wading into housing opens himself up to being painted as a heartless corporate mogul.

So housing greatly contributed to the economic crisis yet neither candidate wants to bring it up. Perhaps this topic might top an unfortunate list titled something like “topics that candidates absolutely do not want to talk about.” They can discuss a range of controversial topics like abortion, education, social security and medicare reform, the outsourcing of jobs, and tough foreign policy topics but not housing…

After seeing a variety of opinions on the topic of housing in the last few years, I wonder if most people, including the experts, are just hoping it comes back. Thus far, government policies do not seem to have helped much. As some have noted, without a more robust housing market, it is difficult for people to move and take advantage of the jobs that might be available. Local governments need increasing property tax values to bring in more revenues. Mortgage lenders, the real estate industry, and builders and developers would benefit from more activity. And if the housing industry doesn’t come back quickly? There doesn’t seem to be much in place for this possibility.

I wonder what Americans would want to hear about housing, if it even rates highly enough (or might simply be part of “the economy”). In the earlier stages of the economic crisis, there was a lot of talk about not providing a lot of support to people who should have known better than to take out mortgages they might not be able to afford. Who deserves to get help? Would Americans be happy with more regulation of mortgage lenders so they won’t be allowed to offer mortgages homeowners that could harm borrowers?

Baby Boomers can’t retire because they all bought McMansions?

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The economic crisis has changed the retirement plans of many. How might have McMansions played a role?

Financial planners on the South Shore and a new national study all point to the same troubled financial picture for people in their late 40s to their early 60s: Many are carrying so much debt from mortgages and student loans they co-signed for their children that retirement is a distant dream.

“They traded in their houses for a McMansion and bought at the higher part of market. They hocked it over 30 years, and they have little equity, if any,” said John Napolitano, CEO of U.S. Wealth Management in Braintree and 2012 president of the Financial Planning Association of Massachusetts…

The study found that the mortgage burden for baby boomers is 25 percent higher than it was for the same age group in 1990.

“In the refinance boom, mortgage brokers convinced (baby boomers) don’t stress out and sold them on a 30-year mortgages,” said Harris. “It was all about cash flow.

The article suggests Baby Boomers are also helping their struggling children. Yet, I wonder about these figures about mortgages and McMansions. This leads to two questions: (1) How many Baby Boomers really bought homes that might be considered McMansions? (2) And how many of them went into excessive debt to purchase this McMansion? For example, I would guess there are a decent number of people underwater on their regular-sized (less than McMansion size) home, particularly in certain housing markets.

This could be a classic case of McMansions serving as a whipping boy or shorthand explanation for the complicated housing market of recent years. When the term McMansion is used here, a certain image comes to mind: a house that is extremely unnecessary for the homeowners. Without seeing the actual numbers, it is hard to know this is exactly what happened but using McMansion certainly helps drive home a particular idea.

Los Angeles files complaint that U.S. Bank is not maintaining its foreclosed properties

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Looking to help residents who don’t like foreclosed properties in their neighborhoods falling into disrepair, Los Angeles is fighting back:

U.S. Bank is the country’s fifth-largest commercial bank, with 3,000 branches in 25 states. It’s also “one of the largest slumlords in the City of Los Angeles,” according to the L.A. city attorney’s office.

In a complaint filed last month, the office accused U.S. Bank of failing to maintain more than 170 foreclosed properties, blighting neighborhoods, decreasing property values and increasing crime rates.

The allegations are similar to those made in a lawsuit filed by the city attorney’s office last year against Deutsche Bank (DB), as well as other complaints from activists around the country who say their communities have suffered as neglected foreclosures deteriorate in the aftermath of the housing bubble.

This is a potentially large problem with the number of foreclosed properties in the United States:

Roughly 620,000 foreclosed properties in the United States are owned by lenders, according to RealtyTrac. The number of these properties, known as REOs, or “real estate owned,” surged after the housing bubble but has since begun to drop, down from over one million in January 2011.

Still, of those 620,000 houses, 24% had been waiting for a new buyer for two years or more, and 11% for three years or more.

You have a confluence of events here: large banks who have thousands of distressed properties on their hands, depressed housing markets, neighbors who are worried about their own property values as well as other neighborhood issues (crime, middle-class appearances, etc.), and communities who don’t want to have to foot the bills themselves.

Throughout the last few years, I haven’t really heard from the perspectives of the big banks on how they are really dealing with these properties. What are their strategies? If they want to hold onto the properties and wait for prices to rebound, they’ll have to pay for upkeep. If they want to sell quickly, they probably can find buyers but would have to write-off significant portions of mortgages. Have the banks hired teams to take care of foreclosed properties? Could a bank take these foreclosures and legitimately and profitably spin off a property division? It seems like this could be a real opportunity for someone yet the big banks appear to killing time with some of the foreclosures.