Possible mortgage principal reduction

The Federal Housing Finance Agency will decide this month whether Fannie and Freddie should allow write downs on the balances of borrowers who owe more than their homes are worth.

Fannie and Freddie have been at the center of a tug-of-war over fixing the housing market. They have long resisted calls to write downn the balances on the loans in their portfolio, saying it would be too costly for taxpayers.

In the wake of the $26 billion mortgage settlement that will reduce principal for 1 million borrowers whose loans aren’t backed by Fannie and Freddie.

The agency, which regulates the government-controlled companies, had decided against allowing principal reduction after internal studies showed that alternatives such as adjusting monthly payments or forbearing principal were more cost effective.

Since then, however, the Obama administration has sweetened the pot. It tripled the incentives it will pay to Fannie and Freddie for reducing principal under the Home Affordable Mortgage Program, or HAMP. This has prompted the agency and the companies to redo their analysis.

Together, Fannie and Freddie have about 3 million loans that are seriously underwater, according to company filings. But three-quarters of these homeowners are current on their payments and may not qualify.

In the end, the number of eligible underwater Fannie and Freddie loans could range from a few hundred thousand up to 750,000, according to estimates. That’s not that much considering there are 11 million underwater borrowers in the U.S., just over a quarter of whom are behind in their payments.

If you have any questions please call or text Scott Groves at (818) 679-5188

Credit Standards

Everyone keeps asking me if credit standards for loans. Well it’s no surprise to anyone who has applied for a loan recently that banks are being far more careful. But a new report shows just how tight conditions have become — and how even borrowers with favorable credit profiles are being denied.

Loans closed by banks and mortgage lenders in February had borrowers with a credit score of 750, up from 740 six months earlier, and an average loan-to-value ratio of 76%. The average denied loan had a credit score of 699 and a loan-to-value ratio of 83%.

Most mortgages today are being backed by federal agencies such as the Federal Housing Administration or through mortgage-finance giants Fannie Mae and Freddie Mac. While lenders will still underwrite FHA-backed loans with credit scores of 620 and down payments as low as 3.5%, they have sharply tightened up their lending standards for Fannie- and Freddie-backed mortgages out of concern they’ll have to buy back the loan if it defaults.

For refinancing, the Ellie Mae report shows that the average borrower going through Fannie and Freddie had a credit score of 770, considered extremely high. (The highest score is 850, but not many borrowers are above 800.)

To get a different idea of how hard it’s become for some borrowers, consider this: the average credit score for a ”conforming” refinance mortgage through Fannie and Freddie that was denied in February stood at 720, which had traditionally been considered good credit.

Conforming loans approved to purchase new homes had an average credit score of 764 and an average down payment of 22%. Applications that were denied had an average credit score of 732 and an average down payment of 19%.

Moreover, Fannie and Freddie are charging higher fees to borrowers who have less-than-perfect credit or down payments of less than 25%. FHA borrowers tend to have less pristine credit profiles, though even that has changed. The agency has often served first-time buyers.

The average credit score for a refinance applicant who received an FHA loan in February stood at 722, up from 706 in August. Purchase loans backed by the FHA that were approved had an average credit score of 701 with an average down payment of 5%.

FHA loans could be harder for some borrowers to come by beginning this week, when a new rule took effect barring FHA loans to borrowers with outstanding credit disputes of at least $1,000. Previously, the restriction didn’t automatically bar someone from getting an FHA loan, though it did require court-ordered judgments to be paid off.

If you have any questions about credit scores or loan qualifications please call or text Scott Groves at (818) 679-5188 or email trustyourlender@gmail.com

Is Mortgage-Debt Forgiveness Worth it?

It’s been one of the most vexing problems of the mortgage crisis: Do policies to restructure loans for underwater borrowers encourage homeowners who don’t need help to default?

The federal regulator for mortgage-finance giants Fannie Mae and Freddie Mac said creating such a “moral hazard” is one of his top concerns now that the Treasury Department has offered to subsidize the costs of debt forgiveness for loans backed by the firms.

Right now, about three-quarters of homeowners who are deeply underwater on mortgages backed by Fannie and Freddie are still making payments. (“Underwater” borrowers owe more than their homes are worth.)

There’s been little research on the subject, in part because the speed and depth of the housing price-crash of the past five years has little national precedent.

One study suggests such concerns aren’t without reason. In 2008, Bank of America agreed to modify mortgages in a settlement related to allegedly predatory lending practices at Countrywide Financial Corp. A study published in January 2011 by economists at Columbia University concluded that Countrywide’s relative delinquency rate “increased substantially…during the months immediately after the public announcement of settlement.”

Moreover, the borrowers most likely to default after that announcement “were the borrowers least likely to default otherwise.”

Most modifications today reduce monthly payments by lowering the interest rate, extending the loan term, and offering forbearance, where payments aren’t required on a portion of the loan balance. So far, Mr. DeMarco says the performance of modified mortgages depends most heavily on how much a borrower’s monthly payment has been reduced—not the extent to which a borrower is upside-down on the mortgage. But advocates of write-downs say banks can design programs that help limit their appeal to only the most desperate homeowners.

One potential “friction,” for example, could limit the program only to borrowers who were delinquent at the time the program was announced. Others have suggested a debt-for-equity swap that would allow Fannie and Freddie to share in any future appreciation.

The program under consideration by Fannie and Freddie would only modify loans for homeowners who are already behind on their payments or highly at risk of default—and not all of those borrowers would receive write-downs under complex formulas that haven’t been made public. In other words, borrowers who default in order to receive help could end up getting nothing.

Some advocates of principal write-downs say that lenders may actually be creating a moral hazard today by failing to craft adequate solutions for deeply underwater homeowners

Mortgage rate are up

After many recent weeks where mortgage rates hit record lows, the 30-year rate jumped this week to its highest level since late October. The 30-year fixed-rate mortgage, a popular choice for most homebuyers, hit 4.08%, according to Freddie Mac’s weekly survey. That’s 0.16 percentage points higher than a week earlier and its first time over the 4% mark since October.

The average rate for a 15-year loan also climbed, to 3.30% from 3.16% last week. The 30-year rate has occupied a very narrow range for months, varying only between 3.87% and 3.98% all this year. Historically low mortgage rates have been a bright spot for buyers in a troubled housing market. Even after the rise, mortgages are still cheap. The increases add less than $10 to the monthly mortgage payment for every $100,000 borrowed.

If you have any questions please text or call Scott Groves (818) 679-5188

Younger Borrowers Are Turning To Reverse Mortgages

As you all know, reverse mortgages became popular right at the onset of the bursting of the American housing bubble. Financial planners used to recommend these somewhat exotic mortgage products only to elderly homeowners who would otherwise have no other alternative to make monthly payments to stay in their home. These borrowers were usually past retirement age.

It is now being reported that a little over 70 percent of borrowers who are considering refinancing into a reverse mortgage are not so senior after all. They are rather baby boomers who are about to enter retirement age. The majority are considering reverse mortgages to reduce their monthly household debt, and they are confident that their properties will continue to appreciate and gain equity.

It is not too far-fetched to see why the younger baby boomers are considering reverse mortgages. After all, most of them have grown up and lived their lives managing financial debt. If anything, reverse mortgages give them a chance to take a break from at least one monthly payment.

Cheaper Reverse Mortgages

The interest rates and fees associated with reverse mortgages back in 1999 made them prohibitive to most borrowers. Since then, the Department of Housing and Urban Development (HUD) has stepped in to make reverse mortgages fair and more affordable. HUD’s Home Equity Conversion Mortgage (HECM) Saver is the ideal product for those looking for a reasonable and compliant reverse mortgage.

Even HUD’s HECM Saver has some caveats for younger borrowers. This is a case in which younger age is not advantageous, for younger borrowers can expect to receive less cash or lower monthly payments than their older counterparts. There’s also the issue of risk; since baby boomers do not generally expect to have their children and relatives take care of them in these difficult economic times, missing a property tax payment or insurance could give lenders a reason to foreclose.

One in four baby boomers who seek reverse mortgages do so while carrying significant amounts of debt. These borrowers with higher debt obligations could see their home equity depleted sooner than they expect.

If you have any questions please either call or text Scott Groves at (818) 679-5188