About Government Refinance and Home Purchase Programs

It used to be that qualifies borrowers could refinance into an FHA loan and get cash out up to 95% of the appraised value of the home. Those days are soon to be gone. HUD just announced that beginning April 1 cash out refinances through the FHA have an 85% loan to value maximum.

FHA had already been moving in this direction. Recently they started requiring a second appraisal for cash out refinances between 85% and 95% of the appraised value of the home. The latest change is almost certainly a way to protect the FHA funds from drying up in this environment where home values across the US are predicted to drop another 20-30% in 2009.

We have been noting the risks of ever dropping housing prices. A post over at Housing Wire reported yesterday that national housing prices dropped a full 3.5% in January alone.

Once again we remind you — if you are in an undesirable loan and still have equity in your home contact us today about refinancing into a government-backed mortgage before it becomes too late.

There was an interesting column published over at Bloomberg recently. It wisely recommends that people lock their loans now while they are still in the 5.5% and less range. It also points out that lending standards remain quite tight and there are always fees associated with refinances. Here are some excerpts:

So who is actually getting some?

I mean those beautiful fixed-rate mortgages advertised at 5.5 percent or less. Maybe, in a virtual world, an avatar can drop into a virtual bank and close a loan at that rate, but here in real life, achieving it is close to a miracle.

…

It’s taking longer to close a loan. Lenders, burned by their own sloppy practices, have gone back to checking what you say on the application and that takes time. For example, they are routinely checking your income claims against your tax return, says Jim Pair, president-elect of the National Association of Mortgage Brokers.

Once you strike a deal on a mortgage, protect yourself by locking up the interest rate for the length of time it will probably take for the loan to close. Rates can change as much as a quarter-point in a single day.

This article is overly pessimistic but it is good to remember that even government-backed loans are becoming harder to qualify for and that there are always fees involved.

This bit from a recent AP article caught our attention:

HOW MUCH WORSE COULD IT GET?: The Federal Reserve estimates home prices could fall 18 to 29 percent more by the end of 2010.

This is a big deal. The more home values drop the more people who will become upside-down / underwater on their homes. When your home is worth less than you owe on your first mortgage you can’t refinance no matter how good your credit and income is unless you currently have an FHA or VA loan. If you owe more than your first and second mortgages combined but your home is worth more than your first mortgage still you may be able to refinance the first mortgage and subordinate the second mortgage but doing so can be difficult.

If you still have equity in your home and need cash out to pay off other debts or need to refinance to get out of an undesirable loan contact us in the sidebar. The longer you wait in the 2010 the lower the value of you home may become.

Fannie Mae and Freddie Mac put out some details for lenders on the new Home Affordable Refinance program. (The full documents can be found here.) As has been announced, the Home Affordable Refinance program is the part of the Obama refinance plan for borrowers who are not in trouble but who, because of home values dropping, have less than 20% equity and thus cannot refinance into the low interest rate loans that are available now. See here for the things that still disqualify borrowers from refinancing. Borrowers who cannot refinance can request a loan modification from their current lender(s).

Here are some interesting tidbits about the new Home Affordable Refinance program:

1. If your middle credit score is below 680-700 the risk-based pricing will likely preclude you from this particular program. The FHA program is still available for borrowers who have credit scores from 620 to 700.

2. If you owe more on your first mortgage than your home is worth this program will probably not work. While the program allows for you to refinance your first for up to 105% of the current value of the home, that extra 5% is mostly there to cover closing costs on the refinance loan.

3. If you have a second mortgage the fees associated with a Home Affordable Refinance may make the program untenable. The program allows you to refinance the first mortgage and keep your second mortgage in place but there are substantial pricing penalties if the amount of your first and second mortgage combined is greater than 95% of the current value of the home. Note: If your first and second add up to more than the value of your home you can still refinance the first mortgage through the FHA program with no penalties as long as the second mortgage holder is willing to subordinate their loan (meaning willing to remain in second lien position).

4. If your mortgage does not have mortgage insurance now your new Home Affordable Refinance loan does not need mortgage insurance either even if your loan to value is greater than 80%. However if you do have mortgage insurance now that insurance is supposed to transfer to the new loan under the program.

5. The program won’t really kick in until April by most accounts. While Fannie and Freddie have announced the guidelines it will take a while for the banks and investors to ramp up and be ready to start funding the new loans.

Please contact us or comment below with any other questions.

We here at Government Refinance Assistance have taken to calling the refinances that will become available as a result of President Obama’s newly announced plan “Obama Refinances”. The eligibility details will officially be released on March 4, 2009 but some details are beginning to emerge. One of the most important details is that with Obama Refinances homeowners who refinance into loans of more that 80% of the current value of their home will not be required to pay monthly mortgage insurance on the loan. This is a big deal because on a loan of around $200,000 the monthly mortgage insurance payment could be about $100 per month. Avoiding that will be a real boon to people who are able to take advantage of the new program. Not only will they get the great rates we are seeing now (in the low 5s in most cases) but they will be able to do so without costly mortgage insurance. That is something that neither regular conventional refinances nor FHA refinances can offer.

Here are some quotes from a recent Seattle Times article on the subject:

Under the Obama plan, borrowers who have made their monthly payments on time but are saddled with interest rates well above current prevailing levels in the low 5 percent range may be eligible to refinance — despite decreases in their property values.

Neither Fannie Mae nor Freddie Mac typically can refinance mortgages where the loan-to-value (LTV) ratio exceeds 80 percent without some form of credit insurance. That insurance can be difficult or impossible to obtain in many parts of the country that insurers have labeled “declining” markets, with high risks of further deterioration in values.

In effect, large numbers of people who bought houses several years ago with 6.5 percent or higher 30-year fixed rates cannot qualify for refinancings because their LTVs exceed Fannie’s and Freddie’s limits.
…

In a letter to private mortgage insurers Feb. 20, Fannie and Freddie’s top regulator confirmed that there would be no requirement for refinancers to buy new mortgage insurance, despite exceeding the 80 percent LTV threshold.

James B. Lockhart III, director of the Federal Housing Finance Agency, described the new refinancing opportunity as “akin to a loan modification” that creates “an avenue for the borrower to reap the benefit of lower mortgage rates in the market.” Lockhart spelled out several key restrictions on those refinancings:

– No “cash outs” will be permitted. This means the new loan balance can only total the previous balance, plus settlement costs, insurance, property taxes and association fees.

– Loans that already had mortgage insurance will likely continue to have coverage under the existing amounts and terms, thereby limiting Fannie and Freddie’s exposure to loss. But loans where borrowers originally made down payments of 20 percent or higher will not require new insurance for the refi, despite current LTVs over the 80 percent limit.

– The cutoff date for the entire program is June 10, 2010.

A: No

Sure, if you can’t qualify for a refinance you could pay one of these many “loan modification” companies that are sprouting up like weeds to help you out. But we recommend against it. Those firms just charge you thousands of dollars to do something you can do yourself. Anyone can contact their own bank and seek a loan modification after all. You don’t need to pay thousands of dollars to do that.

These firms are largely preying on the fear and ignorance of people in the current economic downturn. Don’t let anyone tell you that you can’t contact your own lenders yourself.

We get this from a recent Washington Post article:

A day after President Obama unveiled his $75 billion foreclosure prevention program, administration officials yesterday said they were still determining which homeowners should qualify.

The administration is developing a standard for lenders to use in evaluating applicants that seeks to exclude homeowners who are not in real need or are too far behind in their payments to be saved. Officials have set some conditions for eligibility, including requiring that borrowers’ mortgage payments consume more than 38 percent of their income and that the property be a primary residence.

Government officials are working to finalize details before a self-imposed March 4 deadline when the program will go into effect and lenders are likely to be flooded with calls.

Part 1 of the new Obama housing plan is for borrowers who are having difficulty refinancing but not is serious trouble yet. Part 2 is the loan modification segment of the plan for folks who can’t qualify for part 1 because of bad credit, being behind on the mortgage payments, or being too far upside down on the property to qualify for part 1. We get these talking points from this document about part 2 to the new Obama plan:

Borrowers Who Are at Risk of Foreclosure Are Asking:

1. What help is available for borrowers who are at risk of foreclosure either because they are behind on their mortgage or are struggling to make the payments?

The Homeowner Affordability and Stability Plan offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current. By providing mortgage lenders with financial incentives to modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage.

2. Do I need to be behind on my mortgage payments to be eligible for a modification?

No. Borrowers who are struggling to stay current on their mortgage payments may be eligible if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as a loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

3. How do I know if I qualify for a payment reduction under the Homeowner Affordability and Stability Plan?

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income; and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by your mortgage lender based on your financial situation and detailed guidelines that will be available on March 4, 2009.

4. I do not live in the house that secures the mortgage I’d like to modify. Is this mortgage eligible for the Homeowner Affordability and Stability Plan?

No. For example, if you own a house that you use as a vacation home or that you rent out to tenants, the mortgage on that house is not eligible. If you used to live in the home but you moved out, the mortgage is not eligible. Only the mortgage on your primary residence is eligible. The mortgage lender will check to see if the dwelling is your primary residence.

5. I have a mortgage on a duplex. I live in one unit and rent the other. Will I still be eligible?

Yes. Mortgages on 2, 3 and 4 unit properties are eligible as long as you live in one unit as your primary residence.

6. I have two mortgages. Will the Homeowner Affordability and Stability Plan reduce the payments on both?

Only the first mortgage is eligible for a modification.

7. I owe more than my house is worth. Will the Homeowner Affordability and Stability Plan reduce what I owe?

The primary objective of the Homeowner Affordability and Stability Plan is to help borrowers avoid foreclosure by modifying troubled loans to achieve a payment the borrower can afford. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and at your lender’s discretion modifications may include upfront reductions of loan principal.

8. I heard the government was providing a financial incentive to borrowers. Is that true?

Yes. To encourage borrowers who work hard to retain homeownership, the Homeowner Affordability and Stability Plan provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce your mortgage debt. Borrowers who pay on time for five years can have up to $5,000 applied to reduce their debt by the end of that period.

9. How much will a modification cost me?

There is no cost to borrowers for a modification under the Homeowner Affordability and Stability Plan. If you wish to get assistance from a HUD-approved housing counseling agency or are referred to a counselor as a condition of the modification, you will not be charged a fee. Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance.

10. Is my lender required to modify my loan?

No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

11. I’m already working with my lender / housing counselor on a loan workout. Can I still be considered for the Homeowner Affordability and Stability Plan?

Ask your lender or counselor to be considered under the Homeowner Affordability and Stability Plan.

12. How do I apply for a modification under the Homeowner Affordability and Stability Plan?

You may not need to do anything at this time. Most mortgage lenders will evaluate loans in their portfolio to identify borrowers who may meet the eligibility criteria. After March 4 they will send letters to potentially eligible homeowners, a process that may take several weeks. If you think you qualify for a modification and do not receive a letter within several weeks, contact your mortgage servicer or a HUD-approved housing counselor. Please be aware that servicers and counseling agencies are expected to receive an extraordinary number of calls about this program.

13. What should I do in the meantime?

You should gather the information that you will need to provide to your lender on or after March 4, when the modification program becomes available. This includes

· information about the monthly gross income of your household including recent pay stubs if you receive them or documentation of income you receive from other sources

· your most recent income tax return

· information about any second mortgage on the house

· payments on each of your credit cards if you are carrying balances from month to month, and

· payments on other loans such as student loans and car loans.

14. My loan is scheduled for foreclosure soon. What should I do?

Contact your mortgage servicer or credit counselor. Many mortgage lenders have expressed their intention to postpone foreclosure sales on all mortgages that may qualify for the modification in order to allow sufficient time to evaluate the borrower’s eligibility. We support this effort.

Read the PDF summary of the new Obama Housing plan here. It is found at the HUD site here.

According to the summary the #1 goal of the new program is to help with:

1. Refinancing for Up to 4 to 5 Million Responsible Homeowners to Make Their Mortgages More Affordable

Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have — through no fault of their own — seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

It sounds like this portion of the plan is similar to the FHA streamline program where you can basically streamline your conforming loan to a better rate at a reduced cost. Part 1 of the plan is for people who have a little bit of equity in their homes but not enough to qualify for a conventional loan refinance. The loans in part 1 can refinance up to 105% of the current value of your home. We get this from another worksheet:

3.How do I know if I am eligible?

Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

4.I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

5. Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, you will receive* a “Good Faith Estimate” that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

*Note: If you think you are a candidate for this part of the plan and would like a Good Faith Estimate contact us in the sidebar today.

For those of you who are in deeper trouble and are significantly upside down on your home value the loan modification programs with current lenders look like they will be beefed up a lot as well. See our post on part 2 of the plan for that scenario.

President Obama announced his housing rescue plan today in Mesa Arizona. Here is an AP article on the subject. There were no major surprises in the general plan today — the plan will focus on loan modifications for struggling homeowners, including those who are upside down on their mortgages. The details are reported to follow and the plan should go into affect by March 4. We’ll post more on how to take advantage of the new programs as more details arise.

In an attempt to stave off a financial crisis the Bush administration raised the FHA loan limits in 2008. While the higher loan limits helped, they obviously did not stave off a massive housing crisis. The problem is that the higher loan limits expired on Dec. 31 2008. One of the things the new Obama economic stimulus bill will do is reinstate the 2008 higher loan limits. Here is a quote from an article over at MSNBC.com:

The bill also reinstates the 2008 higher loan limits for FHA, Fannie Mae and Freddie Mac. “These higher loan limits are important to make mortgages affordable regardless of where you live. This will also help reduce inventory and improve liquidity in the overall mortgage market,” McMillan said.

This is good news for many people all over the country. FHA will be able to help significantly more folks with these higher limits.