Mortgage Rate News

One of the issues that is more likely to affect “regular folks” than $700 billion bailout plans for Wall Street and Very Large Drops in the stock market, is negative equity.

Negative equity is something that is affecting a great deal of homeowners right now. This is because as home values drop, then what is owed on second home mortgage loans, HELOCs and even first mortgage loans exceeds how much the house is worth. This is a problem that afflicts more than just subprime borrowers. The massive losses in home values affects a wide swath of society. And some of them will not be able to keep up with the payments and the negative equity will swamp them.

Happily, though, not everyone who has negative equity now is going to go under and foreclose. Many people are in a position where they can ride this out and keep up with their payments. In a few more years — in most cases — that means that the housing market will turn around and the equity will all be positive. But until then, the mortgage market is going to see some serious losses. Calculated Risk figures some of the possibilities for mortgage market losses due to this housing market problem:

Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders.

I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses. If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion.

You can see where this could mean continued problems for the mortgage market, companies and the stock market. It’s time to strap in (if you haven’t already) and get ready for a wild ride.

Tags: HELOC, negative equity, home mortgage loan, second home mortgage,
second mortgage, $700 billion bailout, mortgage market losses

Washington Mutual failed last night. Luckily, though, even as the FDIC took over the ailing savings and loan, JP Morgan was there to buy it. So FDIC insurance payouts aren’t needed. National Mortgage News reports on the largest bank failure in history:

The S&L is the nation’s fifth largest residential servicer with $600 billion in housing receivables. It is also the nation’s largest S&L with $307 billion in assets. “WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” said FDIC chairwoman Sheila Bair.

Also, it is important to note that WaMu will be largely unaffected. So don’t panic. Your money is safe and your banking will go forward as usual. Cash Money Life offers this about WaMu customers:

This deal combines the operations of two banks and most customers should be completely unaffected by this deal. Friday morning should be the same as any other day and customers should still be able to access funds and maintain their normal banking privileges. Customers should not panic as the only thing really happening is a change on the letterhead on their statements.

The way this has fallen out, though, makes for an interesting commentary on the state of things. In his speech the other night, President Bush said that the markets aren’t “working properly.” Apparently, though, they are.

See, WaMu had plenty of fundamental value. The risk was worth taking for JP Morgan. So JP Morgan bought the company at a good rate. The problem with the government buying the assets that everyone knows are bad is this: Who will buy them later? The President asserts that the government can make money when things return to “normal,” but in a normal market, no one wants to invest in something that they know has poor value.

Indeed, even though I am not huge on “free market” as most peopl think of it, I do think it’s working. After all, the investments that are bringing Wall Street down were over-valued, their status was obscured and they were over-leveraged. In a properly function free market, these types of investments should be going down hard. And they are.

Tags: free market, Washington Mutual, home mortgage loan, WaMu,
JP Morgan, bank failure, mortgage lenders

With the news of the economy, and with (an almost certain to be passed) $700 billion bailout in the works, many people are rethinking the idea of home ownership. This is a good thing. Before you buy a home, it is important to ask yourself some very basic questions. Trees Full of Money offers 5 questions you should ask yourself before you buy a home:

1. Do you plan to own for at least three years?
2. Do you have an emergency fund?
3. Can you afford the payment?
4. Have you factored in taxes, insurance and maintenance?
5. Are you familiar with the area?

Right now, I think that #2 and #3 are the most important considerations. An emergency fund is a good idea because it can help you stave of foreclosure should something unforeseen happen while you are trying to make mortgage payments. An emergency fund also demonstrates that you are financial responsible, and that you are planning for future needs. A home mortgage is a huge obligation, and you should be prepared for it.

Can you afford your mortgage payments?

#3 is important — especially when viewed in light of the current financial crisis. And when I talk about affording your mortgage payments I mean two things:

• That you can afford the payment after the reset. You shouldn’t make a choice based on what happens with the mortgage interest rate now, unless you are getting a fixed rate. Mortgage payment decisions should be based on what you will pay each month after special rates and deals end.
• You can comfortably make payments. Your mortgage payment should be no more than 1/3 of your monthly income. 1/4 of your monthly income is better. You need room for other expenses in there.

If there is one thing we’ve learned from this meltdown, it’s that just because you can do something, and just because someone will let you do something, it doesn’t mean that you should.

Tags: home loan, buy a home, home mortgage, afford home,
mortgage payments, mortgage interest rate, mortgage loan blog