Home Loan Focus

Archive for the ‘mortgage system pitfalls’ Category

While the Obama team and Secretary of Treasury Timothy Geithner have been very short on detailed plans they have been very thorough in ‘promising’ detailed plan almost every month.

Geithner was one of President Obama’s first nominees to get pushed through the pipeline after Obama himself took office in January.  Geithner and Obama were both very quick to promise detailed plans to instill confidence in Americans, the economy and the world.  They then promptly started to demonstrate that they had no such detailed plan to share.

Communications 101 teaches students to

1. Tell the audience what you will tell them
2. Tell them
3. Tell them what you told them.

The Obama Administration which seemed almost super human at communications before the election seems to have been infected with the same communications virus that plagued George W Bush, and it shows in their approach of:

1. Tell the audience what you will tell them
2. Don’t Tell them; watch things get worse
3. Tell the audience that you will tell them in two weeks
4. Don’t Tell them; watch things get worse
5. Tell the audience that you will tell them in two weeks
6. . . . .  ??????  Who knows what they will tell us next?

It is pretty obvious why consumer sentiment, investor sentiment and job approval numbers for Obama and Geithner are all dropping.  (People still like Obama, but don’t think he is doing well, which is also very similar to the effect that Bush had on America at one time.)

So when we are told that Geithner will once again tell us in a couple weeks about a detailed plan, I’m skeptical.  In fact, I’d suggest that if he does not provide a ‘real’ detailed plan in two weeks that he should be removed from office.  We do not have time for ineffective people to pander to us.

U.S. officials have pledged to push forward with a revamping of the rules governing the financial system as a necessary complement to emergency efforts to prop up the financial sector and pull the economy out of a deep recession. Geithner said he planned to roll out "a set of relatively detailed concrete proposals" on regulatory reform prior to testifying on the issue before a House of Representatives panel on March 26.

Geithner: Rules revamp needed to shield economy | Special Coverage | Reuters

Here is a copy of the new Treasury Guidelines.  Note that the second part of this DOES cover people outside of the scope of Fannie Mae and Freddie Mac, which is an improvement on previous indications and reports.  Passing the tests offered on part 2 however, will be extremely difficult for many homeowners.  The bottom line is that to qualify for a modification the modification has to pay the bank more than allowing you to foreclose and give the house back.

 

 

U.S. DEPARTMENT OF THE TREASURY
Washington 
March 4, 2009 

Making Home Affordable
Summary of Guidelines

Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosures on families, communities and the national economy.

The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.
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.

The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. This program will work in tandem with an expanded and improved Hope for Homeowners program.
With the information now available, servicers can begin immediately to modify eligible mortgages under the Modification program so that at-risk borrowers can better afford their payments. The detailed guidelines (separate document) provide information on the following:

Eligibility and Verification

• Loans originated on or before January 1, 2009.

• First-lien loans on owner-occupied properties with unpaid principal balance up to $729,750. Higher limits allowed for owner-occupied properties with 2-4 units.

• All borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship.

• Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties.

• Incentives to lenders and servicers to modify at risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default.

• Modifications can start from now until December 31, 2012; loans can be modified only once under the program.
Loan Modification Terms and Procedures

• Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waivers of limits on participation.

• Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive

– meaning that the net present value of expected cash flow is greater in the modification scenario – the servicer must modify absent fraud or a contract prohibition.

• Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation assumptions, foreclosure costs and timelines, and borrower cure and redefault rate assumptions.

• Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI).

• The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.

• The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.

• Servicers must enter into the program agreements with Treasury’s financial agent on or before December 31, 2009.
Payments to Servicers, Lenders, and Responsible Borrowers

• The program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI.

• Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus “pay for success” fees on still-performing loans of $1,000 per year.

• Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.

• The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments.

• The program will include incentives for extinguishing second liens on loans modified under this program.

• No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.

• Similar incentives will be paid for Hope for Homeowner refinances.

Transparency and Accountability

• Measures to prevent and detect fraud, such as documentation and audit requirements, will be central to the program.

• Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification, and other documentation.

• Freddie Mac will audit compliance.

The Geithner/Obama plan to ‘help’ home owners called the “Homeowner Affordability and Stability Plan” and the guidelines – Text Version – that spell out how it is to be executed called the “Making Home Affordable” Guidelines have some holes big enough to drop a country (the size of the United States) through.

Problem 1 – Not Big Enough

The program is only designed to cover 7 – 9 million Americans despite the fact that there are between 50 – 80 million Americans holding mortgages.  In 2008 over 2 million people went through foreclosure and 2 million+ more are expected to go through foreclosure in 2009 by the most modest estimates.  8.3 million people currently owe more on their homes than those homes are worth, which means they can not sell their homes and relocate if they lose a job or even get a promotion requiring a move.  Furthermore, if home prices drop just another 5% (and rates have been going down that much every month in 40% of states in the US (not just California as the problem is spreading) then 2.2 million additional borrowers will be underwater.  Plus, almost 2 million people left the United States and moved to Central America last year as jobs evaporated, which also helped to fuel the evaporation of new home buyers capable of buying a home.

This drop in home prices works like an avalanche.  As it drops more, it picks up more snow and increases in speed consuming more and more formerly safe, stable and financially secure Americans that are in its path.  There are only about 40-50 million American homes that are owned free and clear with no mortgage.  But even these are at the risk of lower prices, increasing property taxes, and rising incidences of property crime as suburbia is turns into gang infest ghost towns.

Problem 2 – Wrong Focus

Then there is the issue that after paying $2 trillion to bail out Wall Street this plan only offers up $75 – %80 billion to actual home owners.

$2 trillion if divided amongst 75 million mortgage holders could have provided $26,000 to each home owner to revalue those mortgages, write down principle, and lower mortgage payments or even payoff mortgages all together!  This could have enabled people to tighten their finances, fix their budgets, and if they need to move, sell or buy a home, they could have done it.  And that is 75 MILLION households, not 7 million that just happen to be covered by 2 failed institutions (Fannie and Freddie).

Instead the government has put good money after bad in a never ending hole for capital currently nick named the financial markets.  They complain about the hocus pocus of hedge funds while poring more money into the banks that own, run and invest in hedge funds instead of the people that own real assets (homes).

Problem 3 – Too Little Too Late – Incentive to Foreclose or go Bankrupt

Essentially the government is simply creating an incentive for homeowners to go through foreclosure or bankruptcy.  The real estate market is not in the tank it is going down and down into the tank.  We are NOT at the bottom yet.  Throwing money on the fire does not stifle the flames, it causes it to burn more.

More and more homeowners that are underwater are realizing that their only real option is to sell their home to the highest bidder, their bank holding the mortgage. 

When that isn’t enough the other option is to walk away from their debt all together in bankruptcy.  Through a bankruptcy consumers can dismiss tens of thousands of dollars in debt on their unsecured credit cards, renegotiate their mortgage rates, their mortgage principal, their car loans and more.  Even if they go through Chapter 13 – Reorganization, they stand a better chance of renegotiating their credit card interest rates down to single digits at a time when credit card companies are racing to raise rates up to 30% before new laws go into effect in July 2009.

Plus, the credit card companies are eliminating credit limits for card holders left and right.  They are dropping credit lines, canceling cards and more.  For those people that worked very hard to keep their credit up and pay their credit cards on time, they are seeing their credit rating sabotaged by banks cutting their limits for no reasons that have to do with that consumer.  They might as well already be in bankruptcy!  Their credit rating goes in the tank, their interest rate goes up to 30%, their cards are canceled, Chapter 13 starts to look like a blessing because all the perils of bankruptcy have already been experienced by people that pay their bills on time!

Problem 4 – Government Reinvention of Sub Prime Loans

So after subprime loans supposedly got us into this mess, the government plan relies heavily on sub prime tools to get people ‘out of this problem’.

• ARMs
• 40 Year Loans

Those ‘evil’ adjustable rate mortgages(ARMs) that trapped millions of people are essentially exactly what the government is offering.  They are enabling people to finance at interest rates of 2-4% for 1-4 years to make their homes ‘more affordable’.

Hello! That is exactly what mortgage brokers did with sub prime loans.  They even went one step better offering 0% mortgages. 

The government is essentially prolonging the problem.  This does enable people to live and fight another day from one perspective.  It also enslaves them to their homes, to the banks and now to the government (with a loan that might not be able to be forgiven in bankruptcy) from another perspective.  Would you rather be enslaved to your home, the bank and the government, or rather sell your home back in a foreclosure or escape the bondages of your debt in a bankruptcy and be on the path to healing your finances (with your full income that you have now).

The second thing that the government is offering is a 40 year mortgage.  There is a historical reason why 40 year mortgages have not been offered to the masses.

40 Year Mortgages are a rip off and they do not make homes more affordable. 

A 40 year mortgage will force a person to pay far more on a mortgage than a 30 year mortgage.  The interest like a credit card where a person pays a minimum payment, almost never stops.  After the first 10 years, you might as well have rented your home, because you will not have much more principle built up in your home.  The banks will earn significantly more interest from you during that time.  In fact you will pay for your home multiple times over in interest even though you will still owe the principle!

This isn’t change we can believe in this is just a really bad idea.  That pretty much sums up all of the plans offered so far in fact.

Government bailouts are making it possible for people to sell their homes and make 20 – 50% more on the price than what the market is offering.  For many people this can help them get out from underwater on their mortgages.  The federal bailout of banks is making this possible.  In some cases people are even able to unload their homes at prices not seen since before the real estate bubble.

That might be welcome news to people witnessing a rate of existing home sales that just dropped in January nationwide.  It might also be welcome news because existing home sales prices dropped in January from from $199,800 in January 08 to $170,300 in January 09 (down from $175,700 in December 08 the month before).

So how might those people sell their home at $199,800 or even $210,000 instead of taking in $170,300? 

What’s the Catch????

They have to sell their home back to the bank. Its called foreclosure. 

For a person that paid $240,000 for a home in 07, and financed $210,000 through the bank only to watch their home go under water when the market price dropped to $170,300 last month, they may have no other choice.

If they happen to be lucky enough to still have a job but are being relocated, they may not be able to afford to pay out $40,300 to pay off their mortgage, even if they can find a REAL buyer that will pay $170,300 for their home.  Not to mention the $13,000 in realtor fees, and $4k in closing costs.

Just giving their house back to the bank (that is getting bailed out by the government with billions of dollars) may be their only option.

Sure Barack Obama’s plan might enable them to refinance at 2% a month and shave $8k off their mortgage principal, but that still leaves them underwater by more than $32k on a house they have to move away from just to keep their job!

The government has engineered a market where the best option for homeowners is foreclosure.  That’s not hope you can believe in, that’s a nightmare come true.

In this quick news report by Reuters things continue to look ugly for Freddie Mac and Fannie Mae.  The real concern for the economy and the world however, is the growing signs of trouble in a number of small to medium sized regional banks.

There are over 90 banks on the FDIC watch list that are facing severe financial threats that could trigger the FDIC to step in and seize control.

The problem is that many investors have even lost confidence in this after the FDIC had to step in and seize IndyMac last week.  IndyMac was not even on the radar for potential trouble and this has many investors concerned that other sleeping giants may fall as well.

We mentioned in a former article that one of the largest mortgage companies in the US collapsed this week.  That’s a sign that the mortgage crisis is turning into a banking crisis.  At the same time that happened Freddie Mac and Fannie Mae’s saw a massive devaluation and are threatened with failure as well.

If banks lose the ability to sell off your mortgage to Freddie Mac and Fannie Mae that will leave them with no other choice but to negotiate a better deal with you in several areas whether you are trying to refinance a mortgage or even buy a foreclosure property from them.

Today, for the most part, banks do not have to deal with you very much when you are in trouble nor even when they are in trouble.  They have a get out of jail card from Freddie and Fannie, but if that option goes away sometime soon, they might have to make a deal and work with their customers to stay afloat and that could be just the lifeline you need to save your house or even to get a great deal.

Freddie Mac is not the only Mac company to get in trouble this week. California-based IndyMac, one of the largest US mortgage lenders collapsed under the credit crisis this week. Federal regulators barged in and seize the assets of the bank fearing that it could not meet withdrawals from its depositors.

It is the second largest bank to fail in the United States history. This happened on the same day that stocks in Freddie Mac and Fannie Mae dropped by 50%. Just like historical bank runs, depositors had withdrawn $1.3 billion from the bank in the 11 days preceding its collapse.

Depositors are only covered by the federal government for up to $100,000 in deposits. This is a rule that’s been in place since the Great Depression and anyone that hasn’t paid attention to banking law or federal deposit insurance was sadly misinformed and ignorant of their liability.

The subprime crisis is now entering into a stage where it is creating bank failure and depositors around the country need to be aware that they should not have more than $100,000 deposit in any one bank. Given the current climate if they have more than that they might as well be investing in ostrich feathers for all the good the money might do them at the bank collapses just like IndyMac did.

We previously talked about some of the problems that Fannie Mae and Freddie Mac have on Wall Street this week. If you are a severe optimist, you might see potential for an interest-rate drop in these events. This runs a little contrary to conventional wisdom because if these firms have no fail interest rates will likely rise.

There could be an exception to that scenario if the US government takes control over these companies. That could in fact increase solvency and provide a significant amount of capital to enable new loans to continue bust increasing the supply of mortgages and possibly triggering a drop in prices, which for mortgages take place on the interest rate.

Personally I doubt their failure will help mortgage rates much, and I doubt even more that will help the US economy or the federal deficit, but there is a remote possibility that it could actually help things. I’m not going to gamble on it myself and I don’t recommend that you do either.  If you must gamble, save it for your Vegas vacations, that city definitely needs some financial help.