Vultures as Angels
There was an interesting article in last week’s Wall Street Journal about the success a hedge fund is having in modifying mortgages and keeping homeowners in their homes. The point of the article was to highlight a successful private market example of mortgage modifications, in this case a distressed investment fund, as compared to the highly publicized Federal programs like the Home Affordable Modification Program (HAMP).
A key difference between the hedge fund’s strategy and HAMP seems to be the willingness to reduce the principal owed on the loans. The hedge fund forgives a portion of the principal in 90% of their modifications. Federally regulated banks subject to HAMP, according to the article, are more likely to lower interest rates, give homeowners time to catch up on late payments, and extend the length of the loan. They only forgive a portion of the principal in 2% of their modifications.
Despite the strong case that the article makes for the private market strategy over government involvement, it identifies two critical factors that limit the hedge fund’s effectiveness:
1. Many mortgages have thousands of owners. Because mortgages were packaged into securities for resale, the infamous Residential Mortgage Backed Securities (RMBS) that were part of the credit crisis, it is often impossible to buy (and therefore modify) individual mortgages – they have thousands of owners.
2. Banks don’t want to recognize losses. If a mortgage does have a single owner, like a bank, then that owner has to be willing to sell the loan at a steep discount in order for it to be attractive to the hedge fund. After all, they’re doing this to make money. The strategy banks currently employ of lowering rates and extending the term allows them to push any losses into the future.
In the end there is no suggested way forward, though presumably the author would hold up the private market model as the ideal. Reports from the government itself seem to show that the Federal programs are not working for everyone either. For many homeowners, the end result is likely to be foreclosure unless the economy and housing markets bounce back quickly.
Check out the full article for an interesting story, and by all accounts a successful mortgage modification strategy for certain homeowners.
Update: I’m Not At Home
Many people are using social media these days. Facebook, Twitter, Foursquare and many others that aren’t even on my radar.
These applications are great for staying in touch with people near and far, people that you know personally and even some that you don’t but have found because of common interests. Depending on your online habits, you may use the applications differently. Some people feel the need to update others on every aspect of their life like “Today I ate oatmeal for breakfast, am wearing striped socks, and my dog just sneezed.” Others use their accounts more sparingly and post news items that are of interest to them or an occasional update on their life.
This summer I’ve noticed that lots of my friends on Facebook and those that I follow on Twitter are posting updates about trips that they’re taking. Some are going to the shore for a week or weekend. Others are visiting family across the country. And others are leaving the country for European excursions. Foursquare updates let me know that someone just checked in at Tapas on Ann or the Starbucks in West Hartford Center.
I’m glad people are out enjoying themselves; relaxing, traveling, supporting the economy. But what I’m concerned about in the back of my mind is that they are announcing that they are not at their home. That they are gone for a few days or a week or longer. Do we really have a good control over who views this information and can they use it in a bad way? Will the wrong person get this information and break-in into your home? Once you know someone’s name, it’s really easy to find out where they live thanks to the Internet.
Who views this information is only as good as your Privacy Settings on Facebook. Or how good you are at controlling who follows you on Twitter. And what if you’ve posted something on Twitter and then someone else re-Tweets it so that whoever follows them can see what you’re up to?
I understand the social nature of these websites, but I also see some information sharing as an unnecessary risk. Kyle and I recently went away for two days. I talked about that trip on Facebook when we got back. The only people that knew we were away were a few people in our neighborhood that I contacted privately through email.
I’m not trying to be the social media police here. You may just want to think about who really has access to all of the information you post online before you announce that you’re leaving for vacation.
I’m assuming that many of the people that follow this blog use some form of social media. Am I overreacting here or do you also think about these types of issues?
PS- I am at home, so don’t try to break-in to my house!
Mortgage Rates are Low
Mortgage rates are currently low. Very low.
It’s common for well qualified buyers to get rates below 5%, and we’ve heard of some rates as low as 4.25% on 30-year fixed mortgages with no points. We even saw a sign by the road advertising a 3.99% rate, though it was not clear what the other terms would be.
Here’s a chart from Mortgage-X.com showing rates going back to 1963, which is further than other charts we’ve seen.
Reproduced with the permission of Mortgage-X.com
Our Thoughts on Low Mortgage Rates
1. People shouldn’t buy houses because mortgage rates are low. Buying a home is a big commitment of time and money, so homeowners need to be in it for the right reasons. Securing a low mortgage rate might be a nice bonus, but it should not be used to justify a purchase – you need to want to own a home.
2. Those in the market for a new home can take advantage of the low rates in different ways. One option is to pay less each month for the same home they would have bought no matter what the rates. Another option is to get a more expensive home for the same monthly payment they would have had before rates fell so low. Finally, they could get a shorter loan (15-years or 20-years instead of 30-years) so that they can build equity faster and pay dramatically less interest overall.
3. Existing home owners may want to consider refinancing their current mortgage. There have been a couple articles recently (CNN, Wall Street Journal) about how refinancings are on the rise again, but that many buyers can’t take advantage because of strict lending requirements (their credit is too poor) and appraisal values (their home values have fallen and they don’t have enough equity).
4. Will rates go even lower? Nobody knows. At some point mortgage rates really can’t go any lower. The two primary inputs into the rates are the interest rate of the 10-year Treasury Bond and the spread above the Treasury that lenders/investors demand. The 10-year Treasury finished yesterday at 2.64%, which is very low from a historical perspective, but it’s possible it could go even lower.
As always, the place to start with everything mortgage-related is with a mortgage professional. They’ll be able to evaluate your specific situation to let you know which options are available to you. We would be happy to pass on the names of mortgage people we’ve used if anyone is interested.