With the Subprime bubble decimating all within the blast range, I’ve never had a lot of sympathy for people that have gotten themselves into loans they couldn’t afford. I was of the opinion that they deserved what they got for not reading the fine print. That opinion is changing recently, since I’ve been hearing about a lending practice that gained popularity in the run-up to the Subprime meltdown.

Redline Discrimination – “Normal” redline discrimination occurs when businesses identify areas where they choose not to do business (either because it would unprofitable, or because other circumstances make doing business there extremely difficult). This happens a lot with inner-city and lower-income areas. Pizza deliveries won’t be made, newspapers aren’t delivered, and many ‘normal’ services are not offered to those areas/residents because of socioeconomic discrimination.

An Example: Insurance companies (before being forced to by the government) would not offer insurance to some parts of Florida, as it is repeatedly hit by storms. It was unprofitable, and they didn’t want to take the much higher risk of covering the people in that area.

The New Discrimination

With Reverse Redlining, a new practice arose of focusing on offering sub-prime mortgages to people in these economically challenged areas. On average, the people in these districts were less wealthy, less economically sophisticated, and were fairly easy prey for the sales pitches of the time, espousing that you could squeeze home equity money out of your home, and still make a profit as the home value went up.

Not to mention that the sub-prime mortgages provided the underwriter with more up-front fees and commissions (read: More MONEY) than a normal prime-rate loan. And as those underwriters planned to bundle and re-sell the mortgages as soon as possible, there was no risk to them that the mortgages would default.

It was VERY profitable, and so, became almost a standard practice throughout the industry. Many people that actually qualified for prime rate mortgages were talked into the more expensive, and more risky sub-prime variety.

Shining a Light on the Problem

Now, as the problem is starting to affect cities and states across the U.S. many state and local governments are seriously moving towards suing the larger banks for “predatory lending” practices, to try to recoup some of the lost tax revenues from these foreclosures. Many, if not all states are seeing projected revenue shortfalls, and the larger states (such as California) are taking actions now to try to deal with the expected lack of funds next year.

So far, cities like Cincinnati, Detroit, and others are putting together lawsuits against banks that used Reverse Redline Discrimination, in an attempt to ‘get back’ some of the money their practices eliminated.

I wish them luck, but I don’t know that it’ll be any time soon before the lawsuits bear fruit.

In the meantime, they still have to deal with the spiraling problems of economic downturn, continuing (and in some cases accelerating) housing foreclosures, and a constituency that is just trying to survive these economic storms.

A Change in Perception is Needed

I know that even amongst my fellow bloggers, my initial knee-jerk reaction was not unusual. People should understand what they are signing and what they are getting into. Personal responsibility is a strong belief of mine.

But even with that belief, the apparent ease and widespread application of this unfair lending practice has gone a long way to changing my mind about this. I still believe that the people being taken advantage of should have read the fine print better (and possibly gotten a second opinion) but I can understand how the could have been taken in, by a slick salesperson and the allure of having more cash from their existing home. Everyone has some responsibility in causing the housing meltdown, but maybe in this case, the homeowner isn’t as guilty as I originally thought.

Do you know someone that was ‘fast-sold’ a new mortgage? Or someone that went with a subprime instead of prime rate mortgage on a sales person’s recommendation? Leave us a comment and let us know.

On a lark, I decided to get the ‘free, no obligation mortgage account review’ just to see what would happen.

I was transferred to one of their ‘mortgage specialist’ who took a look at my balance due, interest rate, and payments.

You Live WHERE?!??

I knew things weren’t going to go well when the strange silence came after he started looking up prices for comparable homes in the area. I know for a fact that no homes have sold in the past year anywhere near me, with many houses on the market, so I wasn’t expecting much.

"It looks like according to my records, your house would only appraise at $170k. Is that right?!??"

First, how would I know without a professional appraisal, and second, even by rule-of-thumb estimates that sounded about what I’d guessed it would appraise for.

"At that rate, even if we reduced the interest by approx. a percentage point, the actual savings wouldn’t work out, after the points."

I was pleasantly surprised to hear them being honest about my savings.

"Even if we were able to somehow get it appraised at $200k, that would just be barely enough to get rid of PMI, and give you a $480/year savings, but I don’t know if we want to risk putting a few hundred into an appraisal that will probably come back short."

At this point I was more than a little impressed. I’d heard about much of the ‘appraise-raise’ practices where the companies made loans based on (possibly inflated) home values. And now that things were in the dumper house-wise, this Countrywide person was sounding pleasantly responsible in letting me know that the outcome probably wasn’t worth the risk.

We made a bit of smalltalk and then said goodbye. He wished me luck in my refinance, and mentioned that they would continue to check back periodically to see if there was anything they could do to lower my payments/rate.

Score one for Countrywide. Even though they weren’t able to lower the payments, they treated me straightforward and professionally.

The house we’re in now is not particularly small, but it is a bit crowded now that the boys are getting bigger. And with all the super houses dropping in price, and the up-coming incentives from the government (particularly the $7000 tax break for people that buy foreclosed houses in the proposed Housing Bill) it seems to be converging on a buyer’s Perfect Storm.

To that end, we’ve been looking around about half-seriously for a larger, better house. Larger would be at least one more bedroom (4) and hopefully a pretty big rec room. The ‘Better’ is more ambiguous. My wife has always wanted marble (or marble appearing) countertops in the kitchen, and a "kitchen island" like many of the newer homes have. I keep having cute flashbacks of cutting up vegetables on the island and ‘banishing’ the leftovers after they’ve been ‘voted off’ the island (yes, I’m a Survivor fan).

Myself, I’ve always wanted a rec room and a ‘real’ office to work in. Sometimes my work requires staying home, but since we only have three bedrooms, I’ve been banished to our (unfinished) basement. I’m about half convinced that my recent illness was exacerbated by the cold floors and dank air. An extra room in the house for my work would be ideal.

As for the rec room. I’ve had friends in high school that had large finished basements that we always hung out in; Watching TV, listening to music, playing games, etc. and I’d like something similar for myself and the family.

Let Loose the Dogs, The Hunt Begins!

Living in the mid-west, I’ve got a number of advantages on my side already.

• Low Cost of Living – I’ve read comparisons that say $100k here is the equivalent of $150-175k+ on either coast or most larger cities.
• Lots of Land – Getting an acre (or two) of land with the house is pretty much a given on a majority of houses. Finding something similar on the coasts or in a metro area either a) drives the costs up to the roof, or 2) comes with a stamp-sized piece of land.

There are some negatives of course, I live in the mid-west!!!

Seriously though, there’s no ocean view, the closest thing we have to skiing is an artificial ‘mountain’ (actually an oversized hill that wants to grow up to be a mountain someday) and our cultural area is kind of a mishmash of everything from hard-rock, to new-wave country. And of course, we’re very deep in the bible belt, which causes it’s own issues if one isn’t DEEPLY and PUBLICLY religious.

All in all though, I like where I’m at, given all those things. The thing I don’t like is EXACTLY where I’m at.

So, this weekend, as a family, we started wandering around various nearby areas and exploring what’s on the market. One of the REAL stars we happened to come across, but obviously have NO way of even HOPING to get into, was this one.

Price: $2,603,000

Bedrooms:  6

Full Baths:  6

Half Baths: 3

This magnificent estate property is situated on two lots, with rolling treed hills and breathtaking views. In-ground pool, Over 10,000 sq ft Two complete kitchens and two garages with a total of 9 garage car spaces. There are too many upgrades and bonus rooms to mention.

The point I’m trying to make (other than I drooled over this one until reality slapped me in the face. 6 bedrooms? 9 bathrooms??) is that you take this kind of house, with these amenities and find something equivalent on the east or west coasts, and you’re realistically talking $7-8 million dollars just as a lowball-offer. BTW, the above picture doesn’t do the house justice. It is Beautiferous when you drive by it.

This house is the HIGHEST priced house in a whole subdivision of similar (but admittedly smaller) houses that have almost HALF of them for sale. (Oh, and going to a different real estate web site, it’s listed at $2.5 mil. Already a $100k discount within a few days).

Now, Explaining the Temptation

I FIRMLY believe that things are going to get worse for the housing market, if not the economy itself, before it gets better. The new Housing Bill won’t go into effect for months. Next month one of the LARGEST number of sub-prime adjustable rate mortgages are coming up on their ‘adjustment dates’ in years, which I’m betting will trigger more foreclosures. The market is saturated with upwards of a year or more inventory of houses, and with the credit crunch, the price of gas and food going up and jobs starting to disappear through company layoffs and cutbacks, people are spending a lot less than they were before.

This all adds up to an even worse future for those McMansion owners that didn’t put away for the rainy day. If I’m right, the rains they’ve seen recently are just a light shower compared to what is on the horizon.

So, why jump in?? Having said that, other than recently, REAL ESTATE HAS ALWAYS BEEN A GOOD INVESTMENT. The sub-prime bubble has scared a lot of people about real estate, but historically, it has always done well overall. We’re in a position of re-adjustment, but even with a 50% reduction in some areas, it will only bring it in line with where it would have been before the whole debacle started. They aren’t making any more land, and if you can weather the bad times, the good times can get pretty good.

Mostly this is idle hunting right now. We’re killing the debt first, so the increased credit requirements won’t catch us, and we’re going to fix up this house to sell (a daunting task on multiple fronts). We’re not exactly in a huge hurry to move, so we can take our time and find a good deal. I’m betting the market downswing doesn’t bottom out until sometime in 2009, at which time we should be ready to make our jump, if we find somewhere to jump to.

So, it’s time to ask the readers: Do you think I’m crazy (and if so, why?) or do you think I should make the jump next year? I’m interested in hearing your take on buying up in this market.

Debate has been going on over one particular point; The ability of bankruptcy judges to unilaterally modify the mortgage agreements for those filing bankruptcy. Ultimately, to get the bill to a point where it even had a HOPE of passing, it had to be removed from the proposed bill. That means that even with bankruptcy proceedings, the most that can happen is to restructure the existing debt. If the person(s) filing bankruptcy can’t pay for the house under ANY means, it’s still going back to the bank.

What the Bill Does

There’s a number of things the bill will allow to happen to help those that are about to lose their homes, and to help others and the economy deal with the existing HUGE backlog of foreclosed properties. As written (and remember, it’s still in the debate phase, so things can change, or the president could veto it entirely)

• Provide a $7000 tax credit, split over two years, for buyers of homes that are about to go to foreclosure or already in foreclosure.
• The issuance of $10 Billion worth of tax-free bonds, with the proceeds to go to help refinance mortgages in trouble (the criteria or selection process hasn’t been completely explained yet).
• The net operating loss carry-back tax rule for 2008-2009 would be extended by two years. That means that related industries (contractors, builders, materials suppliers and a whole myriad of other businesses related to the housing market) could write off their losses over 4 years, instead of the standard 2. It might make the difference between surviving and bankruptcy to some smaller businesses to do this.
• Provide existing homeowners with a standard tax deduction of $500 for single filers or $1000 for joint filers. Finally, a little reward for keeping yourself in check!
• The FHA loan limit would rise to 110 percent of an area’s median home price, with a cap of $550,000 and a 3-1/2 percent down payment required from the borrower. This is an increase from the previous loan amounts the FHA would guarantee in years past.
• Provide cities and communities with $4 Billion in federal grant money to purchase, fix up (where necessary) and resell foreclosed houses in the area. This is to prevent many of the ‘housing deserts’ that are starting to crop up in some cities; Large tracts of either unsold houses, or houses that have been foreclosed on, causing the surrounding area to be virtually abandoned.
• Provide for debt counseling; $100 million would go to provide free ‘Mortgage Counselors’ (already free through the FHA, but in limited numbers) to work with families to find alternatives to foreclosure, and to negotiate with lenders on the borrowers behalf to try to broker a better mortgage deal.
• Put in place a stipulation for lenders to follow special procedures for U.S. Armed forces members coming back from combat. This would hopefully allow our returning military members the chance to have some breathing room and get their affairs back in order before any dire financial actions would be taken by the lenders. Another great provision of this bill, in my opinion.
• Require lenders to MAKE the borrowers read and understand what they are getting into when they get a mortgage. (If this had been in force before, I’m betting a lot of the Adjustable Rate Mortgage buyers might have thought twice before getting into their situations).

Who Foots the Bill for the Bill

Of course There Ain’t No Such Thing as a Free Lunch (TANSTAAFL) and this is no exception. It’s going to come out of taxpayer money. If you’ve visited before, you know I’m none too fond of the idea of paying for someone else’s mistakes on the mortgage front, but there is a point where you just have to bite the bullet and do what’s in the best interest of the country. I think we’ve reached that point, and maybe a bit beyond. This housing bubble, no matter who’s fault it is or how it was triggered, has grown to the point that it threatens to do some serious damage to the U.S. economy, and by extension, the entire world economy.

Sen.’s Clinton and Obama are both in favor of pretty powerful legislation (see above) to stem the flow of financial blood from this wound, while Sen. McCain is in a more ‘let the industry correct itself’ opinion. I think that either solution might be a little too far (in either the liberal or conservative directions), but this bill being discussed is starting to sound like an acceptable compromise to do what has to be done for our economy,

This may be just the first legislation (with more to come) to address the housing crisis, but something substantial needs to be done before the patient (the U.S. economy) bleeds out from all the financial problems. Even a band-aid at this point would be an improvement.

What do you think about the proposed housing bill? Too much, or not enough?? What would you add to it if you could? Leave us a comment and let us know.

Articles are starting to appear across various news sources about how investors that have overextended themselves, gorging on Adjustable Rate Mortgage (ARM) covered investment properties are now becoming the next wave of foreclosures. The get-rich-quick schemers are starting to see their plans crumble, as the rates adjust upwards ABOVE the amount of rent they’ve been able to collect.

Problems with the Leveraged Investor

Even with rent rates going up, for the investor that did the ‘zero down creative financing’ options, the rate shift is causing so much pain that they are starting to foreclose at a rate similar to other sectors of the market. What this means? If you’re a renter who thought they were safe to weather out the Subprime mess, think again!!

What’s happening? Landlords are still collecting rents, but have stopped paying the mortgage on the house itself. After around six months of these kind of financial shenanigans, the bank comes in and forecloses on the house and evicts the renters. The sad part? "The renters don’t find this out until they get the eviction notice!". Also, there is little recourse for getting past rent or deposits back when this happens, as either the landlord has spent the money or the banks aren’t conducive to giving money to renters of a foreclosed house.

The Banks Don’t Show the Love

Since banks aren’t in the business of managing property, the vast majority of them automatically evict the existing tenants. Their thoughts; It’s better to have no one in the house (so it doesn’t get trashed by renters, and can be shown IMMEDIATELY for sale to perspective buyers). This causes problems for renters because of the SUDDEN need to move, and all the time, hassle, and expense that it entails.

Things the renter can do to go on the defensive

• In rent-controlled areas or cities, there are already laws in place to prevent ‘instant’ evictions. Contact a lawyer and see if they can at least postpone the eviction.
• Negotiate with the bank. Sometimes it’s just a matter of a good sales pitch. Talk to them about extending the eviction date, or if you REALLY like the house, you might approach them about buying it directly from them. You’d have a history of occupation, and it would save them the cost of fixing up the house and putting it on the market.

Bad, Bad, Naughty Landlord

You might be tempted to be angry with the landlord, but by the time the eviction notice comes, it’s pretty much useless. The landlord is out of the picture and there’s nothing you can do to get him/her back in. Better to just let it go and concentrate on solving your problems.

However, if you’re a landlord thinking of going down this path,.. Do the Right Thing. Your renters trust you to provide them with a home to live in, at a reasonable price. Screwing them over, even when you’ve made bad financial decisions, isn’t the thing to do. When the bad time come, you’ve got to cowboy up and deal with it openly and honestly. It’ll make the outcome better, even in the worst of situations.