Monthly Archive for August, 2010

The latest home sales reports show that we have a lot to be worried about, and that an economic recovery in the near future cannot be taken for granted. But what's scarier to analysts is an increase in the number of homeowners just beginning to have trouble paying their mortgages.

Nationally, the percent of loans behind by one payment hit its high in 2009 at 3.77 percent, then fell to 3.31 percent by year end. But today's report from the Mortgage Bankers Association has it moving back higher 3.51 percent.

MBA economists attribute the increasing mortgage problems to continuing high unemployment, and claim that the housing recovery will have to begin with a jobs recovery.

The loan default statistics were the third economic release put out this week; first came a National Realtors Association announcement that July sales of existing homes hit a 15-year low, and the US Commerce Department's report that last month's new home sales were the lowest ever recorded. The only decent piece of news was on the unemployment front, where fewer new claims for benefits were filed.

The MBA report did have some encouraging news: the percentage of loans in default is down for the first time since 2006, although that may be just because record numbers of foreclosures have been completed, taking those homes out of delinquent status.

Some homes may have dropped out of the report because they found new owners. But the tax credit that spurred home sales is now gone. Another troubling booger is that the proportion of prime fixed-rate loans entering going into foreclosure increased nationally, from .69 percent earlier in the year to .71 percent. Prime fixed-rate mortgages are considered low risk loans, but anyone can have mortgage credit problems when they don't have jobs.

So, what can you do to save your home?

Exhaust all resources. Your best bet is to go to Hope Loan Port, do not pass Go, do not collect $200. It's a comprehensive and neutral site that helps you prepare requests for modification and submit them directly to your lender. Both HAMP modifications and private modifications are covered. Remember, there are now forbearance and modification programs for people who have lost their jobs or have had income cuts. You can also connect with free or low-cost home counseling through the site. If you have an FHA home loan, take comfort in the fact that FHA loans go into foreclosure at a lower rate because FHA programs have been more successful than others at helping borrowers save their homes. Finally, if it's your other debts that are keeping you from making your mortgage payment, look into debt management through a reputable non-profit like Consumer Credit Counselors, or if you are very desperate, consult a bankruptcy attorney. You may be able to discharge your other debts, get on a plan to make up your missed payments, and keeo your home. But you won;t know until you try.

If your home is worth less than your home loan, and you don't have a hardship that qualifies you for a mortgage modification, you may be considering strategic default -- that is, walking away from your mortgage and daring your lender to sue you. However, you'd rather not incur years of having bad credit and being unable to get another mortgage. Plus, you wouldn't feel too great when your foreclosure caused all of your neighbors' homes to lose value. And a foreclosure is a public record -- everyone in town would know, including those snotty ladies in your book club. Well, now there is a program that allows you to refinance to a lower mortgage rate, and brings your mortgage balance more in line with your home's current value. It starts on September 7th and it's called an FHA Short Refinance.

How does the program work? First, it's not a mortgage modification. Your loan with your current lender will be replaced with a new FHA refinance mortgage. Second, it's not a bad credit home loan or a subprime rescue. Your mortgage has to be current for you to be eligible for this program. You have to meet FHA underwriting guidelines, meaning your credit can't be too horrendous. Finally, your current loan can't be an FHA mortgage. That's because FHA is specifically enjoined by federal law from writing down the principal on any loans it insures. However, FHA does allow you to defer up to 30% of your principal if you qualify through its loss mitigation programs.

The FHA Short Refi program is for people who can afford their underwater mortgages and who can qualify to refinance -- folks who might be temped to walk away from a home without some incentive to keep paying.

Here’s the deal:

Under the program, your first mortgage lender must agree to write off a some of your balance (at least 10%) to get it down to no more than 97.75% of your property's current disgusting horrible sad low value. If you have a second mortgage, that lender has to get on board as well -- agreeing to either write off the entire balance (unlikely) or re-subordinate it to the new first mortgage. If the total of both the new first mortgage plus the old second mortgage exceeds 115% of the home's current disgusting horrible sad low value, the second mortgage lender will have to write off the excess to make this program work.

Um, my lender isn't Santa Claus. Why would it agree to this?

Because homeowners across the country have shown that they are very willing to burn their lenders when their homes are worth significantly less than their mortgage balances. So, chances are your lender is already getting scared of you as your home's value drops, and making you go away may be worth writing down your loan's value -- it's cheaper than a foreclosure. In fact, FHA is concerned that lenders might like this deal enough to help borrowers qualify by bringing their mortgages artificially current. So FHA prohibited lenders from paying the homeowners’ mortgages for them. That’s how far some might be willing to go to get rid of you!

So, before burning your bridges with your current lender, check into the FHA Short Refi. The book club ladies will have to find someone else to gossip about if you don't go through foreclosure!

The lack of transparency surrounding mortgage lenders' modification decision processes is legendary, and the failure of HAMP is well-documented. Mortgage servicers say they're overwhelmed with multiple changes to the program. They claim the reason the many folks get kicked out of the program and don't receive modifications is that they fail to return paperwork. Borrowers counter that they send the same stuff in over and over and that servicers repeatedly "lose" it, then send out a HAMP denial because "documentation not provided." Mortgage counselors agree, with 100% of those surveyed claiming to receive multiple requests for the same documents.

So how would HAMP be run if servicers actually wanted to accomplish the modifications?

I. Approval would be automated. When lenders want to make a fast decision, for example, when they want to approve, fund, and collect fees on as many mortgage applications as possible, they use an automated underwriting system (AUS). The loan agent inputs the borrower's application, the software analyzes the credit, asset, equity, and income in seconds, and renders a decision. the applicant gets a list of conditions required to complete the loan. For example, a funding conditions list for a wage earner might read:

a. Bank statements for most recent two months showing at least $56,700 balance.

b. Most recent pay stubs and last two years W-2s documenting at least $6,781 per month income.

c. Declarations page for hazard insurance.

d. Acceptable property appraisal.

II. Borrowers would have assigned contacts and there would be incentives for applications to be resolved promptly.

Once these things are turned in and approved by a human underwriter, the loan documents are drawn, the paperwork is signed, and the loan funds. When I was a mortgage loan officer, good credit loans could be completed start to finish in eight days. bad credit mortgage loan applications took no more than thirty days. Wouldn't it be nice if you could go online, fill out a form (or have a counselor help you do it), get a decision and a list of required documents in seconds, send them to the lender, and get a final decision in a few days or weeks? It's possible.

So why do mortgage modification applications take over a year to complete in many cases?

If lenders truly wanted to make the process more efficient, they could automate their decision-making process. Why shouldn't applicants be able to input their information (it's the same information that's required to apply for a mortgage), document their hardship, and get an automated decision and a list of conditions to finalize their mod? Why do they have to spend hours on the phone repeating the same explanations to different agents every time, when a mortgage applicant gets a single contact who knows the whole file? Why do servicers make the process so difficult? Are they hiring dyslexics to do their filing? Is it really possible to lose that many documents?

Servicers, investors, and borrowers not on the same page

I spent yesterday reviewing the documents and tutorials that HAMP Admin has created for mortgage servicers. They say that the biggest benefit of HAMP for servicers is that they get a whopping $1,500 for modifying a loan, and that they "are doing their part" to help the US economy. Somehow I don't think that's terribly motivating. Investors may be better off with a reduced income stream than they would be with a foreclosure, but that's not the case with servicers. According to Elizabeth Warren, the frontrunner for heading up the new consumer financial protection bureau, mortgage servicers make ten to twenty times more by foreclosing on you than they ever would by modifying your loan. And they get paid first -- before the investors.

As long as mortgage modification is left to the discretion of servicers, private companies that owe their loyalty to stockholders, not the American public, their investors, or their mortgage borrowers, they will not proceed in an efficient way -- the way that loans move through the system when lenders are actually motivated to do the job.

GM said that it plans to buy sub-prime auto lender AmeriCredit Corp.

Before the mortgage crisis and the recession, GM owned GMAC, which made auto loans that facilitated a lot of GM car sales, but GMAC also funded mortgages. When the financial crisis hit, the mortgage side of GMAC suffered the most.

General Motors is back in the auto loan business, including sub-prime auto financing, helping dealers to sell more GM cars.

Will GM venture back into making sub-prime mortgages as well? probably not, at least not the way they did in the past. Sub-prime auto financing is considerably different from bad credit mortgages.

Treat a Mortgage Like a Car Loan

The bad credit mortgage crisis happened because lenders and investors assumed that house prices would keep going up -- or would at least not fall on a nationwide basis. But sub-prime auto financiers know that cars lose value steadily. That means auto lenders have to be more conservative about the value of the assets backing their loans and understand that borrowers behave a certain way in tough economic times. Mortgage lenders made their decisions based on the assumption that borrowers would blow off other debts to keep paying the mortgage and to hang on to their homes at all costs. Auto lenders made no such assumption.

"Historically homeowners had positive equity in their houses. So they would pay the mortgage first and default on other loans like auto loans," said Sean Egan, president of Egan-Jones Ratings. When house prices dropped, the reverse became true. Having defaulted on their mortgages, borrowers were better able to make their car payments.

"There have been lots of home loan defaults before people defaulted on their auto loans," Egan said.

So why shouldn't sub-prime mortgage lenders act more like sub-prime auto lenders?

That would mean making money available to those under certain conditions. Probably more like the way mortgages were made before Fannie and Freddie made 30-year fixed mortgages the norm.

Make a big down payment mandatory. If you were lending on a car that would lose value the instant it was driven off the lot, you'd want to have that covered. A 20% to 25% down payment should do the trick.

Let the payment schedule keep up with possible depreciation. The problem with today's mortgage is that very very little of the payment initially goes toward repayment of the principal, so it's tough to build equity without some property appreciation. Sub-prime mortgages should come with 15-year terms to combat that problem.

By making sub-prime less risky, you could bring down the costs. One big problem with bad credit mortgages in the past was that lenders focused on the interest rate (very high), without worrying about how the borrower was going to afford it. They approved loans with itty bitty down payments, very high debt-to-income ratios, and few ir no reserves. Then they sold the loans off to investors who loved the very high rates and again did not consider that most borrowers would be unable to sustain that kind of payment.

But if you made bad credit mortgages with big down payment requirements, asset requirements, and full income verification (not necessarily in accordance with Fannie Mae or FHA guidelines), the risk is lower and the interest rate need not be spectacularly higher than prime rates.

Such reform would make subprime financing available to those who can afford it, and a decent and safe investment for those who provide it.

If you got a Social Security number for your child but only use it to get your tax deduction for a dependent, you might want to make sure that no one else is using it.

That’s the latest fraud going around: online only companies selling dormant Social Security numbers to people who want to defraud lenders by getting mortgage credit or other financing they aren't entitled to. The companies refer to their "product" as a CPNs, which stands for credit profile, credit protection, or credit privacy number.

The buyer creates a credit profile (in one case by using another fraudulent company, which reported favorable experience to the credit bureaus) and then uses it to get a mortgage or to run up huge credit card debts that he or she has no intention of ever repaying. If this happens to your child, years later, when he or she tries to buy a house or a car, the credit will be ruined.

The scheme was discovered by Jill Jensen, an FBI agent in the Kansas City field office, during the investigation of a mortgage-fraud case.

According to AP, the numbers are obtained using online public information sources. The numbers are then run through more public information databases to find out of anyone has applied for credit with the numbers and, if not, the numbers are added to the company’s "inventory."

It's not hard to spot. Everyone, underage or not, is entitled to a free copy of his or her credit report. Go to annualcreditreport.com and pull a free report for your child, and make sure that he or she hasn't run up huge debts or bought property before graduating from 6th grade.

Some folks in Missouri were recently indicted for perpetrating credit history fraud and buying property illegally, to the tune of about three million dollars. Credit history fraud is a new crime that is reported growing in popularity. But what is it? These crooks accomplished their fraud by manipulating the credit reporting system. One alleged criminal, a ...

Sub-prime or bad credit mortgages are life savers for the right kind of borrower and unmitigated disasters for the wrong kind of borrower. Here is a list of characteristics of the borrower for whom a bad credit or sub-prime mortgage might be appropriate: 1. You can afford the higher interest rate. Bad credit lenders have been ...