125% Refinance Loans

Some more good reading about the pro’s and con’s of the new 125% refinance loans……

naked capitalism: Is the new affordable FHFA loan program predatory lending?

Yves said her piece about the new affordable FHFA program to allow home ‘owners’ in negative equity to stay in their homes……..

I have another angle too. You’ll notice I mentioned Maria is no financial wizard. She probably does not appreciate the intricacies of mortgage finance. Here are two points to consider.

1. In the state of California, you can just walk away because first mortgages on primary residences are non-recourse. That means that the mortgage is only secured against the house you have bought.
2. However, in the state of California, refinance mortgages are recourse loans. What does that mean? It means you are on the hook for that loan. You cannot just walk away. The bank can come after you and take your car and the stocks in your E-Trade account. They can garnish your wages. They can even take your clothes and the shirt off your back, literally. The only thing they can’t touch is your 401-K. But it’s down 40% anyway.

Why would you trade a non-recourse loan from which you can walk away for a recourse loan that guarantees you’ll end up as bad as some poor slob at Tappahannock? It doesn’t seem like an incredibly appealing choice, does it?

125% Refinance

125% Refinance Loans – Wow here’s another way to look at it….

Anyone who’s been a reader of Straight Talk for a while has known that I’ve been an avid reader of what Yves Smith at Naked Capitalism writes.   Well, she’s got a somewhat cynical but very thought provoking look at the new 125% refi program.

Take the time to read it…..

Tom Vanderwell

naked capitalism: Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today’s action should put your mind at rest.

The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.

The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers’ income.

But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.

Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let’s face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill if prices fail to recover by the time the forgiveness window closes (2012?).

Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.

But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.

Naked Capitalism