Monthly Archive for July, 2009

Homeowners overwhelmed by their housing and other payments may benefit from a loan modification. But they need it fast. How can you get past the red tape and get your file looked at quickly?

First, do a quick and dirty check on your monthly budget. Your total housing expense needs to be over 31% of your gross income to even qualify. But you can't be too strapped either. Because just having a too-high mortgage payment isn't going to get you a modification. If you can't pay your bills even with a modification, you may well be denied one. So first, look at what you're spending and make cuts. Call your credit card companies and ask for their hardship programs or get into a credit counseling or debt management plan asap. You HAVE to get your monthly expenses down as low as you can. Ditch the extra cell phones, at least for now. Shop for the lowest insurance rates, even if you have to raise your deductibles. Quit eating out for a while and start jogging instead of paying health club dues. Document everything you have done to lower your bills.

Write a good hardship letter. Explain why you were qualified to make your house payments when you bought the place, what happened to increase your expenses (medical problems?) or decrease your income (business down, hours cut?) and how a modification to 31% of your gross monthly income will make it possible for you to honor your obligations. Before making this statement, calculate what 31% of your before tax income is and see how much the lender would have to drop your payment. Explain how you intend to improve your finances during your modification period.

Finally, get your paperwork--tax returns, bills--your old high ones and your new lower ones--to prove that you did lower your spending. Copy paychecks, statements, and list your assets as well.

Lenders are slammed by the sheer numbers of applications for modifications. So if you want to get through quickly, it's important to start the loan modification process fully prepared. That means having the correct paperwork handy before calling or meeting with a loan servicer or housing counselor.

If rates have dropped since you received your original FHA mortgage and you can lower your monthly payment with a new loan, well guess what? You can do it with a streamline loan. The best part is that even if your home is worth half of its old value, as long as the new loan balance don't exceed the lesser of old loan balance or your current balance, an appraisal won't be required. Even investment properties qualify under some circumstances. Per HUD,

"Streamline financing by investors, or for secondary residences may only be
made without an appraisal, and must be made solely in the business entity’s
name, if the residence was previously insured in the business entity’s name."

Your credit is not an issue as long as you are current on your mortgage and have not been late more than once or twice (depending on how late) in the last 12 months.

Want to dump a fixed rate and take advantage a lower ARM rates? FHA allows a streamline as long as the new rate is at least 2% lower than your old fixed rate. And unlike other ARMs, FHA rates adjust only 1%, once a year.

Finally, if you have an FHA loan and want to get a divorced spouse off your mortgage, that's allowed too. You need a judge's order and a quit claim. FHA mortgages are popular now for good reason. But if you were ahead of the crowd and have one already, there are benefits that may help you more than a government bailout ever could.

It's nearly impossible to refinance your house these days without the lender requiring an appraisal (unless you're a lucky FHA borrower getting a streamlined refinance--and we'll talk about that tomorrow). And normally the biggest part of determining what your home is worth is the sales prices of nearby homes. But should the prices of foreclosure and short sale properties be counted when calculating what your property is worth?

The National Association of Home Builders doesn't think so. And neither do I--here's why. Foreclosure sales are associated with many risks--there is a chance that the title might not be clear, the previous owners may have vandalised the property, and the home is often not worth what the lender initially asks. So the only way to get a foreclosed property unloaded, knowing that buyers are taking substantial risks when they open escrow, is to offer significant discounts to entice an investor. A buyer that would not have to worry about these issues if he or she was buying YOUR house.

Same thing for short sales. There is a reason that only about one in ten of these go through. The banks want to minimize their losses but are also overwhelmed with problem loans and understaffed to deal with them. So the process takes months. Lenders won't even tell the homeowner if they'd consider a short sale until an offer is presented. So the buyer doesn't even know if the bank will allow a sale. Many banks even have a policy of requiring more than one offer before making a decision.

And some just prefer to foreclose and get it over with. A local Realtor here in Reno told me about a short sale home listing that received SIX offers, two of them unconditional, all-cash deals. She called the lender every day for over five months. The employee assigned to the house finally said, "I have had this hanging over my head for months. But I can get it off my desk right now if I foreclose on it. And that's what I'm going to do right now." And she did, and the bank immediately listed the house for less than four of the offers had been. So people who buy short sale property only do it if the rewards are worth the hoops they will have to jump through--a substantial discount Which, again, they would NOT have to do were they buying YOUR home.

So, while I think that the trends in a neighborhood (prices increasing or decreasing, how long does it take to sell an average home, and the percentage of homes in foreclosure) should have a bearing on the lender's requirements, they should not be used to value YOUR actual home. The lender could simply require more equity if your credit, income, assets, or other factors aren't up to snuff. And if you are trying to sell YOUR home, don't you want it to be evaluated based on it's features and condition, rather than an artificial situation created by someone down the street who may have been an irresponsible borrower?

A story in the LA Times this morning let us know it's official--what's been rumored for weeks has happened. The Obama administration eased eligibility rules Wednesday for its Home Affordable Refinance Program (HARP) , lifting the maximum loan-to-value ratio to 125% from 105%--making refinancing available to more people (like us here in Nevada!) whose homes are worth less than their mortgages. HARP is open to homeowners whose loans are owned or guaranteed by Fannie Mae or Freddie Mac, the mortgage finance giants now under government control. It covers first mortgages only.

However, the programs has been pretty ineffective in hardest-hit areas because the maximum 105% loan-to-value ratio was too low to include many homes that have lost those most equity. And today's rates are almost .75% higher than they were when the first lucky wave of homeowners refinanced their loans.

The new 125% maximum means an eligible homeowner with a $400,000 mortgage can refinance if his or her house is worth at least $320,000. But the borrowers have to be in good standing on their current mortgage and must qualify for--and pay the costs of obtaining-- the new loan. Income requirements are an increasing problem as unemployment continues trending higher and workers receive pay cuts or pink slips.

Treasury Secretary Timothy F. Geithner said the move to raise the loan-to-value limit was "a crucial step in our broader efforts to get America's housing market and economy on the path to recovery." For a certain group it no doubt is, but I'm betting it's a smaller group than Mr. Geithner believes.