Here's a link to an AP story that ran over the weekend:
http://m.apnews.com/ap/db_8559/contentdetail.htm?contentguid=FDzGH9Rw
In it, a bunch of people from the government say that we are on "the verge" of coming out of the recession. I can't belive the absurdity of these statements.
The fact that we only losing 550,000 jobs a month instead of 600,000 does not mean that we are on teh right track.
The fact that home prices continue to deteriorate, just not as fast as they were dropping before, does not mean that the Real Estate market has hit bottom. If it starts to rise, it might mean that.
I predicted well over a year ago (check my earlier posts) that the housing market won't hit bottom until 2011. I hope I'm wrong, but I don't think I am. There are still millions of homes in foreclosure that need to go through the system before we come out of this mess.
Before I start to get comments saying that I should be positive and not a "naysayer" I want to say that in this market and this economy, there are millions of people who are thriving. Regardless of the market as a whole or the economy as a whole, there are tremendous opportunities now and always. That is the beauty of our country and capitalism.
A little background is needed to explain what happened.
About a month ago, HUD asked Congress for about $800 million dollars extra to fund possible future shortfalls in the FHA Home Equity Conversion Mortgage (HECM) program. This is the FHA Reverse Mortgage program and the request was based completely on conjecture about how many claims there could be in the future and how much they will cost.
A claim occurs on a Reverse Mortgage when the borrowers pass away or sell the property and the property is worth less than what is owed. Since these loans are insured by FHA, the lender then makes a claim and the government has to make them whole. FHA collects and has collected Billions of dollars in premiums to cover any possible claims and there have been statistically, almost none to date.
Apparently, someone decided that the claims might exceed the collected premiums because of the recent drop in Real Estate values. The problem is that no one knows when these borrowers will die or where the Real Estate market will be when they do.
Yesterday, the House voted to reduce HECM benefits so that there would be no shortfall. Nobody knows how much of a reduction that will mean or what kind of change in the product that will cause. Let's hope the Senate is a little more prudent.
First Reverse, the Reverse Mortgage company that was acquired by Wilmington Savings Fund Society (WSFS) a Delaware Bank in 2008 is being "wound down" because they were still losing money (although much less than last year) and the bank had a bad quarter.
This stinks because (as I had posted earlier) First Reverse was one of only two lenders that were offering the Jumbo Reverse Mortgage loans for properties that were worth over $2 million dollars.
I wonder if some other entity will pick them up.
Congress is discussing extending the $625,500 limit out at least another year (Thank God) but in the same breath lowering how much borrowers can get. This is coming primarily because HUD recently asked Congress for an additional $800 Million because of possible future losses from possible increases in claims.
There was also discussion about increasing the Home Equity Conversion Mortgage (HECM) limit to $729,000. This would be fantastic, but if loan amounts get lowered, it would be tough to determine if we would be better off or not.
I can say without a doubt that almost every piece of recent legislation concerning the mortgage insustry has not come close to accomplishing it's objectives (e.g. Hope for Homeowners, HVCC, etc.) and that it seems clear to me that Congress as a whole does not have a clue as to what is in the best interests of the homeowner or taxpayer.
Who knows where we will end up in October (FHA Fiscal year starts in October) but I hope the legislators are geting the correct information.
I know I've posted a lot about how great Reverse Mortgages are, but the truth is that every situation is different. I have a Reverse Mortgage ready to close and the borrower now wants to explore taking a regular "forward" mortgage. My first instinct was to convince them that a Reverse was better, but the truth is that in this case I just can't figure out what is better for him.
Here is the situation: The Borrower owes about $175,000 on a house worth about $900,000. They can qualify for about $400,000 from a Reverse. They only need about $50,000 right now for some expenses.
Assuming they can qualify for a $400,000 regular mortgage, the borrowers are telling me that they would prefer to take that because as they make payments their equity will grow, as opposed to a Reverse where their equity will decrease.
I analyzed both loans after ten years and this is what I came up with:
With the Reverse, if they only took the $50,000 (plus the $175K to pay off their loan and closing costs) out, after ten years, they would owe about $500,000. I assumed that rates would stay near their historical norms and averaged them about 3% higher than today's.
With the Forward, they would get about $210,000 today, but they would pay almost $270,000 over the ten years in monthly mortgage payments. After ten years they would still owe about $330,000.
I am not sure what is better for them.
Any thoughts would be appreciated
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