“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.


Contract for Deed as a Non-Profit Affordable Housing Tool

New Orleans   Thinking about how to open up a pool of potentially affordable housing to low-and-moderate income families, ACORN’s Home Savers Campaign has spent a lot of time visiting with people in various Midwestern cities trying to figure out a way to link abandoned housing stock in land banks with the potential for rehabilitation with families that need affordable housing.  There seems to be some appetite from certain companies and investors, and there are huge numbers of lower income families that want rent they can afford or even ownership, if they could swing the payments.  Experience with housing counseling has taught us that credit scores can be improved sufficiently to qualify for even conventional mortgages.  The problem is the gap.  The period between when the house is ready and the family is still working to get its finances and credit in shape.   The missing piece in the puzzle is the bridge.

Contract for deeds and other forms of land contracts have been the target of the ACORN Home Savers Campaign because they are little understood and often highly predatory.  Yet, we have found that nonprofit housing groups in Akron and Youngstown, Ohio, and Detroit all use various short-term land contracts to solve this problem in communities where banks are hesitant to take risks in lower income housing markets.  Theoretically, even long-time organizers in the fight against land contracts believe it is possible to devise such instruments in a constructive way, despite their existence in a grey area of few to nonexistent regulations.

Surveying the field, the answer we have found so far is that maybe such contracts might work.  In Youngstown, some housing organizers and advocates claimed that the nonprofit contracts were worse than some of the for-profit operators.  The Housing Authority says that it has lost money on its half-dozen land contracts.  In Akron, there are several nonprofits using land contracts in various forms on rehabbed houses.  In Detroit, United Community Housing Coalition uses a short-term contract for a couple of years successfully to establish a credit record for families trying to regain their foreclosed properties so that they can refinance.

A 2013 case study by the Federal Reserve Bank of Minneapolis on the use of contracts for deed as a bridge for lower income families detailed favorably the experience of the Greater Metropolitan Housing Corporation (GMHC) in the Twin Cities.  Their SHOP program which stands for Sustainable Home Ownership Program started in 2008.  Bridge to Success was the contract for deed program.  A SHOP-approved buyer would find a home and then SHOP would take possession and hold the deed for no longer than ten years, while the buyer would be able to deduct interest and taxes after making a 2% down payment on houses that average $126,000 and could not be priced any higher than $225,000. Once buyers have their credit straight they are assisted in converting to a mortgage.

Sounds good doesn’t it?  In 2013, they had financed more than 60 homes and had a goal of building a loan pool through Bridge to Success of $50 million that would give them the capacity to purchase 400 houses.  Checking now in 2018 on their website, when I hit the section for “contract for deed” under financing, it took me to a page that said the program had been discontinued.

What happened?  The theory was good.  The early experience was solid.  Was it the land purchase or something else?

Meanwhile we continue to search for the right piece to solve this puzzle.