About Government Refinance and Home Purchase Programs

There has been talk in the news recently about 4% interest rates on mortgages. The problem is that so far none of the plans that would lead to such rates have gained much traction in Washington. The Republicans were pushing to have the economic stimulus plan reduce interest rates for all to spur refinances and home purchases. The problem with that is that the Republicans don’t have much juice in Washington these days and the plans supported by the Democrats which is focused on other strategies.

Now it is possible that rates could be artificially compressed further in coming months, but there is no telling. The new Governor of the Fed, Elizabeth Duke, gave a speech recently and said that compressing rates by buying up mortgage backed securities is one of the ideas the Fed is still kicking around. Here are some excerpts from a recent post over at the WSJ blog:

While Congress and the Treasury debate numerous options, Ms. Duke largely steers clear of specific proposals.
…
Ms. Duke says the government also might consider reducing the interest rate for borrowers, through a subsidy or Treasury purchases of illiquid Ginnie Mae securities to which the borrowers’ interest rate is tied. The government also could purchase delinquent or at-risk mortgages in bulk and refinance them into the existing programs, she says.

The problem is that while we all wait to figure out what the Fed might do, interest rates are higher than they should be and banks are almost discouraging people to get loans now one fears that rates will drop and people will just refinance again in a couple of months.

We think the Fed needs to tweet or get off these things. Teasing the market with “mights” is making things worse, not better.

As of Tuesday the Obama administration had released very few details on how it plans to specifically help struggling homeowners. Odds are pretty good that the efforts will be directed to prompting banks to modify more loans but there is a push to revamp and revive the failed Hope For Homeowners programs as well. Here are some quotes from a recent AP article on the subject:

To those on the front lines of the housing crisis, the Obama administration’s pledge to spend $50 billion to combat foreclosures was a welcome change in the government’s approach. But the actual plan won’t be unveiled for at least a week and might not be enough to prevent the housing market’s troubles from mushrooming further.

…

“The question is: Can we work to design a system where the banks recognize it’s in their interest to avoid foreclosure?” Obama said Tuesday in Fort Myers, Fla., which has been devastated by foreclosures and sinking home prices.

Obama said he would announce his housing strategy in the coming weeks. Meanwhile, home prices are not expected to hit bottom until year-end at the earliest.

A report published this month by Moody’s Economy.com projected that home prices will plummet by at least 50 percent in more than 30 metro areas in California, Florida and Nevada by the time the housing bust ends. More than 60 percent of all metro areas nationally are expected to see prices fall by 10 percent or more, the study found.

While Treasury Secretary Timothy Geithner’s revised plan to stabilize the financial system offered few details about housing on Tuesday, consumer advocates said they were still confident that the forthcoming proposal would offer far-reaching help to borrowers.

“It’s a tough problem,” said Michael Calhoun, president of the Durham N.C.-based Center for Responsible Lending. “They want to make sure to get it right.”

Less patient was Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. He issued a statement criticizing the administration for taking too long to put together a housing plan.

While more and more banks are stepping up to the plate and willingly modifying loans for homeowners who have no equity left, a lot of banks are still rejecting pleas from homeowners who are in trouble but not yet late in their mortgages. One trend to look for in 2009 is for banks to be more and more willing to modify loans even before the situation gets dire. In a recent AP story, new Treasury Secretary Tim Geitner is quoted as saying that banks that receive government help will be required to modify loans to help struggling homeowners. Of course the definition of “struggling” remains fuzzy so we will have to wait and see if the banks will help people who have not fallen behind or not. Here are some quotes from that article:

Treasury Secretary Timothy Geithner on Saturday told lawmakers that financial institutions that receive government assistance will have to make loan modifications and meet other new standards, according to Democratic sources.

Geithner, during a briefing with House of Representatives’ Democrats, was asked about a New York Times report that the Obama administration would not require banks to increase their lending as part of revamped government effort to restore stability to the financial industry.

According to the sources, who asked not to be identified, Geithner said: “We are not doing what they wrote … Institutions that get assistance will have to participate in loan modifications and meet other standards that we set.”

“Public assistance is a privilege, not a right,” the sources said Geithner told lawmakers.

Have you seen zillow.com yet? If not it is a good place to go to get a rough feel for the current value of your home.

Now don’t overestimate this tool. It can at times be pretty far off in its estimates. But it does seem to end up in the right ballpark more often than not. It basically just uses public data on sales of homes and sales prices and then drops that into some proprietary formula to estimate home values. If you live out in the country it may not be able to locate your home but the site has pretty good coverage within most cities. Also, be sure to check the square footage it is basing the estimate on; if you have made additions to your home that Zillow wouldn’t know about that would increase your value.

The value of your home is a vitally important question when it comes to a refinance. As we noted above, if you are “upside down” on your home, or, owe more than it is currently worth, it reduces your refinance options quite a bit (unless you already have an FHA or VA loan).

As we have noted in the past, values on homes continue to drop so if you have equity left still and are in an adjustable rate mortgage (ARM) or a loan with a 6.5% or higher rate now you can contact us in the sidebar to see about refinancing to a 30-year fixed rate loan while rates remain low.

Here is a link to an interesting article over at the New York Times. There are plans that have arisen from both sides of the aisle in Washington on how to help struggling homeowners. Here are a few quotes:

…liberal and conservative economists and lawmakers are pushing to redirect the economic stimulus bill to what they say is the core problem: the housing market.

Senate Republicans are seeking new tax breaks and up to $300 billion in mortgage subsidies to attract homebuyers. Democrats want to spend at least $50 billion on federal programs aimed at reducing mortgage foreclosures.

The Obama administration is hammering out its own plan to spend $50 billion to $100 billion to prevent home foreclosures. And later this month, Democrats hope to pass a measure that would give bankruptcy judges the power to reduce monthly mortgage payments for homeowners who are in default.

There is a growing consensus among lawmakers in both parties that the deepening collapse of the housing market is at the heart of the country’s acute economic downturn.

It will certainly be interesting to see how this plays out over the next several weeks. Stay tuned.

This weekend President Obama reiterated his pledge to help homeowners and to mitigate the mortgage crisis. But details are still lacking. See at Reuters article on the subject here. Here is a quote:

President Barack Obama’s pledge to help housing with a new financial plan spotlights the root cause of the deep U.S. recession and may earn public goodwill as he balances massive bank bailouts with help for homeowners.

Obama promised on Saturday to lower mortgage costs as part of a financial rescue effort he is unveiling soon to boost the battered economy

One thing the federal government has continued to do is buy mortgage backed securities which is keeping mortgage rates below 6%. That is a very good thing for homeowners looking to refinance. Contact us if you are interested in taking advantage of the unusually low rates for a refinance.

As it turns out, most refinances of loans below $100,000 don’t make a lot of sense in the end. Here is why: There are fixed costs associated with a refinance and those fixed costs are the same for a small loan as they are for a big loan. See this page for more on the costs associated with refinances.

So for example, let’s consider a loan of $100,000 at a 6.75% interest rate. The borrower hears that rates have dropped to the low 5’s and assumes that a refinance is a no-brainer. But let’s take a look at the numbers. Here are the fixed costs:

Bank fees and appraisal — ~$1400 (assuming no points)
Title and escrow fees — ~1000 (depends on the state)
FHA upfront insurance fee — $1750 (1.75%)
Tax and insurance prepayments — ~$1200 (This is not actually a fee, but it does roll into the loan anyway)

So in this scenario the borrower ends up with a new loan of $105,350. Now some of that is offset because the borrower skips a month of mortgage payment and the old escrow account (assuming one is in place) is refunded, but even so the actual costs are probably around $4000. None of that is out of pocket but the costs are still real.

Now here is the problem. Even if the new rate is at 5.0% the payments on the FHA loan would probably only be about $40 less per month when we factor in the FHA monthly mortgage insurance. That means the borrower will save about $500 per year. And that means that it would be at least 8 years before that borrower broke even on the costs associated with the refinance. Of course if the borrower plans to never sell the house such a refinance makes a lot of sense because $500 per year is very helpful. But if the borrower might sell the house in a few years the refinance makes less sense.

So the takeaway is that for smaller loan to make sense normally one or more of the following must be true:

1. The current interest rate is very high (at least mid 7s or higher)
2. The borrower does not plan to sell the house for several years
3. The borrower needs cash out to pay down other high interest rate debts

For instance, if the original loan in our scenario above were at 8% (instead of 6.75%) then the savings on the refinance would be more than $120 per month. With those kinds of savings the refinance starts to make a lot more sense.

The good news is that for larger loans the fixed costs are much less of an issue and the numbers usually work out quite well.

Please contact us if you have any questions about this subject.

As we have noted here in the past, with the failure of the Hope For Homeowners program in the Fall of ’08 there haven’t been any reliable refinance options for people who have conventional mortgages and owe more than their home is currently worth. For the last few months we have suggested people contact their lender about a loan modification.

However, there is one possible solution that we have only recently started looking at again. According to the FHA regulations, as long as the FHA loan is in first lien position and does not exceed 97% of the current value of the home FHA does not care if there is a second mortgage behind it. Here is an example:

1st mortgage = $185k conventional loan at 7% (no late payments)
2nd mortgage = $65k ARM loan at 9% (no late payments)
Current appraised value of home = $200k

In this example the homeowners are in some trouble. They owe $50k more than the house is worth. But here is where FHA can step in. Assuming these homeowners meet FHA income and credit requirements, they could refinance out of that 7% first mortgage and get an FHA loan at a much lower rate (based on rates this week at least).

The Catch

But here is the catch: When a first lien/mortgage pays off the second mortgage automatically moves into first lien position and FHA insists on being in first lien position.

The Solution

The solution to this problem is to convince the second mortgage holder to stay in second lien position for the refinance. This is called subordinating the loan.

For much of 2008 it was difficult to convince second mortgage holders to subordinate their loans. But as the economy has continued to weaken more and more second mortgage holders are willing to consider it now. The logic is pretty simple: If the family in our scenario above foreclosed and after all the costs the home sold and cleared $180k for the banks, that entire amount would go to pay off the first mortgage and the second mortgage holder would get nothing. So it is very much in the interests of second mortgage holders to agree to subordinate their loan if it decreases the chances of a foreclosure.

If you are in a situation where this FHA feature could apply and be useful to you, please contact us in the sidebar and explain your situation in the notes section.

Paul Jackson over at Housing Wire put up an interesting article on the state of refinancing in the US. The upshot is that a lot more people are applying for refinances than the number of people who are actually obtaining refinance loans.

With rates quite low these days a lot of people are seeking to refinance. But with housing values dropping quickly, credit score requirements increasing, debt to income ratio requirements tightening, and job losses mounting recent numbers shat that fewer than 50% of refinance applications are funding.

In many cases government-backed loans give borrowers the best chance of getting approved for a loan. Contact us in the sidebar if you are interested in refinancing while rates remain low.

In what appears to be a growing trend, JP Morgan Chase (including its subsidiaries WAMU and EMC) recently announced it is expanding its loan modification program. In a recent press release the company said the following:

Chase announced today that it has extended its mortgage modification efforts to the investor-owned loans that it services — about $1.1 trillion of loans — significantly expanding the reach and effectiveness of its previously announced mortgage modification efforts. This effort includes investor-owned mortgages held in securitizations.

“When homes are foreclosed, everybody suffers, so working aggressively to modify all loans -whether owned by Chase or owned by others – on terms that should work for the borrower, makes good sense for everyone,” he said. “Our experience at Chase has shown that when mortgages are properly modified, using income verification and other appropriate criteria, they perform very well over time.”

This is welcome news for struggling homeowners who are delinquent on their mortgages. While the government programs are a great fit for homeowners who have not fallen behind on mortgage payments, loan modifications are currently the only solution for people who are more than 30 days delinquent.

As we have noted, the original Hope For Homeowners program signed in to law last summer proved to be a spectacular failure. The question now is if the program will just fade away or if the incoming chief of HUD in the Obama administration, Shaun Donovan, will try to revive it. Here is a quote from him in a recent Reuters news piece:

HUD has been roundly criticized for its implementation of a mortgage refinance program called Hope for Homeowners that was conceived this summer to rescue 400,000 troubled borrowers but has retooled fewer than a thousand loans.

“I think it’s clear to everyone that there needs to be some changes to make sure that program is effective,” Donovan said.

Doesn’t sound like a commitment one way or the other to me. We shall see I suppose.

The Fed is making good on its promise to purchase mortgage backed securities. According to this article more than $10 billion in such securities were purchased in the first week of January. The program is having the desired effect as well — mortgage rates remain very low. All good news to folks looking to purchase a home or refinance into a better rate.

Here is an excerpt from the article:

The Federal Reserve Bank of New York said it bought $10.2 billion in mortgage-backed securities this week as it launched a program to lower home borrowing costs.

The purchases are part of a $500 billion program announced by the central bank in November as a way to help stabilize the U.S. housing market, which has entered its third year of a downturn. The MBS — issued by Fannie Mae, Freddie Mac and Ginnie Mae — have rallied since the Fed announcement, sending yields that influence consumer rates sharply lower.

The average fixed 30-year mortgage rate dropped for a 10th consecutive week as of Thursday, to 5.01 percent, the lowest since at least 1971, according to a Freddie Mac survey.