Now Mrs. Forts will receive a 1099-C from Fremont for $45,500 and will be required to pay State and Federal taxes on ordinary income.
Had she just gone bankrupt coincident with a foreclosure, she would not be liable for those taxes.
(any REAL tax accountants here who can confirm?)
attorney... has developed a sophisticated model for settling subprime debts with reverse mortgages.
Complex and expensive financial products got us into this mess and by gum they'll get us out.
It sounded trite and flippant the first time I said it but "All your equity are belonging to we" really seems to be modus operandi of the burgeoning workout industry.
I'm still not sure what benefit accrues to IndyMac in this specific story (going from your excerpts as I don't have a sub). They take a risk that a borrower in poor health; diabetes and surgery will die before they can compound enough interest to get the whole house upon her death. Actuarially they look to be riding an asset down to where they get less than if they foreclosed now. I can only conclude that they are sufficiently scared of taking another property into their ever expanding portfolio and taking another hit to their loan performance statistics in the process. Much better to pretend they "successfully" got a non-performing loan off the books and replaced it with a performing product.
Tant, it's still early, let's say we all move our deck chairs over to the sunny side of the ship.
To me one of the most troubling aspects to this housing boom/bust is the fact it is yet another hit to the around 30 year old generation in terms of debt.
From a high level many in this generation realized a high school education wasn't enough and went to college. They took out cheap loans to pay for school, essentially borrowing from future earnings. Then many of them bought into a house when they got their first job, not that is crumbling. At some point people lose the ability service more debt and have to re-trench. Our economy doesn't seem to work well when people aren't willing to spend. Spending has to go down to service the debt. Is the tipping point a 20% loss on a house? Is it $3.00 gas? Is it $4 milk?
Maybe my children's generation will believe in the debt fairy instead of the tooth fairy. They can put a credit card statement under their pillow and when they wake up it is paid off.
This article just shows how maxed out everyone is getting. I bet if you tell children now about the depression and how people would store their savings in a coffee can or under the mattress the most common reply would be "they had a savings account?"
They take a risk that a borrower in poor health; diabetes and surgery will die before they can compound enough interest to get the whole house upon her death.
Wait. The way a reverse mortgage works, what you owe the lender on the death of the borrower (or the sale of the property or the borrower's failure to occupy) is the lesser of the loan amount plus accrued interest or the value of the property.
The only way the lender gets "the whole house" is if the balance of the mortgage is equal to (or more than) the value at the "maturity event."
So if Ms. Forts dies next month, Indy will collect either: the balance plus interest accrued until her death from her heir, or the heir will turn over the deed to Indy. On liquidation of the property, Indy keeps its make-whole amount and the heir gets the rest.
In a case where the borrower dies prematurely, the reverse mortgage lender is just getting an "early" payoff, like any other lender. The loan no longer accrues interest, but then it gets paid back.
The real risk in reverse mortgages is that the borrower outlives the actuarial tables. In that case, what the lender can end up with is "the whole house" and a loan amount much larger than the worth of the whole house.
In this particular situation, Indy is lending at a very low LTV (courtesy of Fremont).
Robert, there isn't any more detail in the piece than what I quoted. Here's how it works:
Fremont has a first lien on Ms. Forts' house for what I guess is around 90% of value. (I'm basing that on a number I backed into from the reverse mortgage amount given, guessing at value by means of what a reverse lender is willing to lend. I could be off here.)
Ms. Forts cannot afford to keep up the payments on the Fremont loan. Fremont began FC proceedings. Meanwhile, someone found a reverse mortgage for Ms. Forts that will generate $61,000. That is being used to pay off Fremont, so now IndyMac (the reverse lender) has a first lien on the property for $61,000, which will grow over time as interest accrues but no payments are made.
Fremont accepted a payoff of $61,000 for a $106,500 loan. That tells you that, with expenses, Fremont didn't think it could recover more than $61,000 by foreclosing.
So Fremont's lien is now wiped out. Ms. Forts owes only IndyMac. Over time, the reverse mortgage balance will grow; I can't tell you how fast because we didn't get the interest rate on the reverse mortgage. But I suspect that the reverse mortgage balance will get up to $106,500 within an actuarially normal lifetime for Ms. Forts. (She's probably not "actuarially normal" given her health problems, but no reverse mortgage lender I know of uses anything but standard tables based on age, not specific medical history.)
The reverse mortgage balance could at any point in time exceed the home value. But that's true (as we've seen) in a forward mortgage, as well.
Yesterday, Robert Shiller predicted home prices could fall for another five years. There's a good chance that this generation just saw the peak in home prices for their lifetime, certainly in real terms. I wonder how big the secondary market is for the debt created by reverse mortgages?
I would think future value would be difficult price, even in a normal market of steady appreciation. Someone holds the risk of needing to liquidate an unknown amount of real estate at an unknown date. In the present circumstances, the risks would be huge.
lama - I am an Enrolled Agent, not a REAL tax accountant. Yes, Ms. Forts will receive a 1099-C, but it is unlikely Ms. Forts will have to pay capital gains tax on the forgiven amount. I don't remember the exact language right now, but she will show an inability to pay and the gains tax will be forgiven. This was true, even before the most recent legislation.
the home value has to be WAY above 106,000 in order to secure a $61,000 lump sum reverse mortgage payout.
the normal mortality for a 62 year old female is around 20 years and even at an low implied interest rate the $61,000 will compound to double that amount in 10 years or less
I would estimate it would take a house closer in value to $500,000 to arrive at the $61,000 lump sum payment -- and then there are the currently very high fees built into reverse mortgage closing cost to consider.
funny, the WSJ article doesn't seem to mention any of this--almost implying there is hope for the current average homeowner with little or no equity in their house to consider this strategy.
So my guess is that this is a good loan for Indymac, if all the facts were known, maybe there is more in the WSJ article? (I am not a subscriber.)
using a reverse mortgage to take out an existing home equity or first mortgage is a legit strategy in retirment planning, but currently the payouts are generally not all that attractive for the borrower and need to be approached with great caution.
Does it matter to you? Maybe she paid for doctor bills. Maybe the 2006 loan was a rate/term refi. You are not told here how much (if any) of that $106,500 loan was cash-out.
Who in their right mind make a $106K 30 year loan to a 62 year old women?
Someone who does not go to jail is who. It is illegal in this country to refuse to make a mortgage loan to someone based on age or gender.
What do you suggest, forcing people over 60 to get loans with 10-year amortization, that create unaffordable payments? There's no reason not to make 30-year loans to these folks. It's not like the lender can't foreclose against the heirs if need be.
Then someone loaned her a further $60K a year later, after it became obvious she would NOT be able to work to bring in additional money?
No, someone did not loan her a "further $60K." Indy lent her $61,000 and that money was used to pay off Fremont (who wrote off the rest of the original $106,500). She owes today only $61,000.
"Now Mrs. Forts will receive a 1099-C from Fremont for $45,500 and will be required to pay State and Federal taxes on ordinary income."
To the extent she was insolvent immediately prior to the relief it is not income. Given that her only income is social security and the house is probably worth quite a bit less than the debt, the actual reportable income is likely to be far less.
would estimate it would take a house closer in value to $500,000 to arrive at the $61,000 lump sum payment -- and then there are the currently very high fees built into reverse mortgage closing cost to consider.
There is no earthly way this house is worth $500,000. Fremont would have foreclosed in that case.
Check the FHA HECM calculations (I suspect this is what she got).
Actually, I went to IndyMac's reverse mortgage calculator, and got a max loan amount of around $61,000 with a stated value of $120,000.
Bob - about Shiller predicting another 5 years of "real" home price decline, looking at the trend line from previous, nominal prices could be flat for that five years, and considering the depreciation of the structure during that time, its not all bad.
This is my 3rd housing "bust". Had I stayed in my first home, wether buying it at the top or bottom of the early 80s problem, my payments would be less than my grocery bill, my property taxes less than a restuarant dinner.
On liquidation of the property, Indy keeps its make-whole amount and the heir gets the rest.
Okay, I get it now. I didn't comprehend the firewall between Fremont and IndyMac. Fremont takes the entire hit and IndyMac takes the entire risk going forward. Interesting that you report reverse mortgages are not health specific to the borrower.
Sounds like $61k for Fremont's $106k loan is a combination of reputation preservation and straight loss analysis.
Also at age 62 she probably has some unpaid medical bills incurred before medicare eligibility, that puts her deeper into the insolvency hole ... for every dollar in the hole, one dollar of COD income is negated.
This business of "taking less money than the house may be worth" (as opposed to "taking less than the loan amount") may just be sloppy phraseology, but I think it's kind of sypmtomatic of how hard it really is for some folks to shed the assumptions of the Boom.
That sort of thinking is still pervasive.
Personally, I've decided that owning my house free and clear will consitute my "long term care" insurance. Hopefully when I'm too infirm to live there, I can sell it to pay for the average 6months-1 year of nursing home care I'll need at the end of my life.
Rich - I don't know about banking law - but - for tax purposes - if you move from a house which is a primary residence to a nursing home - the house remains a primary residence for purposes of computing capital gains if and when you sell it.
Jim A - At least in the nursing home where my FIL spent the last years of his life - the average length of stay for long term care residents before death is now approximately 24 months (although there are of course great variations). The place has been here for 60 years - so I think the administrators have pretty good data. The CEO thinks we could solve a lot of long term care problems by having mandatory LTC insurance - like social security or medicare - if everyone did more statistical work on the financial issues.
I just can't see how this makes sense. If the house is worth ~61k how did she get a reverse mortgage? If the house is worth ~105k why did Freemont accept so little? If the difference between the sale price and anticipated returns from a FC are so high, why has 20% been the traditional downpayment? Somebody is signing up to be voluntarily screwed, I'm just not sure who it is.
What a house is "worth" is dependent on a great many things. And foreclosures have a way of making houses worth less.
Just like used cars have three different prices quoted in most price guides. Kelly quotes a retail price, a wholesale price and a private seller price.
So, identical vehicles are "worth" $15,000 (sitting on a lot with balloons and free hot dogs), or "worth" $12,500 (sitting on someone's front lawn), or "worth" $10,000 at the auction block.
Same goes for houses. If you are Fremont, you are looking at a "worth" closer to "wholesale", and mandatory repair expenses plus liability risk when owning an REO, and then factor in the the time value of money. So yeah, $61k in hand might beat $70k in the bush.
Justin,The new lender will certainly want an appraisal,while the lender holding the current note will probably settle for a BPO or Brokers Price Opinion.
just can't see how this makes sense. If the house is worth ~61k how did she get a reverse mortgage? If the house is worth ~105k why did Freemont accept so little?
The article does not tell us what IndyMac thought the appraised value is. So it's all guesswork.
We know it is way more than $61,000. Remember that a reverse mortgage lender is going to approach value slightly differently than a lender facing foreclosure on a home would.
Fremont (the FCing lender) would care only about a broker price opinion for the next 90-120 days. That's because if Fremont FCs, they'll need to dump that REO as quickly as possible. Given the payment quoted in the article, it looks like the Fremont loan carries an interest rate of 10% or so. That means that every month that REO sits there, a lot more interest racks up that Fremont owes to the investor on this loan. (We don't know if this is a Fremont portfolio loan or securitized, with Fremont as the servicer.) Given the facts we know, it's quite likely that the attorney involved hinted to Fremont that there was probably a prima facie case for predation on the original loan (it was made knowing that the borrower couldn't handle the payments and with a grotesque interest rate). That might also motivate Fremont to settle.
Reverse mortgage lenders, by contrast, are precisely dealing with a borrower with no intention of selling in the near term. That's the whole idea of these loans. So a reverse lender will look at appraised value with longer-term assumptions for appreciation, market activity, listing time, etc. than a foreclosing lender would.
In other words, IndyMac used an "appraised value," but Fremont was in the position only to use a "current firesale price opinion." That will account for the difference here between what Indy is willing to lend and what Fremont is willing to take.
The old 20% down was never a guarantee that losses couldn't exceed 20%. It had as much to do with motivating the borrower (putting "skin in the game") to pay as it did reducing the lender's loss exposure. 80% LTV loans can have the same loss severity as 100% loans, but since they have much lower loss frequency, they are much safer.
I wonder whether Fremont has so many potential forecloures on its books that it's willing to settle for anything that's even half-reasonable so long as it doesn't consume even more staff time.
if you move from a house which is a primary residence to a nursing home - the house remains a primary residence for purposes of computing capital gains if and when you sell it.
Reverse mortgages are in fact different. I was looking at one of these for my mom, but $20,000 in startup-fees and any money draw compounding at 7% turned me off, quick.
I wonder whether Fremont has so many potential forecloures on its books that it's willing to settle for anything that's even half-reasonable so long as it doesn't consume even more staff time.
That's quite possibly the case, although I note that per the WSJ the deal got struck the day before the FC sale was scheduled. That implies that Fremont had already done quite a bit of FC process work on this loan. I suspect their concern was property management, not FC.
It is a GA case, and GA is notorious for having very short FC timeframes. So the FC may not actually have been going on for all that long.
The CEO thinks we could solve a lot of long term care problems by having mandatory LTC insurance - like social security or medicare - if everyone did more statistical work on the financial issues.
That and better hospice options like where my mom spent her last few weeks - while there I met a lady who opted to live in the hospice long term instead of a nursing home.
The lady we met (lets call her Betty) fully understood that the hospice was not going to perform heroic measures to extend her life - just make her comfortable for a small fee (small compared to a nursing home - about the cost per day of an inexpensive hotel). Betty was all for that - she was a semi-invalid but still capable of brining her wine cellar with her (and shared with us as our mom passed). You wanted to learn the ins and outs of the hospice - ask Betty.
Betty btw could quite easily afford nursing home care - tells you something that she considered nursing homes more depressing than a hospice where people go to TRY to die.
It was an interesting alternative to the more usual death industrial complex.
I came to the best place I know to ask a very serious question and get feedback. I'll try to keep my wild idea short...maybe not so wild, maybe practical.
My wife and I bought our house in 2000 for around 240k (first home) placing 10% down. A few years later with extra p+i pymts and housing appreciation we hit the 20% equity mark sometime in 2003.
We live in nice suburb of Michigan - housing is really getting bad. It's hard to tell but similar houses are going for what mine would of been worth 5 years ago. A short sale just went up down the street on a similar home for 30k less then what we pd back in 2000, were shocked.
Bottom line: Cash flow is no issue for us as we are 2 wage earners and I own a biz but it looks like all of our equity has been evaportated and if we go on the short sale we may be upside down. Just incredible as we are better off than most, didn't over pay and have been paying extra on our mortg.
My wife approached me as told me we should sell now "IF WE CAN" and go rent. Our fear is another 10% housing price drop. If that happened we may never be able to leave our home and we are a growing family who was looking to trade up in the near future.
The question is...Should we look to get out and rent. Selling our current home may be an issue but so is facing another 10% price drop in next 12 months.
That character is a doppelgänger of the VP of Fremont's default admin unit. I can't even hear 'Fremont' without thinking of him.
I remember looking at a Fremont investor powerpoint show early this year, just before the shit hit the fan generally and also just before the C&D.
They pointed out that Fremont-issued securities performed better than non-Fremont-issued securities. This was supposed to get investors on board.
What it meant, actually, if you looked at the slides, was that securities Fremont serviced for someone else had much higher delinquency rates than securities Fremont serviced for itself. Apparently nobody at Fremont noticed the implications of self-dealing or adverse selection in pointing out that Fremont was a great servicer as long as its own ass was on the hook, and not so much if someone else's was.
It did occur to me when I read this WSJ article that the old loan might be Fremont-serviced but not Fremont-owned. Is this kind of a big hit for a short refi? Yep. Will the end investor ever know that? I for one wouldn't put it past Fremont to offer the end investor whatever kind of calculations necessary to just make the problem go away.
Itsme - do you look at your home as an investment or lifestyle choice? That's question #1 to ask.
My sis lived in Grosse Point Farms for about a decade. I have another sis who lives in Ann Arbor - so I know the market. It isn't a good investment market and hasn't been since 'Motown' was hot.
Itsme - I agree with Dryfly - and would add that I think it's too late to sell - and too early to buy. FWIW - my BIL lives in a modest neighborhood in Brighton. He has been in the same somewhat small house since the kids were born - and now they're grown up and gone. If there isn't anything wrong with your house -and you can aford it - I'd be inclined to stay put.
My wife approached me as told me we should sell now "IF WE CAN" and go rent. Our fear is another 10% housing price drop. If that happened we may never be able to leave our home and we are a growing family who was looking to trade up in the near future.
Just how do you think you might "trade up in the near future" if you sold short today? A short sale will appear on your credit report as "settled for less," which will not help you get cheap financing in the future. Even without that credit ding, what funds are you going to use to make a down payment on a "trade up" home, when you have nothing to trade with?
Are you saying that you think renting would be so much more inexpensive than your current mortgage payment that you would "save back" your "equity" out of current income?
I don't give people advice about things like this. I simply don't understand your reasoning. You seem to be saying that, today, you could not sell your house for enough to have any proceeds at all left after paying off the lender (in fact, you might be short). You are worried about being even shorter next year.
If you sell for zero after-payoff proceeds today, you will have $0. If you sell for zero after-payoff proceeds next year, you will have $0. Once you're upside down, the lender has a problem with timing, but why do you? You are not going to get any proceeds unless and until the value of your home recovers and goes back to 2003 levels.
Just how do you think you might "trade up in the near future" if you sold short today? A short sale will appear on your credit report as "settled for less," which will not help you get cheap financing in the future. Even without that credit ding, what funds are you going to use to make a down payment on a "trade up" home, when you have nothing to trade with?
We did want to trade up but understand this isn't the time. Second, we don't know that we would be selling short. A short sale did go up but that was a forced sale, is our house based on the value of the short sale or on other homes up for sale that are being offered for about 20k more than what we bought?
We have enough funds in the bank but I would stress that we would RENT not Buy if we were lucky enough to sell at anything above our cost basis.
I guess the answer comes down to what the heck is our house worth.
Bottom Line: If our house is still worth more than what we paid we are thinking of getting out now and renting. If we wait and prices drop 10% more than we will go upside down.
If we are upside down now we may be stuck unless we are willing to pony up the difference which in that case might make sense to stay put.
Does this make sense?
By the way, if with our resources, good income and strong balance sheet are facing this than many others here and elsewhere must be in the same predictiment. I mean I bought my home 7 yrs ago, 10% down and pd extra on it and to think the value is gonna be less than our cost base? Crazy.
The question is...Should we look to get out and rent. Selling our current home may be an issue but so is facing another 10% price drop in next 12 months.
itsMe
You can hedge by using put options on Housing futures based on the Case-Shiller index for the Chicago metro area:
You have to have a view on the decline percentage though and whether its worth the decaying time value cost. You have to do the math too of course.
Issues of liquidity and the resulting(?) large spreads on bid/ask matter of course.
For me, in the Denver area with a 1.7% YoY decline it wouldn't have been worth it. As I recall when I did the math last year, I needed a 4% YoY decline or better for it to be worthwhile and I didn't think we'd get there.
A short sale did go up but that was a forced sale, is our house based on the value of the short sale or on other homes up for sale that are being offered for about 20k more than what we bought?
The sales price of your home is based on what you can get a buyer to offer.
What percent of that offer a buyer might be able to finance will be based on the appraised value of the property, which will have much less to do with homes that are being "offered" for 20K more and much more to do with homes that were actually sold for less. Your neighbors could be asking for $500,000 more for all a list price matters. No appraiser will care unless they get it.
If your home is located in a subdivision in which more than a few nearly identical homes are being listed, right now, for $20K more than what you originally paid for your home, and you also wish to sell, you will either 1) list at the same price as your neighbors, and wait along with them for a buyer to come along or 2) list for less than that, and snap up any buyer there might be out there.
If you can find a realtor willing to risk wasting time, why not list your house at the price you want, and see what happens? The worst thing that can happen (if you list low) is that you'll piss off your neighbors.
itsme: If you have no problem making the payments, what conceivable reason would you lender have to agree to a short sale? The REASON lenders agree to short sales is that they're more efficient (although harder to ensure an arms length maximum price) than a foreclosure. If there's no chance of foreclosure, there's no reason for the lender to agree to a short sale.
I think some people might be a bit confused about the concept of a short sale.
It is, by definition, the best price the market will bear in any near-term exposure timeframe.
No lender ever accepts a short sale if it has reason to believe that there is a better offer out there in a reasonable time frame (say, six months to a year, depending on how long it takes to FC, evict, and prepare REO to list in a given market).
So the fact that you have a short sale of a comparable property in your neighborhood tells you one of two things: you got a stupid lender (who did not do enough diligence to assure that it got the best offer available) or you got a severe buyer shortage.
The rest of the neighbors can keep listing at any price they want; someone, however, just proved how hard it is to rustle up a buyer at that price.
How is it that denying a 62 year old a 30 year loan is illegal based on their age, yet denying a 30 year old a reverse mortgage is legal?
She's had 40+ working years to save and prepare for retirement. Today's generation is expected to pay $400K+ for a starter home with all the boomers credit card debt and consumer expenditures rolled up into the "value".
I agree with all the points that people have made to my question, it's just a matter of degree. A 40% haircut seems like alot to voluntarily agree to at this early stage of the game. Especially when another lender thinks that there's enough equity to offer a reverse mortgage. Could they be signing up for a bondholder suit by actions designed to avoid a predatory lending suit?
How is it that denying a 62 year old a 30 year loan is illegal based on their age, yet denying a 30 year old a reverse mortgage is legal?
You could make a reverse mortgage to a 30-year old. But the maximum mortgage amount would probably be around $2.00. I'm guessing that most 30-year-olds don't think it's worth it.
A 40% haircut seems like alot to voluntarily agree to at this early stage of the game.
Let's say that Indy got a full standard appraisal (which assumes a balanced RE market, at least 6 months of market exposure, etc. etc.) for $120,000. Even aware that a current price would be lower than that, Indy is only lending $61,000, not $106,500.
Let's say that Fremont, on the other hand, got a BPO for the next 120 days of $100,000.
At 10% interest, every month that loan is outstanding until RE liquidation is another $887.50 in interest. If you assume 6 months interest, plus 7.5% broker commission, plus another 7.5% in property costs (taxes, insurance, maintenance, utilities, management fees; don't forget how much more expensive force-placed insurance is on vacant REO), plus a $10,000 in legal work, inspection fees, eviction costs, default servicing department overhead, whatever, you get a total make-whole amount on projected liquidation of $136,825. If you sell for $100,000, you write off $30,325. If things don't go as planned and you end up taking less than $100,000, or it takes you another 6 months to get $100,000, your write-off is even more. This is, you note, a borrower who does not plan on going quietly. I'm guessing Fremont would have to evict her.
So you can pretty much guarantee a minimum loss of $30k with the risk of more, or you can write off $45,500 and call it done. Certainly what Fremont decides to do is going to be influenced by other potential financial risks, such as a lawsuit over predatory lending or something. The fact that this borrower got an attorney involved undoubtedly acts as a veiled legal threat just because, even if the attorney made no explicit threat to sue. My point is, though, that you don't compare a 40% haircut to no haircut. You compare a 40% done deal today with a best-case future haircut in the neighborhood of 30%.
I find it hard to believe that Fremont really cares about tossing a sick little old lady out onto the curb--they are the sociopaths who made the loan--but as Fremont is under the direct supervision of the FDIC these days, they may have had a regulator leaning on them to make a deal.
You could make a reverse mortgage to a 30-year old. But the maximum mortgage amount would probably be around $2.00. I'm guessing that most 30-year-olds don't think it's worth it.
Tanta | Homepage | 12.27.07 - 1:05 pm | #
There are some folks in the Inland Empire that might take the $2 and be happy about it.
Thanks for the replies from all. I think some are confused at what I am trying to do but Tanta seems to understand.
I am not trying to get my lender to agree to a short sale. This is simply a financial consideration on what is best for my family and balance sheet.
I really do not want to stand idle and watch housing correct further cause the more it corrects the longer I am stuck. Rents are 50% of mortgages and if I can get out now at a gain above cost basis, rent for a few years until rent-own ratio comes back into line I will do very well for me, family and balance sheet.
So in the end Tanta answered the question. List the home at what I want for it and if someone buys it great-go rent if not, except less or watch the bottom fall out, if it falls out.
We did want to trade up but understand this isn't the time. Second, we don't know that we would be selling short. - Itsme
Only one way to find out. Put it on the market with the hundreds of others... you could even try FSBO if a realtor won't sign you (I wouldn't - who needs clients fishing for a price with all the others motivated to sell?).
List the home at what I want for it and if someone buys it great-go rent if not, except less or watch the bottom fall out, if it falls out.
itsMe | 12.27.07 - 1:42 pm | #
One thing about Michigan - it's bottom can't fall far - it's pretty close to zero now. If I moved to Michigan I'd buy now - what the hell, homes all over the Midwest are so cheap they are almost throw aways.
You could make a reverse mortgage to a 30-year old. But the maximum mortgage amount would probably be around $2.00.
I assume this is based on the actuarial assumptions about life expectancy of the 30 year old. In the same regard, it's unlikely that a 60 year old on a fixed income could pay off a 30 year mortgage, even if they do manage to live a good decade longer than average.
dryfly has a point. I think a bottom may have been reached already in Michigan. Check this fixer-upper available for less than 50 cents per sq ft! - whatta bargain!
five gears in reverse
girls looking for the big lift
somebody send out for the night nurse
please don't stick me on the late shift
if you don't know by now
nobody's going to tell you
if you don't know by now
the shock will probably kill you
CHORUS:
and if your patience is exhausted
and you still cannot decide
you're sitting in a garage
contemplating suicide
and you have no motivation
you can't even catch your breath
all the business and celebrations
is driving you to debt
five gears in reverse
you think I don't know what I'm doing
and at a fashionable first
like walking down the road to ruin
but if you're safe and sound
don't let me interrupt you
And if you don't go down
How could I corrupt you
MBA predicts 100% per year growth in RM's as far as the eye can see...baby boomers are just starting to hit their 60's...62 being the min. age for a RM...http://www.livewellfinancial.com/this company has supposedly gone on a hiring spreee the past few months...CFC part II?
In the same regard, it's unlikely that a 60 year old on a fixed income could pay off a 30 year mortgage, even if they do manage to live a good decade longer than average.
It is unlikely that a 60-year-old would pay the loan off in monthly installments.
But since the estate can sell the property to pay off the remaining balance--or the lender can foreclose against the estate if it doesn't do so willingly--the lender still gets repaid.
You seem to be assuming that a lender may not amortize a loan for a longer period than it expects to get installments.
I mean, I guess I could write a loan for a 60-year-old on a 30-year amortization with a 14-year-balloon term, on actuarial expectations that the borrower will kick the bucket at 74, but what's the point? If the borrower does pass on, God just took care of my balloon.
Of course there's a problem with giving an ARM to an elderly borrower on a fixed income, when you know that payment could rise farther than a fixed income could support. No one is advocating doing that. But the original question was why anyone would make a 30-year loan to an older borrower, not why anyone would pretend that a fixed income can rise as fast as an exploding ARM.
The issue with a reverse mortgage, like a forward mortgage, is that you really don't want to let the balance due on the loan exceed the value of the collateral. That's why you can't give a reverse mortgage to a young person: there's too much time involved. Having not enough time to get repaid in installments isn't a problem for the forward mortgage lender.
For heaven's sake, have you not heard of refis? If I can make a 30-year loan to a 30-year-old and that borrower refis in two years, I get my principal back in a lump sum after 2 years. If I make a 30-year loan to a 70-year-old and that borrower dies in two years, I get my principal back in a lump sum after 2 years (plus a few months of probate, during which I earn interest). What's the diff?
itsMe, before this (the RE issue) is over I think a lot of folks are going to find themselves in your position And by that I don't mean the speculators, toxic mortgage holders, those forced to sell for various reasons - death, loss of job, etc.
But so what? If you like your house, your area, the neighbors I'd just stay there especially since you can afford to do so.
I've discussed this with my wife several times over the past year or so. And we both agree that should we ever find ourselves in your situation we aren't going anywhere.
If you are that worried, sure give it a try. But personally, I've got other things more pressing to worry about.
Maybe what I'm missing here regarding the reverse mortgages is what legal rights the banks have once the equity is depleted.
It seems that regardless of borrower age, once the equity position falls to zero (or any pre-determined level) the occupant should be required to come up with cash or turn over the keys/re-finance, much the same as when an option ARM hits the cap the payments recast.
Perhaps calling these mortgages instead of annuities is where the confusion lies.
Another thing to think about if you really want to trade up is that both your house and the one you'll want are both going down, so the differential will be the same and/or actually less as time goes on. IMO the percentage declines will be steeper on higher-priced properties, so you'll be gaining ground on the tradeup even as you lose value overall.
OTOH, it might still be nice to have the extra money from renting, especially with the wife already on board.
Seminole - Thanks for the word that the IRS uses, insolvency. Like you said, when Ms. Forts shows that she was insolvent, which is the word the IRS uses, not bankrupt, she will not be assessed the tax on capital gains due to forgiven debt.
What I find fascinating about this, and the most recent legislation, is that this policy has been in existance before the recent legislation, making the legislation unnecessary, except for those who can afford to pay the cap gains tax on the forgiven debt. The legislation provides no relief for those who could not afford to pay that they did not already have. But is does provide relief for those who could afford to pay the tax and now will not have to pay it.
It seems that regardless of borrower age, once the equity position falls to zero (or any pre-determined level) the occupant should be required to come up with cash or turn over the keys/re-finance, much the same as when an option ARM hits the cap the payments recast.
Mike2, don't take this wrong, but you are confused about a whole lot of things.
The balance cap on an Option ARM has NOTHING to do with LTV. It means that the loan balance cannot exceed a certain percent of the original balance.
If you have a $100,000 OA with a 115% cap, that loan will recast when the balance reaches $115,000.
If it was originally a 50% LTV loan ($200,000 property), it will recast when the balance reaches $115K (57.5% LTV, not that it matters). If it was originally a 75% LTV loan ($133,333 property), it will recast when the balance reaches $115K (86% LTV). If someone was so stupid to originate it at 100% LTV, it will recast at $115K. That is a balance cap.
An OA is a forward mortgage. It is meant to be repaid during its term. The balance cap is the point at which no new principal can be added, and amortizing repayment must commence.
Reverse mortgages have principal limits--a limit to the amount of principal that can be advanced. Once this is reached, no more cash can be extracted. However, since a reverse mortgage is designed not to be repaid in the borrower's lifetime, there is no point at which payments must be made. The point of the principal limit (in conjuction with the actuarial tables used in calculating it) is to reduce the risk that the total balance at the borrower's death (including interest accrued) will exceed the property's value. But nothing can guarantee that won't happen; it's a risk the lender takes.
To force prepayment of a reverse mortgage would entirely defeat the purpose of having them. You can, if you want, be in favor of not having them. But to demand repayment of mortgage loans of any kind as if they were margin loans (depending on changes in the value of the collateral) would totally explode the mortgage and RE market in this country. No mortgage loan product ever known to me personally has ever had after-closing terms that have dog to do with LTV. You set your limits up front the way you do, as a mortgage lender, because you don't get to re-write the loan if the collateral doesn't hold its value.
awgee,
Aww Crap! I wrote bankrupt above. That's wrong. Insolvent means debts exceed assets. She doesn't have to declare bankrupcy, just establish that debts > assets.
Lama regrets the error.
A short sale did go up but that was a forced sale, is our house based on the value of the short sale or on other homes up for sale that are being offered for about 20k more than what we bought?
Forget the wish list prices. Absolutely meaningless in an appraisal. The only thing that counts is what a nearby property sold for and its doesnt matter a damn whether they sold it because they were going into foreclosure or because the decided to move to Alaska. That is the comparable price. PERIOD.
really do not want to stand idle and watch housing correct further cause the more it corrects the longer I am stuck. Rents are 50% of mortgages and if I can get out now at a gain above cost basis, rent for a few years until rent-own ratio comes back into line I will do very well for me, family and balance sheet.
I am a retired lawyer/economist who lives in upper Michigan not the UP but the northern area on Lake Michigan.
If you dont think prices can fall more, you have not been paying attention. If you dont think they will fall more in MI, you definitely have not been paying attention. I've watched the same econoomic deterioration in other states when a long time major manufacturing industry caved.
Rent is 50% less than the mortgage (and then add on taxes and insurance.) That is such a no-brainer on whether to get out from under your house that Im baffled as to why you are even asking.
Sell it IF you can
(1) sell for enough that the mortgage owed is covered and you arent putting more than 1-2 months of the difference between rent-mortgage on the table to get out; and
(2) you have the discipline to put every penny of the difference between rent and your old mortgage in the bank (blowing the savings between rent and mortgage on stuff kind of defeats the purpose.
Everybody here seems to assume Ms. Forts will pay nothing on the new mortgage, just let the interest compound.
If that's the way reverse mortgages work in the US, fine, I accept your logic. They don't necessarily work that way in Australia, and at a rasonable interest rate even a $200/month payment would push out the day of reckoning for that loan a long, long way.
If that's the way reverse mortgages work in the US, fine, I accept your logic.
That is the way they work in the U.S.
They are designed to require no payment from the borrower during his or her lifetime.
If you click through the link in the post to my earlier post on reverse mortgages, there's more info plus links to FHA and Fannie Mae sites about their specific reverse mortgage products.
If Ms. Forts has to go into a long-term care facility temporarily, the bank can take her house, and she will then have no place to go.
The reverse mortgage can be terminated by the lender if it is no longer the borrower's principal residence.
Now Mrs. Forts will receive a 1099-C from Fremont for $45,500 and will be required to pay State and Federal taxes on ordinary income.
Had she just gone bankrupt coincident with a foreclosure, she would not be liable for those taxes.
(any REAL tax accountants here who can confirm?)
attorney... has developed a sophisticated model for settling subprime debts with reverse mortgages.
Complex and expensive financial products got us into this mess and by gum they'll get us out.
It sounded trite and flippant the first time I said it but "All your equity are belonging to we" really seems to be modus operandi of the burgeoning workout industry.
I'm still not sure what benefit accrues to IndyMac in this specific story (going from your excerpts as I don't have a sub). They take a risk that a borrower in poor health; diabetes and surgery will die before they can compound enough interest to get the whole house upon her death. Actuarially they look to be riding an asset down to where they get less than if they foreclosed now. I can only conclude that they are sufficiently scared of taking another property into their ever expanding portfolio and taking another hit to their loan performance statistics in the process. Much better to pretend they "successfully" got a non-performing loan off the books and replaced it with a performing product.
Tant, it's still early, let's say we all move our deck chairs over to the sunny side of the ship.
To me one of the most troubling aspects to this housing boom/bust is the fact it is yet another hit to the around 30 year old generation in terms of debt.
From a high level many in this generation realized a high school education wasn't enough and went to college. They took out cheap loans to pay for school, essentially borrowing from future earnings. Then many of them bought into a house when they got their first job, not that is crumbling. At some point people lose the ability service more debt and have to re-trench. Our economy doesn't seem to work well when people aren't willing to spend. Spending has to go down to service the debt. Is the tipping point a 20% loss on a house? Is it $3.00 gas? Is it $4 milk?
Maybe my children's generation will believe in the debt fairy instead of the tooth fairy. They can put a credit card statement under their pillow and when they wake up it is paid off.
This article just shows how maxed out everyone is getting. I bet if you tell children now about the depression and how people would store their savings in a coffee can or under the mattress the most common reply would be "they had a savings account?"
lama,
You may be right. HR 3648 excludes refinanced mortgages, so she might be liable taxes on the $45,5000 forgiven debt.
I am not an accountant, so I wouldn't know anymore details. I don't even know at what tax rate will be applied for a retiree.
They take a risk that a borrower in poor health; diabetes and surgery will die before they can compound enough interest to get the whole house upon her death.
Wait. The way a reverse mortgage works, what you owe the lender on the death of the borrower (or the sale of the property or the borrower's failure to occupy) is the lesser of the loan amount plus accrued interest or the value of the property.
The only way the lender gets "the whole house" is if the balance of the mortgage is equal to (or more than) the value at the "maturity event."
So if Ms. Forts dies next month, Indy will collect either: the balance plus interest accrued until her death from her heir, or the heir will turn over the deed to Indy. On liquidation of the property, Indy keeps its make-whole amount and the heir gets the rest.
In a case where the borrower dies prematurely, the reverse mortgage lender is just getting an "early" payoff, like any other lender. The loan no longer accrues interest, but then it gets paid back.
The real risk in reverse mortgages is that the borrower outlives the actuarial tables. In that case, what the lender can end up with is "the whole house" and a loan amount much larger than the worth of the whole house.
In this particular situation, Indy is lending at a very low LTV (courtesy of Fremont).
It says a lot about Fremont's estimate of loss severity that they took the money and ran.
It may also say something about their lack of desire to be seen throwing another old lady on the street.
Panicker,
I just checked. I was right for once.
OT sorry, very ugly jobless claims trend
http://www.nasdaq.com/econoday/reports/US/EN/New_York/jobless_claims/year/2007/weekly/52/chart.gif
Robert, there isn't any more detail in the piece than what I quoted. Here's how it works:
Fremont has a first lien on Ms. Forts' house for what I guess is around 90% of value. (I'm basing that on a number I backed into from the reverse mortgage amount given, guessing at value by means of what a reverse lender is willing to lend. I could be off here.)
Ms. Forts cannot afford to keep up the payments on the Fremont loan. Fremont began FC proceedings. Meanwhile, someone found a reverse mortgage for Ms. Forts that will generate $61,000. That is being used to pay off Fremont, so now IndyMac (the reverse lender) has a first lien on the property for $61,000, which will grow over time as interest accrues but no payments are made.
Fremont accepted a payoff of $61,000 for a $106,500 loan. That tells you that, with expenses, Fremont didn't think it could recover more than $61,000 by foreclosing.
So Fremont's lien is now wiped out. Ms. Forts owes only IndyMac. Over time, the reverse mortgage balance will grow; I can't tell you how fast because we didn't get the interest rate on the reverse mortgage. But I suspect that the reverse mortgage balance will get up to $106,500 within an actuarially normal lifetime for Ms. Forts. (She's probably not "actuarially normal" given her health problems, but no reverse mortgage lender I know of uses anything but standard tables based on age, not specific medical history.)
The reverse mortgage balance could at any point in time exceed the home value. But that's true (as we've seen) in a forward mortgage, as well.
Yesterday, Robert Shiller predicted home prices could fall for another five years. There's a good chance that this generation just saw the peak in home prices for their lifetime, certainly in real terms. I wonder how big the secondary market is for the debt created by reverse mortgages?
I would think future value would be difficult price, even in a normal market of steady appreciation. Someone holds the risk of needing to liquidate an unknown amount of real estate at an unknown date. In the present circumstances, the risks would be huge.
She took out a $106K in 2006.
Ermm...what did she do with the money?
Who in their right mind make a $106K 30 year loan to a 62 year old women?
Then someone loaned her a further $60K a year later, after it became obvious she would NOT be able to work to bring in additional money?
This scenario makes my brain hurt. Yep, smooth sailing past the iceberg.
Cheers,
Sorry that the WSJ is becoming only a primer for the future MBA set.
Many of their reporters are just too limited in their understanding of financial matters, especially something as simple as mortgages.
Maybe when Rupert adds the girls to the cover, I'll renew!
julieng,
Did you happen to catch continuing claims?
lama - I am an Enrolled Agent, not a REAL tax accountant. Yes, Ms. Forts will receive a 1099-C, but it is unlikely Ms. Forts will have to pay capital gains tax on the forgiven amount. I don't remember the exact language right now, but she will show an inability to pay and the gains tax will be forgiven. This was true, even before the most recent legislation.
the home value has to be WAY above 106,000 in order to secure a $61,000 lump sum reverse mortgage payout.
the normal mortality for a 62 year old female is around 20 years and even at an low implied interest rate the $61,000 will compound to double that amount in 10 years or less
I would estimate it would take a house closer in value to $500,000 to arrive at the $61,000 lump sum payment -- and then there are the currently very high fees built into reverse mortgage closing cost to consider.
funny, the WSJ article doesn't seem to mention any of this--almost implying there is hope for the current average homeowner with little or no equity in their house to consider this strategy.
So my guess is that this is a good loan for Indymac, if all the facts were known, maybe there is more in the WSJ article? (I am not a subscriber.)
using a reverse mortgage to take out an existing home equity or first mortgage is a legit strategy in retirment planning, but currently the payouts are generally not all that attractive for the borrower and need to be approached with great caution.
Love your blog guys.
She took out a $106K in 2006.
Ermm...what did she do with the money?
Does it matter to you? Maybe she paid for doctor bills. Maybe the 2006 loan was a rate/term refi. You are not told here how much (if any) of that $106,500 loan was cash-out.
Who in their right mind make a $106K 30 year loan to a 62 year old women?
Someone who does not go to jail is who. It is illegal in this country to refuse to make a mortgage loan to someone based on age or gender.
What do you suggest, forcing people over 60 to get loans with 10-year amortization, that create unaffordable payments? There's no reason not to make 30-year loans to these folks. It's not like the lender can't foreclose against the heirs if need be.
Then someone loaned her a further $60K a year later, after it became obvious she would NOT be able to work to bring in additional money?
No, someone did not loan her a "further $60K." Indy lent her $61,000 and that money was used to pay off Fremont (who wrote off the rest of the original $106,500). She owes today only $61,000.
"Now Mrs. Forts will receive a 1099-C from Fremont for $45,500 and will be required to pay State and Federal taxes on ordinary income."
To the extent she was insolvent immediately prior to the relief it is not income. Given that her only income is social security and the house is probably worth quite a bit less than the debt, the actual reportable income is likely to be far less.
would estimate it would take a house closer in value to $500,000 to arrive at the $61,000 lump sum payment -- and then there are the currently very high fees built into reverse mortgage closing cost to consider.
There is no earthly way this house is worth $500,000. Fremont would have foreclosed in that case.
Check the FHA HECM calculations (I suspect this is what she got).
Actually, I went to IndyMac's reverse mortgage calculator, and got a max loan amount of around $61,000 with a stated value of $120,000.
Bob - about Shiller predicting another 5 years of "real" home price decline, looking at the trend line from previous, nominal prices could be flat for that five years, and considering the depreciation of the structure during that time, its not all bad.
This is my 3rd housing "bust". Had I stayed in my first home, wether buying it at the top or bottom of the early 80s problem, my payments would be less than my grocery bill, my property taxes less than a restuarant dinner.
On liquidation of the property, Indy keeps its make-whole amount and the heir gets the rest.
Okay, I get it now. I didn't comprehend the firewall between Fremont and IndyMac. Fremont takes the entire hit and IndyMac takes the entire risk going forward. Interesting that you report reverse mortgages are not health specific to the borrower.
Sounds like $61k for Fremont's $106k loan is a combination of reputation preservation and straight loss analysis.
Also at age 62 she probably has some unpaid medical bills incurred before medicare eligibility, that puts her deeper into the insolvency hole ... for every dollar in the hole, one dollar of COD income is negated.
anything but standard tables based on age, not specific medical history.
Well, technically: age and gender. You know, Tanta will outlive us d00ds.
I didn't comprehend the firewall between Fremont and IndyMac.
It's not a "firewall" between two lenders.
It's a short refi.
In a full refi, Indy would have lent $106,500 and Fremont would have been paid $106,500.
In a short refi, Fremont "settles for less," just as it does in a short sale.
Fremont has no reputation left to defend. My guess is that this was strictly a loss calculation.
This business of "taking less money than the house may be worth" (as opposed to "taking less than the loan amount") may just be sloppy phraseology, but I think it's kind of sypmtomatic of how hard it really is for some folks to shed the assumptions of the Boom.
That sort of thinking is still pervasive.
Personally, I've decided that owning my house free and clear will consitute my "long term care" insurance. Hopefully when I'm too infirm to live there, I can sell it to pay for the average 6months-1 year of nursing home care I'll need at the end of my life.
Someone who does not go to jail is who.
LOL! I was going to respond to that, but sometimes it's better to just sit back and watch 'La Maestra' do her thing.
Rich - I don't know about banking law - but - for tax purposes - if you move from a house which is a primary residence to a nursing home - the house remains a primary residence for purposes of computing capital gains if and when you sell it.
Jim A - At least in the nursing home where my FIL spent the last years of his life - the average length of stay for long term care residents before death is now approximately 24 months (although there are of course great variations). The place has been here for 60 years - so I think the administrators have pretty good data. The CEO thinks we could solve a lot of long term care problems by having mandatory LTC insurance - like social security or medicare - if everyone did more statistical work on the financial issues.
I just can't see how this makes sense. If the house is worth ~61k how did she get a reverse mortgage? If the house is worth ~105k why did Freemont accept so little? If the difference between the sale price and anticipated returns from a FC are so high, why has 20% been the traditional downpayment? Somebody is signing up to be voluntarily screwed, I'm just not sure who it is.
jim a =
What a house is "worth" is dependent on a great many things. And foreclosures have a way of making houses worth less.
Just like used cars have three different prices quoted in most price guides. Kelly quotes a retail price, a wholesale price and a private seller price.
So, identical vehicles are "worth" $15,000 (sitting on a lot with balloons and free hot dogs), or "worth" $12,500 (sitting on someone's front lawn), or "worth" $10,000 at the auction block.
Same goes for houses. If you are Fremont, you are looking at a "worth" closer to "wholesale", and mandatory repair expenses plus liability risk when owning an REO, and then factor in the the time value of money. So yeah, $61k in hand might beat $70k in the bush.
Tanta (or anyone else who might know the answer):
Do you know if appraisals are required for Short Sales?
I was told from a friend, that if it's a short sale, then the house doesn't have to be appraised.
So yeah, $61k in hand might beat $70k in the bush.
Especially when the bushes are already full to bursting with equally questionable 'birds'.
Take the sucker and run.
Justin,The new lender will certainly want an appraisal,while the lender holding the current note will probably settle for a BPO or Brokers Price Opinion.
just can't see how this makes sense. If the house is worth ~61k how did she get a reverse mortgage? If the house is worth ~105k why did Freemont accept so little?
The article does not tell us what IndyMac thought the appraised value is. So it's all guesswork.
We know it is way more than $61,000. Remember that a reverse mortgage lender is going to approach value slightly differently than a lender facing foreclosure on a home would.
Fremont (the FCing lender) would care only about a broker price opinion for the next 90-120 days. That's because if Fremont FCs, they'll need to dump that REO as quickly as possible. Given the payment quoted in the article, it looks like the Fremont loan carries an interest rate of 10% or so. That means that every month that REO sits there, a lot more interest racks up that Fremont owes to the investor on this loan. (We don't know if this is a Fremont portfolio loan or securitized, with Fremont as the servicer.) Given the facts we know, it's quite likely that the attorney involved hinted to Fremont that there was probably a prima facie case for predation on the original loan (it was made knowing that the borrower couldn't handle the payments and with a grotesque interest rate). That might also motivate Fremont to settle.
Reverse mortgage lenders, by contrast, are precisely dealing with a borrower with no intention of selling in the near term. That's the whole idea of these loans. So a reverse lender will look at appraised value with longer-term assumptions for appreciation, market activity, listing time, etc. than a foreclosing lender would.
In other words, IndyMac used an "appraised value," but Fremont was in the position only to use a "current firesale price opinion." That will account for the difference here between what Indy is willing to lend and what Fremont is willing to take.
The old 20% down was never a guarantee that losses couldn't exceed 20%. It had as much to do with motivating the borrower (putting "skin in the game") to pay as it did reducing the lender's loss exposure. 80% LTV loans can have the same loss severity as 100% loans, but since they have much lower loss frequency, they are much safer.
I wonder whether Fremont has so many potential forecloures on its books that it's willing to settle for anything that's even half-reasonable so long as it doesn't consume even more staff time.
I love it when three or four of us answer the same question at once.
Especially when the answers all more or less match.
if you move from a house which is a primary residence to a nursing home - the house remains a primary residence for purposes of computing capital gains if and when you sell it.
Reverse mortgages are in fact different. I was looking at one of these for my mom, but $20,000 in startup-fees and any money draw compounding at 7% turned me off, quick.
I wonder whether Fremont has so many potential forecloures on its books that it's willing to settle for anything that's even half-reasonable so long as it doesn't consume even more staff time.
That's quite possibly the case, although I note that per the WSJ the deal got struck the day before the FC sale was scheduled. That implies that Fremont had already done quite a bit of FC process work on this loan. I suspect their concern was property management, not FC.
It is a GA case, and GA is notorious for having very short FC timeframes. So the FC may not actually have been going on for all that long.
Do you guys remember the character from Jurassic Park who was played by Wayne Knight (a/k/a Newman from Seinfeld)?
That character is a doppelgänger of the VP of Fremont's default admin unit. I can't even hear 'Fremont' without thinking of him.
The CEO thinks we could solve a lot of long term care problems by having mandatory LTC insurance - like social security or medicare - if everyone did more statistical work on the financial issues.
That and better hospice options like where my mom spent her last few weeks - while there I met a lady who opted to live in the hospice long term instead of a nursing home.
The lady we met (lets call her Betty) fully understood that the hospice was not going to perform heroic measures to extend her life - just make her comfortable for a small fee (small compared to a nursing home - about the cost per day of an inexpensive hotel). Betty was all for that - she was a semi-invalid but still capable of brining her wine cellar with her (and shared with us as our mom passed). You wanted to learn the ins and outs of the hospice - ask Betty.
Betty btw could quite easily afford nursing home care - tells you something that she considered nursing homes more depressing than a hospice where people go to TRY to die.
It was an interesting alternative to the more usual death industrial complex.
I came to the best place I know to ask a very serious question and get feedback. I'll try to keep my wild idea short...maybe not so wild, maybe practical.
My wife and I bought our house in 2000 for around 240k (first home) placing 10% down. A few years later with extra p+i pymts and housing appreciation we hit the 20% equity mark sometime in 2003.
We live in nice suburb of Michigan - housing is really getting bad. It's hard to tell but similar houses are going for what mine would of been worth 5 years ago. A short sale just went up down the street on a similar home for 30k less then what we pd back in 2000, were shocked.
Bottom line: Cash flow is no issue for us as we are 2 wage earners and I own a biz but it looks like all of our equity has been evaportated and if we go on the short sale we may be upside down. Just incredible as we are better off than most, didn't over pay and have been paying extra on our mortg.
My wife approached me as told me we should sell now "IF WE CAN" and go rent. Our fear is another 10% housing price drop. If that happened we may never be able to leave our home and we are a growing family who was looking to trade up in the near future.
The question is...Should we look to get out and rent. Selling our current home may be an issue but so is facing another 10% price drop in next 12 months.
That character is a doppelgänger of the VP of Fremont's default admin unit. I can't even hear 'Fremont' without thinking of him.
I remember looking at a Fremont investor powerpoint show early this year, just before the shit hit the fan generally and also just before the C&D.
They pointed out that Fremont-issued securities performed better than non-Fremont-issued securities. This was supposed to get investors on board.
What it meant, actually, if you looked at the slides, was that securities Fremont serviced for someone else had much higher delinquency rates than securities Fremont serviced for itself. Apparently nobody at Fremont noticed the implications of self-dealing or adverse selection in pointing out that Fremont was a great servicer as long as its own ass was on the hook, and not so much if someone else's was.
It did occur to me when I read this WSJ article that the old loan might be Fremont-serviced but not Fremont-owned. Is this kind of a big hit for a short refi? Yep. Will the end investor ever know that? I for one wouldn't put it past Fremont to offer the end investor whatever kind of calculations necessary to just make the problem go away.
Itsme - do you look at your home as an investment or lifestyle choice? That's question #1 to ask.
My sis lived in Grosse Point Farms for about a decade. I have another sis who lives in Ann Arbor - so I know the market. It isn't a good investment market and hasn't been since 'Motown' was hot.
Answer question #1 and the rest will follow.
Itsme - I agree with Dryfly - and would add that I think it's too late to sell - and too early to buy. FWIW - my BIL lives in a modest neighborhood in Brighton. He has been in the same somewhat small house since the kids were born - and now they're grown up and gone. If there isn't anything wrong with your house -and you can aford it - I'd be inclined to stay put.
My wife approached me as told me we should sell now "IF WE CAN" and go rent. Our fear is another 10% housing price drop. If that happened we may never be able to leave our home and we are a growing family who was looking to trade up in the near future.
Just how do you think you might "trade up in the near future" if you sold short today? A short sale will appear on your credit report as "settled for less," which will not help you get cheap financing in the future. Even without that credit ding, what funds are you going to use to make a down payment on a "trade up" home, when you have nothing to trade with?
Are you saying that you think renting would be so much more inexpensive than your current mortgage payment that you would "save back" your "equity" out of current income?
I don't give people advice about things like this. I simply don't understand your reasoning. You seem to be saying that, today, you could not sell your house for enough to have any proceeds at all left after paying off the lender (in fact, you might be short). You are worried about being even shorter next year.
If you sell for zero after-payoff proceeds today, you will have $0. If you sell for zero after-payoff proceeds next year, you will have $0. Once you're upside down, the lender has a problem with timing, but why do you? You are not going to get any proceeds unless and until the value of your home recovers and goes back to 2003 levels.
tom, thanks.
Just how do you think you might "trade up in the near future" if you sold short today? A short sale will appear on your credit report as "settled for less," which will not help you get cheap financing in the future. Even without that credit ding, what funds are you going to use to make a down payment on a "trade up" home, when you have nothing to trade with?
We did want to trade up but understand this isn't the time. Second, we don't know that we would be selling short. A short sale did go up but that was a forced sale, is our house based on the value of the short sale or on other homes up for sale that are being offered for about 20k more than what we bought?
We have enough funds in the bank but I would stress that we would RENT not Buy if we were lucky enough to sell at anything above our cost basis.
I guess the answer comes down to what the heck is our house worth.
Bottom Line: If our house is still worth more than what we paid we are thinking of getting out now and renting. If we wait and prices drop 10% more than we will go upside down.
If we are upside down now we may be stuck unless we are willing to pony up the difference which in that case might make sense to stay put.
Does this make sense?
By the way, if with our resources, good income and strong balance sheet are facing this than many others here and elsewhere must be in the same predictiment. I mean I bought my home 7 yrs ago, 10% down and pd extra on it and to think the value is gonna be less than our cost base? Crazy.
The question is...Should we look to get out and rent. Selling our current home may be an issue but so is facing another 10% price drop in next 12 months.
itsMe
You can hedge by using put options on Housing futures based on the Case-Shiller index for the Chicago metro area:
CME Group - Home
You have to have a view on the decline percentage though and whether its worth the decaying time value cost. You have to do the math too of course.
Issues of liquidity and the resulting(?) large spreads on bid/ask matter of course.
For me, in the Denver area with a 1.7% YoY decline it wouldn't have been worth it. As I recall when I did the math last year, I needed a 4% YoY decline or better for it to be worthwhile and I didn't think we'd get there.
-K
A short sale did go up but that was a forced sale, is our house based on the value of the short sale or on other homes up for sale that are being offered for about 20k more than what we bought?
The sales price of your home is based on what you can get a buyer to offer.
What percent of that offer a buyer might be able to finance will be based on the appraised value of the property, which will have much less to do with homes that are being "offered" for 20K more and much more to do with homes that were actually sold for less. Your neighbors could be asking for $500,000 more for all a list price matters. No appraiser will care unless they get it.
If your home is located in a subdivision in which more than a few nearly identical homes are being listed, right now, for $20K more than what you originally paid for your home, and you also wish to sell, you will either 1) list at the same price as your neighbors, and wait along with them for a buyer to come along or 2) list for less than that, and snap up any buyer there might be out there.
If you can find a realtor willing to risk wasting time, why not list your house at the price you want, and see what happens? The worst thing that can happen (if you list low) is that you'll piss off your neighbors.
itsme: If you have no problem making the payments, what conceivable reason would you lender have to agree to a short sale? The REASON lenders agree to short sales is that they're more efficient (although harder to ensure an arms length maximum price) than a foreclosure. If there's no chance of foreclosure, there's no reason for the lender to agree to a short sale.
I think some people might be a bit confused about the concept of a short sale.
It is, by definition, the best price the market will bear in any near-term exposure timeframe.
No lender ever accepts a short sale if it has reason to believe that there is a better offer out there in a reasonable time frame (say, six months to a year, depending on how long it takes to FC, evict, and prepare REO to list in a given market).
So the fact that you have a short sale of a comparable property in your neighborhood tells you one of two things: you got a stupid lender (who did not do enough diligence to assure that it got the best offer available) or you got a severe buyer shortage.
The rest of the neighbors can keep listing at any price they want; someone, however, just proved how hard it is to rustle up a buyer at that price.
How is it that denying a 62 year old a 30 year loan is illegal based on their age, yet denying a 30 year old a reverse mortgage is legal?
She's had 40+ working years to save and prepare for retirement. Today's generation is expected to pay $400K+ for a starter home with all the boomers credit card debt and consumer expenditures rolled up into the "value".
I agree with all the points that people have made to my question, it's just a matter of degree. A 40% haircut seems like alot to voluntarily agree to at this early stage of the game. Especially when another lender thinks that there's enough equity to offer a reverse mortgage. Could they be signing up for a bondholder suit by actions designed to avoid a predatory lending suit?
How is it that denying a 62 year old a 30 year loan is illegal based on their age, yet denying a 30 year old a reverse mortgage is legal?
You could make a reverse mortgage to a 30-year old. But the maximum mortgage amount would probably be around $2.00. I'm guessing that most 30-year-olds don't think it's worth it.
A 40% haircut seems like alot to voluntarily agree to at this early stage of the game.
Let's say that Indy got a full standard appraisal (which assumes a balanced RE market, at least 6 months of market exposure, etc. etc.) for $120,000. Even aware that a current price would be lower than that, Indy is only lending $61,000, not $106,500.
Let's say that Fremont, on the other hand, got a BPO for the next 120 days of $100,000.
At 10% interest, every month that loan is outstanding until RE liquidation is another $887.50 in interest. If you assume 6 months interest, plus 7.5% broker commission, plus another 7.5% in property costs (taxes, insurance, maintenance, utilities, management fees; don't forget how much more expensive force-placed insurance is on vacant REO), plus a $10,000 in legal work, inspection fees, eviction costs, default servicing department overhead, whatever, you get a total make-whole amount on projected liquidation of $136,825. If you sell for $100,000, you write off $30,325. If things don't go as planned and you end up taking less than $100,000, or it takes you another 6 months to get $100,000, your write-off is even more. This is, you note, a borrower who does not plan on going quietly. I'm guessing Fremont would have to evict her.
So you can pretty much guarantee a minimum loss of $30k with the risk of more, or you can write off $45,500 and call it done. Certainly what Fremont decides to do is going to be influenced by other potential financial risks, such as a lawsuit over predatory lending or something. The fact that this borrower got an attorney involved undoubtedly acts as a veiled legal threat just because, even if the attorney made no explicit threat to sue. My point is, though, that you don't compare a 40% haircut to no haircut. You compare a 40% done deal today with a best-case future haircut in the neighborhood of 30%.
I find it hard to believe that Fremont really cares about tossing a sick little old lady out onto the curb--they are the sociopaths who made the loan--but as Fremont is under the direct supervision of the FDIC these days, they may have had a regulator leaning on them to make a deal.
You could make a reverse mortgage to a 30-year old. But the maximum mortgage amount would probably be around $2.00. I'm guessing that most 30-year-olds don't think it's worth it.
Tanta | Homepage | 12.27.07 - 1:05 pm | #
There are some folks in the Inland Empire that might take the $2 and be happy about it.
Thanks for the replies from all. I think some are confused at what I am trying to do but Tanta seems to understand.
I am not trying to get my lender to agree to a short sale. This is simply a financial consideration on what is best for my family and balance sheet.
I really do not want to stand idle and watch housing correct further cause the more it corrects the longer I am stuck. Rents are 50% of mortgages and if I can get out now at a gain above cost basis, rent for a few years until rent-own ratio comes back into line I will do very well for me, family and balance sheet.
So in the end Tanta answered the question. List the home at what I want for it and if someone buys it great-go rent if not, except less or watch the bottom fall out, if it falls out.
We did want to trade up but understand this isn't the time. Second, we don't know that we would be selling short. - Itsme
Only one way to find out. Put it on the market with the hundreds of others... you could even try FSBO if a realtor won't sign you (I wouldn't - who needs clients fishing for a price with all the others motivated to sell?).
List the home at what I want for it and if someone buys it great-go rent if not, except less or watch the bottom fall out, if it falls out.
itsMe | 12.27.07 - 1:42 pm | #
One thing about Michigan - it's bottom can't fall far - it's pretty close to zero now. If I moved to Michigan I'd buy now - what the hell, homes all over the Midwest are so cheap they are almost throw aways.
BTW - I am a Midwesterner too & feel your pain.
You could make a reverse mortgage to a 30-year old. But the maximum mortgage amount would probably be around $2.00.
I assume this is based on the actuarial assumptions about life expectancy of the 30 year old. In the same regard, it's unlikely that a 60 year old on a fixed income could pay off a 30 year mortgage, even if they do manage to live a good decade longer than average.
dryfly has a point. I think a bottom may have been reached already in Michigan. Check this fixer-upper available for less than 50 cents per sq ft! - whatta bargain!
I know, it's prolly on the Eminem side of 8-mile.
5ive Gears In Reverse
by Elvis Costello
five gears in reverse
girls looking for the big lift
somebody send out for the night nurse
please don't stick me on the late shift
if you don't know by now
nobody's going to tell you
if you don't know by now
the shock will probably kill you
CHORUS:
and if your patience is exhausted
and you still cannot decide
you're sitting in a garage
contemplating suicide
and you have no motivation
you can't even catch your breath
all the business and celebrations
is driving you to debt
five gears in reverse
you think I don't know what I'm doing
and at a fashionable first
like walking down the road to ruin
but if you're safe and sound
don't let me interrupt you
And if you don't go down
How could I corrupt you
... homes all over the Midwest are so cheap they are almost throw aways ...
Not here in the suburbs of Chicago -- yet. But they will be.
MBA predicts 100% per year growth in RM's as far as the eye can see...baby boomers are just starting to hit their 60's...62 being the min. age for a RM...http://www.livewellfinancial.com/this company has supposedly gone on a hiring spreee the past few months...CFC part II?
In the same regard, it's unlikely that a 60 year old on a fixed income could pay off a 30 year mortgage, even if they do manage to live a good decade longer than average.
It is unlikely that a 60-year-old would pay the loan off in monthly installments.
But since the estate can sell the property to pay off the remaining balance--or the lender can foreclose against the estate if it doesn't do so willingly--the lender still gets repaid.
You seem to be assuming that a lender may not amortize a loan for a longer period than it expects to get installments.
I mean, I guess I could write a loan for a 60-year-old on a 30-year amortization with a 14-year-balloon term, on actuarial expectations that the borrower will kick the bucket at 74, but what's the point? If the borrower does pass on, God just took care of my balloon.
Of course there's a problem with giving an ARM to an elderly borrower on a fixed income, when you know that payment could rise farther than a fixed income could support. No one is advocating doing that. But the original question was why anyone would make a 30-year loan to an older borrower, not why anyone would pretend that a fixed income can rise as fast as an exploding ARM.
The issue with a reverse mortgage, like a forward mortgage, is that you really don't want to let the balance due on the loan exceed the value of the collateral. That's why you can't give a reverse mortgage to a young person: there's too much time involved. Having not enough time to get repaid in installments isn't a problem for the forward mortgage lender.
For heaven's sake, have you not heard of refis? If I can make a 30-year loan to a 30-year-old and that borrower refis in two years, I get my principal back in a lump sum after 2 years. If I make a 30-year loan to a 70-year-old and that borrower dies in two years, I get my principal back in a lump sum after 2 years (plus a few months of probate, during which I earn interest). What's the diff?
itsMe, before this (the RE issue) is over I think a lot of folks are going to find themselves in your position And by that I don't mean the speculators, toxic mortgage holders, those forced to sell for various reasons - death, loss of job, etc.
But so what? If you like your house, your area, the neighbors I'd just stay there especially since you can afford to do so.
I've discussed this with my wife several times over the past year or so. And we both agree that should we ever find ourselves in your situation we aren't going anywhere.
If you are that worried, sure give it a try. But personally, I've got other things more pressing to worry about.
Maybe what I'm missing here regarding the reverse mortgages is what legal rights the banks have once the equity is depleted.
It seems that regardless of borrower age, once the equity position falls to zero (or any pre-determined level) the occupant should be required to come up with cash or turn over the keys/re-finance, much the same as when an option ARM hits the cap the payments recast.
Perhaps calling these mortgages instead of annuities is where the confusion lies.
itsme,
Another thing to think about if you really want to trade up is that both your house and the one you'll want are both going down, so the differential will be the same and/or actually less as time goes on. IMO the percentage declines will be steeper on higher-priced properties, so you'll be gaining ground on the tradeup even as you lose value overall.
OTOH, it might still be nice to have the extra money from renting, especially with the wife already on board.
Seminole - Thanks for the word that the IRS uses, insolvency. Like you said, when Ms. Forts shows that she was insolvent, which is the word the IRS uses, not bankrupt, she will not be assessed the tax on capital gains due to forgiven debt.
What I find fascinating about this, and the most recent legislation, is that this policy has been in existance before the recent legislation, making the legislation unnecessary, except for those who can afford to pay the cap gains tax on the forgiven debt. The legislation provides no relief for those who could not afford to pay that they did not already have. But is does provide relief for those who could afford to pay the tax and now will not have to pay it.
It seems that regardless of borrower age, once the equity position falls to zero (or any pre-determined level) the occupant should be required to come up with cash or turn over the keys/re-finance, much the same as when an option ARM hits the cap the payments recast.
Mike2, don't take this wrong, but you are confused about a whole lot of things.
The balance cap on an Option ARM has NOTHING to do with LTV. It means that the loan balance cannot exceed a certain percent of the original balance.
If you have a $100,000 OA with a 115% cap, that loan will recast when the balance reaches $115,000.
If it was originally a 50% LTV loan ($200,000 property), it will recast when the balance reaches $115K (57.5% LTV, not that it matters). If it was originally a 75% LTV loan ($133,333 property), it will recast when the balance reaches $115K (86% LTV). If someone was so stupid to originate it at 100% LTV, it will recast at $115K. That is a balance cap.
An OA is a forward mortgage. It is meant to be repaid during its term. The balance cap is the point at which no new principal can be added, and amortizing repayment must commence.
Reverse mortgages have principal limits--a limit to the amount of principal that can be advanced. Once this is reached, no more cash can be extracted. However, since a reverse mortgage is designed not to be repaid in the borrower's lifetime, there is no point at which payments must be made. The point of the principal limit (in conjuction with the actuarial tables used in calculating it) is to reduce the risk that the total balance at the borrower's death (including interest accrued) will exceed the property's value. But nothing can guarantee that won't happen; it's a risk the lender takes.
To force prepayment of a reverse mortgage would entirely defeat the purpose of having them. You can, if you want, be in favor of not having them. But to demand repayment of mortgage loans of any kind as if they were margin loans (depending on changes in the value of the collateral) would totally explode the mortgage and RE market in this country. No mortgage loan product ever known to me personally has ever had after-closing terms that have dog to do with LTV. You set your limits up front the way you do, as a mortgage lender, because you don't get to re-write the loan if the collateral doesn't hold its value.
awgee,
Aww Crap! I wrote bankrupt above. That's wrong. Insolvent means debts exceed assets. She doesn't have to declare bankrupcy, just establish that debts > assets.
Lama regrets the error.
Itsme
A short sale did go up but that was a forced sale, is our house based on the value of the short sale or on other homes up for sale that are being offered for about 20k more than what we bought?
Forget the wish list prices. Absolutely meaningless in an appraisal. The only thing that counts is what a nearby property sold for and its doesnt matter a damn whether they sold it because they were going into foreclosure or because the decided to move to Alaska. That is the comparable price. PERIOD.
really do not want to stand idle and watch housing correct further cause the more it corrects the longer I am stuck. Rents are 50% of mortgages and if I can get out now at a gain above cost basis, rent for a few years until rent-own ratio comes back into line I will do very well for me, family and balance sheet.
I am a retired lawyer/economist who lives in upper Michigan not the UP but the northern area on Lake Michigan.
If you dont think prices can fall more, you have not been paying attention. If you dont think they will fall more in MI, you definitely have not been paying attention. I've watched the same econoomic deterioration in other states when a long time major manufacturing industry caved.
Rent is 50% less than the mortgage (and then add on taxes and insurance.) That is such a no-brainer on whether to get out from under your house that Im baffled as to why you are even asking.
Sell it IF you can
(1) sell for enough that the mortgage owed is covered and you arent putting more than 1-2 months of the difference between rent-mortgage on the table to get out; and
(2) you have the discipline to put every penny of the difference between rent and your old mortgage in the bank (blowing the savings between rent and mortgage on stuff kind of defeats the purpose.
Pretty sure "that lawyer" is the son of the supreme court justice. He has been a civil rights/public interest attorney with Atlanta Legal Aid.
Everybody here seems to assume Ms. Forts will pay nothing on the new mortgage, just let the interest compound.
If that's the way reverse mortgages work in the US, fine, I accept your logic. They don't necessarily work that way in Australia, and at a rasonable interest rate even a $200/month payment would push out the day of reckoning for that loan a long, long way.
Not here in the suburbs of Chicago -- yet. But they will be.
jm | 12.27.07 - 2:34 pm | #
Head down toward Carbondale/Herrin way - happy meals cost more than some of the homes I've seen down there (on biz trips).
If that's the way reverse mortgages work in the US, fine, I accept your logic.
That is the way they work in the U.S.
They are designed to require no payment from the borrower during his or her lifetime.
If you click through the link in the post to my earlier post on reverse mortgages, there's more info plus links to FHA and Fannie Mae sites about their specific reverse mortgage products.