Monthly Archive for November, 2008

The Troubled Asset Relief program (TARP) was originally touted to Congress and the public as a request for funds to purchase troubled home loans, helping lenders get them off the books and loosening up money for deserving mortgage borrowers. However, once passed, that plan was junked in favor of less direct help.

TARP: What Happened to the Homeowners?
Instead of buying up bad home loans, Treasury Secretary Henry Paulson elected to purchase stock in the biggest lending institutions, in theory supplying cash to lend and thaw frozen credit markets. Treasury official Neel Kashkari claimed that this would somehow help struggling homeowners. "Our system is stronger and more stable than just a few weeks ago," he said.

New Plan Has Worked Before
The feds believe that putting money directly into mortgage markets is better because the money goes further. For every dollar banks receive, they can make more than $10 in loans because of something called the "multiplier effect." It's the way money works--for example, if a lender has $1 million in deposits it may lend $800,000 and keep only $200,000 on hand for depositors. So in effect that $1 million becomes $1.8 million. And it goes even further--that money is spent, and deposited, and loaned again, multiplying the effect of the original million on the financial system. Thos strategy has worked before: Swedish banks were successfully bailed out in the 1990s when the government bought up their stock and the economy was stabilized.

No Help for Homeowners in Sight
Unfortunately, this change means that no direct help to those in imminent danger of losing their homes will be forthcoming from TARP. FDIC Chairman Sheila Blair and House Financial Services Committee Chairman Barney Frank have warned that the foreclosure crisis will worsen to the tune of up to 5 million foreclosures over the next two years.

What Should Homeowners in Trouble Do?
If your mortgage is pulling you under, you won't get any breathing room from bailout funds. Your best chance to save your home remains with your lender, HUD housing counselors, or FHA. Hope for Homeowners has made some changes designed to help more people, increasing eligible LTVs to 96.5% from 90% and allowing 40 year terms, making refinances available to more homeowners. FHASecure allows those with ARM home loans to refinance even if they are behind on their mortgages or have credit problems--if the problems were caused by an upward reset of their ARM payment. The Treasury Department's current strategy is focused on keeping lenders afloat and driving refinance interest rates down, eventually stabilizing the economy. Those who can't wait for that should not count on help from the TARP program.

If you're thinking about refinancing from a subprime or ARM to an FHA loan you'd better think fast. FHA loan limits, raised temporarily by the 2008 economic stimulus package, will return to lower amounts in 2009. A HUD letter to lenders explains how the maximum limit of $729,750 in high-cost areas will drop to $625,500. And limits for other locales will drop to 115% of the median sales price but no lower than $271,050. Falling property values have decreased the maximum loan limit in many counties.

HUD has compiled this list of 2009 FHA loan limits but reading it is a challenge. Click to open the file, then use the "find on this page" function (in Internet Explorer) to find your area. The loan limit number starts on the 11th character of the widest column of numbers and codes. For example, Reno / Sparks, NV has a 2008 limit of $403,750. But in 2009 it changes to $325,450, a drop of over $75,000!

So if your home is in the spendier part of town or if you live in a high-priced area like San Francisco, consider getting your your refinance done before the end of the year. And keep in mind that FHA will grant you the higher limit only if you lock your mortgage rate by December 10th and close it by year end.

Because the success of your home loan depends so much on the skill and character of your loan officer, it's critical to avoid bad ones. Bad loan agents are more than just an annoyance--they can cost you serious money, give you ulcers, and ruin your skin. So look for these red flags when shopping for a loan, and avoid the turkeys:

BAD Loan Officers

* Are invisible and unavailable. They're playing racquetball whenever you call. But no one in their office knows where they are. And of course they don't call you back.

* Push the same loan on every client. Probably the one that pays the highest commission. Or the only one they've bothered to learn about. If you tell your agent you have 20% down, want the lowest rate, and you're selling your home in five years, she should have a very good explanation for trying to shove you into a 30 year fixed FHA loan.

* Don't care about your comfort zone. They encourage you to take the highest loan amount you can qualify for, or push you into riskier loans than you want. If you get the feeling that your loan officer and your real estate agent are tag-teaming you, they probably are. Replace them BOTH and find someone you can trust.

* Are lazy. They hand you a stack of paperwork and expect you to be their secretaries. They make weird requests--for the details of your messy divorce, a letter from your CPA about your lingerie parties, or they order you to get your septic tank drained and inspected--all of these can be legitimate underwriting requirements--but don't bother to explain why.

* Don't communicate. They change your program or rate without consulting you. They don't explain the disclosures, instead saying, "It's all right there on the form." Or they hide behind jargon, explaining, "Well your rate is higher because the loan is a NINA program and your LTV requires an underwriting exception and the doc draw was delayed so we blew the lock." Right. Get out of there fast, clean the BS off your shoes and find a lender who will be straight with you.

* Don't know. When the lending boom was in full swing, suddenly everyone wanted to be a loan officer. The guy on the other side of the table may have been selling used cars or timeshares the week before. And if they don't know the intricacies of lending--the many products, underwriting guidelines, and required legal disclosures--they can't do a good job for you, however motivated or nice they may be. Becoming a good loan officer takes time and effort.

Bad loan officers lack the work ethic, experience, or motivation needed to be good loan officers. And while some may learn from their mistakes, get more experience and knowledge, and eventually become good loan officers, you don't want to be the mistake they learn from, do you?

Your mortgage loan experience depends largely on the competence of your loan officer. A good one can make the process so smooth you hardly know you're in escrow. A bad one can wreck your marriage, make all of your hair drop out, and have you falling off bar stools in no time. Okay, maybe that's a slight exaggeration. But a good loan officer can get you a good loan and make sure you aren't miserable in the process. A good loan officer is someone you trust and someone whose recommendations you have faith in. Here's how to find one:

GOOD Loan Officers

* Return your calls. Within an hour in most cases.

* Explain themselves. If they recommend a mortgage loan product, they can tell you why it's the best one for you. And they know mortgages well enough to explain programs and lending terms in plain English.

* Offer choices. In most cases more than one kind of loan will work for you. A good loan professional offers alternatives, gives you the pros and cons, and helps you make the best choice for your situation.

* Ask questions. The right loan depends on many things. How long do you plan to keep the property? Do you expect increases or decreases in income, such as college graduation or retirement? Does your income fluctuate? Are you a risk-taker or do you want to feel safe even if it costs more? If your agent isn't asking questions, find one who does.

* Consider your comfort. Would you feel better if you could get your loan documents early and review them at your convenience? Would you prefer your loan officer to attend your loan closing? Do you want detailed explanations? Or do you prefer to "cut to the chase" and limit your involvement? Your loan agent's work style should reflect your preferences, not his or hers.

* Thinks on his or her feet. Your credit report came in with an unexpected booger. Your business income was less than you thought. The property appraisal came in at a lower value. The lender discontinued the program you wanted. An underwriter has a question about your employment. Most loans get at least one monkey wrench thrown into the process at some point. A good loan agent prepares for these possibilities and solves the problems.

So when you are shopping for your home loan, look at more than rates. Check with several lenders, find two or three with good rates, and speak to their loan agents. See who can explain programs and mortgage terms like APR, and tell you how rates are determined. See who asks you questions about your lifestyle and finances. See who returns calls promptly and makes your part as easy as possible. Once you find the agent with skills and integrity you want, start your application. And stay off those bar stools!

The process server just left your office, and now everyone you work with knows you're getting sued by a creditor. Yikes. How you handle this can make or break your credit rating and your ability to refinance your mortgage or get a new home loan.

Don't run, don't hide. If you have the funds to pay the debt, call the creditor and try to negotiate a discounted settlement. Accompany your payment with a letter reiterating that you have an agreement to settle the debt for a reduced amount. The wording of this letter is crucial if you want to make the agreement stick. For larger amounts, paying for an attorney's advice is a good idea. At minimum, find a sample letter online and use it to get the correct verbiage in there. Use a cashier's check to pay the debt, and put a conditional or restrictive endorsement on the check, so that by accepting your check (in many states--check the law for yours) the creditor acknowledges that the amount constitutes payment in full.

Creditors don't like to sue if they can avoid it; lawyers are expensive, and more importantly just being granted a judgment is no guarantee that they will be paid. If you don't have the money to pay the debt in full, try to negotiate a low payment. Remind the creditor that if you end up in court the judge will probably let you make a lower payment anyway. And most importantly, get a written agreement that the creditor will report your account paid as agreed and not as a charge off or other derogatory category.

If you and your creditor can't come to an agreement, go to court. By not showing up you throw your rights away. Document your tiny income and horrible debts (that's why you haven't paid what you owe in the first place, right?) and express your wish to pay what you owe if only the amount can be made manageable. The judge won't cut you any breaks on the total amount but chances are you will get a lower payment.

Pay as agreed. A judgment against you is bad anough on your credit report. An unsatisfied judgment is worse. Pay it off and make sure that your report is updated to reflect this.

As with just about everything, the best way to handle credit problems is to hit them early and hit them head on. Contacting creditors as soon as you lose your job or become ill can minimize the effect on your credit rating. Conservative solutions like credit counseling and debt management work best when you haven't yet totally screwed up. And you are far more likely to qualify for debt consolidation loans and other lifelines when you haven't been blowing off your bills for months. Even bankruptcy can be filed without tanking your credit score if you do it right. File BEFORE you begin missing payments and you can be respectable again within a year.

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A debt consolidation loan is heavy artillery--a serious solution for a serious problem. So you don't want to waste it by getting silly with the money you save each month. Debt consolidation is like a diet--you can make it part of a healthy lifestyle change and go on to a better life, or you can ...