The federal government recently figured out what mortgage experts (like us) have been telling them since they put taxpayers on the hook for FNMA & FHLMC – appraised values don’t matter when refinancing upside down homes!

Way back on February 18, 2009 when Obama’s announced his Home Affordable Refinance Program (HARP) and bragged it would help 4 to 5 million homeowners lower their payments to make them more affordable, we wrote the following in a post titled, “The Obama Housing-O-Rama, get Your Tickets Now!”:

“IT DOESN”T GO FAR ENOUGH! As I’ve been writing since October of last year, they need to just do away with appraisals altogether on no cashout refinances. HELP homeowners lower their payments and they’ll be more likely to stay as they have to live somewhere. If they can rent a comparable home cheaper than they’re paying to own, it makes more sense for them to walk-away and many more will.”

Over two and a half years later, we’ve been proven right.  A very shallow victory as no one’s talking about how many foreclosures could have been avoided if HARP had been launched as we recommended.

Before you get all excited and rush out to contact a lender to refinance your underwater home, you should know about the program limitations:

• Your mortgage must have been in effect prior to May 31, 2009.
• You’re only allowed one 30 day late payment on the mortgage in the 12 months preceding a refinance.
• You can’t have any late payments on the mortgage in the 6 months preceding a refinance.
• The program has been extended until December 31, 2013.
• You can read the entire FHFA press release here.

Oh, and the program probably won’t be available until the end of December or January.

One more important fact that many people are misunderstanding – appraisals have not unilaterally been done away with.  The new guidelines still require an appraisal if an acceptable Automated Valuation Model (AVM) is not available from FNMA or FHLMC.  We’ll comment more on this later.
Separating Truth from Political Hype

First, let’s start out by stating that it’s better late than never. 

This HARP 2.0, as many are calling it, will help many families save a few extra bucks each month on their homes, lowering the chances of them letting their home go to foreclosure in the future.

Now let’s look at some issues we have with the program and the political hype.

HARP is a DUD:  Overall the HARP program has not been the success Obama bragged it would be.  When HARP was first announced the political hype claimed 3-4 million homeowners would be helped.  To date, only around 900,000 upside down homeowners have benefited from the program.  This graph is right from the FHFA press release:

It’s obvious that HARP refinances have made up less than 10% of all FNMA/FHLMC refinances.

Big Banks Don’t Care:  One of the big reasons for so few refinances is that lenders don’t have to participate and offer the program to their mortgage borrowers.  The To-Big-To-Fail-Banks, Bank of America, Chase, Citi & Wells Fargo being the 4 largest, have not embraced HARP.  Wells Fargo for instance, will not refinance anyone with an LTV over 105%.

Income Proof Still Required:  We feel the second biggest reason is that a large percentage of homeowners can’t show enough income to qualify for a refinance of any kind.  HARP 2.0 should have removed this roadblock also.  

The argument that it doesn’t matter how upside down a borrower is in their home to justify waiving LTV as a refinance requirement, can also be used to justify waiving income requirements.  If the borrower is making their payments on time, who cares about their income! 

This requirement is even more perplexing as FNMA & FHLMC both had No Income Verification (NIV) programs for several years that were terminated with the Mortgage Meltdown.  How many NIV mortgages did they make that aren’t eligible for HARP because the borrowers can’t prove their income?  How many homeowners that proved their income when they got their existing mortgage, can no longer do so because of the economy?

Risk Premiums Raise Refinance Mortgage Rates:  The original version of HARP, while allowing refinances up to 125% of appraised value, penalized homeowners for being upside down by charging them higher mortgage rates.  For many upside down homeowners, the rate penalty took away any incentive to refinance.   Many phone calls to lenders went something like this: “Mr. Homeowner, your current rate is 6.5% but current rates are 5.75%.  If we add the risk hit because you’re upside down though, you’re only eligible to refinance at 6.25%”. 

Traditionally, higher risk has always meant higher interest rates – just look at junk bond rates.  What never made sense is with HARP is that FNMA & FHLMC already own the upside down debt, so what additional risk did they have on the refinanced mortgage? 

Chalk this one up to the syndrome of, “this is the way we’ve always done it”, and no one involved being smart enough to ask why!  When HARP 2.0 was announced the government indicated the risk pricing will be lowered.  It should really be just done away with altogether.

One-Shot at Refinancing:  Most people don’t fully understand the HARP requirement that to be eligible, the mortgage being refinanced MUST have been originated prior to May 31, 2009.  What this means is that any upside down homeowner that’s already refinanced cannot do so again.  Not only have mortgage rates dropped significantly since HARP started, think of all the upside down homeowners that were penalized by the HARP interest rate risk premium!  This limitation should really be removed in our opinion.

Stumbling over Second Mortgages:  HARP doesn’t care about 2^nd mortgages, but try telling that to 2^nd mortgage lenders.  HARP 1.0 only looked at an upside down homeowner’s first mortgage balance for the 125% LTV limit.  HARP 1.0 didn’t care if there was a 2^nd mortgage or how much was owed on it.  The problem was that the 2^nd mortgage lenders had to agree to subordinate their 2^nd mortgage to the new HARP refinance mortgage – and many didn’t care to do so.  So, many eligible HARP refinances weren’t done because 2^nd mortgage lenders either charged exorbitant subordination fees, took forever to do the subordination paperwork or just had a policy against subordinating their 2^nd mortgages if the homeowner was upside down.  HARP 2.0 still doesn’t address this issue so it will continue to thwart hundreds of thousands of upside homeowners from taking advantage of the program.

What’s sad is that this goes back to the ignorant mindset of, “this is the way we’ve always done it.”  Allowing an upside down homeowner to refinance and lower the payment on their 1^st mortgage, will free up money in that homeowner’s budget each month.  That additional money will make it easier and more likely that the homeowner will be able to make their 2^nd mortgage payment – lowering the risk of default to the 2^nd lender!  So, by not embracing HARP and aggressively subordinating, 2^nd lenders are being extremely short-sighted, if not stupid.

Worse-case, if we were a 2^nd mortgage lender solicited for a subordination to a HARP refinance, we would require the upside down homeowner to put some of the monthly savings from the 1^st refinance towards paying off their 2^nd mortgage faster.  This would require some type of modification agreement, but would make a lot of sense.

Private Mortgage Insurance:  This is another hurdle for many upside down homeowners taking advantage of HARP.  In theory, if you’ve got PMI on your mortgage the mortgage insurance company is supposed to reissue a new certificate for the HARP refinance.  In reality, the process is difficult and takes far too long.  Rate locks are often blown, application documents become stale and homeowners and mortgage originators just get frustrated and quit the refinance process.

Again this makes no sense as lower mortgage payments mean less likelihood of a mortgage default, which means less insurance payouts/losses for the mortgage insurance companies.

NOTE: the recent insolvency of the mortgage insurer PMI, means even more delays and frustrations for those looking to refinance using HARP.  Read more about this at our blog post, “Another Bailout Fiasco on the Way.”

All these hurdles to a more successful HARP program, that should be obvious to any mortgage expert, beg the question of why aren’t they being addressed.

As we pointed out above several times, there’s a severe issue with the mindset of “this is the way we’ve always done it.”  Our government is so big and complicated now, that no one is really fully in control.  Even the best politicians and bureaucrats are just “cat-herders”.  This is not an acceptable excuse.  What it leads to is special interests and big business taking advantage of the system.  And that is what’s stopping changes to HARP to make it more effective.

The To-Big-To-Fail on Wall Street don’t really want homeowners to refinance.  Same goes for the bureaucrats running FNMA and FHLMC.  Accounting standards allow lenders to book profits NOW on FUTURE loan payments.  So, all the existing mortgages have already been booked on some lenders profit & loss statement.  What do you think happens when a mortgage is paid off early?  The lender has to make an adjustment and take a hit to their earnings.  Even if they get the homeowner to refinance with them and put the new mortgage on their books, it’s at a lower interest rate and doesn’t offset the loss from the early pay-off.  Not only are Wall Street firms and the To-Big-To-Fail-Banks struggling to show profits, their executives have also become addicted to high bonuses and like any addict, they will go to great lengths to get their next “fix”.

Word “slipped” out of Washington last week that the Obama administration is considering allowing homeowners with FNMA, FHLMC & FHA mortgage loans to refinance them at a 4%, 30 year fixed rate. 

Understand, that nothing “slips” out of Washington and this was basically the administration’s attempt to “test market” the idea.  If the feedback was negative, Obama could claim it was never his idea in the first place and never discussed seriously.  If the idea was well received the Obama administration would move to put it into action.  The jury’s still out on how well the idea has been received.  Homeowners obviously love it, academics & economists hate it.  Neither really matters as Obama only wants to know what Wall Street and the Banks think and if the idea will lead to them supporting him for re-election.

What’s Obama’s reason for considering this move at this time?

Purely a re-election ploy of course. 

He could have fostered this same plan back in 2009 when he announced HARP, HAMP and a host of other acronym programs to help underwater homeowners.  He didn’t then because he was riding his popularity wave from just being elected.  Now, his popularity at the polls is at it’s lowest, but more importantly, Wall Street isn’t too keen on supporting him for re-election next year. 

So, first and foremost, this plan is all about increasing public support and thereby “encouraging” Wall Street to back him again.

Analyzing the 4% Refinance Plan

Now that the political truths have been covered, let’s look at the plan itself, who it’ll affect and what ripples it will cause.

Who the Plan Will Help

With mortgage rates in the neighborhood of 4% already (disclaimer: you’ll need to pay points to get down that far at this time) many homeowners already have access to the rate Obama is offering.  Through HARP (Home Affordable Refinance Program), even homeowners with a mortgage balance up to 125% of what there home is worth have access to the 4% rate Obama is peddling.  Of course, Obama the politician never tells anyone about the risk-pricing that comes with HARP.  Meaning that if you owe more than 100% of what your home is worth and want to refinance to lower your interest rate & payment, you’ll have to pay a either a higher rate or higher fees than the rest of the market.  Don’t you like how they always leave that part out?  Shouldn’t Obama have to follow Truth-in-Lending disclosure statutes like everyone else? 

So who is this plan really going to help?  The homeowners that don’t qualify for HARP.  These are homeowners that owe more than 125% of their home’s current value, or can’t qualify for a refinance due to credit, income or liquid asset issues.  The question is, which of these will the Obama plan address? 

The easiest roadblock to refinancing to address is the appraisal issue.  Allowing an upside homeowner, that’s still got good credit and income, to refinance will cause the least amount of negative backlash from academics and economists.  We made this point several times when HARP was first announced.  FNMA & FHLMC were by that time taken over by the federal government, so the government really owned their mortgages.  The government has always insured FHA mortgage and owned VA mortgages and guess what?  Both FHA & VA allow homeowners to refinance without having to get a new appraisal – which means it doesn’t matter how upside down a homeowner is, they can still refinance.  Why Obama introduced HARP and only allowed homeowners owing up to 125% to be eligible is still a mystery that makes no logical sense.  It must mean then it was done for political reasons.

I don’t think the plan will allow those with significant credit issues to refinance.  The backlash would be quite large if people that weren’t paying their bills were allowed access to this plan.  The cutoff for qualifying would be ths same as it is now – around a 660 FICO score.  A better option for homeowners with credit issues would be a HAMP (Home Affordable Modification Program) loan modification.  Don’t get us started on the realistic chances of actually getting a loan modification under HAMP.  Read our other posts about that.

Allowing homeowners with good credit, but unable to prove enough income to qualify for the plan sounds like a logical idea – if they’re making their payments, they must have income somewhere.  The problem is the new Dodd-Frank statutes make it very difficult for a lender to give a borrower a loan they don’t demonstrate the income to qualify for.  But, hey this is Obama’s idea and he’s never let laws stop him from doing what he wants before!  Of course, the same can be said of many past Presidents also – another topic for another day.

Homeowners without the liquid assets to pay for closing costs are the last problem-children to discuss.  Many are living paycheck to paycheck and would welcome the extra savings per month a refinance could offer.  They could be allowed to roll the costs into their new mortgage, making them even further upside down.  Never underestimate the greed of some banks and lenders when it comes to refinance generated revenue.  A cap on the amount that could be rolled would have to be put in place to allow these homeowners to participate.  Even then, a few crooks will find a way around the system and screw a few thousand homeowners.

Of course, we can’t ignore that the 4% Obama Refinance Plan will help everyone in the mortgage refinance business by boosting their income for a period of time.  Loan originators, underwriters, mortgage staff, banks, appraisers, title companies, mortgage service providers, etc., will all think it’s the “good ol’ days” again in the mortgage biz.

Who the Plan Will Hurt

The winners were fairly obvious, but there will also be losers. 

The biggest will be those holding the current mortgages and getting the interest from them.  They’ll lose money every time a homeowner pays off a mortgage with a rate higher than the Obama 4%.  Who are these people & entities?  Banks, Wall Street investors, retirement funds, insurance funds, and oh, wait – our own federal government!

Huh?  How can Obama’s 4% Refinance Plan hurt the federal government?  Well, remember TARP and its sister bailout programs?  Our own wonderful Mr. Ben Bernanke & his Federal Reserve empire now owns around $900 billion of Mortgaged Backed Securities (MBS).  On top of that, remember above that we mentioned the federal government now owns FNMA & FHLMC, the biggest issuers of MBS?  They own almost $1.5 trillion worth of MBS they never sold off to investors. 

This is actually a very important matter.  Think of it this way, the federal government is receiving the interest from the $2.4 trillion in mortgages mentioned above.  Most of these mortgage have rates over 4.5%.  Compare this interest income to the interest rates the federal government is paying to borrower - the rates on the 30 year bond and 10 year T-Bills.  As of the writing of this article the 30 year bond was trading under 3.5% and the 10 year was around 2%.  What this means is that our government is borrowering at a lower rate than it’s receiving on the MBS it owns and this moey is helping our budget deficit.  Allowing the entire $2.4 trillion portfolio to refinance to a lower rate of 4%, will increase the federal deficit. 

Bet you didn’t see that coming!

Wall Street and institutional investors will experience losses in the same way explained above for our federal government.  For those who think it’s all fine and dandy to screw Wall Street and the Too-Big-Too-Fail Banks that caused the housing crisis (by the way, we’d like to see some of them in jail), don’t think it won’t hurt homeowners also.  Wall Street & Banks will lay workers off, cut interest rates they pay on deposits even more and homeowner retirement plans will have lower annual returns.  These are just a couple of the ripple effects.

The Economic of the Plan – Is it a Good Idea?

What a loaded question!  The Obama 4% Refinance Plan will be good for some, bad for others as briefly outlined above. 

Evaluating the plan should depend on comparing who it helps and who it hurts, along with what the overall effect on the economy will be.

Boiling it down the plan will put more money in the hands of homeowners – many who are struggling with unemployment, underemployment, high debt and are just hanging on.  Any benefit to homeowners will come at a cost to the federal government, Wall Street, institutional investors and the retirement plans of the those same homeowners. 

Will any of this improve the country’s employment issues?

How many homeowners will the plan save from foreclosure?

What effect will the plan have on growing the economy?

The answers are beyond our expertise.

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.

By NICK TIMIRAOS And MAURICE TAMMAN

The percentage of mortgage applications rejected by the nation’s largest lenders increased last year, spotlighting how banks’ cautious lending practices are hampering the nascent housing market recovery.

In all, the nation’s 10 largest mortgage lenders denied 26.8% of loan applications in 2010, an increase from 23.5% in 2009, according to an analysis by The Wall Street Journal of mortgage data filed with banking regulators.

Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.

“As the noose on credit availability tightens, credit is being choked off at a time when the housing market is extremely fragile,” says Laurie Goodman, senior managing director at Amherst Securities Group LP.

Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles, counters that “banks are doing what they need to do” to change lending standards in the wake of a “crazy bubble. ”

He adds, “You had decades where credit standards were tougher than they are even now.”

Among the would-be borrowers having a harder time are those who have seen their incomes fall or interrupted by a period of unemployment, scenarios that have become increasingly common in recent years. Some self-employed applicants are also hitting barriers to loans—hurdles they didn’t face in the past.

Lending standards are still tight in part because government entities Fannie Mae, Freddie Mac, and the Federal Housing Administration, which collectively account for more than nine in 10 loans being made today, are under heavy pressure to avoid any losses.

Those firms don’t make loans directly but instead purchase or guarantee mortgages that meet their standards, and so have significant influence over which loans banks are willing to approve.

Lou Barnes, a third-generation mortgage banker in Boulder, Colo., says lenders have grown too cautious.

Fannie and Freddie, in particular, “are behaving like a hurricane insurance company that won’t write any policies within 200 miles of an ocean.”

Fannie Mae, for its part, says tighter loan restrictions, while painful for the housing market, are necessary to correct past excesses.

“Clearly we got too loose. This is a return to historical standards,” says Doug Duncan, Fannie’s chief economist. “When markets were stable and these standards were applied, you didn’t hear the same complaints.”

On Tuesday, Mr. Barnes told Amy Menell that his bank wouldn’t be able to approve her for a loan even though she has a credit score above 800, no debt and is willing to put down more than 50% on a $400,000 house in Boulder, Colo. Ms. Menell, a mother of three who is finalizing a divorce and receiving a cash settlement of $400,000, wants to take advantage of low interest rates and the depressed housing market to buy a home.

But Ms. Menell works as a real estate agent and had little income in 2009, when the housing market slowed.

That has left her without the two years of documented income the bank wants for her loan application, even though she says business has picked up over the last year.

“I know the housing market inside and out here, and believed that with a significant enough down payment and more assets behind you, that you could get a loan,” she says.

Mr. Barnes says that in ordinary times, Ms. Menell would have had no difficulty getting a loan. “Going back as far as there has been banking, if somebody walked in the door with a 50% down payment, good credit, cash in reserve, they’d walk out with a loan,” he says.

To be sure, the rejection rates have been higher than they are now, and reached 32.5% at the height of the housing bubble in 2007. That was driven, in part, by brokers and loan officers testing the limits to see just how loose banks were willing to go.

The mortgage data analyzed by The Wall Street Journal included loan applications filed by consumers who wanted to refinance existing mortgages as well as those planning to buy a home. Among home-purchase applications, lenders denied 19.9% of applications, up from 18.2% in the previous year, while 27.2% of refinance applications were denied, up from 24.4%.

Recent surveys by regulators show no sign of credit easing so far this year. Nearly four in 10 banks reported tighter mortgage lending conditions for the 12-months ended in February, according to a survey published this week by the government’s Office of the Comptroller of the Currency. Just 8% said that standards had loosened.

The Journal obtained the data from individual lenders in accordance with the Home Mortgage Disclosure Act, which requires lenders to report such figures. The top 10 lenders accounted for more than 70% of loan originations last year, though a substantial percentage of those loans were obtained by the lenders immediately after smaller firms had approved the loans.

The analysis showed that denials increased in every state except Delaware and in all but nine of the top 100 metropolitan areas. Denial rates were highest in Miami, Detroit, and New Orleans, and lowest in Raleigh, N.C.; Bethesda, Md.; and San Jose, Calif.

In Miami, where home prices are down by 50% from their 2006 peak, nearly 44% of loan applications were rejected last year.

The market relies heavily on buyers with cash: In April, nearly 63% of home sales were all-cash deals, according to the Miami Association of Realtors.

There are some limits to what the data can show. Loan officers say that many borrowers are being dissuaded from even applying in the first place, out of fear they won’t meet stringent guidelines.

In past economic cycles, lending standards tended to ease within the first year of an economic recovery, and the OCC survey showed that banks have eased underwriting standards for commercial loans over the 12-month period ended in February.

But in the current cycle, lenders have kept standards tight for home loans even though the economy is growing. “There’s no question that accessible credit is a problem,” says David Stevens, chief executive of the Mortgage Bankers Association, an industry group.

Mr. Stevens, who headed the Federal Housing Administration for two years until March, says a key factor in banks’ reluctance to lend more freely is the aggressive effort by Fannie and Freddie to force banks to repurchase loans if they go bad.

In a measure of more-rigid lending standards—and, banks argue, proof they are acting more responsibly—the Federal Housing Finance Agency says that just 0.3% of loans backed by Fannie and Freddie in 2009 have ever recorded three consecutive missed payments, down from 2.6% in 2000.

Refinance loans are harder for many borrowers to get because home values have fallen so sharply over the past four years, leaving many borrowers with much less equity than they thought they had.

The Journal analysis found that insufficient collateral was the most common denial code flagged by lenders when they rejected loan applications.

Other top denial reasons included inadequate debt-to-income ratios and poor credit histories.

Adam Bauer, who says his family is pressed for space in its two-bedroom home in Belmont, Calif., has found new hurdles in getting a loan, even though he obtained a mortgage for his current home without difficulty in 2004. Tax returns for the 47-year old information-technology consultant show that his income declined in 2009 due to losses on a start-up business.

Mr. Bauer and his wife have always tried to maintain a stellar credit profile because even before deciding to purchase a new home, they expected to refinance their current adjustable-rate mortgage. They each have a credit score of at least 780, have no credit-card debt, and have more than 20% equity in their home. “We’ve been preparing for this for years, and we’re really surprised we’re not having an easier go,” he says.

He says one loan officer said that based on the income shown on his tax returns, he wouldn’t qualify today for the $537,000 loan he already has on his current property, let alone the $900,000 loan he is seeking to buy a larger house.

Published: Tuesday, 7 Jun 2011 | 9:30 AM ET

By: Diana Olick
CNBC Real Estate Reporter

Andrew and Peggy Sheren can’t resist a good deal, especially when it comes to financing their McLean, Virginia home.

“We’ve gone from an interest rate from something like greater than 6 percent down to the lowest interest rate we currently have is three and an eighth percent,” Andrew remembers. They have refinanced their home four times in four years, taking equity out only the first time for a renovation, but essentially cutting their interest rate in half.

Negative economic reports of late have pushed the rate on the popular 30 year fixed to below 4.5 percent, the lowest this year and just about a quarter percent off the 50-year lows we saw last summer; adjustable-rate products are even lower. When investors see bad economic news, they pull money out of the stock market and park it in bonds. The price of bonds goes up, the yield goes down, and mortgage rates follow down.

“If we see continuing demand in mortgage backed securities, we’ll see further pushes lower. If we see continued doses of bad economic news, the stock market taking beatings, we don’t see positive economic news, continually bad jobs reports and previous months of jobs reports revised lower as we saw last week, then rates will continue to push down as we see that,” says Craig Strent, CEO of Apex Home Loans, a small mortgage lender in Rockville, Maryland. Strent has seen a big surge in refinance requests in just the past few weeks. Nationwide, refinancings are climbing as well, while mortgage applications to purchase a home remain flat at very low levels. Strent, who obviously sells mortgages for a living, says regardless if you’ve already refinanced, you can still stand to save money over the long term.

“If you look at how much can I save in my interest costs and how much will it cost me to do it, and how long will it take me to breakeven and recover those costs? Am I going to be living there that long? And if the answer is yes, it’s going to make sense to refinance,” advises Strent.

That’s why the Sheren’s keep going back to the table. They have gone from a fixed-rate loan to an adjustable rate mortgage on their Virginia home and have also refinanced the loan on a property they own in California. By making some changes to the loan value and term, they have been able to do this at little to no extra cost.

“We did a refinance in California where we actually got negative closing costs,” boasts Andrew Sheren, adding, “I think that’s where we did pay half a point.”

The trouble of course is that one in five borrowers owe more on their homes than their homes are currently worth. 10.9 million, or 22.7 percent of borrowers were in this negative equity position, or so-called “underwater,” position at the end of March, according to a report out this morning from Core Logic, and while negative equity is improving in some of the hardest hit states, it is getting worse in states you might not expect. Nevada still has the highest rate of negative equity, but in New York, borrowers are underwater by the most, an average $129,000.

Being in a negative equity position makes it far tougher to refinance. There are government programs through Fannie Mae, Freddie Mac, and the FHA which offer underwater borrowers a chance to refinance, but there are many qualifications that many borrowers don’t meet. Some borrowers are choosing to do cash-in refinances, where they are putting more money into the mortgage, the opposite of what happened during the housing boom. This helps them get a better rate. Unfortunately, the borrower who need to refinance most, likely can’t. But for those who can, it can make sense, over and over.

“Nobody gets rich, so far as I know, through refinancing, but what you do do is you save cash flow,” says Andrew Sheren.

HUD announced adjustments to its Making Home Affordable initiative to encourage more principal reductions on August 6th.  Soon after, rumors ran rampant on Wall Street and in the press that the Obama administration would be soon announcing that FNMA & FHLMC would be forgiving a portion of the principal owed on the trillions in mortgages they control. What’s going on?

Sometimes the best way to find out how a radical idea will be accepted, is to start your own rumor about it and see how everyone responds.

If someone in the Obama administration is playing this game, they got a lot of responses to digest.

Reuters, Barons & even Morgan Stanley weighed in on the rumor.  The rumor spread so fast the Treasury Department supposedly felt compelled to issue a statement of denial (not that I could find it).

With the economy still not recovering, Obama’s approval ratings in the trash and the Democrats expecting to get skewered in the coming elections – might they actually try it?

Who knows, but it would be extremely difficult to implement with any kind of fairness.

HUD’s FHA Short Refinance Announcement

What we can talk about is the latest attempt by HUD to get banks to use its principal reduction program.

HUD’s first two attempts to leverage the promise of FHA mortgages to get banks to grant principal reductions didn’t work, maybe the third time’s the charm?

Ah, to have the eternal optimism of our government officials.  They are so concerned about underwater homeowners that they keep searching for ways to get the banks to lower principal balances.  They keep trying & trying!

Oh wait, they’re just doing this to keep their jobs!

Even better, HUD couldn’t even come up with a new program this time around.  Instead they announced “adjustments” to their most recent failed program.

What’s it mean for homeowners?

Well if you’re upside down AND can convince your lender to forgive at least 10% of your loan balance, then you may qualify for this “FHA Short Refinance” option.

Has anyone at HUD taken the time to notice that banks can’t get up to speed on short sales or even foreclosures (shadow inventory)?

So, why does HUD think banks are going to embrace this program?
FHA Short Refinance Details

Even if you meet all the requirements below, I wouldn’t get your hopes up about getting your lender to approve you for this program.

This is pulled right from HUD:

Participation is voluntary and requires the consent of lien holders. In order for a loan to be eligible, the following conditions must be met:

1. The homeowner must be in a negative equity position;
2. The homeowner must be current on the existing mortgage to be refinanced;
3. The homeowner must occupy the subject property (1-4 units) as their primary residence;
4. The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a “FICO based” decision credit score greater than or equal to 500;
5. The existing loan to be refinanced must not be a FHA-insured loan;
6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance;
7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;
8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
9. For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;
10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;
11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and
12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.

Anyone that’s attempted to get a loan modification already knows the difficulties in getting lenders to assist when you’re already behind on your mortgage.  Imagine the challenge of getting assistance when you’re current on your mortgage?
Summary

I can only think of three reasons HUD officials would even bother announcing this new option:

1. They’re trying to save their jobs by making it look like their doing something.
2. This is just the first piece of a bigger strategy.
3. They are truly incompetent

For more information on the HUD announcement:

FHA Short Refinance Announcement

HUD Mortgagee Letter 2010-23

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

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

Should Borrowers care also?

A recent article I read online at a real estate blogging site called ActiveRain, brought out some interesting comments.

I was shocked after reading all the comments that most of the agents commenting seemed to endorse buyers shopping for a mortgage solely by price.

A couple of brave Loan Originators pointed out that LO’s could do the same thing to agents and recommend buyers & sellers shop solely for the agent willing to work for the lowest commission.

I don’t really see the tit-for-tat thing being constructive for either side.

Here’s the comment I posted:

I find it interesting that not one Realtor mentioned the experience and knowledge of a loan officer over price!

Hmmm, it seems the collective thoughts, of some of the best agents in the industry, are of the opinion that price is all that matters.

I can’t put into words how disappointed I am if this is truly the thought process of the brightest Realtor minds in this business.

The next time any of you want to complain about one of your deals not going smoothly or blowing up due to lender issues, just remember – the buyer shopped and got the best price, so everyone involved got what they deserved.

Not a very constructive comment either.  I apologize as I was a bit steamed that the other half of our industry’s symbiotic relationship appears to think they could easily survive without experienced or knowledgeable LO’s.

That is the key to this debate.  We’re all in this together.  Each half needs the other to get paid.

I fully believe buyers should be shopping for the best deal.  Rates & fees are only a small part of what makes up the best deal.  The best rate & fees mean nothing if the deal doesn’t close due to incompetency.

So, do unto others as you would have them do unto you.

BTW – here’s a few of the responses by real estate agents to my post.  Borrowers should note that they all endorse experience over lowest price:

	Drew, I ALWAYS recommend the loan officers I KNOW and who are  the BEST and I don’t care what they charge. Of course they are competitive, but they get the job done. Just this year, three deals have risked being blown sky high due to incompetent or inexperienced loan officers and/or processors. Don’t get me started! I am totally on your side. My job is to recommend someone who will get the job done. What good is it to save a few dollars and lose the house?
Frank & Sharon Alters, CDPE-Short Sales Jacksonville-Orange Park-Fleming Island (Watson Realty ) Delete | Report a Concern		12:30pm • #4

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

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

The government is getting more serious about bailing out the housing industry with HUD’s latest announcement about the new FHA program.

It’s potentially good news for upside down Michigan homeowners, as to make a loan eligible for the program, the lender must write down the principal balance AND make sure the payment isn’t more than 31% of income. 

The program is voluntary for lenders, but if the government can get enough lenders to actually participate this could finally be the program that stabilizes the housing market.

Here are some highlights of the program:

• Voluntary option for lenders and borrowers with mortgages NOT currently insured by FHA.
• Encourages lenders and borrowers to work together, when appropriate, to restructure debts.
  • Loans must have a minimum writedown of 10% and all mortgages on a property total to less than 115% of the property’s current value.
• Eligible upside down Michigan homeowners are refinanced into new FHA-insured loans on standard FHA refinance terms for documentation, income ratios and complete underwriting.
• Terms of FHA refinancing:
  • New FHA loan must be equal to no more than 97.75% of the current value of the property.
  • Combined mortgage debt must be written down to a maximum of 115% of the current value of the home.
  • Standard mortgage insurance premium structure will apply.
• Mandatory principal writedown as part of refinance.
• Minimum writedown by lender of at least 10% of the unpaid balance of the original loan.
• Reduced monthly mortgage payments to facilitate sustainable homeownership:
  • Rate on refinanced loan will be set at prevailing FHA interest rate.
  • Total monthly mortgage payment, including second mortgage, will not be greater than approximately 31% of gross monthly income.
  • Total debt service including all forms of household debt will not be greater than approximately 50% of gross monthly income, except for some borrowers with especially strong credit histories.
• Existing lenders can retain their second mortgages on the property, but only up to a combined 115% of the current value of the home.
  • If there is an existing mortgage that is not extinguished, lenders must agree to re-subordinate and extinguish any amount over 115% of the current value of the home.
• Homeowner Eligibility
  • Homeowners must be current on their mortgage payments.
  • Homeowner must occupy the home as their primary residence and fully document their income.
  • Homeowners must qualify under standard FHA borrower guidelines.
  • Homeowners must have a FICO credit score of at least 500.
  • Existing lenders’ choice to consent for an FHA refinancing of this type is voluntary given the principal writedown requirement. Thus, not all homeowners who meet above criteria will receive an FHA refinanced loan.
  • As with any loan forgiveness, the short refinancing will be reflected on borrowers’ credit score.

HUD plans to use up to $14 billion in TARP funding to support the FHA refinance options. The funds will be used to payoff second liens, provide incentives to servicers and provide coverage for some share of potential losses resulting from the newly refinanced loans.

Here’s an example provided by HUD:

Example of a Typical FHA Refinance

• In 2006: Family A took out a 30-year fixed mortgage with a balance of $250,000 and an interest rate of 9.0%. Their monthly payment was about $2,000 per month.
• Today: Home prices have dropped and Family A’s home is worth $180,000.
• With a FHA Refinance: Family A’s loan balance will be reduced to $207,000 and their monthly payment will fall to about $1300 per month. This will reduce their principal balance by about $33,000 and reduce their monthly payments by about $700 per month, saving the family nearly $42,000 over the next 5 years.

When will this all be available to upside down Michigan homeowners?  HUD says,

“FHA will move to implement this as quickly as possible and expect that lenders can begin making decisions by the fall. Specific guidelines will be posted in a FHA Mortgagee Letter in the near future.”

You can read HUD’s press release about the program here, be sure to click on the links at the bottom for even more info.

Additional FAQs can be found at the Making Home Affordable website.

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

Yesterday, Edward DeMarco with the Federal Housing Finance Agency announced that the program that allows homeowners to refinance their upside down homes would be extended.

Big deal.

When Obama announced the program, it was touted to be able to help 4-5 million homeowners refinance into lower rates and therefore be less likely to walk-away from their homes.

Initially, the program allowed homeowners to refinance up to 105% of their home’s current value.

After dismal response, the program was expanded to allow refinances up to 125%.

Apparantly those in the White House consulting the President on this program are clueless to what happens in the real world.

Soon after the 125% expansion was announced, FNMA announced they would charge a lot more for the program.

Also, there are severe problems with homeowners who have PMI or second loans (or lines of credit) on their homes.  Trying to get a PMI company to reissue a new PMI certificate of getting a lender to resubordinate their second lien is a time consuming nightmare.

On top of that, in many hard hit states where upsde down homeowners could be helped the most, many homeowners owe more than 125% of their homes current value.

Come on President Obama, let’s see you step up and really do something to help upside down homeowners.