The government just spent $700 Bill of your money and I’m not sure you’re even going to get a Thank You card. But this is what you ARE going to get under the new bailout provisions.
There are four sections to this insider’s scoop provided by Aaron VanTrojen at Geneva Financial, LLC. (1) $700 Billion Bailout (2) Homeowner Benefits (3) Guideline Changes (4) Death of the Option Arm.
$700 BILLION BAILOUT
The government bailout of the mortgage industry continued on September 8th, 2008 with the unprecedented, socialistic takeover of Fannie Mae and Freddie Mac. The government now runs the world’s largest mortgage banking companies in the world.
This week the government announce another extraordinary bailout of Wall Street with a proposal to buy up as much as $700 billion of illiquid mortgage assets. “The $700 billion plan, the most sweeping intervention in the financial markets since the Great Depression, is aimed at stemming the credit crisis roiling Wall Street and threatening the global markets.” – cnnfn.com
The proposal states for the federal government to buy the illiquid mortgages at deeply discounted prices. The mortgages that the government is buying are illiquid because they fall outside of Fannie and Freddie guidelines, are not performing and are in some state of delinquency, have a higher value than the asset is worth, or a number of problematic issues.
The illiquid assets are putting strain on the mortgage banks and the financial institutions that previously made or purchased these mortgages at a time they were viewed to have value, or were perceived to yield a higher return in the future.
Fed Chairman Ben Bernacki stated Tuesday “Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”
As part of the proposal, the Bush administration wants Congress to raise the nation’s debt ceiling once again, to a staggering $11.315 trillion for the fiscal year of 2009.
It is unclear as to whether or not the plan will work, and ultimately who will pay for it. Initially the tax payers will likely be on the hook for the bailout. If the real estate market corrects, the government has the potential to sell the currently illiquid mortgages for a profit.
There is little question that something needed to be done to help stabilize the financial markets, which should ultimately help the real estate market. The question is will it work? What we do know if that the Federal Government is now running the US mortgage industry.
HOW WILL THE HOMEOWNER BENEFIT
The recent government bailout of Fannie Mae and Freddie Mac, and the $700 billion dollar proposal to bail out the financial markets is being sold to the public as a means of helping the homeowner. The question is, has it or will it ultimately help the homeowner.
The initial announcement that the government was taking over Fannie Mae and Freddie Mac did cause long term mortgage rates to drop; approximately .5% of a point. For those lucky few that can still qualify, 30 year fixed rates dropped to 5.375%; almost a five year low. Rates shot up up after the announced $700 billion proposal to bail out the financial markets on fears of skyrocketing debt, causing a massive sell off of the 10 year T-Bill.
Lower interest rates is not the solution. Lower rates can help revitalize the housing market, but without reducing the restrictions on lending guidelines, too few can qualify for those low rates; or qualify at all. The government has to be cautious on making credit easier to obtain so we do not end in the same situation once again, but it is essential to take steps soon so the average citizen can purchase or refinance a home. Without looser guidelines, the housing market will continue to slide, and the illiquid mortgages the government is about to purchase, will also continue to slide in value.
In an attempt to combat mortgage delinquencies, Fannie Mae has made the following guideline changes: Non Owner Occupied Financing: Maximum number of financed properties allowed by borrower has been reduced from 10 to 4. Six month seasoning is now required to use appraised value on a refinance transaction. No state income mortgages. Borrowers may still qualify under reduce income documentation programs. Note: Commercial financing in some situations may be used to finance more than 4 residential properties.
DEATH OF THE OPTION ARM
Option ARM mortgages had become the loan of choice for many borrowers in 2005 and 2006. The Option ARM or Pick a Payment mortgage gave the borrower four monthly payment options, 30 year amortized, 15 year amortized, interest only, or negative amortization or minimum payment option. In high cost areas, the Option ARM mortgage allowed buyers to qualify based on the minimum payment for homes they traditionally could not qualify for. They also benefited buyers that were not on a fixed income or salary (i.e. self employed or commission) allowing them to have some flexibility with their mortgage payment based on a variable monthly income. Many investors also used this mortgage as a means to create cash flow by making the minimum monthly payment. In an appreciating market, the Option ARM worked; but then the market turned.
The Option ARM meltdown is upon us. “There are about one million option ARMs outstanding, according to Fitch Ratings report, and somewhere between 10% and 24% of these are seriously delinquent – 90 days or more past due.” – cnnfn.com Regardless of the borrower’s initial intent, most paid only the minimum payment, or negative amortization payment. The negative amortization causes the initial loan amount to increase, and with home prices continuing to fall, many borrowers are finding themselves seriously upside down.
“According to First American LoanPerformance, which tracks the mortgage market, more than 65% of option ARM borrowers make only minimum payments every month. They can continue to do that for up to five years, or until their loan balance reaches 110% to 125% of the original principal. Fitch reported that of the $200 billion in option ARMs outstanding, $29 billion worth will convert to what are called “fully amortizing loans,” with payments that will reduce the loan balances, by the end of 2009. Another $67 billion will convert to fully amortizing loans through the end of 2010. That represents nearly half a million borrowers.” – cnnfn.com
The Option ARM was aggressively sold to borrowers by banks and mortgage companies in 2005 & 2006. Many did not read the fine print and had no understanding of the mechanics of the mortgage. Others used it as a tool to purchase expensive property outside of their means, or multiple properties that they would otherwise not been able to purchase on a traditional fixed amortized mortgage. For the more financially savvy borrowers, the Option ARM has proved to be a fantastic financial tool. If making any payment other than the negative amortization payment, many of these individuals are ahead of the curve. Because the rate is variable, many of these mortgages have rates that have fallen as much as 2% over the past couple of years; actually lowering the amortized and interest only payment significantly, allowing the borrower additional freedom. That piece of information, you will not likely hear from the media. If used responsibly, the Option ARM, although discontinued by most banks, is still one of the best mortgage options in the market.