Wednesday, November 25, 2009

Congress and Department of Education miss Boat on Student Loans

In the fall of 2008, the federal government and Congress enacted a new program that would promise relief for millions of college students across America.  Starting July 1, 2009 students with federal student loans could ask that their monthly payments on the loans be limited to 15 percent of their income.  Others, who are unemployed or underemployed could apply for steeper reductions under the Income-Based Repayment (IBR) program. 

Under either scenario, neither program actually addresses the real issue.  For most students, interest rates are substantially lower than when they completed their education.  However, under current rules, students receiving federally backed student loans may only consolidate their loans one time during the entire lifetime of the loan.  Therefore, if rates were 10 or 12 percent and a student consolidates their loans to 8.25 percent it may seem like a good deal.  Not if rates are currently 3 or 4 percent and you are still paying 8.25%!

Over the past year, student loan defaults, according to the Department of Education, rose from 5.2% the previous year to 6.7%. While these repayment programs seem reasonable, they do not address the heart of the problem. Merely delaying or deferring the payments only extends the loan repayment period. This, in turn, allows the banks and other financial institutions to benefit from a no-lose scenario. If the student defaults, the feds pay the loans. If the student opts for a deferred payment program, the banks receive greater interest over the long term.

Under these band-aid programs, students,will in the long-run end up owing and paying more. If a person pays higher principal payments toward a standard mortgage over a 15 year period, they will pay the home off sooner and owe less interest. Sure the payments may be higher, but they own the home sooner. If, on the other hand, a person pays the minimum principal and interest payments or seeks a reduced repayment over a 50 year period they will have paid far more for their home.  If students were able to refinance to a lower rate there is a greater chance of success and increased payments overall.

Ironically, unlike most federal loan programs, the Stafford, Perkins, or GRAD Plus loan program interest rates are not determined by any free-market fluctuations.  Rather, Congress is responsible for setting the loan rates.  Those 535 people in Washington D.C. who for some reason cannot figure out why the student loan default rate continues to skyrocket.  Imagine that!  Unlike other federally backed/government insured loan programs, such as VA, FHA, etc., students who have already consolidated are locked in to higher prevailing interest rates. 

Instead of creating a climate that encourages repayment, Congress in its infinite wisdom allows the rates to remain and instead bars the indebtedness from being discharged in bankruptcy.  Go figure! Then Congress increases the minimum standard deduction on one's income taxes causing fewer people to benefit from the student loan interest deduction altogether.  Hey folks, how about a lower rate!

Changing the current system would result in the following: 1) higher rate of repayment, 2) fewer defaults,  3) a new market for loan refinancing (similar to mortgage loans) opening up, and 4) reduction in the total loan value that the federal government would have to insure.

Its time the federal government addresses the mechanics of the student loan programs.  Failure to do so will only mean higher taxes for all of us as more and more students merely walk away from their financial obligations.  Seems ironic, a person is more than welcome to renegotiate their mortgage loans but not their federally backed student loans.

Tuesday, November 24, 2009

Team Strategy Inc.: FHA Guidelines Problematic for Homeowner Associations

Team Strategy Inc.: FHA Guidelines Problematic for Homeowner Associations

FHA Guidelines Problematic for Homeowner Associations

On November 6, 2009, the Federal Housing Administration (FHA) issued new guidelines relating to condominium and homeowner associations.  The two documents: HUD Mortgagee Letters 2009-46A and 2009-46B set in place new guidelines relating to FHA mortgage insurance requirements.  Set to begin effective February 1, 2010, these requirements present particular problems for homeowner associations struggling to survive in todays recessionary economic climate.

With national unemployment at 10.2 percent, and higher in several metropolitan areas of the United States, prime loan foreclosures eclipsing (in real dollars) new and existing home sales many homeowner associations Accounts Receivables/Aging Detail Reports are beginning to look like a Who's Who list of late payers within the neighborhood.  Under the newly adopted proposals, it will be difficult for homebuyers to participate in the FHA mortgage insurance program if total number of individual units in arrears exceeds 15 percent.  Homes within a community association of approximately 200 units would not be eligible to participate of a mere 30 units were in arrears or delinquent at any given time - regardless of the number of days (30, 60, 90, or greater).

With foreclosures and individual bankruptcies skyrocketing within the homeowner association communities, many HOA's will be left with no alternative but to discharge (write-off) ever increasing amounts of delinquencies.  Otherwise, how is the association supposed to address the time lags associated with foreclosures and bankruptcy filings?  One way is to merely not impose interest penalties and late fees associated with these accounts.  The other would be to discharge any late assessments on a regular basis.  Thus, the HOA's are caught in a catch 22 scenario.  If they don't impose the interest penalties and late fees, they are in violation of the Declarations and Covenants.  If they assess these fees, they will most likely not see the funds at the end of the day anyway.

In addition, the rising Accounts Receivables on the Association Balance Sheet will be problematic as these associations will find it difficult to market vacant properties within the Association.  As units sit idle, the ability to find qualified buyers will decrease as a result.  What then is the answer?  The FHA must put in place specific exceptions relating to vacant properties already in foreclosure or bankrupcty proceedings.  Associations should not be penalized by having units excluded from the program for merely following Association guidelines.  Already, homeowner associations faced with declining monthly assessment revenues  are finding it difficult to provide even the most routine maintenance services.  Currently, homeowner associations in several states may only collect those legal fees, late fees, and interest penalties enforced within the six-month period prior to the foreclosure.  With individuals seeking bankruptcy protection for any reamining assessments, late fees, legal fees, and interest penalties in record numbers - the implementation of this requirement by the FHA become quite problematic.