Wednesday, December 19, 2007

Media stirring fears among Hispanics with foreclosure horror stories

If you told me what I am about to tell you, I would not believe you !

I received a call from a lady who had viewed a recent Mortgage Magic TV Show about market problems in general. She was concerned about her loan and wanted me to review her papers because she felt she had made some bad decisions. When she came in she kept talking about how she may have to live on the streets and was afraid that she would lose her home.

The first thing I did was review her loan papers. She has an Option ARM. But, it is a good Option ARM. The margin on her MTA is only 2.5 and her one year prepayment penalty has past. Her life cap is a very reasonable 10.5. The broker who helped her with the loan was honorable and treated her well.

She is a housekeeper and obviously could not show the income to qualify full doc. She purchased this home 3 years ago and with today's underwriting she would not get into the home. I explained the loan in detail to her and showed her that she now needs to pay at least the interest only because she is getting close to a recast of the payments. She understood that and said that she will start making the interest only payments.

She came to me because she was afraid that she would lose her house in foreclosure. Viewing her mortgage statement she appeared to be up to date but I ran a credit check to make sure everything else is OK. Are you ready for this? Her mid score is 750. I was stunned.
I asked her why she thought she would lose her home and she replied that all she is reading in the newspapers and hearing in the news is how Hispanics are losing their home to foreclosures because of these "horrible" Option ARM loans.

When I explained to her that she is in no danger of losing her home she actually started to cry from relief and asked if she could give me a hug.

Amazing. Here is a lady who is paying her mortgage and all other bills on time. She manages her money very well and has money in the bank. Yet, because of all of the negative media she thought she could lose her home.

The Power of the Media is tremendous and it can be abusive.

Doug Jones December 19, 2007

Friday, December 14, 2007

FICO Scores for Mortgages

I have never been a fan of credit scores. Miss a payment and your score falls dramatically but once you cure the problem the score increases very slowly. This reminds me of the way Congress presents tax increases or reductions; a $1000 a year increase is a "slight" increase whereas a $100 cut is a "dramatic" reduction.

Back in the 1980's I worked for a finance company which designed one of the first credit score systems. We were sued and lost the law suit and had to quit credit scoring. I was surprised when 10 or more years later the entire industry started using credit scoring.

Back to mortgages. Years ago I studied risk analysis for credit and determined that foreclosures are the result of (1) loss of job or income reductions (2) a major medical situation and (3) divorce. These are things that cannot be shown in a FICO score.

Today there was an article with stats from Countrywide that again reinforced my belief. Countrywide stated that 60% or their foreclosures are the result of a drop in the clients income. Sickness and divorce add another 20% or more. Way down on the Countrywide causes-for-foreclosure list, just under 2%, is payment adjustment.

We have a subprime crisis and it is interesting because so many of those subprime loans were approved on credit score alone. There were 100% loans approved with no proof of income so long as the borrower had a high credit score. If the loan was 100% then the loan to value was not a criteria for making the loan; if there was no proof of income, then the debt ration was not a criteria. Therefore the only criteria for making the loan was credit score alone. What a silly way to do business.

Doug Jones

Tuesday, December 11, 2007

Subprime Teaser Freezer Agreement

On December 6th, 2007, the Bush Administration announced an agreement among major loan servicing companies that is intended to help slow the foreclosure rate among subprime borrowers. In this article, we will cover three points. First, we will identify those who potentially qualify for this program. Second, we will discuss the benefits to both the borrower and the mortgage holder. Finally, we will tell you how to get started if you qualify for the program.

The program is targeted primarily at those borrowers who are currently in what are known as 2/28 or 3/27 loans. These two loan types represent the majority of loans that were provided to subprime borrowers. The interest rate is fixed for either two or three years, then adjusts. Typically, the first interest rate adjustment is in the 3% range. To illustrate the impact of such an adjustment, a $300,000 mortgage at 7% has a payment of $1750. At 10%, that same mortgage will have a payment of $2500. And this increase will take place in a single month.

To qualify for the Teaser Freezer Program:

-The property must be a primary residence. Second homes and investment properties don't qualify.
-The current mortgage must have been put in place between January 1, 2005 and July 31, 2007
-The start rate must adjust between January 1, 2008 and July 31, 2008
-The borrower can have been no more than 30 days late on mortgage payments within the last 12 months

Other qualifying factors:

Affordability - Can the borrower afford the higher payments?
Equity - Is there sufficient equity to refinance the mortgage?
Credit - Credit scores above a certain point may not qualify for the freeze

If the borrower meets the qualifications for this program, there are two potential solutions. The first option is that, if there is sufficient equity in the property and ability of the borrower to repay the loan, the bank may negotiate a new mortgage with the borrower under a streamlined approval process. The second option would be for the lender to simply freeze the initial interest rate for up to an additional five years. Either option is likely to stabilize the borrower's payments for a long enough time period for the borrower to avoid foreclosure.

The lenders will benefit from this solution as well. You will notice that borrowers who already cannot meet the teaser rate payments have been excluded from this agreement; these people are likely in such a position that they will be foreclosed upon or have to sell their homes in the near future anyway, so securing a payment that they are already unable to make will benefit neither the borrower nor the lender in these cases. The lenders want to avoid foreclosure wherever possible. A recent estimate showed the cost of a single foreclosure as $58,000 that the lender must absorb. In some situations, it's not unusual for lender losses to exceed $100,000 per foreclosed property. So collecting less than the planned interest rate on the mortgage securing a property that might otherwise go into foreclosure is a much better situation for the bank than having to absorb the cost of the foreclosure.

This is not a bailout; nobody gets to walk away free and clear. Those borrowers that negotiate longer fixed rate periods or new loans will have to pay the interest on those loans. They don't walk away with a lower interest rate, lower payments, or a larger house. The lender has to forgo the anticipated higher income from the loan; however, to be fair most lenders anticipated that the majority of these loans would be refinanced at or near the time of adjustment anyway. This program is not subsidized by any government agency. It's simply a make-sense agreement among the major loan servicing companies. And if it is successful in slowing the foreclosure rate, it will benefit everyone by more quickly bringing stability to the housing market.

Any borrower who potentially qualifies for this program needs to contact The Homeowner Preservation Foundation at 888-995-HOPE or where they can reach a mortgage counselor who will guide them through the process.

Article by Dennis Martin

Friday, December 7, 2007

Loan Points- Let the seller pay them

Here is a financial win/win that so few people know about. Realtors and sellers are frustrated because their listings are remaining stagnant. Home sales in many parts of the country are not moving. Buyers are frustrated because loan qualification has become more difficult and they need more money to close the transaction.

Many Realtors, lenders, and consumers do not know that the seller can pay the loan points and the buyer can write them off. Why is this so important? In most areas it is now a Buyers market and the Seller can entice the sale of their home by offering to pay the loan points. The buyer gets the write off and obtains a lower interest rate. Because the rate is lower, the buyer qualifies more easily for the loan.

If you are selling, consider this as a cost of doing business. Once you pay the points as a seller you also lower the gain on your home potentially reducing your capital gain tax liability. If you are buying, get the best interest rate by having the seller pay your points.

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Doug Jones has been a lender since 1968.