Countrywide Home Loans Letter to Borrowers
Submitted by
CalculatedRisk on Fri, 08/18/2006 - 10:32am (22 comments)
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CR,
Does the owner have to pay off the mortgage in thirty years?
Can the mortgagee require that the loan be reset? (By this I mean, that the home owner has to begin paying off the mortgage in a thirty year period?)
I might not be asking the right questions. Somehow, I am not exactly sure what is ahead for these folks.
Thanks.
Stormy, the loan terms require that the borrower start paying the fully amortized amount on a certain date.
The borrower has a few choices at that time: start paying the full amount (in the example, the fully amortized amount was more than double the current payment), refinance to a new loan (the MBA data shows refis have been increasing) or go into foreclosure.
Best Wishes.
Stormy: It's a double whammy. Any unpaid interest portion compounds into a growing principal (if the minimum payment is less than initial interest), plus the full-amortization term is reduced by the time principal is not paid down.
My understanding is that the end date of the loan term remains constant at 30 years from origination, or whatever the initial duration.
But then I'm a layperson.
In the last few years the affordability scale has been off the charts.
At the same time home sales have reached new highs.
This is now what happens when too many people buy houses they cannot afford.
Someone better tell the stock market that the s*** is hitting the fan. The NASDAQ had it's biggest week in 3 years. Indexes all up 5 straight days.
Copper = $3.50/lb vs $0.80 three years ago.(40 % of copper consumption in the US is housing - another large chunk is autos)
I have been bearish on housing and the market for ~ 2 years. I made the mistake of believing the Fed was interested in price stability. Have watched with incredulity as the housing, commodity, and bond bubbles inflated and the the Fed proclaimed inflation was dead.
The Bernanke pause has touched off more of the same. I think the pause is exasperating the problem. Higher rates because of inflation. The Fed is holding the door so the banks et al can escape. More crap.
CR, you mentioned foreclosure as an option but failed to mention selling the home. Your bias is as big as the Montana sky.
Marketwatcher-
The original question was "Does the owner have to pay off the mortgage in 30 years? Can the mortgagee require that the loan be reset? , not what happens if the ower can't make their payment. CR is correct in that those are the options for PAYING THE MORTGAGE. Your bias, Marketwatcher, is looking for something to critcize when there is nothing there.
Another option IF the borrower has home equity would be to extract the equity and use a portion each month to bridge the payment increase. This ,however, is a stopgap which adds new debt and only works in a rising market but might be appropriate if a spouse had a pending job or some other form of new income - otherwise a Ponzi scheme.
A Neg Am Loan will typically have a 5 year period where the borrower can make a low minimum payment. After 5 years the loan would then turn into a fully amortized loan. However, the loans also have a maximum the loan can go up 110 - 125% depending on the lender and loan. On a loan that has a 3.5 margin over the 12 MTA, the loan will hit 110 in 2 years and 2 months if the borrower makes the minimum payment. This is assuming the 1 year Treasury stays the same. The lenders send out disclosures showing the 12 MTA staying the same (even though it is a 12 month average of the 1 year treasury--and 12 months ago the 1 year treasury was lower). Once the loan hits the cap it can go, the loan turns into a fully amortized loan. In this rising rate environment, the borrower has a double whammy: Rates are higher than when they started and their balance is higher.
Options -
Make the new payments - only problem here is that many people will not be able to double their mortgage payment. The share, I dont know, but I can guess that if option arms were making up 20% of CA market, and 70% of those were going neg-am, we've got a lot of people in trouble who wont be able to go that route.
Sell the home - dear marketwatch, yes, this is an option, but have you noticed that that's not such an easy proposition. If you are one of the zero equity types, and bought recently, or had some equity and cashed it out, chances are you are upside down on the loan. You can sell, but you take a giant hit, and you can rest assured these folks are going to be paring back their spending severely. What many of these people will do is move with the market, and keep ratcheting down prices, but not selling, because clearly noone knows just how low the true clearing/equilibrium price is for a lot of the overpriced crap out there. Buyers are going to be even harder to come by soon. MOre than likely if you are selling into this market, your budget situation is bad. My guess is also that there is a strong correlation between this type of loan and zero down buying. So, for any recent buyers, or again, for anyone who cashed out the equity of the last year's gains, a sale here means you have to cough up cash. Ouch.
Refi - again, how many people will not be able to refi because the new and realistic appraised value is already a lot less than their existing mortgage? They may get a new loan, at a fixed and higher rate, but like it or not, for many folks, if they can keep their house this way, they are going to have an even more constrained budget.
Foreclose - just seeing the tip of the iceberg on this. The foreclosures are already having a hard time finding vultures who think they are a deal, and the ones with no equity arent being touched, so plenty will go back to the banks, which may avoid a crisis, but even if they dont, it wont matter. Foreclosure means the net worth of these folks is hammered. They will be forced to save, and their spending will suffer.
So, pick your option, or decide the %s of each, and how bad each is, whatever. Each one has its ugliness, and they all add up to the same thing. The mortgages are there and they aint going away. The values are falling, and one way or another, the owner must choose. Each one leads to a pullback in spending as finance costs eat up more of household budgets and that is the key.
The reality here is that prices are already falling, so deal with it. What ive been sayint for years is that once that happens, many of these exotic mortgages will have to be resolved painfully. There is no escaping a major wallop that not just the housing market will take, but also the economy. When sales rates drop 30%, that's a lot of commission money that doesnt get made or spent, which is just another form of equity extraction, through transaction costs. Stacks of undocumented constructio
I have a pay-option loan, and yes I have been choosing the minimum payment feature. But here is something that makes this loan interesting, I pay a rate currently of 1.5%, but I can deduct on my taxes the fully indexed rate to which I am negatively accruing, which is currently 7.5%. So, if I am in the 33% tax bracket, I can deduct 7.5%*(1-.67) = 2.5% on my taxes. After paying 1.5%, but getting 2.5% back from taxes, I effectively have a negative 1% cost of carry!
CR - I have a mortgage from Countrywide, but it is a 30-fixed at a low LTV. I got a letter from them last week telling me how much I could extract in a cash-out refi.
I threw it in the garbage, but they were willing to let me take out a sh*tload....
Following the money - who exactly (by percentages) is holding the notes and related derivatives on zero-down, purchase seconds, subprime, PMI and similar products and what kind of return are they getting on them? Aside from purchasers and the direct and knockdown economic effects of the slowdown, who's got the at-risk paper?
rational actor: Not too long ago I received a letter from my credit card issuer notifying me of contract changes that would become effective if I don't decline them by so and so. It struck me as purposely designed to look like the type of junk mail people usually discard sight unseen.
This paper is held by funds like Delaware Investments Fixed Income Fund, and probably your pension fund too.
I just started a thread at Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis about this. Check the Delaware Investments thread in the forums. I'm dying to learn more about this, but it's a difficult market to figure out, so few have written about this. Richard Duncan, who I quoted in my thread, is one person. To understand who buys this, you have to understand derivatives, insurance of investment products, layering of tranches, Federal Flow of funds, and more.
"CR is correct in that those are the options for PAYING THE MORTGAGE."
Nikki,
Stating that foreclosure is an option for PAYING THE MORTGAGE but selling the home is not is MORONIC.
But, after looking at your home page I would not expect you to know that.
Rusty
That's because you are paying the full interest, it's just being added to the principal each month. You're not getting anything for free.
In fact, you're now paying interest on that interest, over 30 years. Run a spreadsheet calculating what's added to the principal every year, add your payments, and then take off the tax deductions. You are worse off every year, by quite a way - the tax deduction just makes it slightly less hideous. Even if you factor in what you'd pay in rent otherwise, it doesn't make sense.
Now if you're a savvy investor with uneven income who knows a large quantity of cash is soon heading his way with which to pay off the difference, and you need/want to own today, then maybe it makes sense. But not for 99% of people out there who simply use it to stretch themselves even further than before.
As an aside, how many people are now getting whacked with the AMT because of these insane housing deductions? I don't own a house yet am getting worringly close to the AMT cutoff, I'm sure deducting the interest on a $750k+ property would push me over the edge, negating one of the supposed advantages of buying.
Isn't that the whole point of the AMT - to keep upper middle class and rich people from getting away with paying too little taxes?
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The current full interest rate on the loans is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term.
If the loans reset at today's rates, the letter explains, the full payment required would be $2,887.50 - more than double what the homeowner has gotten used to paying. Future reset rates could be even steeper, making the potential payment crunch much worse.
Well, it looks like the latest stimulus plan will be officially passed any day now
. Although Im not sure that they are aware of it,
taxpayers have already paid $250-billion towards the previously passed stimulous plan.
Here is an article break...
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