So many homeowners want principal reductions, but are told they can’t have them.  A select few though, don’t even have to ask to get them…

Your a homeowner struggling to make your payments on a home your hopelessly upside down on.

Every time you make a payment you ask yourself why you’re continuing to throw good money after bad.  You consider stopping your payments and just letting the home go to foreclosure like several of your neighbors, friends, co-workers, etc. have (we ALL know someone who’s done it!).

You could use the mortgage payments to payoff other debt, save up for a down payment on a new home in your spouse’s name (if they’re not on the current mortgage) or another “angel” relative or you could just rent something for almost half what your mortgage payment is.

If only your mortgage servicer would cut you a break…

While YOU may stand little chance of getting the balance of your mortgage cut, others are getting their mortgage balances cut without asking.

Here’s a story by David Streitfeld at the NY Times: Big Banks Easing Terms on Loans Deemed as Risks

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.
…
Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages …

Ms. Giosmas bought her two-bedroom, two-bath apartment north of downtown Miami for $359,000 in early 2006, according to real estate records. She made a large down payment, but because each month she paid less than was necessary to pay off the loan, her debt swelled to about $300,000.

Meanwhile, the value of the apartment nosedived. By the time Ms. Giosmas got the letter from Chase, the condominium was worth less than half what she paid. “I would not have defaulted,” she said. “But they don’t know that.”

The letter, which Ms. Giosmas remembers as brief and “totally vague,” said Chase was cutting her principal by $150,000 while raising her interest rate to about 5 percent.

Think this is a relatively new development?  Wrong.  Wells Fargo was offering a similar program last year, here’s an excerpt from the Bloomberg story:

Wells Fargo has forgiven an average of $46,000 in principal, or 15 percent, for the 43,500 option-ARM loans it has modified this year through September, said Franklin Codel, chief financial officer at the bank’s home-lending unit. The San Francisco-based lender has cut as much as 30 percent off the loan principal in a few “rare exceptions,” with the ceiling typically capped at 20 percent, Codel said.

The obvious question is why are these people getting principal reductions and you aren’t?

The reason is that you do’t have the right mortgage program or mortgage servicer:(

Wells Fargo, Chase and Bank of America are only offering principal reductions on the infamous Option ARM’s they have in their portfolios.

What’s an Option ARM you ask?

It’s a mortgage program where the payment amount and interest rate are disconnected.

With most mortgage programs if the interest rate changes, the payment also changes.  Most Adjustable Rate Mortgages (ARM) are set up this way.

Option ARM’s though, have an initial low minimum payment based on an extremely low teaser-rate, typically 1-2%.  The low minimum payment can only change annually and those annual changes are capped, typically for the first 5 years of the loan.  The interest rates though, change monthly after a short introductory period.  So, there’s a disconnect between the interest rate and the payment which leads to the minimum payment not covering the interest accruing on the loan as the interest rate increases.  The extra interest gets added to the mortgage balance, so instead of a homeowner paying down their mortgage balance, it actually increases over time.  This is called “negative amortization”.

The loans are actually designed so that close to 100% of the time, negative amortization occurs.

Why would anyone sign up for such a mortgage?

Well originally these mortgages were designed for the affluent and sophisticated so that they could leverage their money.  Instead of paying down a mortgage with an interest rate of 5-7%, the Option ARM program allowed them to make a relatively small minimum payment and invest the difference in something paying more than the interest rate on their mortgage.  The loans were intentionally more difficult to qualify for than your average mortgage loan.

Than the housing bubble happened and Wall Street encouraged lenders to make the loans easier to get under the premise that housing prices only go up!  Theoretically the increase in home prices would more than cover the increases in the mortgage amount resulting from the Option ARM program.

We all know now that Wall Street was seriously wrong.

A lot of Option ARM mortgage were originated though.  See the graph to the left.

Think about your unhappy situation with your upside down home.  It could still be going down in value as you continue to wrestle with whether or not to continue paying on it.

Now imagine that on top of that, your mortgage balance keeps going up also!

Think you’d be more likely to stop paying your mortgage if that was the case?

Obviously, the answer for many homeowners is yes and Wells Fargo, BOA and Chase are thinking the same thing.

We’ve explained why principal reductions are being targeted for Option ARM mortgages, but why are only 3 banks offering them?

It’s because Wells Fargo, BOA & Chase own over 80% of the $230 billion in Option ARM mortgages still in existence.

What’s interesting is that none of the 3 really originated these problem loans.  Wells Fargo acquired their portfolio of them when they acquired Wachovia Bank.  Chase got theirs when they took over Washington Mutual (WaMu) and BOA buried themselves with the Countrywide acquisition that may go down in history as one of the worst bank acquisitions ever.

One other fact that explains why Option ARM mortgages are being targeted for principal reductions – the banks actually own the mortgages.

You see, most mortgages are rarely owned by the bank or lender that originate them.  Mortgages are typically pooled together as Mortgage Backed Securities (MBS) and sold on Wall Street as an alternative to U.S. Treasuries and Bonds.

So, to modify or reduce the principal of a mortgage that’s part of an MBS requires the approval of all the investors that bought a part of the MBS pool the loan is in.  Not easy!

Most Option ARM mortgages though, are owned outright by the bank that services them.  So, modifying them or reducing principal is entirely the bank’s decision.

If you have an Option ARM mortgage, contact your lender if they haven’t offered you a principal reduction yet.  They may be more willing to negotiate than you think.

Our last blog entry pointed out that sales of REO properties are increasing and are expected to climb even further.  We pointed out that this was likely to put pressure on housing prices.  This latest news  confirms that trend.  The silver lining is two-fold: affordability is heading up for purchasers and the housing market may finally be on its way to cleansing itself of the oversupply.

Home values in the United States fell faster in the first quarter of 2011 than they have in any quarter since 2008, when the housing market experienced its worst performance, according to Zillow’s first quarter Real Estate Market Reports. The Zillow Home Value Index fell three percent from the fourth quarter of 2010 to the first quarter of 2011, and declined 8.2 percent year-over-year to $169,600. Home values have fallen 29.5 percent since they peaked in June 2006.

Negative equity reached a new high mark with 28.4 percent of single-family homeowners with mortgages underwater at the end of the first quarter, up from 27 percent in the fourth quarter of 2010. A homeowner is in negative equity when they owe more on their mortgage than their home is worth. Foreclosures rose throughout the first quarter as banks unfroze moratoriums and allowed foreclosures to resume. Foreclosures had fallen in late 2010 due to the slew of moratoriums brought about by the “robo-signing” controversy. In March, one out of every 1,000 homes in the country was lost to foreclosure.

With substantial home value declines, as well as increasing negative equity and foreclosures, Zillow forecasts show it is unlikely that home values will reach a bottom in 2011. First quarter data has prompted Zillow to revise its forecast, now predicting a bottom in 2012, at the earliest.

“Home value declines are currently equal to those we experienced during the darkest days of the housing recession. With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011,” said Zillow Chief Economist Dr. Stan Humphries. “We did expect substantial payback from the homebuyer tax credits, which buoyed the housing market last year, but underlying demand post-tax credit, as well as rising foreclosures and high negative equity rates, make it almost certain that we won’t see a bottom in home values until 2012 or later.”

Very few markets were exempt from home value declines in the first quarter. The vast majority (97 percent) of the 132 markets covered by Zillow logged home value declines. Only the Fort Myers, Fla., Champaign-Urbana, Ill. and Honolulu, Hawaii metropolitan statistical areas (MSAs) experienced quarterly increases, with home values rising 2.4 percent, 0.8 percent and 0.3 percent, respectively. Home values in the Sarasota, Fla. market remained flat.

There’s more to the LO Compensation Rule than meets the eye.

Well the dust is settling and mortgage brokers lost the fight to control their earnings in the first round, by a technical knockout.

What did everyone expect when they were going up against Ben Bernanke and the our new “Big Brother” government?

Think our country is still 100% for capitalism?

Who’s next to get their earnings capped and controlled?

In case you missed, the new health care bill capped doctors.

But, I digress so let’s get back to LO compensation.

One has to ask why Ben Bernanke himself, has been so concerned about the hundreds of thousands of dollars that LO’s make, when many on Wall Street make millions and even billions?

Wall Street is much more corrupt than the LO’s on Main Street.

Bigger numbers always attract bigger cheating, scams and fraud!

So why is Bernanke so concerned about limiting how much LO’s make?

Let’s look a little deeper at who the rule really affects.

To make any real money under the new rules, LO’s have to do VOLUME, not a few “fat” deals.

Now to do more volume you can do one of two things (or both):

1. You can just do bigger loans.
2. You can do more loans.

So, every LO in the country will be chasing bigger deals that they can close fast to pump more volume through the origination system and make more money.

That means every commission LO in the country will be avoiding small deals and/or deals that take a lot of time.

Now who do you think that will affect?

Let’s see, small deals would be first-time homebuyers.

Tough deals will be those with borderline or no credit, income issues and those that don’t have a decent down payment.

Who are these people?

Immigrants, the poor, the small-time self-employed, those at the lower end of the socio-economic ladder.

LO’s & Realtors, just think of all the money you’ve made working hard to put together loans & homes for people that fit these descriptions.

How much of your business have they been since the real estate bubble burst?

Now why would the government be interested in making it harder for people like this to get a mortgage to buy a home?

Could it be because they are statistically the most likely to historically default?

And the bankers on Wall Street don’t like anyone to default … except their comrades who are too big to fail…

So, there you have it.

The real affect of the LO Compensation Rule.

I’ll leave you with one more sobering thought to ponder – what’s more profitable than collecting interest on a loan for 30 years?

…how about collecting rent on someone for a lifetime?

Well, it was nice while it lasted – the record low interest rates that is.

Who would have ever thought back in the 1980′s, when rates were pushing 20%, that rates would be almost 4% for a 30 year fixed with no points? 

Hopefully, those not in the market for a home refinanced their existing one.  If you haven’t refinanced yet, you’d better get moving and get it done soon!

What have mortgage rates been doing?

Take a look at this Morgtage Backed Security chart:

Since October of 2010, rates have been heading higher (note: the chart is for bond price which is inverse of rates).

For those prone to panic, note that rates have stabilized and actually improved a bit lately.

So what does this mean for the real estate market?

Well, the most important factor for most homebuyers is their monthly payment.  Afterall, it’s what they’ve got to come up with each month.

For a monthly payment to remain the same for a 1% jump in interest rates, the mortgage amount would have to drop by about 10%.

It’s pretty safe to correlate mortgage amount with purchase price, so we can also say that a 1% interest rate increase would require a 10% lower purchase price to keep a homebuyer’s payment the same.

With housing prices more likely to fall than increase in 2011, higher interest rates shouldn’t have too much of an effect on housing sales.

Lenders continue to tighten their mortgage lending criteria in response to record foreclosures, but the negative publicity is scaring many qualified homebuyers away.

Every week it seems we get a call or email from a referral who doesn’t think they can get a mortgage – and they turn out to be well qualified Michigan homebuyers.

While it’s all well and good that the lending industry has brought sanity back to lending after the 2002-2006 period of “have a pulse, get a loan”, the pendulum has just about swung too far in the other direction.

What’s worse is the media’s negative hype and exaggeration about current lending standards that’s causing many potential Michigan homebuyers to think they have very little chance of qualifying for a mortgage!

Here’s some recent statements we’ve heard from referrals:

“I don’t have 20% down, but I’m hoping you have a program for 10% down.”

“My credit score is under 700, what do I need to do to get it higher to qualify for a mortgage?”

“Don’t I have to pay off all my debts to qualify for a mortgage?”

“I’ve only been on my job for 2 years…”

All of these referrals ended up qualifying for a mortgage fairly easily!

How many potential Michigan homebuyers though, think this way and don’t even speak with a lender or Realtor to get the facts?

What’s it Really Take to Qualify for Mortgage?

It’s true lending standards have tightened and it’s tougher to get a mortgage now than it was 5 years ago, but it’s still easier now than it was 20 years ago!

This is not the venue to get involved in all the fringe areas of qualifying for a mortgage, but here are the “mainstream” requirements for FHA:

Credit – have 2 out of 3 FICO scores 640+, no bankruptcy in the last 2 years, no foreclosures in the last 3.

Income – have a fairly consistent employment history for the last 2 years and be able to prove income.

Cash to Close - On FHA, everything can be gifted!  A minimum 3.5% down payment is required.  A seller’s contribution of 6% of the sales price can be applied towards closing costs, escrows & prorations.  Depending on property taxes, the 3.5% down + seller’s contribution usually covers all required funds for properties above $100,000.

Do these requiements really seem that tough to meet?

Of course, we still get lots of inquiries about zero-down programs (which there are only 2 options – VA & RDA) and the occasional inquiry from those with FICO scores under 600.  We can’t help in most of these situations, but we do try to point these contacts in the right direction.

Getting the Correct Message to Potential Michigan Homebuyers

If you’re a homeowner, a real estate professional or you just care about our economy, we need to get the correct message to those thinking about buying a home. 

For better or worse, home ownership is one of the foundations of the U.S. economy.  So, we’ve got to fix the housing market to see a rebound in the economy.

Make an effort to get the word out – forward this blog post to family & friends, write something similar if you have a blog, post it on Facebook, Tweet it, do something to make a difference!

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

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P: 248-356-3739 • F: 866-215-3755 • InfoTLE@TheLendingEdge.com • www.TheLendingEdge.com

September 7th, 2010 HUD is changing the MIP fees it charges borrowers for FHA mortgages.

The changes are expected o generate an additional $300 million per MONTH for HUD’s FHA insurance program.

That’s an extra $3.6 billion per year.

Here are the changes:

First, HUD is lowering the upfront MIP from its current 2.25% to 1.0%.  This is the amount that can be financed on top of the loan amount.

Simultaneously, HUD is raising the monthly MIP amount:

• For loans with less than 5% down – from 0.55% to 0.85%.
• For loans with more than 5% down – from 0.50% to 0.90%

Now technically these changes only affect loans of more than 15 years, but in reality most FHA mortgages are 30 year loans.

How Do These Changes Affect Borrowers?

Let’s compare some different purchase price amounts to see what HUD done to homebuyers:

Note: all the examples below assume a 4.5% mortgage rate on a 30 fixed loan with the minimum 3.5% down.

Notice that at every purchase price amount the monthly cost has gone up!

This means that for any given monthly payment a buyer will now qualify for less of a purchase price due to the higher corresponding payment.

Just be glad HUD didn’t implement a FICO credit score pricing matrix as they have discussed numerous times.  Just be forewarned – if FHA foreclosures don’t improve soon, that may still be implemented.

Are there any borrower benefits at all in this change?

There is if you can pay off your FHA loan quicker.  Notice in the above chart that the actual financed amount & payment are lower under the new program.  This is because of the lower upfront MIP amount.

For example, for a $75,000 purchase price the old plan had a principal & interest payment of $374.97 versus $370.38 under the new plan.  That’s a savings of $4.59/month.

The easiest way to pay off an FHA mortgage would be to refinance to a FNMA or FHLMC conforming mortgage.  But you’d need at least 10% equity to do so and FNMA/FHLMC have price adjustments for FICO credit scores, so you’d have to be careful and consult with a true expert mortgage professional about this.

More Information

If you’d like more information on this change you can click on the links below:

FHA letter from David H. Stevens

HUD Press Release

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

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If you enjoyed my blog post,
I invite you to connect with me on the social networks below & subscribe to my blog!

“Referrals are Sending Someone You Care about, to Someone You Trust!”
So, forward this blog post to someone that’ll appreciate it!

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Drew Sygit: CMPS, CMC, CRMS, CMLO, CALO, MBA, NAMB/MAMP Instructor & Speaker
The most Certified Mortgage Expert in the Midwest

Contact him for The Lending Edge
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Check out this chart, compliments of my friendly neighborhood First American Title rep, Julia Halpin:)

Gadzooks & zounds!  These historically low mortgage rates are record setters.

What more could a Michigan homeowner looking to refinance or a Michigan homebuyer looking to buy ask for?

How about appraisals coming in higher & a job to qualify to buy!

These historically low mortgage rates are a sign that our economy is not doing all that well:(

But, if your home can appraise or you do have a job, it’s a fantastic time to get a mortgage!

So, give our team a call.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

The issue – the agent had told them that because mortgage interest is tax deductible, their $1,000 rent payment compared to a $1500 house payment.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

I can only assume the agent was implying that they were in a 33% tax bracket to make that claim.  The buyers were never asked that information.

The bigger issue though was that the agent clearly had no understanding about how the mortgage interest tax deduction works.  They were just abusing a sales technique they’d picked up somewhere and never really learned about.

What did I have to clear up?  Well let’s take a look.

Assume the $1500 PITI breaks down like this:

P&I                             - $1,125
Property Tax         - $300
Home Insurance  – $75

This about works out for a 5% interest rate on a $210,000 loan.  Let’s ignore down payment & PMI for this example though.

Now intially this sounds like a fantastic deal.  Can’t you just hear the buyers, “wow honey, instead of paying $1,000 for this apartment, we can buy a $210,000 house for the same payment using the mortgage interest tax deduction!”

Well unfortunately, that’s not even close to the real story.

Here’s how the numbers actually work out.

The first year’s interest on the mortgage above would be approximately $10,430.  The annual property taxes would be $3600.

So the total ELIGIBLE for deducting on Schedule A of the 1040 would be $14,030. 

Now the agent in question would probably say that since the buyers were in a 33% tax bracket, they could write off, and thereby save, $14,030 x 33% = $4630.

Not true!

Look at the image of Page 2 of the 1040 tax return below:

Notice that the “Married Filing Jointly” Standard deduction in the left column of the page is $11,400.

Line 40 of the 1040 states, “ (from Schedule A) or your standard deduction Itemized deductions”.  So you would enter the higher number on line 40.

What this means is that the buyers get an $11,400 tax deduction whether they own a home or not!  

The only time you’d put your Schedule A total on line 40 would be if it exceeded $11,400.

So the couple’s actual benefit from owning the home in this example would only be:

                 $14,030 – $11,400 = $2,630 x 33% = $867

A drastic difference from what their agent had ignorantly misled them with.

I’ve seen mortgage people make a version of this mistake also by telling clients, “that 5% interest rate is really 3.35% after taking into account your 33% tax bracket.” (that’s 5% x (1-0.33))

Keep in mind that our example was based on a $210,000 mortgage.  I’ve heard agents using this same technique on deals under $100,000 – where the buyer wouldn’t realize any additional tax savings whatsoever.

The true professionals in our industry really need to know the facts about tax deductions to avoid making any misleading statements. 

The best way to handle this tax issue is for buyers to take the tax deduction savings issue up with their CPA.  If you don’t have a CPA, contact me for a referral!

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

The Department of Housing Urban Development (HUD) is moving forward with its plans to stem the losses in its Federal Housing Administration (FHA) program.

With concerns in Congress that HUD may need its own bailout, steps are being taken to generate more revenue to absorb the higher losses on foreclosures.

Starting April 5, 2010 all case numbers pulled for new loans will require an upfront MIP factor of 2.25%.  Currently the factor is 1.75%, which was recently increased from 1.5%.

The 2.25% is what FHA’s upfront MIP factor was in the 1990’s before the Clinton administration had it reduced as HUD’s MIP insurance pool was flush with cash.

Also of note, the monthly MIP factor was recently increased from a 0.5% to 0.55% base.

What’s this mean for homebuyers?

If you’re getting a $100,000 loan, the upfront MIP changes mean an increase of $500 and the monthly change is an increase of $4.17/month. 

It’s important to remember the upfront MIP is usually financed into the loan amount, so the monthly effect of the $500 increase in the above example will depend on the borrower’s interest rate.

FNMA offers money for closing costs and appliances to sell more homes.

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

Not enough incentives out there to get you to buy a home?

 FNMA has launched its own incentive program to move its Michigan foreclosed homes.  To be eligible, the home must be a foreclosure offered for sale by FNMA with the above “HomePath” logo.

You must close by May 1st, 2010, but the program offers some nice incentives:

• FNMA will pay 3.5% of the sales price towards closing costs.
• Or the buyer can chose to purchase Whirlpool appliances.
• Or the buyer can choose a combination of closing costs & appliances.

To be eligible you must purchase to owner-occupy, no investment properties are allowed.

This special offer is on top of the standard FNMA HomePath program, which offers:

• As little as 3% down, which can be gifted
• No mortgage insurance
• No appraisal fee (FNMA has already determined the property value)
• Can be investment property (higher down payment required)
• Credit can be less than perfect

FNMA does some repairs to these homes, but they are sold “as-is” and you are advised to get your own private inspection.

Click here for more information about the program and to find eligible Michigan foreclosed homes.