Monday, March 30, 2009

Refi Rescue from Washington Will Be Met with New Whining from Wall Street

After an outcry from the public, the stimulus package from DC has help for people who need to refinance their properties in order to keep them.

The result is the “Refi Plus Program” which will go into effect April 5th, 2009. So now the following bullet points that sum up the loans:
  • Present loan must be a FNMA loan
  • No Minimum Credit Score Required
  • New Lender Does Not Need to Be the Current Lender
  • Reduced Income Documentation Allowed on All Loan Applications
  • The automated system most lenders use will assess borrowers for this program and the automation will help increase the number of approved clients requesting Refi Plus.
  • If existing loan does not have mortgage insurance (MI), the new loan will not have MI regardless of the Loan to Value.·
  • The New Loan must be a 5+ year fixed term loan (5, 7, 10, 15, 30 year type loan).·
  • Loan to Value(LTV) OK up to 105% with an unlimited CLTV(combined ltv--for more than one loan) subject to the 2nd lender allowing the subordination.
  • 3 to 4 unit only ok to 80% but after May 3rd, 2009, ok to 105% Loan to Value.

There will be more to follow as we get closer to April 5, 2009. Even so, looking at the list, one colleague pointed out that even though the LTV is over 100% it will be hard for many who are under water to actually float again. Because even that high Loan to Value doesn't cover the 50 plus percent that housing values sank.

For example Joe and Jane Wishful bought a house in Tracy in 2005 at $400,000 and borrowed $390,000 . Well they would pay about $2400/month. Even if they had a regular loan, one that paid principal and interest without mortgage insurance and never missed a payment they would be in trouble. Not through their wrongdoing, but because of their luck. Part of the trouble is basic, in every loan the first payments basically cover more of the interest than the principal. So, with perfect payments on a $390,000 at 6.25% fixed interest for 30 years at the end of 3 years, they would still owe $388,884.06. That's not the bad luck part, that is basic finance.

Now enter bad luck. Because so many other houses have foreclosed, because their neighbors didn't make the mortgage for whatever reason, the market is down. Meaning that Joe and Jane's house is losing value as their loan interest accrues. And they are not alone; this housing crisis has hit California hard. The overall decrease in house value in CA is over 50%. So that means Mr and Mrs Wishful have a $390,000 loan on a $200,000 house, in TODAY'S MARKET. The refinance options in the stimulus allows a LTV (Loan to Value) 105% which means that they can only get a $210,000 loan. So that amount won't cover a $390,000 refinance.

There is a loss no doubt. The question is, 'who should take the loss?' Joe and Jane Wishful, or the bank? How about the taxpayer? Who?

Welcome to the new debate. No one wants the loss. If the bank takes the loss for all the houses in this predictament then the bank fails. To many banksWell one idea is to allow the house be valued on a horizon of 3 to 5 years from now. The lender would not use today's market but base the value of the house on a prognostication (uhh, i.e. guess) of the house's future value. Okay, what is the upside to this future value loan? Simply, the it is that the loss is delayed or softened by time. And, ironically, time is the downside too. What if the estimate is wrong? There will still be a loss, but the pain of that loss would be compounded by a new loan for an amount that is more than the value of the house. That kind of speculating got us in this mess in the first place.

Look for this, a new debate--"Should houses be marked to Market?" And if they aren't, are we still in a free market system?

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