Monthly Archive for March, 2009

Perhaps indirectly.

A short sale is worked out between you, your lender(s), and the buyer(s). Therefore, everything is open to negotiation. The lender can request a contribution from you as a condition of okaying the deal--but you can say no. Of course the lender will want as much as it can get from you and the buyer. Just as the buyer wants the best deal possible and you would like to avoid being skinned alive.

The lender may request cash from you at closing or demand that you sign a note for part or all of the shortage. But that doesn't mean you have to just fork it over. I recommend having a real estate attorney or bankruptcy lawyer experienced with short sales, foreclosures, etc. help you with the negotiations.

If all parties have dug in and can't be moved, the short sale can't be concluded. This would then probably cost you some money--you'd have to keep making payments to avoid foreclosure, or you may have to cough it up when the lender forecloses. In most states, if the lender can't recover the balance owed by selling the property, it can take you to court and sue to recover the funds. And if you have the money, well, you may have to part with it--this is called a deficiency judgment.

But the lender does NOT hold all the cards. First, if you don't have the money it's pointless for anyone to incur the expense of taking you to court. And agreeing to a short sale saves the lender the trouble of foreclosing, rehabilitating the property, and carrying it on its books month after month. Convince the lender that it will get the most money from a bad situation by accepting your offer. If you are insolvent you could offer the lender a deed-in-lieu of foreclosure. You could also avoid a deficiency judgment by filing bankruptcy--which would protect certain retirement accounts and other assets. Again, a lawyer may be your best guide in this situation.

Who'd have thought? Today, lenders are putting limits on how LOW an adjustable rate mortgage rate can go. Just like caps on interest rate adjustments help protect borrowers, interest rate floors protect lenders. Rate caps are features of all adjustable rate mortgages. When buying a new home or refinancing with an ARM loan, you paid careful attention to these caps (because you read this blog!). Rate caps drive your interest rates just as surely as the financial index does.

Over the life of an ARM, you may pay several different rates. The start rate is usually a below-market rate, sometimes called a teaser. This rate may be in effect for anywhere from a month for a monthly COFI ARM to several years for a hybrid ARM. It is critical for homeowners to know when their rates will reset and what they will be paying when that happens--and that's where rate caps come in.

You might have three different rate caps to worry about. First, there is the periodic cap, which determines the highest rate to which your ARM could increase in a single adjustment. If your current rate is 3% and your cap is 1%, your rate can only go to 4% this time. If you have a hybrid ARM, one that is fixed for a few years before it converts to an ARM, there may be a higher cap on the first adjustment, say 3%. This limits how high your rate can go the very first time it adjusts. The life cap is the highest rate you can be charged over the life of the loan, typically 5 to 7 points over your start rate.

In addition to caps, you should also consider a loan's floors.
These are limits to how LOW your rate can go at a single adjustment or over its life. Right now, many indexes used to calculate ARM rates are very low, even near zero. But if your loan has a floor of 4%, that's a low as your rate will go. So that's another consideration that most people probably paid little attention to in the past.

Your rate is determined by three components--an index, a margin, and applicable caps or floors.
The index is an external rate that reflects the conditions of money markets in general. According to the Federal Reserve, the most common indices are the 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).

The margin is a percentage that the lender adds to the index and is usually between 2 and 5 percent.The sum of the index and the margin is the actual rate you pay (subject to caps and floors). This is called the fully-indexed rate. So, if you have an ARM based on the 6-month LIBOR index with a 2 percent margin and you are due for an adjustment or reset in early 2009, you could reasonably expect to pay about 3.75%. Unless your loan has a 4% floor.

So in today's market, ARMs are a viable choice. For example, a family interviewed in a CNNMoney.com story explained that they bought a $500,000 home with an FHA-insured ARM at just 3.875% for the first five years. After that, it resets once a year and cannot go up by more than one percentage point annually. It has a five point lifetime cap, so the rate can never exceed 8.875%. They figured that the initial savings would keep them on the winning side of that equation for at least 12 years.

The key is to enlist the help of an experienced loan agent, play around with mortgage calculators and look at different loan scenerios, know your time frame, and consider rate caps and floors when comparing mortgages.

Many thousands of people get mortgages after completing a bankruptcy. How long you have to wait depends on a few things.

What was your credit like before filing bankruptcy? You'd be amazed--usually it's not the bankruptcy filing per se that destroys your credit score but the late or missing payments, judgments, and collection accounts leading up to the filing. If you pay your bills on time until the day you file (I know, easier said than done!), your bankruptcy is much less damaging.

What kind of filing was it? Sometimes 13 is a luckier number. Chapter 13 bankruptcies are often treated differently than Chapter 7 filings--Chapter 13 filers repay some or all of their balances while Chapter 7 filers may pay nothing. Often underwriting guidelines let Chapter 13 filers get mortgages a year or two sooner than Chapter 7 filers.

What caused your bankruptcy? People who were downsized, suffered the death of a spouse, endured severe illness, or invested with Bernie--crises beyond their control--are looked at differently. It's called "mitigating circumstances" in the mortgage industry. But those who took one too many world cruises or blew off payments on the McMansion, boat, motor home, and 4 cars when business got a little slow will be looked at more harshly. For example, FHA will write you a mortgage 12 months after discharging a bankruptcy if you have the right mitigating circumstances and have resolved your problems. Everyone else has to go at least another year and probably longer.

How have you handled your debts since the bankruptcy? This is the time to prove that you've really learned your lesson. Suck up to your creditors by paying EVERYTHING on time. Use credit only for small purchases and don't carry balances on your cards. If you choose to stay out of trouble by avoiding credit, that's okay. FHA guidelines state that you can choose NOT to reestablish a credit history if that's you're way of managing your budget. And it won't be held against you.

Make sure it won't happen again. Establish an emergency fund (and no, the need for "retail therapy" does NOT constitute an emergency!), enough for several months' worth of expenses. Buy medical insurance if you don't have it. If you have credit accounts, never carry a balance--the amount of available credit you use really affects your credit scores. Be prepared to show lenders the actions you've taken to avoid financial mis-steps in the future. Experience is a harsh teacher but you don't have to be a slow learner.

Who would have thought "mortgage" would be everyone's favorite cocktail party topic?! And listening to the misconceptions flying around you'd have to conclude that everyone at the party was drunk. So here's a quick course on mortgage rescue.

Part of the confusion stems from all the names and acronyms for the plan or its various parts. Making Home Affordable. The Homeowner Affordability and Stability Plan, aka HASP. Home Affordable Refinance Plan, or HARP. Home Affordable Modification Plan (HAMP, anyone?). People are running around claiming things like, "The program drops interest rates to 2% if you have a Fannie Mae loan and are behind on your payments and at least 105% underwater on your loan."

No, it doesn't.

Here's the straight answer:

The Homeowner Affordability and Stability Plan (HASP) is the name of the whole plan. HAMP and HARP are parts of the plan. Making Home Affordable is a cute nickname for a great site that walks you through some questions and tells you what you're eligible for (or not). The plan offers many provisions for helping homeowners with a variety of issues.

Home Affordable Refinance Plan (HARP) Qualification

This plan is designed to allow homeowners who are underwater on their houses but successfully making their payments to refinance to today's lower rates. It is what's called a streamline refinance with minimal qualifying. To be eligible:

1. Your mortgage must be owned by Freddie Mac or Fannie Mae.

2. The home must be your primary residence. No investment or vacation properties.

3. You can't have been more than 30 days late on your mortgage payment any time in the last 12 months.

4. Your refinanced first mortgage can't exceed 105% of your home's current appraised value.

Home Affordable Modification Plan (HAMP) Qualification

This program is for homeowners in trouble--those whose mortgage payment is unreasonably high for their income (perhaps with a subprime loan or payment option ARM that reset to wacky terms). To be eligible:

1. Your housing costs must exceed 31% of your gross income.That's monthly principal, interest, property taxes, and insurance.

2. The unpaid balance of your mortgage can't exceed $729,750 (multifamily homes have a higher limit).

3. You may be required to attend credit counseling sessions if you've been silly with your money and have too much consumer debt.

4. Modification takes place first by lowering the interest rate (to as low as 2% if necessary). Then, if more needs to be done, the term of the loan can be extended to up to 40 years. Finally--only as a last resort--the balance may be reduced (to no less than the appraised value of the home). You must be able to realistically make a modified payment.

5. Mortgage servicers don't have to make you a modification if you're close to defaulting or you are at least 60 days behind on your payments. In that case, the servicer is required by law to determine if modifying your loan will generate more cash flow over five years than not modifying it. If it does, you get a modification. If not, the lender doesn't have to modify your loan and if you default it can foreclose.

Say a borrower owes $400,000 on a $300,000 home. He makes $6,000 a month. Can he save his house with a modification?

The principal and interest payment on a $400,000 loan would be $2,935 at his current 8% rate. The whole monthly payment (including $854 for taxes and insurance) is $3,789, or 63% of his gross income. Obviously an impossible payment for him.

So how does modification work? First, the interest rate could be lowered. At 2%, the payment could be dropped to $1,478 (plus $854 for a total of $2,332). Oops, that's still 39% of the homeowner's gross income.

So stretch the term out to 40 years. The total payment drops to $2,179 ($854 + $1,325), which is still 36% of the gross income.

Dropping the loan balance nearly down to the home's value ($303,400) gets him a payment of $1,859 ($854 + $1,005). That's the magic number--31% of his income! So he can get a modification, yay! However, if before seeking help he let the mortgage go into default, the lender may not have to modify his loan. So getting help early is important.

These programs have been created with the goal of helping 9 million homeowners. Check with your current loan servicer to see if you might be one of them.

If you're just getting to the point where you feel you understand your credit score, well, prepare to start over. FICO 08 is on its way and is already in use by some lenders. How will this new credit scoring system affect you when you apply for a home loan?

FICO 08 differs from traditional credit scoring in three major ways:

1. Crummy little debts that slip through the cracks won't hurt you - Any collections or public records with an original amount less than $100 will be ignored. Maybe. For a collection to be ignored by the system, it must be reported as a 3rd party collection agency account and not the collection department of a credit card company. If the collection shows up as "tradeline," or late payment, then it will still count against your score even if it is less than $100. This is great for those whose feet have been held to the fire over library fines, pesky tiny balances for medical labwork that show up in the mail, like, a year after you had the work done, parking tickets, whatever. Yay!

2. Credit card utilization WILL hurt you - The ratio of your current balances to your current credit card limits will be a very big booger with FICO 08. Consumers who get close to maxing out their limits will find their scores lower with FICO 08. FICO has apparently concluded that those who over-use credit cards are more likely to default on their debt than they used to be, so this will count more heavily against you than it used to. Couple this change with the credit card companies' recent moves to cut or close the credit lines of less profitable or higher-risk customers and you have a trend toward less available credit and increased penalties for using it. Today, when a one point difference in your credit score, for example 679 versus 680, can cost you thousands in surcharges to Fannie Mae or Freddie Mac, the FICO 08 changes could be expensive for many borrowers.

3. No piggybacking allowed - This new version of FICO is supposed to be able to tell if an authorized user is artificially boosting his / her credit score by piggybacking--that is, paying to be added to the credit card of someone with good credit as an authorized user. Legitimate authorized user accounts, for example a husband and wife, will still count on your credit score. Whether FICO 08 throws out legitimate accounts or inadvertently lets in piggybackers remains to be seen. But if you are relying on piggybacking to elevate your score, you can probably expect it to drop with FICO 08.

The best thing you can do in anticipation of this change is to pay down your credit card debt as much as you can, but keep your accounts open if possible. Make your payments on time. Apply for credit only when needed. And check your credit report at least annually to correct mistakes, head off identity theft, and monitor your progess as you improve your score.

Two large American lenders are being sued by the NAACP for allegedly discriminating in their lending practices. The two separate lawsuits filed in the U.S. District Court in California cite studies that indicate that some lenders' policies treat borrowers of different races, well, differently. In fact, upper income black Americans are two times more likely ...

The Wall Street Journal recently featured a new mortgage product that allows borrowers to pledge their future equity in exchange for a loan today. It works like this: The finance company advances you money–usually 10 to 15% of the current value of your home, and when you sell it, the investor gets half of the ...