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Monday Morning Cup of Coffee: New capital for negative equity

Reverse mortgage criteria set to tighten, and what went wrong with the GSEs

September 9, 2013
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Monday Morning Cup of Coffee takes a look at stories across the HousingWire news desk, with more coverage to come on bigger issues.

The nation found a new city to call home to the most negative equity mortgages. Rockford, Ill., now holds the title to that dubious distinction, with the highest percentage of homes underwater.

Even the mayor is in a tight spot. The Wall Street Journal writes a snapshot of what life used to be and what it is now. Like so many other cities in America, the former is so much more romantic than the later.

Unemployment is on a steady decline, but behind the national average, and may never catch up.

"In addition to factory layoffs, the town has been hit by a virtual stop in new construction," author Conor Dougherty writes. "In 2006, when Rockford was becoming a fringe community for Chicago, the metro area's population grew 1.6% and it was at one point on pace for 2,000 new homes to be built."

It is easy to feel some sympathy for Rockford, but the tragedy is negative equity is a widespread plague. The Sun Sentinel also reports that South Florida is equally slammed. "Although prices are bouncing back, these underwater mortgages continue to haunt the local housing market and will for at least the next few years," the article states.

Things are getting better, slowly, and some homeowners doubt they will ever claw back the money they stand to lose on their home investment.

The Federal Housing Administration, which insures most reverse mortgages, is set to tighten its criteria and The New York Times explains the probable outcome of that decision.

The FHA, of course, says such limits are necessary to protect its insurance fund. By not allowing homeowners to take out more risk on their homes, the insurer is less at risk. Under the new restrictions, a homeowner eligible to withdraw a total of $200,000 in cash, for example, would be allowed to get only $120,000, or 60% of that sum, in the first year.

According to the NYT, that could be a total deal breaker for some of the nation's elderly. Furthermore, the ability-to-repay obligations will also detract some lenders after taking in to account the taxes and insurance the reverse mortgage borrower will be required to pay.

Back in the Journal, Nick Timiraos wrote a piece encapsulating the recent history of the government-sponsored enterprises. It's not pretty, citing one misstep after another.

"To avoid consolidating more than $5 trillion in assets and liabilities onto the federal ledger, the government never took full control of Fannie and Freddie when it bailed them out," the article states.

When the U.S. agreed to inject vast sums of aid in exchange in September 2008, for a new class of stock—"senior preferred" shares—that paid a 10% dividend, the GSEs entered a period of ownership limbo. In such an instance, no meaningful reform can be accomplished according to then Treasury Secretary Henry Paulson.

"It was the single most important thing we did to prevent disaster—real disaster," said Paulson the article. But five years later, he adds, "it didn't occur to me that we'd be here with nothing done."

ABC is running a Bankrate story listing five popular mortgage scams. Be sure to read up and get to know when something is fishy.

The Federal Deposit Insurance Corp. did not close any banks this month, but it is looking to bar a former executive of First State Bank, according to NJ.com. The Cranford-based lender, closed by regulators in October 2011, allegedly extended improper lines of credit to its former chief executive, one of which ended up causing a major loss to the bank, according to the article.

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