Blog Somebody

By Author: David A Perry 

This past week Congress passed the long awaited housing bill. President Bush also signed it, so the new law is about to be available to help us victims of the 2005 housing bubble. The bill has a few differnent parts. The first part gives some interest free money in the form of a tax credit to any first time home buyers. This should help attract some new buyers and maybe it will increase the sales of homes over the next year or so.   

The second part is like a governement sponsored loan modication law. It offers some incentives to banks to let them forgive us of some of our debt as we forgive those who ….  LOL.

It looks like the Federal Government will give some of the lost money back to the bank, if they choose to let us borrowers who can’t afford to keep paying our high mortgages, because of high payments, low equity and a few other factors such as the reset of the loan payments on those teaser rate, option payment ARMs etc. ,that are accruing negative equity. Usually after 3 or 5 years the bank has to re-evaluate these loans and when they realize that your home has no equity, up goes the payment! So now what happens when you can no longer afford that payment. If the payment exceeds 75 percent of what you earn in a month, you are going to have a problem paying it, and this is something that the banks did not take it to consideration when you were originally approved for the loan.

Up until last year, if you had good credit, you could qualify for a mortgage at almost any bank, as long as you monthly income was 50 percent of the minimun payment. They never looked at your fully amortized payment to see if you made enough income to pay that. And in the case that the bank did check that, in most cases you could ask for stated income and boom you qualified for the loan anyway!

Well the new law is going to forgive us for all of that negative equity that happened as a result of us paying the less than interest only rate, and also the sharp decline in home values. This part occured because of 3 reasons:

1) Too many foreclosures and short sales. Sales at super low prices. This really reduces the average market values in any neigborhood.

2) Too hard for new buyers to get loans or qualify for them. This is because Banks had to get tougher and they realized their mistakes that are leading to so many foreclosures and short sales.

3) Prices that are too high to effecively yield any positive cash flow even if you rent out the place. Thanks to the Bubble of 2005 - 2006 ! So this makes it cheaper to rent, but not worth it to buy!

Well the new housing bill promises to forgive the negative equity and gives the homeowners that have not already foreclosed a second chance. So if you owe the bank $280,000 and your home is now only worth $180,000 your bank will have to eat the $100,000 loss and give you a new loan for 90 percent of the new value.  So now you get a new loan for $162,000 and now you can get it with a 6.5 percent fully amortized payment that is probably equal to your old teaser rate payment! This is almost too good 2 be true.

My only question is: Will this law apply to our investment homes too?

With the current housing and credit crisis more and more people are finding that their homes are worth much less than they owe on their mortgage. I too own 2 homes and my main home that I purchased in 2003 is also worth less than it was worth in 2006 and also it almost getting to be the same value that I paid for it.  Now my other house that was supposed to be a super investment is now worth over 100,000 less than what I owe the bank. That home was purchaced in late 2006 and that is the reason for its failure.

You see true home values probably hit a peak in either late 2003 or 2004. Then every price after that was based on a fake speculation and the prices were pushed up too high. The prices never could account for a purchaser to have a positive cash flow by renting it out. This is where all the banks went wrong. They should have realized it back then and this whole mess would never have happened.

This is something that all of the great real estate gurus always tell you. If you buy Real Estate, always make sure that the rent that you can get for it is enough to pay your mortgage each month, this also includes the escrow for taxes and insurance. But we all did not listen to this advice. We just went out and got those mortgages with those 1 percent teaser payment rates because our Real Estate agents assured us that we could flip it in 6 months or so. I still remember that smile on my agents face.

And then the flip that never happened. It was not possible anymore. By the time I closed on the sale of this pre-construction home, it was already worth $30,000 or $40,000 then what I had paid. The problem is that none of wanted to admit it. We did not want to admit that we screwed up. So we waited longer and longer and now we are so deep in debt to the bank that we have 2 choices left. One is foreclosure and the other is for us to wait 15 years until the 2003 prices increase 150 percent - at 10% a year. So forget about it. What is better? 2 years of bad credit or 15 years of misery?