Beyond the Headlines

The New York Times

Loans for a niche market
During the height of the real estate cycle, many people complained that lenders issued interest-only loans too freely. Their availability now is restricted to a privileged few.

Making sense of the story

  • A staple of the jumbo market, interest-only loans continue to be used by affluent borrowers to help them manage irregular cash flow, reap a tax benefit, or free up cash for investment elsewhere.
  • In particular, people in the financial services industry who derive most of their compensation from yearly bonuses commonly rely on interest-only loans to keep their mortgage payments manageable the rest of the year. According to one lender, homeowners who use this tactic often take a portion of their annual bonus to pay down the principal amount on their mortgages, which in turn lowers their monthly mortgage payment.
  • Because of this pay-down method, interest-only loans have evolved into a financial tool, and no longer a means to affordability.
  • Resulting from big losses, Freddie Mac stopped backing interest-only loans in 2010, resulting in fewer lenders offering them. Lenders who still offer them have strict qualifying standards.
  • Lenders generally require that the borrower have at least 30 percent equity in a property, and a minimum FICO score of 720. Determination of ability to pay back the loan is based on the fully amortized payment, not the interest-only payment.
  • Additionally, most lenders who will extend an interest-only loan to a borrower will want to see assets to cover as many as 24 months’ worth of principal, taxes, and insurance payments.

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In other news …

Los Angeles Times

Home prices post sharp increase in January
The Standard & Poor’s/Case-Shiller index recorded a sharp 8.1 percent year-over-year increase in January, underscoring the vigor of the recent housing recovery.

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The New York Times

A mortgage practice gets a closer look by regulators
Federal and state regulators are taking a look at the practice in the lending industry of purchasing and billing homeowners for property insurance policies that have lapsed.

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The Wall Street Journal

20 seconds for love at first sight
Researchers tracking the eye movements of subjects who looked at online home listings found that more than 95 percent of users viewed the first photo – the one that shows the exterior of the home – for a total of 20 seconds. After that, their eyes tended to flit all over the screen.

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San Francisco Chronicle

Consumer confidence falls in March
The Conference Board’s Consumer Confidence Index fell in March to 59.7 from a revised reading of 68 in February.

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Los Angeles Times

Report: Mortgages become slightly easier to get as standards ease
Credit standards appear to be easing, just a bit, according to an analytical study and reports from front-line lenders.

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Los Angeles Times

Housing investors buy in bulk, aim to profit in hard-hit areas
Investors say they’re providing nice homes for families by buying up bargains, holding them, and renting them out. Critics say they’re taking advantage of a situation they caused.

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Talking Points

  • Some homeowners who are behind on their mortgage payments and other debt obligations may think that filing for bankruptcy will prevent their home from going into foreclosure; but they are mistaken.
  • A Chapter 7 bankruptcy – the most typical bankruptcy protection filed by individuals – will at best delay, but not prevent, a foreclosure. Banks will typically wait out the bankruptcy case, then immediately proceed with the foreclosure upon discharge.
  • Occasionally the banks will petition the court to release the property even during the bankruptcy if it has no equity so they can proceed with foreclosure. If the home has enough equity, it will be sold as part of the bankruptcy case, with the proceeds going to creditors.
  • What a bankruptcy will do is convert all “recourse” loans – where a borrower has a personal responsibility for repayment – into “non-recourse” loans, where lenders cannot sue a borrower to get repayment. That’s because a Chapter 7 bankruptcy will discharge the borrower’s personal responsibility for the debt even though it will not release the liens on the property for the loans.
  • So, while a bankruptcy does not eliminate secured home loans and a homeowner can still be foreclosed on, all home loans, including second mortgages and home equity lines of credit, will become non-recourse, and lenders cannot sue the homeowners for any balance owed.

Source: Orange County Register

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