Meet Our Team
Why Choose Humboldt Home Loans
Overview
Pre-Qualify
Apply Now
Calculators
My Account
Contact Us
Overview
Monthly Payment
Payment Schedule
Extra Payment
How Much Can I Afford
How Much Can I Borrow
Rent vs Own
Overview
Profile
Loan Status
Conforming & Jumbo Loans
ARM Loans
VA Loans
Construction Loans
Sub Prime Loans
Investment Property Loans
Market Analysis
Mortgage News
Upcoming Seminars
Shop Rate, Or Not?
Credit Basics
Forms
Links
HomeAbout UsLoan CenterProductsTip SheetsResources

ABUSIVE LENDING PRACTICES - AN INTRODUCTION

AVOIDING FORECLOSURE!

 

The growing number of foreclosures remain a major concern as we wrestle with the continuing financial crises. Solutions to homeowners woes are not easy. Among the suggested solutions are the following:

ASK THE LENDER FOR THE NOTE

 

The most recent suggestion for home owners facing foreclosure is to ask your lender or the original note from the original purchase loan.

 

Here is the rationale behind this strategy:

 

Home owners, facing possible foreclosure, are advised to contact their lender to “negotiate” a loan modification. Complaints have occurred in which homeowners acquire no cooperation from the lender. We have also heard that because of the way that mortgages were packaged and sold globally, that lenders have experienced difficulty in retrieving the paper work related to the loans that they are “servicing”. Perhaps there is a connection between the lender’s unwillingness to modify a loan and the fact that they really are not in possession of the note and thus do not have the authority to negotiate a modification. On the other hand, as a servicer, they are authorized to initiate a foreclosure action.

 

When one finances a home purchase, the “agreement” between the lender and the borrower is identified in the NOTE. The lender produces the note as evidence that they have the authority to negotiate with the borrower as well as exercise the foreclosure option.

 

The rationale behind seeking a copy of the note is that the owner wishes to “negotiate” a modification with the lending entity in possession of the note and with whom the owner is obligated. If the servicer is not capable of negotiating a note modification, the owner is encouraged to “demand” being able to relate to the note holder directly.

 

Thus, if the foreclosing entity cannot produce the note, there may be a reasonable question as to their authority to foreclose without having at least addressed the issue of a note modification.

 

Will this strategy work? We don’t know. But, it may be worth a try!

HOME AFFORDABLE GUIDELINES ( formerly called the stimulus package)  . . . WHO DOES IT HELP?

The Making Home Affordable portion of the stimulus bill has been defined and the following is a summary of the guidelines. There are several aspects to the program including a refinance option and a modification option. (the comments in parenthesis and italicized are the author’s) 

Home Affordable Refinance

This program is available to homeowners who have a solid payment history on an existing Fannie Mae or Freddie Mac loan. The anticipation is that those borrowers who have been prohibited from refinancing because their current loan-to-value ratio exceeds 80% will now be eligible to refinance at today’s lower rates.  

The expectation is that because the lenders and servicer already have the borrower’s information on file, less documentation will be required in the new refinance transaction.

This reduction in documentation along with the expectation that an appraisal will be able to be waived is expected to make a refinance quicker and less costly for lenders and borrowers. 

The plan relies upon the voluntary cooperation of the lenders and seems to allow each lender the latitude to determine the credit worthiness of the borrower and other aspects of each refinance request. Nor do we have a clear idea of the evaluation process, including how low the interest rate might be adjusted and/or how long the term might be extended to make a refinance viable. (This lack of consistent guidelines, adopted by all lenders, is a concern for consumers. It may be reasonable to assume that many borrowers will be deemed ineligible and thus we can expect that short sale transactions will continue.)

Home Affordable Modification

This portion of the program has received the most attention and seems to have the more developed guidelines. Designed to reach “at risk” borrowers and modify loans into more affordable payment schedules.  

Eligibility & Verification:

·         Loans originated on or before January 1, 2009

·         First liens on owner occupied properties only

·         Conforming loan limits although the higher limits up to $729,750 in designated communities are allowed

·         Full documentation of income and assets required accompanied by a affidavit of financial hardship is required

·         Verification of owner occupancy status is required

·         Borrowers who have not missed payments but who are deemed at imminent risk of default are to be targeted.

·         The monthly payments, including PITI and any PMI, will be reduced to no more than 31% of the borrower’s gross monthly income. The lender will be reimbursed by the government for the cost of the reductions in monthly payments from 38% DTI to 31% DTI. 

·         The modification sequence requires first the reduction of interest rate with a floor of 2% and then extending the term to a maximum of 40 years. Then, if necessary, a principal forbearance could be initiated.

·         Loans can be modified only once (this was in response to the criticism that previous modifications were insufficient to provide real relief and were for only a short period of time)

One major concern already identified with the process has to do with the requirement that servicers conduct a “net present value” calculation. Translated, this means that the servicer will compare the cost of a loan modification with a foreclosure and will implement whichever option provides the lesser cost or loss to the lender. (The net present value is non-transparent, meaning that the numbers used to make the calculations are presently available only to the servicers.)

The plan retains its limitation on the amount of value loss that a borrower can have experienced in order to be eligible for a modification. If one is more than 5% “underwater” the property is not eligible. Many borrowers whose loans are more than 5% more than their home’s current value will be prohibited from participating in the modification program. (A reasonable assumption might be that short sale transactions will continue to be a remedy for many borrowers)

The current interpretation of an “at risk” borrower is one who is current on payments but can identify a sufficient hardship to warrant modification. The borrower who is delinquent in payments seems ineligible under the guidelines. (Unfortunately, many borrowers were previously instructed that they were ineligible for assistance until they were delinquent. Now, those same borrowers are told that because they stopped making payments, in an effort to qualify for help, that they are no longer eligible. We can only imagine the confusion and outright anger at this turn of events.)

There appears to be no assistance available for the unemployed borrower. The guidelines clearly require modifications for those who can “qualify” under the 31% ratio rule and other set forth provisions noted above. No provisions have been identified for the borrower who has done everything right, has paid the mortgage faithfully and now is unemployed and unable to continue payments. (Many believe that some form of forbearance assistance should be made available.)

Finally, the plan calls for this structured relief plan of lower monthly payments to be a five year program after which there can be a step up to current interest rates. Some critics have already voiced an opinion that this is consequently only a temporary fix and are concerned that borrowers will be unable to afford the adjusted interest rate bumps in the future. (If home values have not rebounded significantly during that same 5 year period, home owners may have found that they only postponed a problem rather than having found a solution.)

Judicial Modification at Bankruptcy

Provisions are being developed to allow homeowners who have exhausted all other options to seek a debt payment plan via bankruptcy. With evidence that the borrower has tried unsuccessfully to obtain an affordable loan modification, a bankruptcy judge would be enabled to reduce the outstanding principal balance to the current fair market value to facilitate the borrower’s retention of his/her owner occupied home. Known as a “cram down” provision, lenders are understandably opposed to the ruling. Their resistance is based on the supposition that the number of bankruptcies will increase dramatically. Proponents, point out that bankruptcy is a last choice situation and will encourage lenders to work with borrowers in seeking loan modifications. 

Other provisions

The legislation is lengthy and has other provisions included. There are elements to strengthen FHA, Fannie Mae and Freddie Mac in their ability to intervene with at risk borrowers. There are outlined provisions for borrowers with high total debt ratios who can seek HUD certified consumer counseling and a debt reconstruction program along with their loan modification.  Incentives for lenders and servicers are spelled out in the legislation along with expectations regarding how PMI companies will assist in the modification process. While a very ambitious program, we have to wait to see how it will actually help troubled homeowners.

A good start

In spite of the limitations to the programs noted above, we can be hopeful that the refinance and modification programs set out above will help millions of projected borrowers. Keeping home owners in their homes is a big step towards establishing some stability to the housing segment of the economy.

SHORT SALE OPTION

Lenders seem to be open to participating in a short sale, often arranging for the homeowner to remain in the home during the sale process. A short sale can be less costly than having the lender actually proceed with foreclosure. There has been increasing frustration among borrowers who find that, in spite of their willingness to participate with the lender, the process is lengthy and convoluted. With the stimulus legislation, maybe we will see a reduction in short sales as borrowers are able to arrange payment plans to allow them to remain in their homes?

In the meantime, a “short sale” transaction is one in which the home owner sells their home, with the consent of the lender, for “less than is owed”. Until recently, homeowners were punished for such transactions as they were taxed on the amount of “debt forgiven”. In other words, if the lender allowed the home owner to sell for $50,000 less than owed on the mortgage, the borrower was taxes on the $50,000 as if it were income. One of the better things that Congress has done is to eliminate this “phantom tax”.

While the new rule is not a panacea for dealing with the foreclosure situation let’s celebrate this as a first step in resolving some of the growing foreclosure problems. A less discussed consequence exists for borrowers who choose to participate in a short sale. Lenders are likely to view the borrower in the same way as an individual having declared bankruptcy. The credit report will most likely identify the mortgage as having been “settled for less than owed”. This, in turn, could affect a borrower’s ability to acquire future financing but may still be a better alternative than going through foreclosure?

            Author’s Note: the next phase to making this legislation most effective for short sale home sellers is to amend the credit scoring models in regard to how said sales affect the calculation of future individual credit scores. It has been suggested that the scoring models be changed to permit new home mortgage financing after two years has elapsed from the past short sale? Of course, other conditions such as unblemished credit since the short sale, etc. would have to occur.  Unfortunately, no such options appear to be under consideration at this time.

Past Fannie Mae rules allowed a borrower to seek new financing after four years had elapsed from the foreclosure and/or short sale. More recent discussions have centered around increasing this time frame to five years. While often suggested, it remains unclear whether a borrower who participates in a short sale will be eligible again to purchase a home within two years or will have to wait the new five year term recently suggested by Fannie Mae.

 A borrower can contact their lender directly or contact a real estate licensee to help to arrange a short sale. Lenders are very willing to work with Rreal Estate representatives so you may find it helpful to have an advocate working for you when negotiating with your lender.

In either situation, be prepared to confront several potential hurdles. The fact that a short sale is being considered means that the amount owed exceeds a possible sales price. In recent years we saw an increase in 100% loans wherein two loans were obtained . . . a first mortgage for 80% of the sales price and a 20% mortgage for the remaining purchase amount. In most cases, two different investors now “service” the two loans. While the first mortgage holder will likely be cooperative with your short sale request, the second mortgage holder will most likely be literally “wiped out” and lose their investment in any short sale. Acquiring the voluntary participation of the secondary lender in this kind of situation can not only be time consuming but can result in not being able to proceed at all.  Complaints about the length of time it takes to consummate a short sale are more understandable when recognizing the position of any secondary lender. (see “ask for the Note” article at the top of the page that may explain the reluctance and/or inability of some lenders to negotiate a loan modification).

 

SEEKING HELP VIA GOVERNMENT OPTIONS

Recent legislation in Congress, while not directly addressing the plight of Homeowners facing mortgage problems, did renew questions about what help is available for homeowners experiencing difficulty making their mortgage payments.  Congress placed most emphasis on the resources of FHA to provide the necessary assistance to troubled home owners. The two most discussed FHA programs are and FHA Secure. and Hope for Homeowners. These available plans can be confusing and too often will not provide real help.

FHA SECURE PROGRAM

 Under this loan option, FHA will provide a loan to 90% LTV of the present appraised value. If the borrower owes more than this new loan amount, the current lender will have to agree to either a.) carrying a second trust deed for the additional debt  or b.) eliminate/forgive the debt overage completely.

There are other rules affecting a borrower’s eligibility for the FHA Secure program. The program was established to mostly accommodate those borrowers facing payment increases due to Adjustable, especially option ARM, loan resets. Any borrower who is current on their mortgage is eligible for an FHA Secure refinance. If, on the other hand, the borrower is delinquent, the default must have been due to the payment shock of an interest rate reset or, in the case of an Option ARM, re “recasting” of the mortgage to the fully amortizing payment. Help might be available to those already in foreclosure but each situation is unique and depends upon the value of the home, how much is owed and whether the lender is willing to offer a second mortgage or “write off” the remaining debt.  

In all cases, the borrower must “qualify” for the refinance loan under present FHA guidelines.   We know that many borrowers will not qualify for the FHA Secure loan option. They are encouraged to contact their present lender to pursue a workout plan that might involve forbearance, a mortgage modification or some other replacement plan. In some cases, foreclosure may not be able to be avoided. (see information above regarding a Short Pay as another option)

THE HOPE FOR HOMEOWNERS PLAN

The Hope for Homeowners (H4H) program, authorized by the Economic & Housing Recovery Act or 2008 was initiated as of October 1, 2008. The program is intended to help borrowers at risk of default and/or foreclosure refinance into a more affordable loans. FHA’s refinance loan will be limited to 90% LTV of the current appraised value of the home. If the current amount owed exceeds the refinance limit, a current lender must:

a.)    “forgive” the overage amount, or                                                                 

 b.)  accept a second trust deed for the un-refinanced amount.

 Eligibility rules include:

·        the existing mortgage had to be originated on or before January 1, 2008

·        the mortgage debt to income must be at least 31% as of March 1, 2008

·       the borrower must demonstrate an inability to afford the current loan payments

·       certification that the borrower has not intentionally defaulted on their existing loan or has not obtained the existing loan fraudulently, and has not been convicted of fraud.

The exclusion regarding “not having obtained the existing loan fraudulently” is not an FHA requirement but is likely to be adopted by many lenders doing the H4H loan and will require some interpretation regarding the word fraudulent. We know that many of the loans facing default, for instance, were obtained with loans in which incomes were exaggerated. While some borrowers can maintain that they were somehow “persuaded” and/or deceived in the acquisition of their loan, many borrowers were willing participants in the loan process. Now that they must fully qualify or any new loan, any previous deception is likely to become apparent. Whether such discovery will be sufficient grounds for loan denial will be up to each individual lender.

 

 

 

Word/john/avoiding foreclosure