Thursday, March 5, 2009

Refi’s, Loan Mods, Foreclosures, Oh My!

Obama’s administration announces latest guidelines on Homeowner Affordability and Stability Program (HASP).

March 4, 2009 -- BLOOMFIELD, MI – Get ready for the wild, wild, west of saving homes from foreclosure. Obama’s administration released dozens of pages of guidelines today to clarify their February 18th introduction of HASP.

The two week delay shows that Obama’s administration thought the program was important enough to rush the announcement on February 18th, even though all the details hadn’t been worked out. The administration believes any economic turnaround will begin with stabilizing housing values and is committed to making that happen.

The details released today cover a lot of material that will bore most homeowners to sleep.

So, let’s summarize the important details:

If you’re making your payments on time, but can’t refinance because you’re upside down, this program MAY provide some relief. The program is expected to help 4 to 5 million homeowners. Requirements known at this time:

- The mortgage must be owned or securitized by FNMA or FHLMC
- The property must be owner-occupied
- Mortgage payments must be current
- No cash out allowed, only transaction costs can be rolled into new loan amount
- The new mortgage may not exceed 105% of the property’s current value
- Second mortgages & lines of credit that exceed the 105% may be subordinated if the lien holder agrees.
- Program ends in June 2010

To determine if your mortgage is FNMA or FHLMC eligible toll-free phone & web systems have been set up to aid homeowners. The information is not a guarantee of eligibility for the program though.

Fannie Mae,
1-800-7FANNIE (8am to 8pm EST).

Freddie Mac
1-800-FREDDIE (8am to 8pm EST)

What’s most interesting about the clarifications offered today is what wasn’t addressed:

- Can a second mortgage or line of credit be rolled into the new mortgage?
- What about other possible liens on title, like IRS liens?
- Will PMI be required if a homeowner doesn’t have it now?
- Can an escrow account be rolled into new loan if one doesn’t exist now?

The Treasury Department deferred to FNMA & FHLMC on these questions and more with this cryptic paragraph:

“GSE lenders and servicers already have much of the borrower’s information on
file, so documentation requirements are not likely to be burdensome. In
addition, in some cases an appraisal will not be necessary. This flexibility
will make the refinance quicker and less costly for both borrowers and lenders.
The Home Affordable Refinance program ends in June 2010.”

What about homeowners whose primary residences are upside down by more than the 105% allowed?

Stay tuned as there are rumors that FNMA/FHLMC may eventually copy the FHA Streamline Program (as I’ve been recommending since October of last year) and ignore appraised values, income & assets for refinancing homeowners who are current on their payments. It makes sense – if you’re making your payments now, lowering your interest rate & payment will only decrease the chances of you defaulting on your mortgage.

Also of note in the latest announcement, you don’t see anything about 4.5% interest rates. The Fed is still buying Mortgage Backed Securities, but it’s now more to stabilize mortgage rates, not force them down. So, if you’re waiting for rates to go back down under 5% to refinance, you may be waiting a looong time.

This is the real focus of Obama’s HASP initiative which is shown by the amount of content. It’s expected to aid 3 to 4 million homeowners in avoiding foreclosure by reducing their mortgage payments. We’ll summarize the details, but first let’s consider why this program is so important.

To stabilize the housing market & housing values in the current economic climate, housing ownership payments must be brought inline with housing rental payments.

Assume you’re a homeowner, you’re upside down in your home and you can rent the exact same home you’re in, for less than your current mortgage payment. What’s your incentive to stay, keep making your payments and wait for your home’s value to recover? Not a lot, especially if you’re struggling financially.

If your mortgage payment can be brought down to the level of market rents though, you won’t be able to live anywhere cheaper without moving into a smaller home. So, your incentive to stay and tough it out is going to be a lot higher. Also, if you hold onto your home, it’ll eventually go up in value and you may have equity again someday. So, modifying mortgage payments to make this happen will lead to a lot less walk-aways and the resulting foreclosures, which lower housing values further.

Of course, if you’ve lost your job, been laid-off or otherwise can’t afford the market rent for your home, than you have no choice but to down-size or move to cheaper area of town to lower your housing costs.

Now let’s review the hi-lites of HASP modifications:

- Only mortgages closed before January 1, 2009 are eligible
- The program takes effect immediately, modifications end December 31, 2012
- Owner-occupied homes only, no vacant or condemned properties
- It doesn’t matter how upside down the property is
- The government is giving financial incentives to lenders to modify loans that are NOT in default if the borrower can prove imminent hardship.
- Homeowners who make on-time mortgage payments will be eligible for annual principal reductions of $1,000 for up to 5 years.
- All borrowers must document income and sign an affidavit of financial hardship & a 4506-T
- Lenders will follow a specific sequence of steps to reduce monthly payments to no more than 31% of verified gross monthly income. Second mortgage & lines of credit are not included in this calculation.
- Homeowners with total debt payments over 55% of their income will be required to participate in HUD-certified consumer debt counseling program to be eligible. (Hope Hotline at 888-995-HOPE (4673), website
- Homeowners in bankruptcy may still be eligible
- Homeowners will have a 90 day trial period to prove they can make modified payments, during which any foreclosure proceedings will be suspended.
- If homeowner defaults on modification plan, they are not eligible for any additional modifications.
- Lenders will receive incentives to allow short-sales or deeds-in-lieu instead of foreclosing.
- Incentives will be offered to extinguish second mortgages and lines of credit (to be determined)
- Participation in the program is voluntary for lenders, but will be required if they receive Financial Stability program funds.
- Private Mortgage Insurance companies have agreed to work out settlements on modified loans.

For all those homeowners expecting the balance of their mortgage to be reduced as part of a loan modification, it’s the last thing the government wants to do. Here’s the specific step-by-step procedure outlined in the plan to reduce a homeowner’s payment to qualify:

· Lenders may add to loan amount to be modified: accrued interest, past due real estate taxes and insurance premiums, delinquency charges paid to third parties in the ordinary course of servicing and not retained by the lender, any required escrow advances already paid by the lender and any required escrow advances by the lender that are currently due and will be paid by the lender during the Trial Period. Late fees are not included.
· The interest rate will be reduced in 1/8% increments (subject to a floor of 2%) until the payment equals 31% of the homeowner’s income.
· Next, extension of the term of the mortgage up to 40 years is allowed. The 40-year term begins at the start of the modification (after the borrower successfully completes the Trial Period).
· Finally, IF necessary forbearance of principal is allowed. If there is a principal forbearance amount, a balloon payment of that forbearance amount is due on the maturity date, upon sale of the property, or upon payoff of the regular mortgage. The modified balance must be no lower than the current property value.
· There is no requirement to use principal reduction under the Home Affordable Modification program.

There is much more to the program, but these are the details most relevant to homeowners. If you’d like to read more, here are links to what’s been published so far:

NOTE: we strongly recommend that homeowners suspend any & all payments to mortgage modification brokers until their eligibility under this program is determined. Many of these services charge $2,500 or more and have a suspect track record of success. We put all our client loan modifications on hold after the initial announcement on February 18th and will be actively assisting our clients to qualify for this program instead. If you’d like our assistance in this matter, we will do so for a nonrefundable consulting fee of $375.

1 comment:

  1. Have to say I agree with your summation of the program but disagree with your final conclusion about not sending people to loan mod companies. Not all charge huge fees and some do a great deal more in helping people than Obama's program does.

    For example, we charge at the very most $1500 in total fees even if there is a first and second mortgage on the property. We offer a money back guarantee and we have a 98% success rate and tons of testimonials from thrilled past clients whose homes we have saved. Moreover we are "Obama on Steroids"! We are doing jumbo loans, second homes and non owner properties. Not everyone can be helped by his program and we are happy to help those homeowners who want to stay in their homes.