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Negative Amortization Loans and Recasting

by Doug & Gwen Campbell at Sun Bay Associates

The Florida mortgage crisis is maybe not as close to over as people want to believe.  The boom days of the real estate bubble, 2005, 2006 and 2007, were when the negative amortization loan was "king".  Now the 5 year clock is ticking for these loans to "recast".  Let's go through an example to see how this all works.

Why someone would want a negative amortization loan is a story for another time.

Take a typical loan in Florida in 2005.  Sale value of the house is $250,000.  The appraisal is $300,000 - of course high appraisals didn't really happen.  The loan is 80% loan to value, or LTV.  The interest rate is 7.5%.  Principal and Interest on a 30 year loan at 7.5% is $1678.11.  The interest only payment is $1500.  The total PITI is $2344.11.

Now this is where it gets really interesting.  Wamu, Countrywide, IndyMac, World Savings, etc. all of which no longer exist, allowed you to pay back at a 1.5% rate for 5 years or until you got to 125% or the original loan.  The loan then would "recast" and now you would have to pay principal and interest to pay back the balance in 25 years, not 30.

Here are the scary details of how this worked.  The interest only payment on the original loan would have been $1500.  At 1.5% payment rate, NOT the loan rate, you are only paying $828.29.  This is $671.71 less than the interest only payment so you are adding that amount ($671.71) to the back end of the loan each month.  In effect you are borrowing $671.71 every month so that at the end of 5 years you have added $40,302.60 to your original loan.  Now you will be at 125% of the first loan and then the loan will get recast. 

Fast forward to 2010.  Now the market value of your home is $150,000 and the appraised value is $140,000.  80% LTV is now $120,000.  You now owe $300,000 at 7.5% on a $150,000 property AND you only have 25 years to pay it off.  The 25 year loan of $300,000 at 7.5% brings a new payment of $2216.97, plus the esccrow, for a new total of $2882.97.  This increases your payment by $1388.68.

Here is another problem, you owe $300,000 on a $150,000 home and are shopping around for refinance loan.  And, in 2005, you got a stated income or no documentation loan.  Today you have to verify the income that you claimed with no hard paperwork. 

This is one outline of why there are so many short sales and bank foreclosures, especially in Florida.  Even the homeowners with the very best intentions are now in very difficult situations because of the precipitous drop in housing prices that they had no control over.  Now the banks have really tightened their lending requirements, making it very difficult for even qualified borrowers to get financing.

Let's wait and see how this plays out, however, don't expect Florida housing prices to suddenly rebound to 2005 levels.  We are years away from that, or even decades.

FHA Puts HVCC on Hold

by Doug & Gwen Campbell at Sun Bay Associates

With the problems that the HVCC has caused in the real estate industry, such as unqualified appraisers killing deals because of complete unfamiliarity with local markets, or simply because of an overall lack of appraisal experience, FHA Commissioner David Stevens recently stated that FHA has no plans to implement HVCC for FHA loans.

This action may help avoid some of the issues caused by out-of-market appraisers killing deals from not knowing the local markets or recognizing the values of specific areas or neighborhoods.

Realtors, mortgage brokers and the home-buying public should take this as very good news.  For an interesting take on this, click here

The bottom line, and it appears to be very good news for now, is that the FHA will not implement the HVCC for FHA loans, at least for the immediate future.

Foreclosures-Record New Highs

by Doug & Gwen Campbell at Sun Bay Associates

Recently, RealtyTrac, the leading online marketplace for foreclosure properties, in its April U.S. Foreclosure Market Report, said that foreclosure filings were at 342,038 properties in the US during the month of April.  One in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate posted since RealtyTrac began issuing it report in January 2005.

James Saccacio, CEO of RealtyTrac, said this April was slightly above the previous month, setting another record high.  Much of this activity is in the early stages of foreclosure, while bank repossessions, or REOs, were down to the lowest level since March 2008.  Mr. Saccacio suggested that this means the banks are beginning to initiate foreclosure on loans that had been delayed by legislative and industry moratoria.  It also means that later this year we can expect to see a spike in REOs as loans move through the foreclosure process in the next few months.

Unfortunately, Florida had a 37 percent month over month increase in foreclosure activity and this boosted the Florida foreclosure rate to the second highest among the states in April. One in every 135 Florida housing units received a foreclosure filing in April.  This is more than 2.7 times the national average.  The total Florida foreclosure activity is up 75 percent from April 2008.

Despite all the doom and gloom, this is definitely a buyer's market in Florida.  Mortgage rates are at record lows, for at least a generation, of as low as 4.75%.  There is the first time homebuyer tax credit of up to $8,000.  And there is a lot of housing available at very low prices.  The banks are lending to qualified buyers.  For first time homebuyers, there may never be a better time to buy the home that just two years ago seemed totally out of reach.

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Photo of Gwen and  Doug Campbell - Sun Bay Realty Group Real Estate
Gwen and Doug Campbell - Sun Bay Realty Group
at Keller Williams Realty
30522 US Hwy 19N, Suite 107 S
Palm Harbor FL 34684
Doug's Cell 727-741-4189
Gwen's Cell 727-741-7260
Fax: 888-447-7908