Piggyback or PMI?

Posted on April 19, 2007 by grim

From the Wall Street Journal:

When It Makes Sense to Pay PMI

My sister Melissa and her husband Joe have finally pulled the trigger and made an offer to buy a house, after years of struggling to find something affordable near my Jersey Shore town.

Melissa and Joe have enough in savings to make a 10% down payment on the $250,000 home, but doing so would leave them with no financial cushion. Instead, they want to put just 5% down and save the rest for financial emergencies and to pay other expenses, such as moving costs and making minor improvements to their new home.

So the couple is considering two options. One would be to take out a traditional 30-year fixed-rate mortgage for 95% of the cost of the home and pay the remaining 5% out of their savings. Because they’d be financing more than 80% of the home price, they’d be required to pay private mortgage insurance (PMI) — coverage that protects a lender in the event the homeowner defaults on the loan.
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Piggyback mortgages grew in popularity when mortgage and interest rates were low. (Mortgage rates track the movements of the Treasury market, while second mortgages — or home-equity loans — move in line with the Federal Reserve’s fed-funds target rate.)

But after the Fed began incrementally raising short-term rates — to 5.25% today from 1.25% in June 2004 — piggyback loans began to lose their luster. The problem? The second mortgage payment became too expensive for some borrowers, says Keith Gumbinger, spokesman for New Jersey mortgage-data publisher HSH Associates.

This year homebuyers such as Melissa and Joe have another reason to avoid non-traditional loans such as piggybacks. Piggybacks used to be more attractive than traditional loans because mortgage interest on the second loan was tax-deductible, while PMI premiums weren’t. But under a new federal law passed late last year, PMI premiums are tax-deductible for borrowers who buy or refinance a home in 2007. There are eligibility requirements: A homeowner must have an adjusted gross income of $100,000 or less to get the full deduction. Above $100,000 the deduction begins to phase out — borrowers with AGIs of $110,000 ($55,000 for married people filing separately) or more get nothing. The deduction also doesn’t apply to mortgage-insurance contracts issued before Jan. 1, 2007.
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So does it make sense for my sister to pay PMI? I asked Mr. Gumbinger of HSH to run the numbers to see how the two loans compare at today’s rates. On a piggyback loan — 80% financed with first loan, 15% down payment financed with second loan, 5% down payment from savings, no PMI — Melissa and Joe would pay $1,236.64 in principal and interest on a $200,000 30-year fixed rate mortgage at 6.29%. On the second loan — a $37,500 20-year loan at 8.15% — they’d pay $317.17 a month in principal and interest. So their total monthly payment would be $1,553.81.

On a $237,500 fixed-rate 30-year mortgage with PMI (95% financed, 5% down) at 6.29%, their monthly payment would be $1,468.51 and PMI would cost an additional $154.38, for a total estimated monthly payment of $1,622.89 — or about $69 more a month than the traditional loan. Now factor in the PMI tax deduction: $39 a month, assuming a 25% tax bracket, according to this calculator from PMI Group Inc. So Melissa and Joe would save just $30 a month for the remainder of this year by going with the piggyback loan.
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The iffy housing market also may mean Melissa and Joe’s home will appreciate in value much more slowly than in recent years, or may even decline, forcing them to make premium payments for much longer than the five to seven years homeowners typically pay for PMI. “With the position the housing markets are in today, it’s much more of a crapshoot than it was before,” says HSH’s Mr. Gumbinger.

While traditional loans are looking more appealing these days, there’s also no guarantee that PMI premiums will remain tax-deductible — the law is set to expire in 2008. Melissa and Joe are likely to begin making mortgage payments in August, so the tax benefits would be relatively small. (And if they took the standard deduction when they filed, rather than itemizing, they wouldn’t be able to deduct PMI premiums at all.)
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In the end, Melissa and Joe decided to go with the piggyback loan, largely due to the flexibility of the lower monthly payment and their doubts that the tax break for PMI will be extended for purchases and refinancings after 2007. Because the short-term second loan pays down principal more quickly than a long-term first mortgage would, they’ll save on interest by making additional principal payments to pay down the second mortgage. Since they’ll likely receive a much larger refund thanks to mortgage-interest and property-tax deductions, they plan on reducing their tax withholding so there’s more income to make those payments. (This IRS withholding calculator can help you determine how much to withhold.)

Posted in Housing Bubble | 4 Comments

NJ Unemployment up in March

Posted on April 18, 2007 by grim

From the NJ Department of Labor and Workforce Development:

New Jersey Employment Gained 4,900 Jobs in March Unemployment Rate at 4.3 Percent for the Month

New Jersey’s payroll employment expanded in March fueled by job growth in the private sector. New Jersey’s unemployment rate, although inching higher to 4.3 percent, continued to remain below the national unemployment rate of 4.4 percent.

Total nonfarm employment in New Jersey increased by 4,900 in March, reaching a level of 4,089,900, according to preliminary estimates from the Department of Labor and Workforce Development’s monthly survey of employers. The previously released February estimate was revised upward by 400 to 4,085,000 based on more complete reporting.

“Payrolls increased in New Jersey by almost 5,000 jobs in March, and the private sector accounted for 98 percent of the job gains,” said Labor Commissioner David J. Socolow. “At 4.3 percent last month, New Jersey’s unemployment rate remains low and continues to be lower than the national rate.”
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Job gains over the month were recorded in both the goods producing (+1,400) and serviceproviding (+3,500) sectors of New Jersey’s economy. Moreover, within the private sector, seven industry supersectors realized job gains, while only two recorded losses. Government employment edged up over the month by 100.

Job growth in goods producing industries was fueled by construction employment (+1,800) in March as many projects were back on track after weather-related slowdowns in February. Further employment gains in the goods producing sector were slowed by lower payrolls in manufacturing, which was down by 500. Job losses in durable goods (-1,000) overshadowed an increase in nondurable goods employment (+500) over the month.
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Employment gains in financial activities were tempered by mortgage companies having to reduce their workforces to adjust to the slower volume of loans and the shakeouts in the subprime lending industry.

Posted in Economics | 8 Comments

Unwinding of the bubble will take time

Posted on April 18, 2007 by grim

From Mark Kiesel at Pimco:

Still Renting
(This one is worth the click)

One question my friends and colleagues have asked me repeatedly over the past six months is: Are you still renting? Yes! I sold my house over a year ago and continue to rent. Back in late 2005, I became anxious about my investment in the “American Dream,” after spending a considerable amount of time and effort researching several factors that I felt would influence housing prices. At the time, I was nervous about housing and ended up selling my house in early 2006 after owning for eight years, and then, upon closing, published For Sale, our U.S. Credit Perspectives, June 2006 publication. A year ago, I suspected housing prices were set to take a sharp turn for the worse and more “For Sale” signs were coming.

Based on the current outlook for housing, I will likely be renting for one to two more years. While many factors that influence housing prices have turned negative, I suspect we have not yet hit bottom. In fact, housing prices should head lower throughout the rest of this year and next year as well. Why? Housing inventories remain high, delinquencies and foreclosures are set to rise as homes purchased over the past few years by speculators and individuals with teaser-rate and adjustable-rate mortgages come back on to the market, affordability is low, and sentiment and risk appetite has shifted negatively. Most importantly, the availability of credit is set to take a turn for the worse as lenders tighten credit standards.

This is all great news for renters and buyers who are patient. Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the U.S. housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ½ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.
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Housing was an asset bubble influenced by bullish sentiment, robust risk appetite and speculation, lack of fundamental analysis, cheap money, inflated appraisals and easy lending standards. These factors helped to drive housing prices up to new levels and the unwinding of these conditions is expected to drive housing prices down. Never before have we witnessed so many people lever-up real estate with so little money down or “skin in the game.” This growth in mortgage debt and risk appetite helped fuel consumer spending and corporate profits. As such, the unwinding of this bubble will have broad consequences for the overall economy.

As the housing bubble unwinds, what are the implications for the overall economy and credit spreads? The U.S. economy will likely experience sub-par economic growth for the next year as declining housing prices lead to weaker consumer spending, slower corporate profit growth, a decline in business investment and less job creation. This environment favors reducing credit risk, especially to cyclical industries and lower-quality sectors of the market. As lending standards tighten and risk appetite turns more conservative, housing prices are likely to face a further leg down.

What’s the big picture? Declining housing prices will lead to a pullback in job creation and a sharp slowdown in corporate profit growth, causing the Fed to lower short-term interest rates by the end of this year. Despite lower short-term rates, mortgage rates may not follow downward, because more cautious lenders will charge higher spreads relative to Treasuries. In addition, credit spreads should widen as consumers rein in their risk appetite for housing and investors turn more cautious on the outlook for the U.S. economy. We will now turn to an analysis of the supply and demand factors influencing housing. These factors should help to illuminate the future path of housing prices over the next year.

Posted in Housing Bubble, National Real Estate | 47 Comments

Bailing out borrowers

Posted on April 18, 2007 by grim

From Reuters:

Subprime summit to propose steps to help borrowers

A Washington summit on Wednesday on how to help troubled subprime mortgage borrowers will end with seven principles to aid borrowers, according to a document prepared for the meeting.

Mortgage servicers should seek to modify the terms of subprime loans before the interest rates are reset higher and set aside dedicated resources and staff to help those borrowers, according to the document obtained by Reuters.

Fannie Mae and Freddie Mac should work with lenders to make credit available to borrowers who have trouble refinancing out of subprime loans, the document also states.

Another principle calls for servicers to make early contact with subprime borrowers with adjustable-rate mortgages to determine if they qualify for a more stable loan, according to the document.

The goal of Wednesday’s summit is to “maximize the number of homeowners who are able to stay in their homes who would otherwise be threatened with default and foreclosure as subprime hybrid ARMs reset, resulting in significant payment shocks,” according to a statement that will accompany the principles.

From Bloomberg:

U.S. Foreclosure Filings Rise 47 Percent in March

Banks began foreclosure proceedings against 47 percent more U.S. homeowners last month compared with a year ago as falling housing prices made it more difficult for borrowers to refinance mortgages.

More than 149,000 filings were posted in March, the highest number since RealtyTrac Inc. began collecting data in January 2005, the Irvine, California-based research company said today in a statement. California filings rose to 31,434, more than triple the number a year ago. Nevada and Colorado had the largest percentage gains.

The number of owners making late payments on mortgages is at a four-year high and the failure or sale of 50 subprime mortgage companies has tightened the supply of money for lending. The National Association of Realtors is forecasting that the median price of a home will fall 0.7 percent this year to $220,300.

“Foreclosure activity shifted into a higher gear in the first two months of 2007, and March’s numbers continued that trend,” James Saccacio, chief executive officer of RealtyTrac, said in the statement. “Last year we saw a surge in foreclosures in the first quarter followed by a leveling off through the second and third quarters.”

Foreclosure filings in March rose 7 percent from those in February, RealtyTrac said.

(Edit: The original post, below, has been removed.)

From the Online Journal:

Trouble in Squanderville

Posted in Housing Bubble, National Real Estate | 67 Comments

Luxury home prices slide

Posted on April 18, 2007 by grim

From Bloomberg:

Luxury Home Prices Fall in New York’s Long Island

Luxury home prices slid in New York’s Long Island and Queens in the first quarter as more property came onto the market and took longer to sell, appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said.

The median sales price fell 5.3 percent to $900,000 from a year earlier and houses took 25 percent more time to lure a buyer, the companies said today in a report. An oversupply of expensive houses for sale is reducing demand, said Jonathan Miller, president of New York-based Miller Samuel, in an interview.

“You’re just not seeing the demand level that you had been seeing in prior years,” Miller said. “You just reached a saturation point to what the economy could support.”

The decline in the luxury market in these areas outside Manhattan mirrors a drop in prices across the U.S. In Manhattan, the most expensive urban real estate market in the U.S., the median apartment price rose 1.2 percent in the first quarter to $835,000, the smallest quarterly gain in five years, Miller Samuel and New York-based Prudential said on April 3.
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In the first quarter, it took owners 121 days to sell their homes, compared with 97 days a year earlier, a sign demand has weakened.

The median sale price of a condominium dropped 4 percent to $240,000, Miller Samuel and Prudential said. The total number of condominium sales rose 6.2 percent to 1,312.

The weakness at the high end also hurt the overall housing market on Long Island, which includes the suburbs of Nassau and Suffolk counties, and in Queens, a borough of New York City.

Sales fell 6.4 percent to 7,001 from a year ago and the median sales price slipped less than 1 percent to $437,500. The number of homes for sale jumped 18 percent to 31,954.

“Inventory levels today are double what they were two years ago,” Miller said. “It’s a real issue. What that’s going to do is temper any price appreciation going into the spring market.”

Posted in National Real Estate | 1 Comment

School board and budget results

Posted on April 18, 2007 by grim

From the Record:

Budgets in the black

Tuesday’s school elections produced some surprising results, from squeakers on budget approvals and veteran board members being voted out of office to a power outage that held up counting.

Rochelle Park showed that every vote counts. The $10.1 million budget passed 190-187 at the polls, but absentee ballots still needed to be counted.

And in Maywood, the budget passed with 13 votes, although 15 absentee ballots were still waiting to be counted.

Teaneck’s budget passed after last year’s was the first in eight years to be defeated. Also veteran board member Barbara Ostroth lost her bid for a fifth term, placing fourth in a five way race for three open seats.

The smallest community in Bergen overwhelmingly supported its spending plan. Teterboro voters passed the budget unanimously, 4-0.
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Eileen K. DeBari, secretary of the Bergen County Board of Elections, said the board had managed to count all but a few of about 2,400 absentee ballots before the power outage brought the count to a halt. It was not clear when a final tally would be available.

With 25 of the 74 districts reporting, school budgets in Bergen County were passing overwhelmingly. Tax levies were approved in 24 of the 25 districts.

Passaic County election officials were having technical problems Tuesday night and were unable to disseminate election results quickly.
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Last year, 75 percent of budgets were approved in Bergen County — the second highest in the state. Only 28 percent of spending plans were approved in Passaic County.

About 53 percent of budgets were approved statewide last year, the lowest in 12 years.

From the Cherry Hill Courier Post:

Results on school budgets mixed

South Jersey voters went to the polls Tuesday, approving school budgets in towns like Cherry Hill, Deptford and Mount Laurel, but rejecting spending plans in Washington Township and the Lenape regional district.

Elsewhere, budgets appeared to pass narrowly in Haddon Heights and Medford, both with margins of fewer than 25 votes. South Harrison’s budget was approved in a 184-183 squeaker, according to unofficial results.

Budgets went down by narrow margins in Haddonfield and Evesham, while defeats were lopsided in Waterford and the Black Horse Pike regional district serving Bellmawr, Gloucester Township and Runnemede.

Winslow voters overwhelmingly rejected a budget that would cut 80 jobs, as well as a $3.7 million proposal that would bolster security.

At press time, tri-county voters had approved basic budgets in 64 districts and rejected them in 33.

School administrators fared worst in Camden County, with 21 approvals and 18 rejections. Burlington County had 23 approvals and eight rejections. Gloucester County had 20 approvals and seven rejections. Results were too close to call in at least one school board race.

Posted in Politics, Property Taxes | 8 Comments

Buyer’s market on LI?

Posted on April 18, 2007 by grim

From Newsday:

LI home buyers feeling in control

It’s still a buyer’s market on Long Island but less so in Queens, according to the latest report on housing sales and prices.

Statistics compiled for the real estate brokerage Prudential Douglas Elliman and released today show that housing prices and sales on Long Island slipped in the first quarter, compared with a year ago, while inventories rose. But in Queens, sale prices continued to appreciate.

The data exclude the Hamptons and the North Fork.

The latest findings largely confirm the results of other reports released recently.

Overall in the three counties, the median sale price of a home fell 0.6 percent to $437,500, compared with $440,000 a year ago. The number was buoyed by a 3.8 percent increase in the median home price in Queens to $492,900. But the statistic was pulled down by a 4.2 percent drop in median prices in Nassau, to $460,000, and a 1.8 percent drop in Suffolk, to $385,000.

Rosie West, an associate broker for the real estate firm Re/MAX Action in Freeport, said sales are slowing because sellers are still “overpricing” their homes, and buyers are holding out. “Buyers are in control right now, and they know it,” she said. “They have a lot of homes to choose from.”

In fact, the number of sales declined 6.4 percent in the three-county area, said Prudential, which is based in Huntington. But again, Queens buoyed that number with a 1.2 percent increase. Meanwhile sales declined 3.2 percent in Nassau and 14.7 percent in Suffolk.

As a result, overall listing inventories rose – 17.9 percent from a year earlier, to 31,954 homes. In Nassau they climbed 19 percent, to 9,260 houses. In Suffolk the listings rose 20.1 percent, to 13,424. In Queens the supply of homes listed for sale rose 13.7 percent, to 9,270.

Posted in National Real Estate | 1 Comment

Don’t forget to vote

Posted on April 17, 2007 by grim

From the Home News Tribune:

School vote matters

New Jersey is holding its annual school board elections today, the one moment of the year when voters have a direct say in how their tax dollars are spent and how much they must pay in annual property taxes. Pretty important, right?

It is puzzling then — and more than a bit aggravating — that so few of those who are eligible to go to the polls actually make the trip. Just as strange and sad is that those who skip the election are no doubt the same ones who will complain the loudest when the tax bill arrives. For once, how about those absentee citizens do something about it by taking part?

Here’s why it is crucial. School votes decide not only who sits on boards of education but how much those elected bodies are allowed to spend. Neither’s a small matter.

School board members guide educational policies in the areas of instruction, personnel, administration, and — the one everybody feels — finances. Quality in each of those areas usually translates into quality results in the classroom.

But the rate of capital devoted to those endeavors is vital, too, not just to the interests of students but to the interests of taxpayers. School spending relates directly in many cases to school achievement, but not always. And taxpayers aren’t a bottomless pit. School budgets on average account for more than 70 percent of the local property-tax bill.

And when a budget is defeated by voters, it is left to the local governing body to make cuts. Sometimes members of the local governing body will bypass that responsibility if voter turnout was light, and they’ll leave a budget intact. The not-enough-people-went-to-the-polls excuse is easy to trot out when less than 20 percent of registered voters show up, as is the norm, or less than 10 percent participate, which is fairly common.

Voters shouldn’t give elected officials any room for excuses when a school tab gets defeated. Likewise, the electorate should say it with a shout when a school budget passes. School spending is, after all, the public’s money, and the public’s decision. Don’t forget to vote. Time’s running short. Let’s hustle.

Posted in New Jersey Real Estate, Politics, Property Taxes | 24 Comments

“This is the greatest April storm on record”

Posted on April 17, 2007 by grim

From the Record:

Flooding leaves 2 dead, 1,700 evacuated

Flooding from a fierce spring nor’easter that pummeled North Jersey for a second straight day Monday could get worse before it gets better, forecasters and local officials said.

More than 1,700 people have been evacuated, dams have overflowed and homes have been inundated by feet of rushing water throughout Bergen and Passaic counties. Officials said the flooding is the worst they have seen in two decades, since fierce rains caused hundreds of millions of dollars of damage during a 1984 storm.

Officials blamed the flooding for at least two deaths statewide. And in Mahwah, authorities called off the search Monday night for a woman they fear may have driven off Route 202 and into the Ramapo River.

Meteorologists said the flooding is likely to trump the havoc wreaked by Tropical Storm Floyd, which killed six people as it tore across New Jersey in September 1999. Upstream reservoirs were not as full when Floyd hit, and this storm spread rainfall over a larger area than its infamous predecessor.

“This is the greatest April storm on record,” said David A. Robinson, the official state climatologist.

But to the dismay of a waterlogged state, the worst of the flooding, forecasters said, may be still to come.

Though the heaviest rains should be long gone by late Tuesday afternoon, the Passaic River isn’t expected to crest until tonight into Wednesday morning, meaning flooding could get worse in already inundated areas that line it.

Posted in New Jersey Real Estate | 82 Comments

Most flood claims will be denied

Posted on April 17, 2007 by grim

From the Record:

Insurance claims likely to be denied

Otterstedt Insurance Agency in Englewood Cliffs helped about 100 homeowners file insurance claims Monday, but most of them will likely be denied.

Most of the claims were from people with flooded basements, and the bad news for many of those policyholders is that standard homeowner’s policies will rarely cover such flood damage, said Lydia Bashwiner, Otterstedt’s claims manager.

A typical homeowner’s policy will pay for damage from a tree that blew onto the house, and it will cover broken glass from a storm-tossed lawn chair. But a drowned furnace and water heater in the basement require a policy from the federal government’s flood insurance program.

And homeowners with damage to finished basements probably will not be covered either by their standard homeowner’s policies or their federal flood insurance, Bashwiner said.
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The number of properties in New Jersey with federal flood insurance has risen about 7 percent in the past year to more than 215,000, said Rachael Moore, director of the Insurance Council of New Jersey, a trade association that represents 26 property and casualty insurers.

Posted in General | 3 Comments

Fannie and Freddie to offer rescue loans

Posted on April 17, 2007 by grim

From the Wall Street Journal:

Fannie, Freddie Will Offer Lifelines To Struggling Subprime Borrowers
By DAMIAN PALETTA
April 17, 2007; Page A12

The top executives for mortgage-finance giants Fannie Mae and Freddie Mac plan to unveil alternatives that would help homeowners with subprime loans avoid foreclosure, according to prepared congressional testimony.

Subprime loans are made to borrowers with weak or shaky credit histories. Some subprime adjustable-rate mortgages begin with low “teaser” rates for the first two or three years and then reset to much higher monthly payments.

Fannie Mae Chief Executive Daniel Mudd is expected to tell the House Financial Services Committee today that his company is expanding its products to allow subprime borrowers to refinance out of certain adjustable-rate mortgages with these low, teaser rates.

Mr. Mudd is expected to say that Fannie Mae is adjusting its credit requirements so that more borrowers would qualify for this option.

“Essentially, homeowners facing imminent payment shock will be able to refinance into our loans without first having to clear up unpaid bills on their credit reports,” Mr. Mudd is expected to say.

The government-sponsored enterprise also plans to broaden the number of lenders offering certain subprime assistance products to 2,000 from 500.

Mr. Mudd also plans to say that Fannie Mae will purchase 40-year loans on the secondary market in addition to the more traditional 30-year loans. “This will shave the monthly payment by about 5%, and it will allow many more borrowers to qualify,” Mr. Mudd is expected to say.

Posted in Risky Lending | 13 Comments

Expanding homeownership or predatory lending?

Posted on April 17, 2007 by grim

From USA Today:

Subprime lenders’ big gifts helped lawmakers

The nation’s top subprime lenders, including New Century Financial (NEWC), which has filed for Chapter 11, have lavished generous donations on homeownership programs sponsored by black or Hispanic members of Congress.

The paid sponsorships give lenders an entree to lawmakers and their constituents. Along with New Century, backers include Countrywide Financial (CFC), which settled a New York fair-lending investigation in 2006 by agreeing to compensate black and Latino borrowers for improper loans and set up a $3 million consumer-education program.

Another is Ameriquest Mortgage, which in 2006 agreed to a $295 million settlement with state attorneys general who charged it with improper lending practices.

Minority homeownership rates rose in the past several years. But the Congressional Hispanic Caucus Institute and Congressional Black Caucus Foundation today face an imploding market as subprime mortgages — higher-priced loans to consumers with impaired or scanty credit — go bad at an escalating rate. Federal regulators are tightening up on the lenders. The non-profit groups, founded by lawmakers, run education and outreach programs.

Still, a key lawmaker and caucus officials say subprime lenders remain important options. About 50% of black and Hispanic borrowers used subprime loans in 2005, compared with 17% of whites.
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The minority organizations aren’t the only recipients of subprime lenders’ largess. The industry contributes to other non-profit housing groups and lawmakers.

Posted in Risky Lending | 1 Comment

Bankruptcy no longer an option?

Posted on April 17, 2007 by grim

From the Philly Inquirer:

Filings for bankruptcy decline 70 percent

Bankruptcy filings plunged 70 percent last year after changes to federal rules made it more expensive and burdensome to file for protection from creditors.
The Administrative Office of the United States Courts reported yesterday that federal bankruptcy cases fell to 617,600 last year from 2.1 million in 2005, when debtors rushed to file under the old rules.

Last year’s filings were even 62 percent below the nationwide average for 2002 through 2004.

Experts said it was not completely clear why bankruptcy filings had dropped off so sharply.

“We know there is a perception out there that you can’t file bankruptcy anymore,” said Henry J. Sommer, a Philadelphia lawyer and bankruptcy expert who is president of the National Association of Consumer Bankruptcy Attorneys.

Sommer said 90 percent of the people who could file for protection from creditors under Chapter Seven of the bankruptcy code before the law changed could still do so.

Among the changes is a “needs test” of a borrower’s ability to repay at least some debt.

Chapter Seven, the most common form of bankruptcy, provides a financial fresh start, allowing borrowers to walk away from their debts.
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In the Eastern District of Pennsylvania, total filings fell to 8,325 from 29,207. Filings in New Jersey, which has one federal court district for the entire state, dropped to 14,041 from 49,597. In Delaware, which also has one district, filings were down to 1,528 from 4,368.

Posted in Economics, General | 1 Comment

Out of the woods?

Posted on April 16, 2007 by grim

From Investment News, by Bill Gross:

The U.S. housing market’s grim reality

Well, not so fast — at least for some of them, it seems. Home prices, as measured by the Chicago-based National Association of Realtors, have gone down by 2% nationally over the past 15 months, and there’s fear in the air that it could get worse.

It most assuredly will.

The problem with housing, however, is not the frequently heralded increase in subprime delinquencies or defaults. Of course, write-offs, collateralized-debt-obligation price drops and even corporate bankruptcy of subprime-mortgage originators and servicers will not help an already faltering U.S. economy. But foreclosure losses as a percentage of existing loans will be small, and the majority of homeowners have substantial amounts of equity in their homes.

Because this is the reality of the U.S. housing market, analysts and pundits now claim we’re out of the woods: The subprime crisis is or has been isolated and identified for what it is — a small part of the U.S. economy.

It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that, in part, are a result of those losses. To a certain extent, this reluctance to extend credit is a typical response to end-of-cycle exuberance run amok. And if one had to measure this cycle’s exuberance on a scale of 1-10, double-digits would be the overwhelming vote.
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No one really knows the amount that homes must fall in order to balance supply and demand, nor the time it will take to do so, but if one had to hazard a conclusion, it would have to be based in substantial part on affordability statistics that, in turn, depend on financing yields and home price levels in a series of different scenarios as outlined in the accompanying chart.

The chart shows the amount that home prices or mortgage rates (or a combination of the two) need to decline in order to revert back to affordability levels in 2003, a year that might have been the last to be described as a “normal” year for home price appreciation.

Since then, annual gains of 10%-plus have been the rule, whereas average historical estimates provided by Robert Shiller may have suggested something on the order of 4% to 5%. By that measure alone, homes likely are 15% to 20% overvalued (three years x 5%+ annual overpricing).

If mortgage rates don’t come down, home prices need to decline by 20% in order to reach prior affordability levels. If rates do come down, home prices will drop less.

Posted in Housing Bubble, National Real Estate | 97 Comments

Just who is the victim?

Posted on April 16, 2007 by grim

From Bloomberg:

Subprime Mess Produces Unqualified Victims

The story line of the newest American financial debacle is now clear:

President Bill Clinton eased lending standards to encourage the rich people who run the mortgage market to embrace poor people with low credit ratings. Then these horrible rich people — these unfeeling sharks — went to work exploiting the poor.

First, they talked poor people into borrowing money they should never have borrowed. Then they brought in some other sharks to package the loans as bonds, who in turn talked some other only slightly less poor people into buying the bonds. The rich middlemen took their fees and left the poor borrowers and slightly less poor lenders holding the bag.

The moral of the story is also clear: No matter how much the government might try to help the poor, the rich people who run financial markets will find a way to screw them.

At any rate, that’s how it reads to me in the many scandal- tinged accounts of the subprime loan-market collapse. And on its surface the moral is appealing: the story is always better, and easier to write, when the rich guys are the crooks. But this interpretation of current events does raise a few questions. To wit:

1) If the subprime home-loan market was a cynical conspiracy, why did so many of the putative conspirators wind up taking so much of the risk?
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The single biggest collapse in the market has been that of New Century Financial Corp., the second-biggest subprime mortgage lender. When New Century collapsed it owed money to many, but the single biggest creditor, according to the London Times, was…Goldman Sachs Group Inc., followed by Morgan Stanley, Lehman Brothers Holdings Inc., etc., etc.
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2) Why does the most financially obsessed and presumably well-informed character on earth, the American Investor, insist on playing the fool?
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Then they go to the media. From Bloomberg News we learn the sad story of a small investor named Buck Meyer who lost $300,000 when American Business Financial Services tanks. The man has two children! He planned to use the amazingly high interest rates he earned on his American Business Financial Services bonds to pay the mortgage on his own new house in Chattanooga, Tennessee! How could they possibly fail to pay off?

No one suggests that Buck Meyer, in effect, gambled his savings away — that he might as well have grabbed the special offer of a free hotel room and flown to Las Vegas, groped his way to the roulette table, plopped his life savings down on 00, and then sued the casino for losing his money. Then again, the Vegas gambler can’t expect journalists and juries to take his case seriously.
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3) Why in this new drama is it so easy to imagine borrowers in a different role, other than the one in which they are currently cast: The Victim?
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Moving is never pleasant or cheap, but that is the main cost to the subprime defaulter: He hands back the house, whose value has presumably plummeted, to the people who lent the money to buy it, and walks away. He rents. (Shrewdly!) In effect he bought a very cheap call option on the U.S. housing market. While he waited to see if his call option made him richer, he lived in a much nicer house than he could otherwise afford and probably wondered why rich people had become so recklessly open- handed. His behavior was irresponsible, but the markets let him do it and so it’s hard to blame him for taking a flier.

Am I the only one who wonders how a person who borrows money he can’t repay, buys a house he can’t afford, and then stiffs his creditors, is allowed to play the victim?

Posted in Risky Lending | 12 Comments