Foreclosure help another first step

Fannie Mae and Freddie Mac have a new plan out to help homeowners facing foreclosure.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

This plan differs from the housing bill passed in August. The original plan allowed borrowers to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This required that the current lender agree to write down the loan, which is at their sole discretion. Even though it was in the best interest of the current lender (they would likely lose more money by going forward with foreclosure), very few loans were modified.

This new plan removes the stipulation that the current lender agree to the modification, but also does not write down the principal amount of the loan.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."

Another major issue in this loan modification is that it does not address a majority of the loans likely in or headed to foreclosure - subprime loans.

Though Fannie and Freddie own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

This plan is an important first step, and hopefully its success will encourage private lenders to follow suit. As always there are no simple fixes to complicated problems, and it will take some time to dig our way out of the mess we have created, but this is an encouraging step.

Full article.

Housing bill

The "American Housing Rescue and Foreclosure Prevention Act of 2008" was passed by both houses and signed by the President on July 30, 2008. The measure provides mechanisms to help the troubled housing market as well as tighten lending practices and reform financial institutions. Though the 238 page law can be found online, I thought I’d hit a few of the highlights here.

One of the provisions garnering the most attention is the program to allow homeowners in danger of foreclosure to refinance into a new 30 year fixed loan. At a glance, the bill provides that the homeowner would be eligible to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This requires that the current lender agree to write down the loan, which is at their sole discretion. However, it is estimated that banks would lose an average of $25,000 to this program vs. $64,000 by letting the house go to foreclosure. As a trade off for this opportunity, any future appreciation realized in the home would be shared with the FHA.

The bill also creates an independent regulator to oversee both Fannie Mae and Freddie Mac, while increasing the dollar amount of loans they can buy or guarantee from $417,000 to a maximum of $625,000 (based on individual markets). FHA down payment requirements increase from 3% to 3.5% as well, and the bill provides an additional $4 billion for hard-hit communities to buy and rehabilitate foreclosed homes.

One bright spot in the legislation is the tax credit for first-time homebuyers. A taxpayer is considered a first-time homebuyer if they have had no ownership interest in a principal residence in the last 3 years. If your home purchase closes before June 30th 2009, you may be eligible for a tax credit for 10% of the purchase price, up to $7,500. This is a credit, not a deduction, so it can wipe out what you owe and get you a refund as well. It does phase out at certain income levels.

However, this is not a gift. The credit must be paid back over a 15 year period ($500 a year for a $7,500 credit). If you sell the house before that time, the remaining repayment will come from the gain. If there is not enough, or no gain at all, you will not be required to make up the difference. In essence, the tax credit is an interest-free loan with the government taking all the risk on house appreciation. Plus with the time value of money, you will be paying back less than you received. This is a great benefit to first-time homebuyers, and could give the market a little boost.

What 80% of buyers find out the hard way

That their loan officer sabotaged their home purchase.

In speaking with a number of Escrow Officers, they estimate that about 80% of people signing their loan documents when buying their home are surprised to see that the rates and fees are higher than they were told. They try to reach their loan officer on the phone, but no one answers. Do they sign for the loan with worse terms, or do they risk losing the house?

Law requires that, if requested by the borrower, the closing statement figures must be given one business day in advance. Without this review, clients see the final figures for the first time at the closing table when they sign their papers. Victims of these bait-and-switch tactics are put on the spot and usually sign the papers with these higher terms in place.

There are several advantages of using an Integrated Agent from The Real Estate Group when purchasing your home. Integrated Agents are both real estate agents as well as mortgage loan officers. Your Integrated Agent will have all the important figures at hand throughout your transaction, so you will always have up-to-date figures available to you. Also, typically a real-estate agent will be with you when you sign your papers, but rarely/never your loan officer. As we are one in the same, you will have both at your signing to explain every figure and answer any questions.

An Integrated Agent from The Real Estate Group is your strongest ally in buying or selling your next home. Please call me or drop me an e-mail if you are interested in learning about the best way to buy a home.

Houses are growing as families are shrinking

Nationally the average household has shrunk slightly since 1990, to 2.6 people. However in the same period, the average new house grew 400 square feet to 2,434. One in five American homes had at least 4 bedrooms in 2005. That is up from one in six in 1990. Locally 20.7% of homes in Washington have at least four bedrooms, up from 18.3% in 1990. Houses are growing in size as families shrink, even though cost of materials, labor and energy to heat and power the homes rise.

Some communities are fighting back, though their motivations are not likely ecological. In the Seattle/Bellevue area it has been a popular practice to tear down an 1100 square foot rambler and replace it with a 4,000 square foot home that bulges up to the property line. These “McMansions” as they are called overpower their neighbors and do not fit in with the neighborhood. Neighbors are fighting back and trying to get their cities to regulate the tear-down/rebuild practice.

Seattle is considering:
· Shrinking the height limit from three stories to two.
· The house can occupy only 35% of the lot. Currently it is 35% or 1,750 sq. ft., whichever is greater. This means a 1,750 house can be built even if the lot is under 5,000 sq. ft.
· Replacing multiple houses with one large one would also be prohibited.

Bellevue is considering:
· Requiring a certain percentage of trees on the lot to be preserved, possibly up to 15%.
· Measuring the height of the home by grade before construction begins. Some developers have changed the grades of lots dramatically to get around regulations.
· Requiring weekly removal of debris, distributing guidelines to developers, posting of informational signs before construction, and cleanup of abandoned work sites.

The cities are weighing the regulations against concerns over property rights and effects the regulations will have on home builders. Of course the larger homes often mean higher tax revenue for the cities, so I am sure that is a major factor in their decision.