The Feds Step In: Foreclosure Bailouts

No one can say that they were quick to act. They did infuse 24Billion into the secondary market. But that is not very tangible for the average homeowner. What the Feds have done for you lately is the New and Improved FHASecure program. Here's how it works. You have to currently be late on your payments due to and increase in your payment from your ARM (Adjustable Rate Mortgage) adjustment. If you meet those requirements, then you can apply for a new refinance, and the program will ignore your late payments! What a deal. Actually, that's pretty impressive. The new refinance terms will be a fixed mortgage, with mortgage insurance, no matter how much equity you have in your home. No bells or whistles. If you know of someone who may need this, please let me know. They need someone who's going to work with them and not take advantage of them while they are in a vulnerable position.

Here is an article posted on CNNMoney that goes into more detail.

A subprime bailout plan that works

The government's FHASecure program could get a quarter of a million troubled borrowers out of unaffordable loans.

By Les Christie, CNNMoney.com staff writer

December 5 2007: 12:04 PM EST

NEW YORK (CNNMoney.com) -- One government response to the subprime mortgage crisis is up and running and on track to help a significant number of borrowers avoid losing their homes.

The Federal Housing Authority's FHASecure program offers refinancing options to move delinquent hybrid ARM borrowers into reasonable, fixed-rate loans. It should help about 250,000 home owners through 2008, according to Department of Housing and Urban Development spokesman, Steve O'Halloran. FHA is part of HUD.

The program launched August 31 as delinquency filings were soaring. About 225,000 default and other foreclose notices were filed, nearly double the total of October 2006, according to the latest data from RealtyTrac.

Those numbers are likely to increase. Interest rates on hybrid adjustable rate mortgages (ARMs) are set to reset at a record pace of about $362 billion in 2008, according to Banc of America Securities.

The resets will push monthly mortgage payments higher for many borrowers and put 2.2 million of them in jeopardy of losing their homes through 2008, according to the Center for Responsible Lending.

FHASecure can minimize the impact of higher interest rates on borrowers whose ARM loans have already reset. Instead of a borrower's interest jumping from, say, 7 percent to 10 percent, which would mean a typical payment increase of several hundred dollars a month, an FHASecure loan might drop the interest rate back to 7 percent, and it would never go up.

In a speech Monday, HUD secretary Alphonso Jackson, reported that 33,000 borrowers have already refinanced their subprime ARMs into fixed-rate, FHASecure loans. An additional 20,000 are in the pipeline for approval this month, bringing the total to more than 53,000 in four months.

But to John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer rights group, "That's just scratching the surface."

Even using HUD's own statistics, FHA will only solve the problems of about a tenth of all the borrowers facing foreclosures through the end of 2008. "We were one of the first to support the use of FHA. I'm not pooh-poohing the program, but let's not overstate its impact," Taylor said.

First off, not all subprime ARM borrowers are eligible for FHASecure loans.

FHASecure targets owners whose mortgages have gone delinquent due to the increase in payments after interest rates have reset. Since that doesn't happen for at least two years for most hybrid ARM loans, those written after December 31, 2006 will not qualify for the program.

Foreclosure rescue: No help for you

The original loan must also be a non-FHA ARM, and the borrower must show no late payments for at least six months before the reset. (Some exceptions are made for delinquent loans if there is sufficient equity in the homes.)

The existing mortgage holder must write off any indebtedness not covered by the FHA loan and take back second loans if that would mean FHA loan-to-ratio values are exceeded; and lenders must determine that borrowers have sufficient income and assets to pay off the FHA loan.

Borrowers apply for loans through private, FHA-approved lenders. The FHA doesn't actually make loans - it insures them, charging borrowers a small insurance premium. With government backing, the loans are practically guaranteed to sell in the secondary market, making them attractive for lenders.

Lenders use an FHA scorecard to underwrite the loans that outlines acceptable payment-to-income ratios (up to 31 percent) and debt-to-income ratios (43 percent). It also requires analysis of borrowers' credit histories and determines if past delinquencies were connected to resets.

The FHA also requires that lenders properly review appraisals and determine that the values are accurate. Lenders will be held equally responsible, along with appraisers, for violations if the lenders knew or should have known appraisals were inflated.

Another of Taylor's criticisms is that FHASecure cherry-picks low hanging fruit, that is, borrowers with fairly good credit histories. Many of the home owners who qualify for FHASecure could get already help through conventional refis.

There's also the problem of low cap limits. The maximum amount of the loans ranges from about $200,000 to $362,000, depending on local home prices, according to HUD spokesman, Steve O'Halloran. That leaves out many people living in high-cost areas like California.

"Hundreds of thousands more could be helped if Congress passes the FHA Modernization bill," said O'Halloran. That bill, which was enacted with overwhelming support in the House and sailed through the Senate Banking Committee, has yet to pass through the full Senate.

The bill may not come up for a vote before the end of the year as appropriations bills monopolize Senate floor time. "It's difficult to get anything up for a vote in the Senate right now, including common-sense bills like this one," said Jim Manley, a spokesman for majority leader, Harry Reid.

If it does pass, FHA Modernization would, among other things, raise FHA cap limits to $417,000, enabling many more borrowers to gain entry. O'Halloran estimates it would double the number of borrowers who would qualify for an FHA loan to 500,000.

Prime Rib? No Prime Rate.

This just gets me. Gets me bad.
I do understand that it is my job to know this stuff. But it continues to amaze me how many clients will call me and ask me about a refi because the Feds lower "rates" again. People, people. Here is your lesson for the day:

Prime is the index most commonly used for short term loans. For example, car loans, credit card interest rates, etc. Prime is calculated by adding 3% to the Fed Funds Rate. The major lending institutions borrow from the Government, and guess what they are looking at? The Fed Funds Rate.
Long term interest rates are based exclusively on Mortgage Backed Securities (MBS) or Mortgage Bonds. Not Prime. MBS's are traded on Wall Street just like stocks. In fact, stocks and bonds are competing for the same investment dollars. So a good day on the stock market, usually is a bad day on the Bond market (bad for Interest Rates). Additionally, any loan originator that is watching the T-Bill, Prime or any other index, is watching the wrong indicators, and is thus giving you inaccurate advice. Run! Don't walk, from that "professional".

To Shop, Or Not To Shop? That Is The Question.

The mortgage industry, in conjunction with your friend and mine, The Media, has a lot of explaining to do. Our industry preys on the lack of consumer education. Sure, you are told to "shop around" to get the best deal. Or you think that because there is a cute little martian dancing on the side column ad on CNN.com that you should click on him and give your Social Security Number out to only God knows who. But there really is no accountability for that smokin hot rate that some guy in some cubicle in Guadalajara quoted you. Let's be honest. We've all heard the horror stories about what someone promised, then didn't deliver, and your friend is sitting at the closing table with zero options but to sign the astronomically ridiculous paperwork that is sitting in front of them. Or better yet, your friend doesn't even read the paperwork!!! Scary, but true.
The real truth is behind "shopping around" is that no one wants to be had. No one wants to be taken advantage of. And everyone wants to get a fair shake, or even, a deal from time to time. And our industry "professionals" haven't always been the most upfront bunch. There is responsibility on both sides of the sandbox.
It is time that we as professionals, take our industry more seriously. We hold the keys to some one's home, some one's dream, and ultimately their financial stability.
And, you as consumers, need to be smarter. In any purchase, You Pay For What You Get. Don't roll the dice with your future. Hire an expert. Sure, you will have to pay some money, but it might not cost you any more than getting hugely bad advice. In fact, in the long run, great advice will always save you time and money.
I'm off my soapbox.

Tax Deductible Mortgage Insurance Is Back!

With the changes in the industry of 2nd mortgages being pretty much obsolete, more and more homeowners are either choosing or required to have Mortgage Insurance (MI or PMI). This is insurance for the lender for loans over 80% of the appraised value of the property. The tax legislation (allowing MI premiums to be deducted on personal tax returns), originally approved in December 2006, pertained only to loans closed in the 2007 calendar year. With this renewal, there are three important points to note:

• The tax deductibility extension is for three more years (through 2010). After that, it will have to be renewed again for existing homeowners to continue to deduct premiums and for new borrowers to take the deduction.
• The specifics of the legislation will remain the same. Borrowers whose annual adjusted gross income is $100,000 or less can deduct their mortgage insurance premiums from their 2007-2010 federal income tax returns for homes purchased or refinanced during this time frame. Those with incomes between $100,000 to $109,000 are eligible for a reduced tax break under the law.
• Deducting the cost of mortgage insurance on federal tax returns is estimated to save borrowers $200-$400 each year.

New Blog To Keep You In The Loop

Given the deterioration in the mortgage market in the past six months and especially in the last 90 days, I was compelled to start this blog. The mortgage industry landscape continues to change on a daily basis. I spend a good portion of each day educating myself on market trends including guideline and product changes, trends in mortgage backed securities, legislative changes, etc. This blog will allow me to share the resources that I have accessible to me, and pass the best information on to you.

As the lending industry shake down comes to settle over the next six to eighteen months, knowledge and sound advice is going to continue to be your best ally. As most of my clients know, education is my valuable commodity that I offer to my clients and network. Hopefully, as this blog grows, it will become another source of knowledge for my clients that they are able to make wise decisions about their financial future.

Please utilize this as much as you can. Send me feedback, ask me questions. Chances are other people are wondering the same thing!

Best Wishes for a happy and prosperous 2008!

Zoa

"I Swear They Know!"

I have had many clients ask me why they have been getting so many solicitations for a mortgage after they have just applied.
There is a reason: Trigger Leads.

As part of the application process your credit report was ordered. While this is an essential piece of your approval process, it automatically generates an inquiry with all three national credit bureaus – Experian®, TransUnion® and Equifax®. As a result, you may receive unsolicited mortgage loan offers (via phone and/or written correspondence) from companies other than Knight Financial.
While we take the privacy of our clients very seriously and do not sell any information to other companies, the national bureaus are legally able to sell what are called “Pre-Screen” lists, which lenders can purchase for marketing purposes.

This means that your phone will ring more and your junk mail will increase. But be smarter than the average bear. It is a solicitation. Which means that they are probably baiting you with some promises they can't deliver. So OPT OUT! If you would like to opt out of random companies purchasing your information, go to www.optoutprescreen.com or call 888-567-8688. The website has a wealth of information.

Quick Hits:
• This practice, as well as these types of offers, is permitted under the federal Fair Credit Reporting Act, 15 U.S.C. 1681 et seq.
• Your personal credit file was NOT sold to anyone as part of this process. Creditors purchasing these lists receive only your name and address, and possibly your phone number.
• This process did not impact your credit file or credit score in any way.
• Go to www.optoutprescreen.com or call 888-567-8688 to stop receiving these types of solicitations.

Mortgage Glossary

Just The Basics

Alt-A mortgage:
Generally, a loan that can be underwritten with lower or alternative documentation than a full documentation mortgage loan but may also include other alternative product features.

Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)

Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.

Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation.

Assumable mortgage: a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

B

Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.

Bankruptcy: a federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.

C

Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller. Signing will normally take place 1-5 business days prior to closing.

Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing. These are one time costs at are paid at closing.

Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.

Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Credit history: history of an individual's debt payment; lenders use this information to gauge a potential borrower's ability to repay a loan.

Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.

Credit bureau score: a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.

D

Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed: the document that transfers ownership of a property.

Deed-in-lieu: to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.

Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.

Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.

Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.

E

Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase

Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.

Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

F

Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.

FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.

G

Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.

Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges.

H

Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.

Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence )r inappropriate action that result in someone's injury or )property damage.

HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD1 Statement: also known as the "settlement statement," it itemizes all closing costs, pre-paid items, and settlement charges.

I

Index. a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.

Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value.

Interest: a fee charged for the use of money.

Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

J

Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.

L

Lease purchase: assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Lien: a legal claim against property that must be satisfied When the property is sold

Loan: money borrowed that is usually repaid with interest.

Loan servicing:
The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.

Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.

Loan-to-value (LTV) ratio:
The ratio, at any point in time, of the unpaid principal amount of a borrower's mortgage loan to the value of the property (expressed as a percentage).

Lock-in: since interest rates can change several times daily, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

M

Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Modification:
Any change to the original terms of a mortgage. Most commonly associated with One Time Close Construction financing. Modificiation happens when construction is completed, and your permanent financing is ready to begin.

Mortgage: a lien on the property that secures the Promise to repay a loan.

Mortgage banker: a company that originates loans directly from their own funds.

Mortgage broker: a firm that originates and processes loans to any number of wholesale lenders.

Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.

O

Origination fee: Revenue for the bank, charged to the borrower at closing. Typical cost is 1% of the first mortgage loan amount.

P

PITI: Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

PMI (MI): Private Mortgage Insurance; privately-owned companies that offer mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.

Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.

Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.

Principal: the amount borrowed from a lender; doesn't include interest or additional fees.

R

Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms or to access one’s equity.

Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

Reverse mortgage:
A financial tool that provides seniors with funds from the equity in their homes. Generally, no borrower payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed not to exceed the proceeds from the sale of the home.

S

Settlement Costs: Total amount of money that is required to close the transaction.

Secondary Mortgage Market:
The market in which residential mortgages or mortgage securities are bought and sold. Many of the decisions that are made by mortgage lenders, are dependant on the ability to sell a mortgage to the secondary market.

Subordinate: to place in a rank of lesser importance or to make one claim secondary to another. Typically known as a 2^nd mortgage.

Sweat equity: using labor to build or improve a property as part of the down payment

T

Title insurance: insurance that protects the borrower or lender against any claims that arise from arguments about ownership of the property.

Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.

Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.

VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.