“Cash-out” Refinancing and Swimming with the Fishes Underwater

Milwaukee       Anyone running out of things to worry about?  How about housing finance?  Maybe we could party like it was 2007 again and watch it all come crashing down again?

For example, The Wall Street Journal, noted that housing “cash-outs” hit the highest level since the 2007 housing meltdown in the 3rd quarter of 20018, involving 80% of all the borrowers and cashing out $14.6 billion in home equity.  Cash-outs are slang for refinancing home mortgages in order to pull money out of any equity gains.   This post-2007 surge was surprising since normally refinancing is strongest as interest rates are going down and borrowers are looking to lower their monthly payments when they have a higher rated mortgage, while of course also sucking some of their capital out simultaneously.  Driving the truck this time, regardless of rising interest rates, was the return of higher prices for homes, so many struck while they hoped the iron was hot.

Why is this important?

Some economists and researchers still involved in the post-mortem of the Great Recession have more recently argued that cash-out refi’s were a much more significant factor in triggering the crash and busting the bubble than previously acknowledged.  In fact, these cash-out refi’s may have been hyperventilating more air into the housing bubble than new home purchases or broker driven low down payment and marginal credit.

Worth some worry?  Maybe.

Here’s another bit that has emerged, contradicting received wisdom at the time during the Great Recession.  As we all know, millions of homes were underwater, meaning their mortgage obligations were way higher than the value of their homes once the bubble crashed.  Most observers believed that, like the much earlier savings-and-loan meltdown, people would walk away from the now inflated mortgage obligations because it was in their economic self-interest to do so and simply mail the keys back to the bank.   Frankly, in a project between 2008 and 2010 in Phoenix when we were unable to negotiate mortgage modifications, we advised people to stay as long as they could in default, save the money, and use it to start over when they finally had to walk away.

Well in fact the numbers now indicate that most families just put on their scuba gear and swam underwater rather than crawling to the shore.  Researchers have now found that only 3% of mortgage holders walked away.  That’s amazing!  Interviewing many of them, the thinking was varied from “honoring my debts” to not finding any better alternatives to simply hoping for the best.  What the researchers did not evaluate was the fact that many of the “ghost” banks simply allowed people to stay on any terms, including minimal payments, rather than have to devalue the mortgage on their books.  Personally, I would bet many families took our advice and were able to weather the storm underwater because the banks were not in their usual rush to foreclose, having too many nonperforming loans on their books already, and too few new customers in line to buy the foreclosed properties.

What can we learn from all of this?  Don’t’ suffer from “premature certainty” and measure twice or more times before cutting, which is good advice for policy makers as well as carpenters.

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Some Good News for Low-Income Families Hoping for Homes in Cincy & Detroit

New Orleans       For lower income and working families in these days of escalating rents and no money flowing in the credit deserts, the old saying that if it “weren’t for bad news, there wouldn’t be any news at all” feels too much like an everyday story.  In Detroit and Cincinnati recently, there was some good news that should create some hope for some families trying to keep homes out of foreclosure or buy homes through installment land contracts.

The Detroit story is a hard one to get your arms around, like so many things in Detroit.  The topline is that a suit led by the ACLU reached a settlement with the City of Detroit that may allow some families to stay in their homes.  As the Detroit News summarized,

The ACLU sued the city in Wayne County Circuit Court two years ago over how it administered the state-mandated property tax break for the poor, arguing it was inaccessible to the vast majority of homeowners who were needlessly losing their homes to foreclosure.

To be clear, the city didn’t allow lower income families to get the property tax exemption approved in state law and instead tallied the delinquent property taxes for several years and then after being in arrears for more than three years, foreclosed on the houses and put them up for sale at tax auction.  Nothing pretty about that story.  It’s almost a Ripley “believe or not” tale.

The settlement forces the city to have to step up.  As the Detroit News reports:

Under the plan, a group of homes headed to this year’s fall tax auction will instead be bought by the city and sold to owner-occupants who prove they qualified for the city’s poverty tax exemption, which lowers or eliminates tax bills.

All good so far, though it gets tricky.  Families that can prove that they were wronged have to buy back the homes for $1000, which, frankly, I don’t understand at all.  The money they say is going to come from private foundations.  The whole affair is being administered by some fantastic folks the ACORN Home Savers Campaign was privileged to meet earlier in the campaign at the United Community Housing Coalition.  UCHC has already qualified about one-hundred families.  There are more than 4000 homes scheduled for the fall auction with over 2000 occupied by owners or renters, so of course there is concern that there may be more people trying to win justice under the settlement than there is money available from foundations, but fingers crossed.  This is still good news and the city can’t claim to be protecting home owners from foreclosure even while cheating them earlier so I’m sure there will be a fix if there’s a shortfall.

In Cincinnati, an ordinance was passed unanimously to assure that any house offered under an installment land contract had to first establish that it was up to code.  Given the history of how companies have operated there, this is also a good step forward.

In both cities these are steps forward and offer hope of more progress for lower income tenants, potential homeowners, and existing homeowners in the future.

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