Thursday, May 21, 2009

That's not music I hear.


The fat lady has not yet sung.

The Business Insider
Here Comes The Option ARM Mortgage Explosion
Joe Weisenthal|May. 21, 2009, 6:51 AM

Subprime is done. All the teaser rates are over, the interest rates have reset and the writing is on the wall.

But in the coming quarters, the scenario will play out with other exotic mortgages, Option ARM (pick-a-pay), Alt-A, etc. The homebuyers may have had better credit, but they had the same strategy: Get a low interest rate upfront, and then deal with the reset down the road, by either refinancing or selling the home. But, whoops, home values are way lower and the economy sucks. Plan derailed...

...Unlike sub-prime mortgages, these were for the most part targeted at more upscale homeowners. The next wave of foreclosures will be in gated communities, not on the 'wrong side of the tracks.'

The chart shows that the sub-prime problem is largely behind us (dark grey part of the bars), as most of those teaser rates have now expired. As long as people have some equity in their houses or are less than 5% underwater, it is possible for them to refinance their mortgages as long as rates stay low. The refi of up to 105% is part of the Obama housing relief plan. If people are further underwater than that they are out of luck (and increasingly out of a place to stay).

Our current position on this graph is the bar immediately preceding the "Sept 09" label (that label representing the end of the next quarter). As you can see, there are a lot of flaky adjustable rate mortgages left to implode.

Since credit standards have tightened considerably, stagnant or decreasing wages being the norm and not the exception, it is likely that the vast majority of these mortgages will not be able to be refinanced.

What effect will this have on our communities? More foreclosures, first and foremost. As a community we need to be in an economic position to stop foreclosures from happening, either by paying off these flaky mortgages and giving our community members fixed rate loans (5% or less interest) on their homes, or by providing money for foreclosed families to relocate and resettle.

But I'm not holding my breath on any of that actually happening.

So far, the only "help" most federations are offering are loans for delinquent mortgage payments now due, which in all reality no one will ever be able to repay, since when their house is finally foreclosed other creditors will have higher status in the allocation process (presuming there is any profit on the home to actually allocate). This "help" does nothing to solve the actual problem with the greedy mortgage companies - who, after all, were not required to raise the payment amounts. They CHOSE to do so, nothing and no one made them. Nor does it solve the problem of people being underemployed or underpaid, a problem which is not likely to go away anytime soon. Though the Federations may forebear on collecting payments toward these loans for as long as they can, many Federations are themselves in financial difficulty.

What we need to solve this problem are three main things, and none are cheap.

The first thing is, frankly, institutions like the Muslims already have - "banks" or credit unions which offer zero-interest or very-low-interest mortgages and loans to fellow co-religionists.

The second thing is, amazingly, better funded benevolence funds - funds to simply pay the bills of people in very specifically defined catastrophic situations with no expectation they will ever be able to repay them. The Federation of which we are members actually has no such fund - and our offer to give seed money for one was soundly rejected. Jews today are so unwilling to act as a community for the welfare of individual members that we can hardly fathom the idea that loans are not a viable means of help for people in many dire situations, such as the disabled/elderly on fixed incomes, or people with health care emergencies, or people with job losses or cuts in their pay and hours (the three leading causes of bankruptcy).

Or is it some sort of stereotypical greed gene showing through that makes the idea of a benevolence fund so alien? I hope not.

Amazingly, these very same suggestions are part of an article about an organization that deals with recalcitrant mortgage banks who lag or refuse to work with their customers.

Wall Street Journal Online May 20th 2009
Activist Financier 'Terrorizes' Bankers in Foreclosure Fight

...NACA says it arranged $367 million of mortgages last year. Those borrowers must become members of NACA, agreeing to participate in its protests or help out at its offices, and for several years must contribute to a fund for homeowners who fall behind because of sickness or job loss. All NACA members pay the same interest rate, currently 4.375%...

So why can't we do that, class?

The third thing is a commitment by all Jewish business owners in the area to hiring those who need part-time supplemental work (for those with wage or hour cuts) and a commitment to providing full-time jobs for those who have become unemployed. We need to look after our own.

But I'm not holding my breath on that one, either.

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