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Trying to Unload your Home with a Short Sale? Don’t Hold Your Breath

Published
by
Gina Pogol
on August 27, 2008
in Foreclosure
. 0 Comments

Frustration mounts on all sides. The desperate homeowner wants to sell a home and dump a mortgage he can’t afford. The lender wants out with its skin on. The buyer and her agent want to proceed as soon as possible (and they want a good deal to compensate them for the hassle of entering the transaction). And yet the deal doesn’t get done, the home goes into foreclosure, and everyone is disappointed (and a little poorer). Why can’t short sales work even when they are clearly in everyone’s best interest?

One problem is the number of parties involved. To unload your home in a short sale, you have of course the primary lender to placate. But you can also involve a second mortgage holder, a mortgage insurance company, a title company, a secondary investor (like Fannie Mae or Freddie Mac), or a government agency like HUD. And every one of these parties is likely to be swamped with inquiries and understaffed to deal with them.

So first everyone needs a chance to look at and approve the deal. And there are conflicts of interest to deal with–for example, a first lienholder who will be repaid in full will be more enthusiastic about a short sale than the second lienholder or mortgage insurer who will end up writing off the deficiency.

Then, there is the amount of information needed, and the scrutiny required. Lenders won’t consider a short sale for borrowers who are making their payments successfully; those 90-120 days in arrears are likely to get their attention first. Ditto for homeowners with assets who could bring in the difference when their home is sold. Much of the initial approval process is devoted to making sure that a short sale is the lender’s best chance for minimizing loss. The advantage for the lender is in reduced costs–no attorney fees, no having to put the property on its books, maintain it, and arrange for its sale. But short sales aren’t the first resort when there is a chance of collecting the full amount from the borrower.

Then, there is the issue of mortgage insurance. In some cases, the mortgage insurer has to approve the short sale–one more group to check out the offer, verify the homeowner’s hardship, and negotiate a better deal for itself. And sometimes, the obstacle is the primary lender–if it can get more by foreclosing and collecting mortgage insurance proceeds than by allowing a short sale, you won’t get your short sale. And if you are a borrower relying on a short sale to save you from foreclosure, and the deal doesn’t close, you could be really stuck–trashed credit, evicted, and perhaps a deficiency judgment against you.

So a short sale isn’t the great solution it’s cracked up to be. Even the ones that fly through smoothly take at least 120 days. So how can you, as a borrower / seller or as a potential buyer move the proceses along more quickly? That’s the topic for the rest of the week. Feel free to add your questions any time.

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You Could Commit Loan Fraud Without Knowing It

Published
by
Gina Pogol
on August 26, 2008
in New Home Loan
. 4 Comments

Yes, it’s true. Loan fraud is still going on, even after the subprime crisis and other problems supposedly opened everyone’s eyes. According to CNNMoney, the first part of 2008 was plagued by even more loan fraud than early 2007! And while the FBI’s Web site indicates that the vast majority of fraud was perpetrated by borrowers against lenders, it turns out it’s not that simple.

A study by the Mortgage Asset Research Institute (MARI) determined that most fraud involved home buyers whose loan officers or brokers ”tweaked” their applications to get the borrowers approved in the face of increasingly tight underwriting standards. And while studies by Bank of America and other lenders have concluded that loans originated by their own employees held up, those brought in by outside brokers were far more likely to go sideways.

But who ultimately gets the blame? The loan officer might be the one who engaged in “tweaking,” but whose signature is on that application with the fraudulent information? And who signs off on the final documents? That’s right, the buyer. Front and center. Open and shut.

So don’t be a fall guy. Or girl. When you complete a loan application, keep a copy of what you originally give to the broker or loan officer. When he or she presents a final application for you to sign, chances are the information will be different. There might be debts that are on your credit report that don’t need to be counted because they are included in your business. Your rental income might be recalculated based on underwriting guidelines that say you get credit for 75% of the income. Your salary might have schedule 2106 expenses deducted from it. These differences are fine, as long as your loan officer can explain them. But don’t sign anything you don’t agree with or feel comfortable signing.

Red flags to watch for are:

* income much higher than what you indicate on your initial application

* a large expense disappears from the loan application, especially if it’s one that doesn’t show on your credit report

* significantly overstated assets like bank and brokerage accounts

So don’t just flick through your paperwork and sign where highlighted. Make sure every part of your paperwork reflects what you told your loan officer and shows your true financial position. And be sure that the program, rate and terms are what you agreed on with no surprises. Because signing incorrect documents, especially at closing, makes you responsible. You don’t want to find that not only have you inadvertantly committed loan fraud but that you have agreed to make loan payments you can’t possibly afford. And you don’t want your next home to have bars on the windows.

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Do You Need a Bad Credit or Subprime Mortgage?

Published
by
Gina Pogol
on August 12, 2008
in Mortgage Refinance
. 6 Comments

Some of those studying the mortgage crisis have concluded that unscrupulous lenders often put borrowers with fair or good credit into expensive subprime products, jeopardizing their homes and costing them money. Undoubtedly this happened, but probably not for the reasons that you think.

Consider that a mortgage broker, who has access to many lenders and many programs, has to offer a competitive bid or the borrower will probably go somewhere else. So if you were a broker, you wouldn’t quote 13% at 2 points if you could get a borrower 7% and charge the same price. You would find your borrowers the best-priced programs that they qualified for that you had access to. That’s the key; not every broker or lender has access to every kind of program. For example, many lenders don’t offer FHA loans and won’t be in a position to see if you qualify for one. Ditto Freddie Mac and Fannie Mae. Lenders that tend to specialize in subprime or bad credit mortgages often don’t provide any other kind of financing. Sometimes, borrowers make the mistake of assuming that they need bad credit loans when maybe they don’t. They go directly to subprime lenders when perhaps they could start a little higher up the food chain and get a better loan.

So here, in order of rates / costs, are the types of loans that **may** be available to you, assuming that you are not looking for large (jumbo) or exceptionally large (super-jumbo) loan amounts.

* Fannie Mae or Freddie Mac conventional mortgages. These are almost all underwitten electronically, so you can get a decision very quickly most of the time. It makes sense to see if you can squeak out an approval before trying elsewhere. Pricing depends on your risk factors, including property type, the size of your down payment, and your credit score.

* FHA financing. May be underwritten electronically or by hand. FHA guidelines are less strict than traditional conforming mortgages and feature low down payment requirements.

* Expanded Approval (Fannie Mae) and A- (Freddie Mac). These are loans that “just miss” getting approved with conforming guidelines but can still be underwritten. Extra fees make these loans more expensive than prime grade loans but lower-cost than subprime loans.

* Subprime mortgages. These loans can be graded from B to D, depending on your credit and the lender’s criteria. Credit scores below 600 will probably (but not necessarily) land you in this category. However, just because you are subprime doesn’t mean you can’t comparison shop and make choices.

So before committing to financing, check your options at several levels. And keep in mind that a lender who doesn’t have access to a particular product may not know about it or recommend it, even if it’s a better fit for you. So even if you expect to hear “NO,” suck it up and reach higher anyway. You might be pleasantly surprised.

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A Tax Break for the Rest of Us

Published
by
Gina Pogol
on August 8, 2008
in Uncategorized
. 2 Comments

Most tax breaks for homeowners go out the window if you don’t itemize your deductions on a Schedule A. And 63% of Americans don’t itemize deductions. The tax benefits of home ownership accrue primarily to the affluent, who are more likely to have mortgage interest and other expenses that exceed the standard deduction of $5,450 for singles, $10,900 for married couples, and $8,000 for heads of households (many single parents).

 So those with less income (who are also more likely to have credit issues and pay higher interest rates for everything they buy) also get less financial benefit from homeownership. However, the new housing reform law does throw those who don’t itemize a bone starting in 2008. Even taxpayers who don’t itemize deductions will be able to deduct property taxes from their income (up to $1000 for married folks and $500 for other filers). Add this incentive to the $7500 first time homebuyer tax credit and you get some real reasons to buy this year if you can swing it.

For lower income buyers, the fact that the $7500 is a refundable credit is important. In fact, the credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI exceeding $170,000. But if you qualify, even if you pay little or no tax you get the benefit of this credit. For example, Joe Taxpayer has $2,500 withheld from his paycheck during 2008. His tax liability for the year is $3,000. Normally, Joe would have to write the IRS a check for $500 when filing his taxes. However, in 2008 Joe became a first time home buyer. So he gets a $7,500 tax credit. Instead of writing a check for $500, Joe gets a check from the IRS for $7,000 (the $7,500 credit minus the $500 he would have owed). Pretty sweet.

There is a small catch. The credit does get paid back to the IRS over time ($500 a year over 15 years). Or if the home is sold, then the remaining credit would be due from the profit of the home sale. If there isn’t enough profit from the home sale, though, the credit is written off and you don’t have to repay the IRS. So if you buy a house, live in it for a couple of years and sell it, even if you don’t make money on the deal you’re still $6,500 ahead (the $7500 credit less the $1,000 repaid by you).

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Put It In Reverse: Your Mortgage, That Is

Published
by
Gina Pogol
on July 30, 2008
in Mortgage Refinance
. 6 Comments

If you are 62 or over, have a lot of equity in your home, and need money, you are in luck–even if you have bad credit. Reverse mortgages, also called Home Equity Conversion Mortgages (HECMs) are the only mortgages where people with bad credit pay the same rates as prime borrowers. That’s because you don’t pay this loan; it pays you.

Reverse mortgages were designed to help older homeowners stay in their homes even if their income is low. They allow borrowers to cash out their equity without worrying about making payments or selling. When you take out a reverse mortgage, the lender uses a complex formula and calculates how much you can borrow based on your age and the amount of equity in the home. You can take this money as a monthly payment, a lump sum, or a combination of the two. You are responsible for keeping up your home and paying the property taxes and insurance, but there are no mortgage payments–that’s why it doesn’t matter if you have bad credit.

The mortgage doesn’t have to be repaid until you move, sell the home, or die. The loan is repaid and any remaining proceeds from selling the home go to you or your heirs. No matter what the balance of the loan is, you never owe more than the value of the property. HECMs are administered by HUD and have some limitations, primarily the amount that can be borrowed against the property. Other private companies offer reverse mortgages in jumbo amounts and with differing eligibility requirements.

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Bad Credit? Fannie Mae Is Not Handing You the “Keys”

Published
by
Gina Pogol
on July 28, 2008
in Mortgage Refinance
. 4 Comments

At first glance Fannie Mae’s “Keys to Recovery” plan seams too good to be true. It is. One provision touts itself as a rescue effort designed to help borrowers underwater on their mortgages–with loans up to 120% of the current value of the home in fact. But wait, there’s more. The existing loan has to already be a Fannie Mae loan. Well, how many people with prime, conventional financing can do better by refinancing now? Not many. Those who could really improve their positions, meaning people in non-traditional ARMs with negative amortization, for example, or subprime rates, can’t get a Fannie Mae rescue. Because Fannie is a private company, responsible to its shareholders. And it would be irresponsible to refinance loans up to 120% of the value of the home.

So “Keys” amounts to little more than a publicity stunt. Very few will be helped by this effort. Stay tuned.

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Borrower Beware? What NOT to Worry About

Published
by
Gina Pogol
on July 23, 2008
in Mortgage Refinance
. 4 Comments

If you’ve been following the news about mortgage reform, you might have come across the term YSP, or Yield Spread Premium. YSP is simply a rebate paid by a wholesale lender to a mortgage broker for originating a loan. While some (usually well-meaning but ignorant) folks rant about how lenders use the Yield Spread Premium to steal from poor dumb consumers, the truth is that consumers are pretty sharp when it comes to shopping, YSPs save many people money, and most people who get loans from brokers (85% in fact) choose to make use of them.

Here is how YSP works: When a mortgage broker brings in a loan, he or she saves the wholesale lender time and money. The lender doesn’t have to market or advertise, network in the community, maintain a local office, meet with the borrower,  analyze the income, assets, and debts as well as future financial and lifestyle changes, help the borrower choose the best loan, complete the paperwork, and document the financial package. The broker who does all this doesn’t work for free but is not an employee of the lender either. So brokers get paid one of two ways: they either collect fees from the borrower (that’s you and me!), for example origination and application fees, or they get them from the lender in the form of a rebate. Borrowers can choose to pay the fees to the broker out-of-pocket or they can opt for a slightly higher rate and the lender will cover the broker fees for them. And 85% of borrowers opt to have the lender pay the broker fees. It’s their choice.

But this is hard to visualize. So here’s an example:

Bob Borrower wants a $200,000 loan with a 30 year fixed rate. His broker shops around and offers him the chance to get a 5.75% rate while paying 1 point ($2,000) plus about $1700 in other fees. Or, Bob can choose a 6% rate and pay NO fees. Bob finds an online mortgage calculator and puts these figures in. The 5.75% loan carries an APR of 5.92%. The payment is $1,167. The 6% loan, costing $0, has an APR of 6% and a payment of $1,199, a $32 per month difference. So Bob can choose between paying $3700 upfront or paying $32 a month more. While the 5.75% loan has the lower APR, it takes almost ten years before Bob makes up the $3700 by saving $32 a month. So you can see why most people choose the so-called “no-cost” loan.

How can Bob KNOW that he’s not being taken advantage of? Simple, when it’s easy to compare rates and programs online. Bob checks online and finds another lender who wants 6.125% for a no-cost loan — he knows he’s getting a fair deal. It doesn’t matter what the wholesale price is; by comparing offers and taking the best one you get a good deal — no different than shopping for clothes or tires (aka threads and treads).

There are plenty of things to watch for when shopping for a loan — the APR, the fees, terms like prepayment penalties, teaser rates, amortization — but YSP doesn’t mean “You’re Swindling People” and yield spread premium isn’t anything to worry about.

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Finding an Honest Mortgage Lender

Published
by
Gina Pogol
on July 21, 2008
in New Home Loan
. 4 Comments

Today’s big mortgage news is from Florida (what else is new!?). The Miami Herald discovered that not only are the majority of the state’s mortgage professionals unlicensed, but over 5,000 of them were convicted felons! Even worse, this practice is perfectly legal. How can this be?

The devil is in the details, and while it’s illegal in Florida and most other states for mortgage brokers to have a criminal record, their subordinates (generally referred to as loan officers, loan originators, account executives, or mortgage finance officers) are allowed to. The idea is that the broker is held responsible for the ethics and practices of his / her employees. Unfortunately, this provides a nice little loophole for those who were stripped of broker’s licenses because of their shady lending practices. They just become loan originators and work for another broker. And there are brokers out there who don’t check the backgrounds of their employees and don’t police their lending sufficiently.

So, how does a borrower make sure a lender is reputable? First, know that the odds of getting a fair deal are in your favor. Real estate expert Robert Bruss, in an article about mortgage lending practices, acknowledges that “most mortgage lenders are honest.” So does Realty Times, stating that while there are a few “bad apples” the “vast majority” of lenders are honest.

Second, learn what your state’s requirements are. Some are quite stringent, requiring background checks, education minimums, and passing exams before a loan officer can be licensed. Other states have no requirements at all. Here is a link to state requirements for loan officers.

Third, check your lender’s status in your state. Here is a link for states which have lender databases online. You can generally find out if its licensing requirements are in order and if there are pending actions or investigations.

Fourth, check out several lenders before committing to one. Especially for subprime or bad credit borrowers, getting quotes from several mortgage loan companies is the best way to make sure you are being offered a fair deal.

Finally, really read your disclosures and remember that whatever is in writing trumps anything you are told by a loan officer or broker. The most often reported abuse of borrowers occurs when the terms disclosed upfront are changed at closing. If the interest rate, fees, or terms such as the addition of a prepayment penalty have changed at closing and weren’t discussed with you beforehand, don’t sign the documents until the misunderstanding is cleared up and you either receive a satisfactory explanation or get the loan you expected.

When you refinance your primary residence, you have three days to rescind or back out of the loan–use that time to make sure your loan is what you expected. When purchasing property, insist on getting copies of your documents a day or two before closing. That way you can really go through them and resolve any questions in a less pressure-filled atmosphere.

A lender you trust and work well with is as priceless as a good mechanic or hair stylist. And the amount of money involved makes it serious business. A little legwork (or mouse-work) upfront can save you money, smooth out the mortgage financing process, and ease your mind.

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Still Stuck…

Published
by
Gina Pogol
on July 18, 2008
in Uncategorized
. 0 Comments

Okay, I was promised information from Fannie Mae about using their 120% refi program to get a spouse off an underwater loan. But I have NOT heard back and I’m still rattling cages. So stay tuned, we’ll go on to other credit issues until I get an answer from Fannie and friends. Next week we can explore short sales and why those with bad credit mortgages may actually have an advantage in this arena.

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Stuck with Your House — Part 2

Published
by
Gina Pogol
on July 14, 2008
in Mortgage Refinance
. 5 Comments

Couples who wish to divorce but can’t sell or refinance the family home have a special obstacle to dissolving their relationship. Normally you would just sell the property or the party keeping the home would refinance the mortgage and release their ex from the obligation. But when you owe more than you could sell the home for this becomes impossible.

Some couples agree that one keeps the house and takes over the mortgage, with the stipulation that the occupying spouse refinance or sell within a specific time. In this case, the non-occupying spouse should remain on the home’s title until the refinance or sale is complete. Signing a quit-claim (relinquishing your interest in the property) only means that you no longer have any ownership interest — but you’re still on the hook for the mortgage payments. And keep in mind that any agreement between the two of you–even sanctioned by a judge in divorce proceedings–carries no weight with your lender. And while judge can order your ex to refinance the property, he or she can’t force a bank to lend if it doesn’t want to. What an agreement can do, however, is give you the right to sue your ex in the event that the mortgage payments don’t get made and you have to come up with the money.

Another less-than-perfect option is to rent out the home while continuing to own it together–as business partners, not husband and wife. Consult an attorney about creating a business (for example a corporation or limited liability company), transferring the home into it, and dividing the expenses, income, and tax deductions between you.

If you can afford to do so, refinancing or selling, even if you have to bring cash to the table, is probably be the best option. In fact a judge could conceivably order you to do just that. Talk to a good lender about which programs will allow you to finance the most of your home’s value–you might be surprised at how high the new FHA or Fannie Mae programs will allow you to go.

While “winging it” and hoping your ex makes all the payments as agreed may be the cheapest solution it’s also the riskiest. You have a lot to lose in the event of a foreclosure. The lender may even come after you for the difference between what you owe and what it is able to sell the property for (this is called a deficiency and is legal in 48 states as of this writing). Your credit will be trashed, potentially affecting your ability to get financing, insurance, even jobs.

If you can’t afford to bring in cash, you may be in a position to make a deal with your lender. Replacing the old loan with a new one obligating one party is referred to as novation, but this rarely happens unless the occupying spouse has great credit and plenty of income. There are other allowances a lender can make, and not all lenders require you to be delinquent on your mortgage before approving a loan modification or short sale. Speak with your lender / mortgage servicer about a short sale, and enlist the services of an experienced real estate agent or attorney who specializes in arranging these transactions.

The next post will look at available loan programs most helpful for refinancing underwater mortgages.

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