About Government Refinance and Home Purchase Programs

There was an interesting opinion piece over in the Wall Street Journal about when walking away from a home is a good idea. Here is the short version: The author recommends that anyone who is more than 25% underwater on their property should consider walking away. You can be the judge yourself.

Here are some bits from the piece as well:

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom — it’s possible, but by no means certain — it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

People who are underwater on their mortgage normally can’t refinance to a better rate. The main exception to this is people with FHA loans can streamline those loans down to better rates.

According to new reports we should expect US home prices to continue to fall into 2011. For folks who still have some equity and would like to refinance into a fixed rate loan or just a better rate that means that the time to refinance is now rather than later while rates are still relatively low. Here are some excerpts from a recent CNNmoney.com article on the subject of falling home values:

Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next.

The average home price in the United States will fall by about 6% by September 2011, according to a joint report between Fiserv and Moody’s Economy.com. And that’s after plunging more than 27% in the past three years.

Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.

The main reason for continued decline, according to Mark Zandi, economist and co-founder of Economy.com, is foreclosures — the same thing that’s plagued markets for the past three years.

“Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can’t,” said Zandi.

He figures there are at least 4.5 million mortgage loans either in foreclosure or clearly headed in that direction. When that additional inventory hits the market, it will provide numerous choices for buyers and encourage sellers to drop their listing prices.

The end of two federal programs, which have been propping up markets, will also tamp down prices.

The Federal Reserve has been purchasing mortgage-backed securities since early 2009, scooping up as much as $1.25 trillion worth. That has dampened rate increases by providing a ready market for the securities. But the Fed’s program lapses on March 31, when it cedes the playing field to private investors, who will almost surely demand higher rates.

Contact us in the sidebar if you think you are a good candidate to refinance.

Some encouraging news was released earlier this week. We get this from the Washington Post story on the subject:

Borrowers fell behind on mortgages at a slightly slower rate late last year, but the overall number of homeowners in financial distress remained at record levels, according to industry data released Friday.

A survey by the Mortgage Bankers Association found a surprising decline in the number of borrowers who had missed just one mortgage payment, the initial stage of delinquency. Mortgage holders who were 30 days delinquent fell to 3.6 percent of all borrowers in the fourth quarter, down from 3.8 percent in the third quarter and 3.85 percent in the corresponding period in 2008. This was the first quarter-over-quarter decline in that category since 2004.

The improvement was remarkable because delinquencies usually rise during the last three months of the year as homeowners divert cash to cover higher heating bills and holiday expenses, said Jay Brinkmann, chief economist for the industry group. If seasonal patterns hold, the rate at which loans go bad will decline again during the first quarter, he said.

The data are a sign that the end of the foreclosure crisis may be in sight, Brinkmann said. “It also gives us growing confidence the size of the problem now is about as bad as it will get,” he said.

Among the companies hit hardest by the housing downturn are the mortgage insurance firms. These companies insure conventional mortgages for banks so that if the home forecloses the bank can collect to trim its losses. The problem is that a lot more homes are foreclosing now than anyone anticipated a few years ago and the insurance companies are taking a beating as a result. See this article on the latest news related to this subject:

Mortgage insurer PMI Group Inc reported a much wider-than-expected quarterly loss, as its U.S. unit continued to post disappointing results, sending its shares down 5 percent before the bell.

The company posted a loss of $228.2 million, or $2.76 a share from continuing operations for the latest fourth quarter, compared with a loss of $181.0 million, or $2.22 a share, a year back.

From the perspective of consumers the problem is that these sorts of things ultimately make it harder to get approved for refinances or other home loans.

Mortgage rates usually mirror to some degree the yields on the 10 year treasury note. With Ben Bernanke announcing the Fed’s plans to pull back on its programs of economic stimulus the price of yields on the 10-year treasury bounced up. With it mortgage rates bounced up nearly a quarter point as well. We may be at the beginning of the expected rate increases already.

With more than 9% of FHA loans now seriously delinquent the fears that the Federal Housing Administration will need to be be bailed out are not going away. Of course that does not mean the FHA will cease lending but it could mean tighter standards and higher fees down the road. We get this from a recent Washington Post article on the subject:

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.

Although the FHA’s default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.