I received a couple of interesting emails:
Wanted to add some color to the latest Critical Mass update..
The reason we aren't re-fi'ing is two-fold:
1) We've already got a very low interest rate... just a hair over 5% on a 30 year fixed, and about 10 years into it. By historical standards, that's AMAZING. We don't feel like we're 'missing out' by shaving a fraction of a point from that rate.
2) We're already concerned about our chain of title, and are VERY concerned about two specific things; a) it'll get FUBAR'd worse, and b) we'll lose any legal recourse to rectify a broken title with a new mortgage contract. THIS is a sleeping giant that hardly any mainstream analysts have seriously examined. We think the banks are scared stiff about what happens when the pervasive title fraud in this country gets uncovered, and are scrambling to re-write their loans to 'heal' busted titles.
3) Our current loan is non-recourse, so should times get even tougher, we could have an attorney help us 'walk away'. That's probably not in our future, but hey.. I'm a professional planner, so that means all eventualities get examined. I suspect many of these re-fi's have full recourse clauses written into the fine print... You think the bank is going to point that out in the signing session? No, I don't either.
There ya' go.. Just thought I'd add these issues to the pile.
Thanks again and talk soon,
I really enjoyed this email. First, it came from someone who has reviewed all of their financial options and details of their money world, completely. I love someone who does that because it allows one to have a smart money game plan.
The broken title issue is potentially a big issue IF it gets pursued with any vigor in the future, and yes, I can image banks trying to clean things up as part of any new refinancing.
As a business loan officer, my loan documents are an inch thick. No one, NO ONE, wants to read that mound of paperwork when they want money and usually just sign and go. It's quire rare for a borrower to read any kind of loan documents or have an attorney review them. It's quite easy to put anything you want in loan documents as a lender.
Another interesting email:
JD - You recently described how most states are recourse states, that is, unless a mortgage holder has filed for bankruptcy, the bank can come after him for their losses if they sell his house in foreclosure and get less than what he still owes on his mortgage.
And BofA has made headlines for announcing it's going to squeeze its debt card holders with new fees, to make up for what the bank is losing on (legally mandated) lower fees from retailers.
And now you write about how already-bleeding banks are dealing with mounting foreclosure cases.
In 2005, the banks pushed legislation through Congress making it harder for people to escape their credit card debt through bankruptcy. Means testing can send a bankruptcy applicant into chapter 13 (some debt stays) instead of chapter 7 (clean slate.)
What do you think the chances are that banks will eventually push Congress to pass something similar for mortgage debt? Some sort of "no-escape" law that will attempt to keep people tied to their mortgage debt - even after their house has been sold to someone else - so long as they have a paycheck or a pulse?
It's an interesting question. My gut tells me there is very little chance of that happening and I hope it doesn't happen. If a law of some kind like this was enacted, I personally think it would have downward impact on real estate values for the wrong reason. Why would anyone want to buy a house and potentially end up in financial slavery?
If we want to cure the mortgage issue it's quite simple..................let's get back to basic and prudent lending!
We only let banks, or Freddie, Fannie and FHA make a loan to someone who demonstrates they can qualify for the loan with the following standards:
1) A minimum down payment of 20% on a single family residence, 25% on a rental, and 30% on a jumbo or vacation home. Let's require anyone lending money insured by FDIC or some other government agency (Freddie, Fannie, or FHA) that borrowers have real skin in the deal.
2) Let's make sure the front end debt/income ratio is no more than 30% and the back end ratio is no more than 35-40%. We have too many people living to make a mortgage payment and spending more than half of their income on debt payments.
3) A home buyer needs to demonstrate liquid assets of 3 to 6 times the monthly loan payment. This demonstrates that after the down payment, the borrower has some reserves to withstand a financial shock.
If we forced lenders to be prudent lenders we wouldn't have the financial crisis we are in now. Sure, if we force them to do it now prices will fall for healthy long term reasons because there are few people who qualify today under the above.
However, once prices fell enough you would then see a lot more people qualify and a return to a healthy real estate market and a healthy lending environment.
Hope all is well.
J.D. Rosendahl, Rosey