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Roberto Bell's Articles in Mortgages

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Stop a Foreclosure by yourself- Act fast and save your house You may have been hit with a foreclosure notice or know that one is about to come. All hope is not lost if you act quickly. Even if your income is severely reduced or has plunged to 0, there are methods that you can use to stop the bank dead in their tracks. Record Numbers of Prime Fixed Rate Mortgages Head into Foreclosure Prime fixed-rate mortgages now account for one in three foreclosure starts. The best borrowers in our financial system are defaulting on the best loans in our financial system. Did Lenders Cause Their Own Credit Crunch? It seems lenders forget basic facts about lending every so often and create a new financial bubble. Perhaps they succumb to the pressure of the investment community or their own shareholders, or perhaps they just start believing their own "innovation" marketing pitch and forget the basics of sound lending practices. Recourse and Non-Recourse Loans - What Is the Difference? When a borrower cannot repay a loan, the lender may or may not be able to sue the borrower to collect any shortfall. The key difference is whether or not the loan is classified as a recourse loan or a non-recourse loan. Future Loan Terms and Residential Real Estate Markets One of the primary mechanisms for inflating the Great Housing Bubble was the widespread use of exotic loan terms including interest-only and negative-amortization adjustable rate mortgages. The appeal of interest-only and negative-amortization loans is the lower payments they offer, or their ability to finance larger sums of money with the same payment. These loan terms are unstable, and they may not be offered to future buyers. If these loan programs were eliminated, the financing sums would decline, and home prices would decline along with them. Credit Crunch - Why Did We Have It? In 2007, the financial markets were abuzz with talk of a "credit crunch." It was portrayed as some unusual and unpredictable outside force like an asteroid impact or a cold winter storm. However, it was not unexpected, and it was not caused by any outside force. The credit crunch began because borrowers were unable to make payments on the loans they were given. When lenders started losing money, they stopped lending money: a credit crunch. Housing Bubble Credit Expansion - Credit Inflated the Housing Bubble The Great Housing Bubble was inflated by a massive expansion of credit and the influx of capital into residential mortgages. The expansion of credit took four forms: lower interest rates, lowering or eliminating qualification requirements, different amortization methods, and higher allowable debt-to-income ratios. Mortgage Interest Rates and House Prices Mortgage interest rates are determined in an open market and are subject to the forces of supply and demand. These rates are the sum of three main components: riskless rate of return, risk premium, and inflation expectation. The Great Housing Bubble was characterized by historic lows in the federal funds rate, risk premiums and inflation expectations which resulted in the very low mortgage interest rates. These low mortgage interest rates allowed people to finance large sums of money, and these larger bids helped inflate the housing bubble. Financial Innovation is a Fallacy When the lending industry developed exotic loan products, they touted them as "innovation," and they sold these toxins far and wide. Since these loans achieved the highest default rates ever recorded, it is apparent the "innovations" of the bubble rally were not entirely successful. The cutting edge is sharp. Innovators often pay a heavy price for attempts at advancement. Sometimes these advances lead to quantum leaps in human knowledge and understanding. Sometimes the time, effort, and money are merely thrown into the abyss. The financial innovations of the Great Housing Bubble are of the latter category. Mortgage Equity Withdrawal - Are Americans Addicted to It? Much of the money homeowners borrowed fueled consumer spending and reinforced poor financial management techniques. It was common during the bubble rally for people to run up enormous credit card bills then refinance every year and pay them off. It is foolish enough to finance consumer spending, but it is even more foolish to pay for this spending over the 30-year term of a typical mortgage. The consumptive value fades quickly, but the debt endures for a very long time. Judicial and Non-Judicial Foreclosure - What Is the Difference? When a borrower cannot repay a loan, the lender may or may not be able to sue the borrower to collect any shortfall. The key difference is whether or not the loan is classified as a recourse loan or a non-recourse loan. If the loan is recourse, meaning the lender can go after any shortfall, the lender still must go through a judicial foreclosure in order to collect the deficiency. Downpayments Are Back! What Happened to 100% Financing? Downpayments are required again thanks to the credit crunch. Many people thought 100% financing would be made available forever. They were mistaken. One-hundred percent financing will never return because it exposes lenders to too much risk. Stated-Income Loans - How Common Were They? One unique phenomenon of the Great Housing Bubble was the utilization of stated-income loans, also known as "liar loans" because most people were not truthful when stating their income. When house prices were going up, greed motivated many people to buy homes to capture appreciation. Actually having the income to qualify for a loan was a limitation to participating in the financial mania. Stated-income loan programs eliminated this barrier and allowed people to borrow as much as they wanted without concern for home much money they made to cover the payments. Pick-a-Pay Option ARM Loans - What Are They? The Negative Amortization mortgage (aka, Option ARM or Neg Am) is the riskiest loan imaginable. It has all the risks of an interest-only, adjustable-rate mortgage, but with the added risk of an increasing loan balance. Using this loan, there is the risk of not being able to make the payment at reset, and the borrower is much more at risk of being denied for refinancing because the loan balance can easily exceed the house value. In either case, the home will fall into foreclosure. The Interest-Only, Adjustable-Rate Mortgage is Very Risky The interest-only, adjustable-rate mortgage (IO ARM) became popular early in the Great Housing Bubble. When fixed-rate mortgage payments were too large for buyers to afford, they turned to IO ARMs as an affordability product. Unfortunately, these mortgage products are not stable because at some point, payments increase, and the borrowers often default. Conventional 30-Year Amortizing Mortgage - Why use It? A fixed-rate conventionally-amortized mortgage is the least risky kind of mortgage obligation. If borrowers can make their payment, a payment that will not change over time, they can keep their home. At the end of a predefined term, the original funds have been paid in full, and the loan is discharged. Exotic Loan Programs Always Fail Over the last 60 years since World War II ended, a number of experimental loan programs have been attempted. These include interest-only loans, adjustable rate loans, and negative amortization loans among others. It is this group of loans that has consistently failed in the past for one simple reason: if payments can adjust higher, people will default. High default rates doom mortgage programs because these high default rates will eventually cause large default losses for the holders of these loans.

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