What is the best way to get the US real estate market / economy going?

A) lower interest rates to 4.5% for new / first-time homebuyers (Ben Bernanke’s plan)

B) lower interest rates to 3.0% for those facing foreclosure (at least three-months behind in payments) (Sheila Blair’s plan)

C) wait until home prices drop enough to bring new buyers into the market (Adam Smith’s plan)

D) $7,500 – $22,000 tax credits to homebuyers (US Congress’s plans)

E) all of the above (National Association of Realtors plans)

F) none of the above (I.M. Angry’s plan)

Or, do you think you have a better plan?

You might think that the foreclosure crisis is mainly hitting innocent people taken advantage of by unscrupulous lenders.

Truth is, the reality is a lot more complex.

in an article in this week’s Dorchester Reporter, Chris Lovett reports that many homes in Boston’s Dorchester and Roxbury neighborhoods appear to have been bought by speculators and flipped for inflated amounts, or unceremoniously dumped as the owners fled (if they ever existed, at all).

A review of more than 200 conversions over the last two years in Boston – mostly in Dorchester and Roxbury – shows more than 100 foreclosure filings against owners who bought more than one unit, sometimes in the same building. Names that appear as unit buyers with mortgage trouble sometimes turn up later as investors converting more units, or as people with power of attorney to represent other buyers.

What will happen next is anyone’s guess. Will new buyers come in to stabilize the neighborhoods, or will the faltering economy leave destruction in its path?

Back in the halcyon days that were 2004-2006, many buyers who should have known better took out what are called “option-ARM” loans.

As you know, and as Wikipedia describes, an option-ARM is “typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.”

Many borrowers who took out these loans ended up paying just the minimum, which doesn’t cover the cost of the accruing interest, which is then added to the principal balance on the loan, which means your loan balance actually gets bigger, not smaller, the longer you are in your home.

At some point (115% of value, actually), the bank doesn’t let you add any more to the outstanding loan amount, and then the fun begins.

According to a recent article:

In one of the first significant studies to consider the ramifications of option ARM loans, Barclays Capital revealed that nearly 95 percent of all outstanding option ARM loans “have negatively amortized to some extent” and that the payment shock incurred when the loans reset, or recast, will be far more severe than the highly publicized subprime adjustments.

In a report titled “Option ARM-ageddon: The Real Reset Risk,” Barclays Capital researchers predicted that a majority of the existing loans would recast in 2010-11 and monthly payments would jump 60-80 percent. By comparison, most subprime resets should cause only an 8-10 percent payment shock.

The problem is easy to understand. First, many borrowers won’t be able to afford the jump in payments. Second, many borrowers won’t be able to refinance into better loans, since the values of their homes have decreased. Third, they won’t be able to sell for what they owe, not even what they owed before they started owing more.

If borrowers had paid the regular monthly payment, they would have been fine. But, there were a couple problems. First, many people who took out these loans borrowed beyond their means. So they couldn’t afford the loans from day one. And, when some borrowers financial situations changed, they were faced with the choice of making regular payments or cutting back and, of course, many cut back.

There are two parts to an “option-ARM”. The first part is the “option” of course, which is bad enough. The second part is the “ARM”. As the article mentions, rates will increase for many. But for many, rates have already increased. Many of these loans were tied to the LIBOR rate which began rising during the same time so required loan payments began to rise, right away. (For example, the LIBOR rate went from 2.17% to 4.182% in a matter of 15 months, beginning in 2005.)

Just throwing out one example, suppose you took out a $420,000 option-ARM loan back in February 2006. You had four options: pay the 15-year loan amount of $3,328, the 30-year loan amount of $2,263, the interest-only loan amount of $1,761, or the “minimum payment” amount of $1,399.

Guess which option you were likely to choose. Yes, the one where you pay the least amount, hoping that some day in the future you can “catch up”.

Bloody likely.

As you can see, these types of loans are terrible, and I would hope that someday they will be outlawed. Many major lenders have stopped offering them.

But, there are still banks who see them as viable options for some borrowers.

In theory, they are right.

In reality, it’s drinking gasoline.

( *** On a related note, when I hear people these days talking about “reverse mortgages” and how “you can’t lose”, it makes me fear that we’re in for something very similar. Reverse mortgages are a way for old people to receive some of the value for their homes while remaining in them until they die. The company buying their homes can’t kicked the people out, for any reason.

While it seems like a “win-win”, something just strikes me as risky, and I wonder if it will end up biting a lot of people in the ass, somehow.)

Source: Option ARM fallout to surpass subprime mess – By Tom Kelly, Inman News by way of Housing Intelligence

Housing expert and economist Karl “Chip” Case says the US real estate market looks close to its bottom and could rebound within 90 days.

He bases his opinion on the fact that new housing starts have dropped under the 1 million (annualized) rate, for the first time. In previous downturns, the market began to rebound when it hit this benchmark.

A caveat, however.

“Anybody who tells you they know when the housing market will bottom is delusional, but anybody who denies there are some positives out there that could make the housing market bottom fairly soon is equally delusional …”

Source: End To US Housing Market Meltdown In Sight? – Banker & Tradesman

How do you help a homeowner who can’t keep up his or her payments on a home loan?

You find him or her another loan, is what you do.

So that the borrower can default on that loan, too.

At least that’s what pessimists are saying will happen following Congressional approval of the new “housing rescue” bill, which will become law once signed by President Bush.

First, what are the highlights of the bill?

Allow Holden Lewis at Bankrate.com to fill you in (along with my comments in parentheses).

* The first-time homeowner tax credit. ($7,500 “loan” to first-time homebuyers, courtesy of the US Congress (and taxpayer); must be paid back over ten years.)

* The extension of loan-amount limits. (Higher conforming loan amounts, meaning you can borrow more, hopefully at a lower interest rate.)

Among other things.

Here’s the kicker (as pointed out by Holden, as well, but quoting columnist Dean Baker): of the estimated 400,000 homeowners who might benefit from having reduced loan payments, 160,000, or 40%, are expected to default, anyway. Again, with lower payments, the borrowers will still lose their homes.

That this may happen only raises concerns on the parts of many that this entire housing “rescue” plan is nothing but government humbug.

Worse, when those new loans do go belly-up, private industry won’t be on the hook, the FHA will be.

Backed by the full-faith and credit of the United States government.

(I didn’t much like the op-ed piece in today’s Globe written by By Chuck Turner and Merelice. It perpetuates the myth that the lending crisis is primarily the fault of banks (it’s not, it’s the fault of people buying homes they couldn’t afford) and that the primary reason for the increase in defaults is resetting interest rates on loans (it’s not; more than half of all homeowners defaulting did so before their rates reset. But don’t let facts get in the way of a good story. (Their recommendations have some merit, though.))

More: The Housing Law and You – By Holden Lewis, Mortgage Matters, Bankrate.com

Also: Bill That Will Cause 140,000 Homeowners to Face Second Foreclosure Passes Congress – By Dean Baker, American Prospect

And: Fighting the Foreclosure Crisis – By Chuck Turner and Merelice, The Boston Globe