Monthly Archive for August, 2009

While news that lender underwriting guidelines have toughened up is old stuff, and most people now know that unless they are candidates for financial sainthood they will be dinged with surcharges for everything from missing credit score cutoffs to buying a condo to obtaining subordinate financing (a second mortgage to increase your down payment). And most people know now that loans are largely underwritten by computer programs. What you probably don't know is that an automated approval from Fannie Mae or Freddie Mac may not be worth the paper it's printed on.

Because every loan approval has contingencies, things that need to be done before the maortgage can be funded. And unless you have at least 20% down, every Fannie or Freddie approval is contingent on you being able to get approved for Mortgage Insurance (MI). That used to be pretty much a formality--if you were good enough for the mortgage giants, you were good enough for the insurers. But today's mortgage insurance companies were burned in the recent mortgage conflagration and they are trying to make up for their losses and bring enough super-high-quality loans to offset the toxic stuff they are still carrying.

For example, Mortgage Guaranty Insurance Corporation (MGIC), one of the largest underwriters of mortgage insurance in the country, has updated it's guidelines as of July 1, 2009. It even has a "restricted markets list" and if your property is on that list you have about a snowball's chance in hell of getting insurance there.

For those in non-restricted markets, you still have a higher burden to meet than ever before. Your minimum credit score is 700. Cash-out refinances are ineligible, period. And even if you were approved by your lender, bankruptcies, deeds in lieu of foreclosure, or foreclosures within four years make you ineligible for MI. And this is the NON-restricted market. If you are in a market like for example the entire state of Nevada, your requirements will be so restrictive that you have either already been nominated for sainthood or you will not be getting insurance.

Even programs allowing secondary financing or owner carry-backs are for all practical purposes gone. So, you don't have a lot of options these days--it's either save a substantial down payment, go with a government loan program, like FHA or VA, or look for a bad credit lender that will make you a loan without requiring mortgage insurance (but these hard money guys will probably want very high rates and a few points up front).

It's a great market out there for those who are in a position to buy; find a bad credit lender and be prepared to pay big, find owner financing, lower your sights and try to qualify for a government loan, or save a larger down payment. That's what's out there now. Not pretty.

Until the recent mortgage crisis, it wasn't all that important to document your income for lenders if everything else was in order--good credit, assets, and a demonstrated capacity to handle large amounts of debt successfully. Stated income loans had a purpose, and it wasn't to allow pathological liars to buy bigger houses. They were created because traditional underwriting guidelines can be quite restrictive in determining what income gets counted when qualifying applicants for home loans. This means many sources of income that would be available to make a mortgage payment aren't used in calculating how much home a borrower can afford. Stated income loan programs allow borrowers to indicate what their available income is and be qualified for a mortgage based on that amount.

With a stated income loan, the lender extrapolates (calculates based on available information) the applicant's income from things like liquid assets. For example, it's not hard to believe that someone makes $10,000 a month if she's got a 401(k) with $200,000 in it. Second, stated income borrowers usually put more money down than traditional borrowers--this means they have more to lose if they overstate their income, can't make the payments, and lose their home. Finally, if someone runs up $25,000 on his Amex each month and pays it off each month, it's a pretty good indication that the income is there.

So why don't stated income borrowers just prove their income like everyone else? They could if the rules were a little different, but right now it's hard for many people with less traditional sources of income. For example, some self-employed borrowers have unusual accounting and business cycles -- a developer may have immense expenses and little inflow in the initial stages of building but make lots of money two years later -- and traditional underwriting may discount most of that income because it requires the underwriters take the lower of the last two years' tax return income. Other hard-to-use income can include child support (you have to provide 12 months of canceled checks and it's not always easy to go hat-in-hand to an ex-spouse and get these). If your support comes in sporadically or you get it in cash, underwriters probably won't allow you to use it. Stated income loans can be an alternative for self-employed borrowers who make more than their most recent tax returns show, for those making a lot of money but are doing it with a new business or sales job (2 year history required by traditional underwriting), or for multiple borrowers in situations where one borrower has bad credit and can't be included on the loan application.

The problem with stated income loans was that lenders eventually went too far--making loans to people with no assets, no down payments, and bad credit. Would you do that if it was your money? That mistake (called layering of risk) is what took a very good and useful product pretty much off the market. But the need is still here. And it will be back

If you're like most people, you never heard of a company called Taylor, Bean and Whitaker. But they may soon have a very profound effect on your life. Because the FHA loan you think you are approved for and ready to close on may just have disappeared.

The twelfth largest lender in the country, Taylor Bean funded a huge portion of brokered mortgages, including FHA loans. Questionable disclosure and other practices led Fannie Mae to suspend dealing with the company five years ago. In addition, many lenders with wholesale divisions, such as Chase, stopped working with this company years ago.

Recently, The Federal Housing Administration suspended Taylor, Bean & Whitaker Mortgage Corp. from originating loans insured by the federal agency, and raised questions about the company's business practices and financial disclosures. If you got your loan through through a mortgage broker or bank not licensed to do FHA loans on its own, odds are good it's going through Taylor Bean. Or, I should say, it WAS. If you had an approval, you no longer do. If you had a loan set to close, you no longer do. The company has suspended operations on all fronts and its downfall will be a major loss of funding to the hundreds of mortgage brokers and community banks that originate loans everywhere.

And loans will cost more. If small mortgage lenders are unable to do business, "it will mean fewer choices for the consumer and higher mortgage rates," said Glen Corso, a spokesman for the Warehouse Lending Project, a group of about 35 mortgage banks pushing for federal aid to encourage more warehouse lending.

So, what do you do? Call your broker first. Find out what lender is funding your loan and make sure it's still in business. If you have any doubt, run, don't walk, to a direct lender (like a large bank approved to do FHA loans) and get your application in ASAP. If you have copies of everything, you're ahead of the game. If not, get your file from your unfortunate old lender and take it to one that can complete the job.

Okay, you know you're in trouble--too much personal debt and a mortgage you can't handle. But there's a tightrope you need to walk in order to score a mortgage modification. You have to have enough income to qualify for a modification--that is, you need to prove that you can successfully make the new payment--but you need to show that you can afford ALL your payments. And if you got too silly with your credit card debt it could cost you your modification approval.

Try calling your credit card companies first. Many have hardship programs that will allow you to get a low rate in exchange for freezing your card and not using it anymore. This is different from closing the account, which by dropping your amount of available credit and increasing your utilization rate can tank your credit rating.

How About Credit Counseling?
Credit counseling can be a very good thing, especially for those who have real difficulty managing finances and paying bills. But most agencies also require that you close out your credit cards--which can hurt your credit rating. If you normally had a good track record with your creditors, and have financial difficulty due to something out of your control, AND can show that the difficulty is not permanent, you can probably do a DIY payment reduction plan and then apply for a refinance or modification if applicable. See www.makinghoimeaffordable.com. However, iif you need a debt management plan to get your finances in order and the budgeting help you require, a reputable counseling service can make it happen. Then you too can look into refinancing or modifying your home mortgage.