By now, everyone has heard of lender loan workouts. Very few however, know anything about how to negotiate them successfully. Many struggling homeowners have tried to contact lenders on their own, to be strung along for months without end, only to be told nothing can be done. Many have opted to take on the services of professional loss mitigation agencies to negotiate their loans, but they are often not informed of the loan modification timeline and how it works. Before entering into an agreement with any loss mitigation agency, you will want to have realistic expectations of the entire process. I am writing this short article to let the general public know what to expect, before relying on a strange 3rd party to save their homes. If anyone you know has concerns about using a loan modification agency, please feel free to pass this information along. I cannot speak for any other firms, but here's what you can expect from my agency, from the moment we first speak on the phone:

Understanding the Loss Mitigation Timeline  Loan Modification Demystified INTERVIEW - DAY 1 During our first conversation, I'll ask you to tell me about your situation. It is important that you explain everything that has led to your mortgage problem and why you are now seeking advice. Based on the information you share with me, I'll make an initial assessment of the possible resolutions with your lender(s). If it sounds like we may have a case, I will ask you to complete a short financial information form, detailing everything regarding your mortgage, credit and personal budget, as well as the amount of money you take home monthly. Ideally, we are looking to prove your financial hardship, while at the same time, prove that this hardship will be cured if the lender agrees to make changes to your loan. ASSESSMENT - DAY 3 Once you email me the completed financial form, I will immediately schedule a time for us to speak again. The goal of our 2nd conversation is for you to clarify the information you've provided and for me to give you my honest opinion of possible outcomes to a mitigation. If we mutually agree that there is real possibility for relief, I will then discuss your scenario with my agency to determine if we can accept your case. [The reason why I must first pre-qualify your case with my team, is because the agency offers a guarantee of resolution. If a favorable resolution is not likely or we are not confident we can negotiate a beneficial result, then unfortunately we will not be able to represent you. However, if it is determined that there is a real possibility for financial relief, then we'll accept you as a client and move things forward swiftly.] CONTRACT & AUTHORIZATION - DAY 5 After we have agreed to take you on as a client, I will forward a soft copy of our "Work & Trust Agreement" along with a 3rd party authorization to negotiate with the lender on your behalf. You will want to carefully review these documents and inquire with me on any clarifying questions. POSTING - DAY 6 After you sign and return fax the signed documents, I will then forward wire instructions for you to make your "initial posting" into our client trust account. The amount of this posting will be fully disclosed in our Work & Trust Agreement. NOTE: We do not collect your fee from the client trust account until the end, once your case has been resolved and closed. In the meantime, the funds remain as yours but are held in escrow by our firm. [The money that you have in our trust account will be treated similarly as the funds you wired into escrow when you first purchased your home. In comparison, your escrow company did not disburse your funds to the seller until the end, when the purchase of your home was finalized.] Upon wiring the funds, you may want to fax me a copy of the bank's wire verification so I can take next steps.  *Ask me about additional "good-faith" postings you'll be making to our trust account if you are presently late on your mortgage and we are negotiating a loan modification. Typically, your lender will reject partial payments if they are made on a delinquent mortgage. In lieu of sending payments to the lender, you will post your new target payment to the trust account every month to exhibit your willingness and ability to pay. If negotiations fail or if you refuse to accept the lender's final mod agreement, the funds in your trust account will be disbursed back to you. However, if we are opening up early negotiations in a situation when the mortgage is not yet late, we ask that you pay the lender directly, and on-time as agreed. CASE SUPPORT - DAY 7 to 14 Over the following week, I'll be in constant contact with you to collect the required support documentation to substantiate your case. Our negotiations are backed by hard documented evidence of the reasons why your lender(s) should provide relief and do it quickly. Until all of the necessary documentation is successfully received and verified, we cannot engage your lender(s). Requested items include but are not limited to: tax returns, bank statements, credit card and utility bills, W2s, payroll stubs, property tax statements, lease agreements (if any), and a letter of hardship. CASE PREPARATION - DAY 14 to 21 Once you've successfully faxed all of the required case support, my agency will work diligently to prepare your case for submission to the lender. This stage typically takes 5-7 business days to complete. If any inconsistencies or inaccuracies arise during case preparation, you will be informed immediately.  CASE SUBMISSION - DAY 21 Know that your case may be submitted to various governmental relief agencies, your lender(s), as well as the ultimate insurer of your loan (i.e. FHA, Fannie Mae, Freddie Mac) in order to get you the best possible relief. Once your package is verified as received by your lender(s), there will be a waiting period for your loan to be assigned to a negotiator on their side. It is important to know that lenders do have their own way of prioritizing loss mitigation cases for review. *Some lenders now have an automated underwriting process for this. The waiting period will depend on the severity of your situation and the way your specific lender(s) prioritize your case. NEGOTIATION - DAY 21 to 60 After your case has been assigned, negotiations will take place and hopefully a beneficial resolution will be reached. I say hopefully, only because no matter how strongly we negotiate your case, the lender can always resolve to do nothing. Be cautious of a loss mitigation agency that is overly optimistic to win your business. The lender has the ultimate decision making authority to accept a short payoff or modify your loan, and presently there are no laws that require them to do so -unless ordered by a judge in bankruptcy court. With that said, lenders have much more to lose in this housing market when they opt for foreclosure, so they will only exercise that option after evaluating all other remedies. Today, lenders will suffer tremendously if they refuse to modify loans where it makes better business sense to work something out. These are the cases that we accept. TERMS - DAY 30 to 60 Depending on how quickly your case is assigned and negotiated, you may be waiting 30-60 days on average, before modification terms will be reached. If the terms are deemed as fair, I will then connect with you to discuss the details of their offer. RE-NEGOTIATION - DAY 60 to 90 If the terms are determined as unfair, and we feel we can obtain more beneficial terms from the lender, your case will enter a RE-negotiation phase. *By the time I contact you with modification terms, we shall have arrived at the best possible result the lender would accept. MODIFICATION AGREEMENT - DAY 60 to 90 Due to the overwhelming requests for loan modification, the entire loss mitigation process typically takes at least 2-3 months for terms. If all is agreeable, you will then sign the final loan modification agreement as drawn up by your lender and make future payments as agreed. Depending on our negotiation strategy, other remedies can also be reached. For example, if a short refinance was in negotiation, you will then payoff your existing lender with a new FHA loan. If a short sale was in negotiation, you can begin to submit buyer offers for the lender to consider. *It remains your right to turn down any loss mitigation offer from your lender, so long as you are willing to accept the consequences of reverting to your original loan terms or ultimately losing your home. During the loss mitigation process, understand that your lender may attempt to contact you directly. Only a bankruptcy court can temporarily stop foreclosure proceedings or cease calls from their collections department. It is important that you continue to take their calls, but make sure to relay any communications to me. However, it is important to defer any loan negotiations to our agency, as to avoid confusion and potential conflicts with your case. Hopefully this helps make the loss mitigation process a bit more clear, and you now have greater confidence to face your lender. Please feel free to call me about your situation and find out your options.

Why work with Randy? My expertise comes from years of providing financial and mortgage advice. When you enter into negotiations with your lender, you want representation by an expert who truly understands the industry - not someone who simply sees opportunity to earn profits. When pre-qualifying for a loan workout, it is essential to work with a true professional who can assess your present situation and offer real solutions. Otherwise you might just get the runaround, and there is very little time to act when your lender is demanding full payment. Please, there is absolutely no cost for a preliminary phone consultation and no obligation to use my services. And unlike dealing with your mortgage company, at least you already know my real name. I look forward to making things better for you and your family. -Randy Miguel Flat Fee: $1475 to negotiate one mortgage; $595 for the second

 

PREDICTION: 6.5 million U.S. foreclosures by end of 2012.

-Credit Suisse Research Report 04/2008

 

SOLUTION: Federal Bailout to help 400,000 homeowners by Sept 2011.

-U.S. Government

 

Let's assume this prediction is accurate. To put things into clearer perspective, 6.5 million is the equivalent to 12.7 percent of all U.S. homes with mortgages. So let's also assume that this massive federal housing bailout will be the government's last, since there's only so much money they can print. Now let's do some simple math: 400000/6500000=6.15%. This means roughly 6% of the total foreclosure victims in the United States will obtain federal aid once the The Housing and Economic Recovery Act of 2008 takes effect in October of this year.

 

6% of Americans facing foreclosure within the next 3-4 years can *possibly* benefit from this Federal aid, named the "Hope for Homeowners Program." This financial housing assistance will come in the form of a new FHA (Federal Housing Administration) refinance to get delinquent borrowers out of loans they cannot afford and into permanently fixed interest rate loans they CAN AFFORD. Most mortgage brokers refer to this as an FHA "short refinance" because the existing lender will have to accept a short payoff (for less than what is owed) in order to make this work. ALL HOMEOWNERS THAT CAN QUALIFY FOR THIS FEDERAL HOUSING AID SHOULD NOT HESITATE TO APPLY. The benefits far outweigh what you must agree to in exchange.

 

How do you know if you could be one of the lucky 6%? You can narrow down the possibility by finding out how one would even qualify for the Hope for Homeowners Program. Let's take a minute to review some of its key highlights.

 

The Hope for Homeowners Program will give you:

 

• A permanently fixed 30yr FHA loan

• 10% of renewed equity back into your home

• What more can you ask for? It's a fresh start and you can call your home a true investment once again.

 

In order to qualify for the Hope for Homeowners Program you must:

• Live in and own your ONLY HOME. Anyone holding investment property or a 2nd home is automatically disqualified. *If this is you, please read below for alternative relief.

• Be able to prove ON PAPER that you can afford the new principal and interest payment, plus monthly mortgage insurance, property taxes and hazard insurance. *Find out if you can income qualify now.

•  Be late or in danger of foreclosure.

• Be willing to acknowledge that you did not intentionally go late in order to qualify for the program. Otherwise, fines and federal incarceration will apply.

• Be willing to share future equity with the federal government.

 

If you've made it this far, you must be able to convince your lender to:

 

• Write down the principal balance down to market value PLUS an additional 10%, which I would strongly advise against doing on your own. Here you've got only one shot at presenting your situation in such a way, where the lender agrees that a short payoff is better for them in the long run. Know that the pending legislation will in no way require or incentivize your lender to agree to take less money than you originally committed to pay. A professional loss mitigation agency can help you prove that it is in the lender's best interest to accept less. Remember only 400,000 homeowners will be helped and you want the best representation to make sure you are one of them.

 

Still think you can be one of the lucky 6%? Maybe that's why it was strategically called HOPE for Homeowners Program, because that's all it really is? Please don't misunderstand me. I applaud the U.S. government for stepping in to offer help, and in my opinion, this crisis housing situation was collectively brought about by us Americans pursuing the American Dream- to own a home no matter what the price. In retrospect, the government should have stepped in years sooner, but we the people would have despised the feds for interfering with the free market - which would have been very UNAmerican. Without putting the blame on any one group of people, agency, or bank, this is an unfortunate circumstance that must be dealt with. The Hope Program is great, but it's too restrictive and just not enough. Although some goverment assistance is clearly better than none, most of us simply cannot rely on the feds to bail us out. If you cannot qualify for federal assistance but your home will certainly fall victim of foreclosure if nothing is done, please take matters into your own hands and seek professional help.

 

Here are some home retention alternatives that are available today (in order of greatest net benefit to the homeowner):

 

SHORT REFINANCE (GREATEST)

A short refinance is where your existing lender agrees to a short payoff, by reducing your principal balance to market value PLUS enough to cover the new lender's equity requirements AND refinance closing costs. In many ways, this is exactly what the Hope for Homeowners Program offers. However, the key difference here is that successful short refinances now happen in cases where the borrower is NOT late - the reason being, you will not qualify for a traditional FHA refinance if you have been late on your mortgage within the past 12 months. *The exception is FHASecure, where the program grants exceptions to those borrowers who have gone late as a result of an interest rate increase. If you are successful with a short refinance, you will not have to share your equity with the government. In fact, all of the loss mitigation alternatives mentioned here will not require that. Why an FHA refinance and not a conventional or jumbo? FHA guaranteed loans are the only ones that will refinance up to 95% of a home's market value. Otherwise, your existing lender would have to write down enough to give you 10% equity to qualify for a conventional loan PLUS more to cover closing costs- and that's simply not going to happen.

 

SHORT MODIFICATION (GOOD)

A short modification is where your existing lender agrees to write down your principal balance to an amount you can afford and re-sets your loan terms to a 30yr fixed payment. Loss mitigation efforts that result in short modifications most often happen in cases where the borrower is seriously delinquent and cannot qualify for a new refinance loan. An example of a case, where a short modification might be considered, is in satisfying all of the qualifications for the Hope for Homeowners Program EXCEPT the requirement to own only one home. To explain why a short modification may be less desirable than a short refinance, in a short mod the principal balance may not be written all the way down to market value. It is possible that you may not afford a principal and interest payment at your present loan amount, but you could afford it if it were brought down partially lower (but perhaps not as low as market value). On the other hand, in a short modification there are no refinance closing costs due to the fact that your existing lender simply modifies the balance and terms of the original note.

 

TRADITIONAL LOAN MODIFICATION (OK)

A "traditional" loan modification is where your existing lender modifies the terms of the original loan agreement, without writing down the balance. Traditional loan modifications typically stop an interest rate from re-setting, where you could otherwise afford to pay. Traditional loan modifications are permanent solutions, with no future adjustments to the interest rate and payment after the new agreement is in place. This could be considered permanent financing without having to refinance into a new 30yr fixed loan.

 

SHORT-TERM MODIFICATION (ACCEPTABLE)

Now short-term modifications offer the LEAST benefit to the borrower, while giving the GREATEST net benefit to the lender (or their investors). Short-term modifications happen mostly in situations where a borrower attempts to work out a loan modification directly with their bank. This is a temporary solution that makes your payments more affordable until something else can be done. What that something else is, is simply more time. Because banks would rather keep the original loan terms intact, they can offer temporary relief in hopes that the market will recover OR you the borrower will soon make more money. For you this means your home will not foreclose now, but it will instead delay the process until your short-term mod agreement expires. At the time of expiration, your loan usually re-sets to the original terms that put your home in jeopardy in the first place. With all of that said, a short-term modification might be the only option the lender will offer, but you at least avoid foreclosure and remain in your home.

 

If you're like me, you've probably spent countless hours researching loan modification solutions for your home and family, and this is only one of the many articles you've read on the topic. But hopefully, I've been able to introduce some new possibilities here that you haven't yet come across. Remember, the idea of a lender to make a financial sacrifice for a borrower is a completely new concept for them, so it may take time for short refis and short mods to become more widely accepted. As is it now, it doesn't look like lenders have very much collateral to secure their debt. As their collateral continues to fall further and further down, they should start to accept short payoffs by the millions. Just be patient and don't lose HOPE.

 

Pre-Qualify for a Short Refi Now

 

 

by RANDY MIGUEL | Loan Modification Counselor

Equitas Capital, Los Gatos | Associate Broker

Morgan Financial, Granite Bay | Direct FHA Lender

Office. 408.216.7274

Fax. 866.876.8514

http://www.randymiguel.com

 

Right now, we are witnessing first-hand the worst real estate crash in U.S. history. Someday many of us will look back at years 2007-20?? and say, "Yeah, those were the days when we owed more than our houses were worth." But in the present day, in the midst of our housing crisis, we must decide what to do about it. Bottom-line is, nobody wants to lose their home, but most would rather lose that than lose money- and keep on losing it. So do I sell short or walk away? These are two things that come to mind when homeowners think about their equity lost and cutting their losses short. Unfortunately, both of these choices involve moving out of one's home and all of the trauma that goes along with it. There's hardly a bright side to either one, but what if there were another way? Today, I want to give you an alternative option to consider, which may also be for the greater benefit of our national economy: SHORT REFINANCE.

Fed Chairman Ben Bernanke said it best,
"With low or negative equity... a stressed borrower has less ability (because there is no home equity to tap) and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure."

 

In layman's terms, reduce the loan balance or else the house forecloses. The easiest way for me to explain the way a short refinance works is to draw the analogy between that and a short sale. By now we've all heard or spoke about someone short selling their property, typically because they can no longer afford the payments and cannot sell it at a high enough price to payoff their existing lender. In a short sale, the lender's potential losses- by having to foreclose on a home and incur the costs of re-selling it on the open market- are reduced by accepting a buyer's offer for less than what is owed. Obviously, no bank or investor wants to accept a payoff of less than what they originally lent out, but by not accepting such an offer they run the proven risk of recouping far less than that later. Most importantly, a short sale pays the bank whatever they can get for the home NOW. In finance, we like liquidity and appreciate the time value of money. A bank can use this partial payoff and quickly re-allocate it to less risky borrowers who pay on time, thereby realizing an immediate profit. It takes at least 6 months for a bank to recover a home once a borrower misses their first payment! As bank's must report quarterly profits, 6 months can be an eternity for them to wait their money. [With new CA foreclosure protection bill SB 1137, lenders could expect it to take even longer!] Okay, I think we can all agree that a short sale may be in a bank's best interest if doing nothing can result in greater losses. The concept of short refinancing works in the exact same way, except in a short refi the current homeowner remains the homeowner. Let's compare these two concepts more closely:

• In a short refi, the lender accepts a payoff for less than what is owed, just like a short sale. This is fairly easy to understand, as a full payoff would be considered a straight forward refinance.

• In a short refi, the lender should reduce the principal balance for LESS THAN the true market value of the home. This may not be so simple to comprehend as one might think the bank would be giving up more money than necessary. However, if a lender does not leave some equity in the home, a new lender would not take the risk of refinancing it. Its investors require a little cushion in the event that property values drop further. Presently, the highest loan-to-value ratio loans are being offered by FHA (Federal Housing Administration), which are capped between 95%-97.5% depending on loan amount. Even at these high levels, banks must write-down an additional 2.5-5% in order for an FHA guaranteed loan to come to the rescue and pay them off. 2.5-5% is not too much to ask, considering the bank would pay realtors a 6% commission for short selling the same home (not to mention the added closing costs). The new FHA bailout plan calls for lenders to forgive principal balances down to market value PLUS an additional 10%! *The FHA bailout is targeted towards delinquent borrowers, which is not being discussed here. More on this topic later...

• For a short refi, YOU DO NOT HAVE TO BE LATE, unlike a short sale. *If you are or have been late, ask me about a "short modification." In fact, most refinance options are limited if you have been late on your mortgage. Present underwriting guidelines for FHA loans do not allow mortgage lates, unless those lates happened AFTER an Adjustable Rate Mortgage payment increase (See FHASecure). On the other hand, you may need to prove that there is imminent threat of becoming late if they decide to do nothing. For instance, you have a negative amortization loan that will balloon in payments 2X what you are paying now, and you will certainly default if the future payment is not reduced. Threatening to walk away, simply because there is no equity, may not justify a short refinance.

• To enter into a short refinance negotiation with your lender, you do not have to wait for Congress to pass the FHA bailout plan (a.k.a FHA Housing Stabalization and Homeownership Retention Act of 2008). Short refinancing involves direct negotiation with your lender, at your lender's option, just like a short sale. Laws do not need to be enacted before a lender can agree to accept a lesser sum for payoff. For them, this is purely a business decision. NOTE: Lender participation in the pending FHA bailout is also completely voluntary.

• To enter into a short refinance negotiation with your lender, you should be able to prove financial hardship, just like a short sale. It may be difficult to convince a lender to reduce the total debt owing if you can truly afford to pay it. Remember, a lender may not be willing to accept less money unless they risk losing more by doing nothing. Lenders are aware that many borrowers would rather continue paying on their high cost mortgages instead of sacrificing their good credit. At the same time, you must be able to prove ON PAPER that you can afford principal and interest payments at the reduced loan amount.

• For a short refi, you may want to take on the services of an experienced Loss Mitigation Agency to pre-qualify and negotiate your case. Beware of Loss Mitigation / Loan Modifcation Fraud. Many fly-by-night companies have sprouted to take advantage of homeowners in distress. My partner-agency has been in the business of loss mitigation for over 23 years. The charge for my services is a flat fee of $1475 per lien, charged only after your case is closed.

If they are so similar, why aren't short refis as common as short sales? I think it has a lot to do with banks having to deal with the idea of rewarding their borrowers for not honoring the original terms of their agreements, and the domino effect of having to reduce balances for otherwise "good loans." Things are different now. Banks have greater incentive to workout terms with existing homeowners, since their repos simply aren't selling. Besides, I think we're way past the concern of rewarding speculators and investors who made bad investment decisions. The overall health of the national economy is at stake.

Since early 2007, I have been deeply concerned about how I can assist my clients who have zero or negative equity in their homes. Finally, I can help. It is my strong belief that offering home loan and loss mitigation services now go hand-in-hand, as many home sales and refinances cannot and will not happen unless principal balances are negotiated DOWN. Please stay tuned for my follow-up newsletter on "short modifications." But if you must know now, visit my website at http://www.RandyMiguel.com. Hope you found this information helpful and feel free to pass it along.

RANDY MIGUEL
Equitas Capital, Los Gatos | Associate Broker
Morgan Financial, Granite Bay | Direct FHA Lender
Office. 408.216.7274
Fax. 866.876.8514
http://www.randymiguel.com

 

The other day I picked up a for-sale brochure from a home across the street. It was no surprise to see it listed for $150,000 less than what mine appraised for 2 years ago. Nothing new. This is the same old story that we've heard for the past year and a half. But now it is becoming increasingly common for me to see principal loan balances that are substantially higher than what their collateral properties are worth. Presently, a homeowner in this upside-down dilemma has the following options:

1. Continue making the mortgage payment in hopes that the market will recover.
2. Negotiate with the lender for a work out agreement (a.k.a. loan modification).
3. Sell the home for less than what is owed to the lender (a.k.a. short sale).
4. Walk away.

For the person with an adjustable loan, option #1 may be feasible so long as the fluctuating payment remains affordable. Since it is next to impossible to refinance an upside-down home, option #2 is the next best alternative. But due to a backlog of requests, 90+ day late cases have become the lenders' top priority, which makes loan modifications more difficult to close. To exercise option #3, one must wait for a serious buyer and then negotiate with the lender(s) to settle for less than what is owed. Unfortunately for many Americans, there is very little time and money, so option #4 has been an exceedingly popular choice. I am not writing this blog to tell you how bleak our housing situation is, but rather to give some troubled homeowners a reason to stick things out just a little while longer.

You may have heard of a government rescue plan designed to slow down the rate of foreclosures across the United States. Its short name is the "FHA Housing Stabilization and Homeownership Retention Act of 2008." Essentially, it encourages lenders to REDUCE principal loan balances, which will give homeowners real incentive to continue paying on their homes. Here are some brief bullet points taken from the proposed plan:

• A lender must be willing to forfeit any amount owed above true market value PLUS an additional 10% equity.
• FHA will guarantee the new loan amount, up to 90% of a home's true market value, on a 30yr fixed rate.
• Borrowers must occupy the residence as their primary home AND be able to provide sufficient income documentation that proves they can make the new monthly payments.

What's the catch?

• A borrower must pay an extra insurance premium to FHA for backing the loan.
• Future equity must be shared with the government if the loan is refinanced or the property is sold. The split would be the greater of 3 percent of the new loan amount or 50 percent of the profits on the sale.
  

If I may speak directly to those people who this might benefit: It's not a bad deal at all, especially if you could end up owing substantially less than what you do now. On top of that, you get a fixed rate, a reduced payment, and a real chance to payoff your home in 30 years.

Who stands to benefit?

The Congressional Budget Office estimates that up to 500,000 U.S. homeowners would qualify for the program.

Why are they doing this?

There is very little that the free markets can do to correct our credit and housing problems in our nation. Without immediate government intervention, the rate of foreclosures may rise faster than our fragile economy can handle, which can only lead to further devaluation of U.S. homes and an economic recession.

When is this going to happen?

On May 8th, the House passed this bill on a 266-154 vote. On May 20th, the Senate Banking Committee passed their similar version of the plan by a 19-2 vote. They hope to have this bill up for a full Senate vote and in front of the President before July 4th. If things go as I hope, this bill will become law by October 1st.

How can you participate?

Given that lender participation in this plan will be completely VOLUNTARY, I expect that this will involve intense negotiation through loss mitigation efforts with lenders. Borrowers will need assistance to convince banks that it makes financial sense to write-down the balances on their loans. If you or anyone close to you could benefit by re-gaining some real equity, please email me a quick response. We can get a head start by 1) assessing your qualifications for this program; 2) evaluating the net write-down benefit on your loan; and 3) calculating your new future payment. I look forward to hearing from you.

Hope all is well,

Randy Miguel
Associate Broker, Equitas Capital

Home financing may never be the same again.

As much as I think I know about mortgage, it's been challenging to keep up with who still does what and which banks are still in business. Due to limited equity in homes and tightening loan qualification criteria, I can't be so confident anymore that I will be able to refinance my clients' loans when their fixed payments become adjustable. If you are one of the fortunate ones with some equity, I would highly suggest exploring your options now. Things are changing in this industry daily, and I believe you could benefit from what I've been able to gather from my direct lending experience. Knowing how this information may directly impact you, your homes, and your family will be important when it comes time to make a critical financing decision.

Refinancing will likely not reduce your payment, but quite the opposite. And this is a good thing.
 
In the past few years alone, lenders have introduced countless mortgage options from negative amortization loans to zero payment programs to 125% financing! As you know, this led to an incredible surge in home values driven by people's desire to leverage the lowest possible payment for the largest possible home they could "afford" -- which ultimately led to, the worst housing market the United States has seen since the Great Depression. Depreciating value is certainly something that us homeowners are not used to, and the limited loan programs available for people to refinance or buy homes of such reduced value reflect the banks' resistence to lend in this market. For example, equityline 2nd mortgages which once accounted for more than 25% of my business now constitute a whopping 0%, because most lenders no longer offer them. What this means to borrowers is that it may no longer be an option to split a loan into two in order to obtain a reduced rate. You may have once taken out an 80% 1st mortgage and up to the remaining 90% (or 100%) on an equityline 2nd. Today you'd have to take out only one loan, and if it's greater than 80% you'd also pay a monthly "PMI" insurance premium to protect the lender from default. On top of that, the mortgage insurance companies have been less likely to insure loans with limited equity, so although a lender might approve such a loan, they may not be able to fund it without a willing insurer. Don't get me wrong, if you can refinance into a 30yr fixed with PMI, it's still wiser than gambling on a short-term adjustable rate. The payment may be higher, but your payment is permanently certain.

So what are people to do if they owe more than 80% of what their home is worth and they cannot get a traditional bank loan?
 
Well that's where the Feds come into the picture. FHA (or Federal Housing Administration) will guarantee a bank up to 97.5% of a home's appraised value if borrowers can prove they can afford the monthly payments, even with troubled credit. Comparable to (but less than) a monthly PMI fee is an annual FHA insurance premium of .5% of the loan amount, which is paid monthly. And for a home purchase, a seller can assist in the downpayment and closing costs by contributing up to 6% as a seller credit to the buyer. *In this buyers' market, sellers are very willing to contribute money to cover buyers' closing costs. I know I've mentioned this before but FHA limits have been TEMPORARILIY increased this year along with conforming limits, so people now have a short opportunity to buy beautiful homes at reduced rates with very minimal down. There has been debate in extending these limits beyond 2008, but nothing official has been declared yet.
 
Sadly in real estate, one person's loss is truly another person's gain, and for first-time buyers there are so many reasons not to wait any longer. At some point in the future, when existing homeowners finally break even on their home investments, recent buyers will have gained sizeable equity. Furthermore, there are several bills now in congress to assist our ailing housing market, including greater incentives for buyers of foreclosed homes and solutions for 100,000+ homeowners who now owe more than their homes are worth. Due to limited equity in people's homes, FHA loans now account for more than 35% of my transaction volume. FYI, FHA rates are unbeatable.
 
VA (Veteran's Administration) loans are even more attractive, where borrowers can finance up to 100% WITH NO PMI. *In general, VA loans are more restricted to homes at or less than $417,000 because VA will only guarantee 25% of this maximum loan amount to the bank, so purchases higher than $417k will typically require cash to pay down the difference (but there are exceptions for higher cost areas). This would explain why VA loans do not require mortgage insurance, because the bank essentially risks only 75%. And of course, you must be a veteran or an active reserve to qualify. However, because FHA/VA do invlove higher closing costs, I would encourage looking at traditional loan options first (*although an FHA or VA loan might be lower in rate). The simplest way to describe traditional loans in 2008 is to group them into categories based on loan amount. For purposes of this memo, I'll detail loan present loan limits for Santa Clara County: *Click here to view conforming limits in your area.

• $0-$417,000 are called "conforming"
• $417,000-$729,000 are now known as "jumbo conforming" because the increase to the traditional conforming limit is only temporary
• $729,001 and up is the new "jumbo"
• from my experience, "super jumbo" loans greater than $1MM are extremely challenging to obtain as sufficient equity, income and assets must be proven for a bank/investor to be willing to lend.

For simplicity sake, as you go up the tiers from traditional conforming to super jumbo loans, interest rates become dramatically higher. If borrowers can qualify for one of these loans, they have more options in terms such as choosing interest only or shorter fixed rates. Although many options still exist for traditional loans, I would encourage borrowers to lock a 30yr fixed even though a principal and interest payment can be much higher. For the majority of lenders "stated income" loans, where you show no income documentation, are becoming more and more scarce -but they are still out there. Lenders are now more concerned about your ability to payoff the loan over the long haul, as they can no longer count on sufficient collateral to cover their risk. Unfortunately in the short term, many people will suffer from downward spiraling home values and ballooning loan payments. But there is a bright side. Once adjustable loans inevitably expire and this wave of foreclosures finally calms down, I think it's safe to say that we can all look forward to a stable real estate market, where people can truly afford their homes.

Thank you for taking the time to read my mortgage update. Please feel free to send me an email or give me a call to discuss if any of these options might make sense for you. Unfortunately for many of us no equity means no refinance, so I also offer services in Loss Mitigation, where it may be necessary to negotiate directly with your lender if there really is no other option. All information shared will be kept strictly confidential. 
 

by Randy Miguel | Serving all of California
Associate Broker, Equitas Capital
FHA/VA Specialist, Morgan Financial
408.216.7274

About Me
 
Randy Miguel grew up in the Bay Area and attended Bellarmine College Preparatory in San Jose, California. From there, he went on to Santa Clara University where he earned a Bachelor's Degree in Finance. In 2004, Mr. Miguel established RefiWise, Inc. which later became known as WIRE Financial, a full service mortgage firm located in Santana Row of San Jose. In 2007, he and his family relocated back to their home near Sacramento, CA. Now as an active associate broker of Equitas Capital, he offers 12 years of banking and consultative loan experience to a diverse client portfolio, offering private "hard-money" financing to top tier A-paper loans. Additionally, Randy offers services in loss mitigation and direct lender negotiation in situations where refinancing is not an option. In such an uncertain economy, he commits to educating home buyers on the inherent risks of adjustable vs. fixed rates. Mr. Miguel prides himself in making sense of the fine print, so his clients can make the most informed decision about their home financing.