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Monthly Archive for July, 2008

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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Stuck with Your House and Your Spouse: Divorce and Your Mortgage Part 1

Published
by
Gina Pogol
on July 11, 2008
in Mortgage Refinance
. 5 Comments

Okay, we’ve heard about couples who stayed together “because of the children” for years before finally divorcing. But kids aren’t the problem for many of today’s would-be divorcees. Couples in soft real estate markets can’t separate because of………the house?

That’s right, the house. Normally, divorcing couples sell their home, split the profit from the sale, and go their separate ways, or the partner who keeps the home buys out the other and refinances the home into his or her name. But what happens when the house is worth less than the mortgage balance? It can’t be sold for less than what is owed (called a short sale) if the couple can afford the mortgage and the payments are current. And with zero or negative equity a spouse who wants to keep the home can’t refinance and get the soon-to-be ex off the loan and out of the picture.

Think a judge in divorce court can solve the problem? Probably not, and that’s why attorneys always advise divorcing couples to sever their financial connection completely. Because even if a judge says that your ex gets the house and that you are no longer responsible for paying the mortgage, your lender is unlikely to see it that way. And if your ex stops paying, the lender still has a contract with you–and in most cases the right to come after you for the missed payments.

Then, there is the equity issue. In most cases, the partner keeping the house pays the exiting spouse for his or her share of the equity in the property. When there is negative equity, the spouse leaving owes the one who stays. For example, a house worth $200,000 having a $240,000 mortgage has negative equity of $40,000. The one moving out may owe $20,000 to the spouse who stays.

Those who are destitute have more leverage with their lender–that is, they are in a position to say “restructure the loan or allow a short sale or we’re walking.” Additionally, government rescue programs like FHA are available to help those who could make payments under a restructured plan. The catch is that you aren’t eligible if you aren’t living in the house. So some spouses continue to live together while they work this out, although they might not be on speaking terms.

Next week’s entries will be devoted to exploring this topic and potential solutions. Have a great weekend!

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My Lender Is in Trouble. Am I?

Published
by
Gina Pogol
on July 9, 2008
in New Home Loan
. 6 Comments

These days it seems as though mortgage lenders are dropping like flies. So how does it affect you if your home loan company goes belly-up? It depends on whether you have a preapproved loan and are still house-shopping or are already making payments. Your response to the news is also driven by the reason for the company’s exit from the business–if for example there is fraud involved, if the company is being sold, or if bankruptcy is in the works.

First, if you are still shopping for your home and you hear your lender is in trouble, you need to make a few phone calls. If you are working with a mortgage broker, find out what he or she knows about the situation, if your mortgage pre-approval is still valid, and if the loan product you are planning on using is still available. Keep in mind that programs are subject to change without notice and that payment option, stated income, interest-only, 100% financing, or other products may not be available even if you have been pre-approved for such a loan. Your broker should be springing into action and arranging alternative financing in the event that your lender can’t close the deal when you’re ready. If you are working with a bank and have a property in escrow, check with your loan officer to make sure that you are still on track to close on time. If you can’t get this guaranty, preferably in writing, it’s time to find another lender before an unpleasant surprise derails your home purchase.

If you already have a mortgage with a lender who is in trouble, what do you do? First, continue making payments. Federal law states that mortgage terms cannot be changed regardless of who is servicing the loan (collecting your payments). However, you want to be sure that your payments are being credited to your account properly–when someone else takes over your loan the transition isn’t always as smooth you’d like. Check with your current servicer about future changes and continue to make your payments to the same address until you get TWO notices (sometimes called transfer letters). One will be from your old lender and one will be from the new servicer. Watch out for scammers! Some may deliver notices telling borrowers to make their checks out to a new lender and send them to a new address–and you might find yourself funding some dirtbag’s permanent exit to Bermuda. You will also want to verify that your taxes and insurance are being paid by your lender if these amounts are included in your mortgage payment (impounded).

Finally, if your lender was shut down by regulators be extra-diligent. If there are fraud charges, find out what the lender is accused of doing. Some fraud cases involve identity theft–get a copy of your credit report asap if this is the case and put a fraud hold on your credit report. You may even want to register with a service to keep an eye on your credit information for a while. Other kinds of fraud involve misappropriation of funds such as impounded tax and insurance payments. Call your county and insurer and make sure these payments are current. Some fraud could even involve you! For example, you may have applied for a loan on an investment property, but, lo and behold, the final documents show a loan against a primary residence. Or the income listed on your application doesn’t reflect what you told your loan officer. Or the property value is overstated. It is important to read everything before you sign, but if you spot something after closing on your loan, inform the authorities in your area.

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Is Foreclosure Necessary?

Published
by
Gina Pogol
on July 7, 2008
in Foreclosure
. 3 Comments

Foreclosure is a nasty process. The stress on families has been well-documented. So has the turmoil it visits on neighborhoods. And it’s expensive for the lender. So who in the world does foreclosure benefit? All of us.

Before you CLICK to get away from this obviously psycho blogger, pull out your credit card statements. Look at the APR of each of those accounts. Now imagine making a mortgage payment with an interest rate like that. Mortgage rates are among the cheapest kind of financing available because they are secured by property. By taking the threat of foreclosure out of the equation you end up with an unsecured loan–just like a credit card. And with that level of risk comes that kind of interest rate.

So, how SHOULD banks lend? How can we balance the needs of homeowners and buyers with investors’ requirements for safe transactions? How do we keep mortgage financing affordable and accessible? Your ideas are gladly welcomed HERE.

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Virginity Restored? How to Be a First-time Homebuyer Again

Published
by
Gina Pogol
on July 3, 2008
in New Home Loan
. 5 Comments

Once you joined the ranks of homeowners, are you permanently locked out of all first time buyer benefits? Or is it possible for you to regain access to the benefits of being a home-buying “virgin”? According to HUD it is. Here’s how this agency, which administers FHA loans and whose definition of first-timers is cited in the new housing bill making its way through Congress, defines “first-time” homebuyer.

  1. Those who have not owned a primary residence during the three year period immediately preceding the close of escrow on the new home. Presumably this doesn’t exclude you if you only owned rental property or other commercial real estate.
  2. Single parents who owned their homes with their ex-spouse.
  3. Displaced homemakers who owned their homes with their ex-spouse.
  4. People who owned homes not considered real property, such as mobile homes not affixed to permanent foundations.
  5. Property owners whose current residence can’t comply with building codes for less than the cost of rebuilding.

So there are many ways for previous homeowners to recapture their first-timer status and take advantage of whatever special assistance becomes available as a by-product of mortgage reform. Now, what form that bill and potential assistance will take remains to be seen. Stay tuned and have a happy 4th!

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