Thursday, April 17, 2014

The Best Job to have in 2014 and how it is about to destroy millions of homeowners.

Here is a link that lists the best and worst jobs to have in 2014. You don't have to go farther than number one to see who is about to destroy the lives of homeowners who have spent 10, 20, 30, 40, or 50 years attaining home ownership, it's the Actuary.

Click on Image to Enlarge.

An Actuary calculates the mathematical "sweet spot" where financial services can competitively offer their Insurance products and money loan products, while making a profit.

Think of an Actuary as the Guy behind the Curtain in the final scene of the Wizard of Oz, they pull all the knobs and dials that makes things go boom, but they are kept hidden from the masses. It can be said that Actuaries live in their own gold plated glass bubble.

Actuaries help set HELOC guidelines. A HELOC, (Home Equity Line of Credit) is possibly one of the SAFEST investment opportunities a bank can make if they are the first lien holder on a home property being used as collateral for a HELOC.

Here is one explanation of how a first lienholder HELOC would work. A homeowner has a paid off home. It may have taken the homeowner 30 years to pay off that home, they are now advancing in years, probably retired, and their income is most likely dropping. Their home, having taking so long to be paid off, may now be worth anywhere from 2x to 5X the value of what they originally purchased it for (for non homeowners please keep in mind that many times the appreciation in value is significantly balanced out by all the maintenance, upgrades, yearly property taxes and insurance costs homeowners will typically pay for over the course of 30 years time). The Home Owner is able to draw money out of their paid off home via a HELOC and they can pay back the loaned amount at interest only payments for the first 10 years.

After the 10 year draw period, the homeowner now has to pay back interest and principle for the next 15 years on the HELOC, which can cause the monthly payment to suddenly almost triple. 

Example, 40 years ago a homeowner purchased their home for 100,000 dollars and it is now worth 375,000. The home was paid off after 30 years. The homeowner then decided to take out 100,000 dollars worth of home equity via a HELOC over a ten year time frame. Since the 10 year draw period is about end, and the new payment will be almost triple, the homeowner would rather simply use another 100,000 dollars of home equity, aka a RE-HELOC, to pay off the first 100,000 HELOC, in essence getting another 10 years of interest only payments. Maybe the homeowner wants to  do a RE-HELOC for 125,000 (which is also tax deductible) so they can use the extra 25,000 to pay off their high interest rate credit cards or their kid's student's loans.

A RE-HELOC is safe if the homeowner is keeping the RE-HELOC to overall value of the home at reasonable ratios. In our 375,000 home value example, the 125,000 dollars is 33% value of the home, and there is no mortgage. Should the homeowner default during the 10 year draw, there should be no risk to the bank that they will recoup their investment.

But here is where it gets icky, the Actuaries who set the income verification and credit ratings requirements may have set the levels so high that it prevents the homeowner from RE-HELOCing their own owned home even if they never missed a payment on their first HELOC and the HELOC to overall value of the home is extremely safe. Suddenly the homeowner has a 100,000 dollar HELOC, a home worth 375,000, but they can't RE-HELOC their FIRST LIEN HELOC even though there is virtually NO RISK to the banks.

The inability to RE-HELOC a HELOC is how the Actuary is about to ruin the lives of millions of homeowners who took HELOC's out 10 years ago. A scenario has been created in which the banks have one of the absolutely safest investment products on the market because it is completely collateralized, and they are now going to begin denying RE-HELOC's to millions of american homeowners because either their income is too low or their credit score is too low.

Or, the interest rate will be jacked up because the homeowner will be considered a "risk" even though the bank is the first lien holder on a home that has so much more equity remaining in it versus what is being RE-HELOC'd that there is virtually no danger to the bank of losing their financial stake in the home.

One of the dangers of thinking politically is it can lead to believing that evil is being created by either the left or the right, yet there are plenty of examples where it is just math being used to cause grief for millions. Actuaries who have set first lien, no risk RE-HELOC guidelines unnecessarily high are causing hardship to millions of american homeowners with impeccable payment histories.



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