She originally bought her condominium for $77,500 in 1997. As her condominium appreciated in value, she refinanced a couple of times and took out a home equity loan adding to her mortgage balance. Cashing out of her condominium as the condominium price appreciated during the inflating period of the housing bubble allowed her to retire some credit card debt, and pay for a new car and a new roof on the house.

After losing her job, she struggled hard to keep making her house payments for a while, but she pulled it off somehow. Finally, when it was clear she wouldn’t be able to do that anymore, she called the bank for a loan modification.

Even though she was eligible for it, the bank turned her down. The bank very cleverly asked her to hand over $18,000 including $5,000 in fees after which the bank would be able to cut down her monthly payment from $1046 to $967 or by $79 per month.

It appears the bank was taking the extra money, putting a large part of it into paying down the balance to bring loan to value within the 105% requirement of the Making Home Affordable Refinance Program, and then offering a refinance to Ms. Ulery. Of course, the bank’s solution doesn’t help or solve Ms. Ulery’s looming delinquency problem because the new mortgage payment would still not be affordable for her even if she could somehow find $18,000.

This example is pretty typical of how rational decisions are made by lenders and mortgage servicers. Ms. Ulery is eligible for loan modification as per Treasury’s guidelines for the loan modification program, but of course, the lender/mortgage servicer is NOT REQUIRED to offer it to her.

Offering loan modification to her would mean taking an immediate financial hit for the lender, which they could delay or at best avoid altogether. Ms. Ulery has been regular with her mortgage payments so far. She seems to want to keep her house and credit score, and might find a way to keep making those payments. If she were to stop making her mortgage payments and foreclose, then the bank would take a hit. But obviously, she is not at that stage yet.

That brings up a discussion of Ms. Ulery’s attempts to stay current on her mortgage and seek relief. The Making Home Affordable Program can help her some, but only when the lender/mortgage servicer finds helping her to be a better option (less costly) than not helping her and allowing her to foreclose on the house. It would seem the rational thing for Ms. Ulery would be to move toward foreclosing, because that could be an incentive for the lender to work with her.

It is unfortunate that the two parties seem to have to game their response to make the system work in their short and long-term benefit.

Ms. Ulery should also look into the Hope for Homeowners (H4H) Program. If she has a good credit history to qualify for a FHA mortgage, she could have her principal balance reduced to 96.5% of her home value. She will have to pay mortgage insurance, but at least in theory she could have a lower payment schedule. In practice however, looking at the history of H4H, the likelihood of her actually getting a H4H refinance are not very high.

What do you think? Should she stop paying her mortgage and then try a loan modification with the bank?

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Source: www.ehow.com

The Obama administration has been coming out with a slew of programs to stop the ongoing foreclosure hemorrhage in housing industry. Treasury came out with the Making Home Affordable Refinance and Modification programs earlier to help defaulting homeowners. Next came the Second Lien Program. Treasury also modified the Hope for Homeowners (H4H) program. Since then, Treasury has come out with the Foreclosure Alternatives and the Home Price Decline Protection Incentives Programs.

Foreclosure Alternatives Program

The Foreclosure Alternatives Program provides incentives to a homeowner and the mortgage servicer to pursue short sales of homes or deeds in lieu of foreclosure. Troubled Borrowers meeting the minimum eligibility requirements for a Home Affordable modification but unable to qualify for a loan modification will receive up to $1,500 to help with relocation expenses when they agree to a short sale or deed-in-lieu of foreclosure. Mortgage servicers will earn up to $1,000 for successfully completing the short sale or deed-in-lieu.

The Foreclosure Alternatives Program provides for a simplified and streamlined process, time frames, and standard documentation for short sale and deed-in-lieu. More details on the program are available here in this webpage on Treasury’s website.

Home Price Decline Protection Incentives Program

In neighborhoods where home prices are continuing to decline presenting a disincentive to the lender to do a loan modification, the Home Price Decline Protection Incentives Program provides additional cash incentives for two years after loan modification with the amount of the incentive linked to the decline in local housing prices. More details on the program are available here in this webpage on Treasury’s website.

Helping Families Save Their Homes Act of 2009

Last week on Wednesday, President Obama signed into law the Helping Families Save Their Homes Act of 2009. The Act modifies the Hope for Homeowners Program by reducing fees and providing greater incentives to mortgage servicers for loan modification. It also makes the underwriting requirements more consistent with standard FHA practices.

The Act also provides a safe harbor from liability to mortgage servicers performing a loan modification consistent with Treasury’s programs or utilizing Hope for Homeowners. Investors lobbied heavily against the provision claiming sanctity of contract law but lost in the end. Congress had earlier rejected mortgage cramdown, that is, mortgage modification by a bankruptcy judge. The safe harbor provision has been presented in as an alternative to bankruptcy cramdown.

The Impact on Foreclosures

Is the full force of the federal government as reflected in these various initiatives going to root out the drumbeat of foreclosures? I think these programs only tinker at the edges of the problem. In the end, these programs provide incentives to avoid foreclosures rather than require lenders and servicers to not foreclose. The size of the incentive is not tied to the size of the mortgage, and thus, can be relatively minor in expensive markets. Lenders and servicers have generally appeared to have chosen to not realize a quick loss on their books by loan modification or refinancing. Or maybe, they are holding out for the government to come out with even better incentives if things stay bad.

There is some hope that with the threat of investor lawsuits gone, some mortgage servicers may be more inclined to modify a loan than before. Of course, it will probably only work when the mortgage servicer is not the original lender. The safe harbor provision provides the only worthwhile ray of hope in substantially impacting ongoing drumbeat of foreclosures.

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Second Lien Program

As I had discussed in my earlier post here, the Home Affordable Modification Program reduces mortgage payments on the primary debt for homeowners close to defaulting or foreclosing.  However, the Home Affordable Modification Program did not automatically modify the payments on any secondary lien on the house.

Source - http://www.flickr.com/photos/respres/2539334956/

With the Second Lien Program, payments on the second mortgage will be sharply reduced by participating mortgage lenders according to a set formula for any customers who have modified their first mortgage.  For borrowers paying principal and interest on the second mortgage, the interest rate would be lowered to just 1%.  For borrowers paying interest only, the interest rate would be lowered to 2%.

If any part of loan balance was forgiven by the lender on the first mortgage, the same proportion of the second mortgage would be forgiven.  The second lien can also be extinguished for a lump-sum payment according to a pre-set formula determined by Treasury.  Basically for second loans due payment for more than 180 days, the lender will be paid three cents on the dollar for extinguishment.  For loans past due less than 180 days, the lender would be paid anywhere from four to twelve cents on the dollar for extinguishment depending upon loan to value (LTV) and debt to income (DTI) ratios.

Besides sharing the cost of reducing monthly payments with the lender, Treasury is also offering lenders $500 cash incentive upfront and $250 a year for three years if the buyer maintains payments after loan modification.

Hope for Homeowners Program

The Treasury is also trying to revive its beleaguered Hope for Homeowners Program (H4H) by offering new incentive payments for lenders and requiring mortgage servicers participating in Home Affordable Modification program to evaluate if the borrower could qualify for H4H.  Treasury will pay lenders $2,500 at the time of H4H refinance and $1,000 a year for up to three years if the borrower continues to make mortgage payments on time.

H4H refinance potentially offers a homeowner facing foreclosure a way to reduce loan balance to 96.5% of the current home value.  The remaining loan balance will be written off by the lender as a loss.  However, the borrower must be able to qualify for an FHA (Federal Housing Administration) loan, has to pay mortgage insurance premiums, and has to share any gains from selling a home in future at an appreciated price with the government.

The Impact on Foreclosures

So, is it all wonderful?  Will these new initiatives be the last nail on the coffin burying homeowner defaults and foreclosures?  Well, not quite.

Treasury itself says that the Second Lien Program will help reduce mortgage payments for one to one and a half million borrowers out of the three to four million homeowners estimated to be helped by the original Home Affordable Modification program.  It is not expected to expand the pool of borrowers expected to be helped any more than the primary mortgage modification program.  It will streamline the process in that the uncertainty in dealing with the second mortgage on a house will be eliminated for those qualifying for the Home Affordable Modification program.

The H4H program was launched last year amid much fanfare, and has been a miserable failure.  It has helped a grand total of one homeowner avoid foreclosure so far.  The lenders have opted to take the loss at foreclosure rather than take a loss by cutting some of the principal that borrowers owe.

With the new announcement, lenders could pocket up to $5,500 for modifying a loan balance down to 96.5% of the current house value.  However, the H4H program does not require a lender to modify the loan balance.  It is left to the lender’s fiscal interest/judgment to decide whether to modify the loan balance or not.

Simple math suggests that $5,500 is not enough of an incentive when the house value has dropped precipitously in expensive markets like California, Nevada and Florida.  The new program might nudge some lenders to cut down the loan balance for some homeowners facing foreclosure, but it is not likely to help the vast majority of homeowners facing foreclosure.

The Obama administration was also trying to get legislation passed in Congress allowing bankruptcy judges to alter loan terms and shield mortgage firms from investor lawsuits when they ease loan terms.  The House passed the legislation, but the Senate left out the provision to allow bankruptcy judges to modify the loan balance.

With the potential threat of mortgage reduction by a judge gone, there is little likelihood of a lender cutting down the loan balance for a foreclosing homeowner.  Foreclosures, meanwhile, continue as the economy and unemployment go from bad to worse.  At least 4 million homeowners are estimated to face foreclosure this year compared to about 2.2 million homeowners in 2008.

So, all in all, Treasury’s new Second Lien and Hope for Homeowners Programs are unlikely to add new foreclosing homeowners to the pool of those likely to be helped by existing programs.  The programs are unlikely to substantially stop the continuing drum beat of additional foreclosures.

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Historic Mortgage Interest Rates

Figures below show the historic conventional conforming 30-Year fixed mortgage rates from 1971 through 2009, and 1993 through 2009.  Mortgage interest rates averaged the highest at over 18.5% in 1981 (along with high inflation).  Mortgage rates rarely went above 7% after 2002, and averaged over 6.6% at their 2008 peak in July.

Thanks to the concerted efforts by the Federal Reserve and Treasury, mortgage interest rates have come down drastically since then.  For the week ending April 30, 2009, the average interest rate for 30 year fixed-rate mortgage was 4.78% with 0.7 points in fees.  This equaled the rate for the week of April 2, 2009, and is a historic low according to Freddie Mac’s survey going back to 1970.

Additional Fees

Fannie Mae and Freddie Mac have raised some of the fees charged to lenders when they buy or guarantee certain types of mortgages, most of which are going to be passed down to consumers.  It will impact both — mortgages for new purchases, and refinances of existing mortgages.

Fannie Mae has revised upwards its Loan-Level Price Adjustment (LLPA) Matrix effective April 1, 2009.  Depending on the borrower’s credit score and (mortgage) loan to (home) value ratio (LTV), the additional fees range from 0.25% to 3% of the loan.  Refinancing with a loan bigger than the principal balance on existing mortgage for a cash-out will add another 0.25% to 3% in fees.

For example, someone with a credit score of 660 and LTV of 85% would pay 2.5% in fees instead of 1.75% prior to April 1, for a 30-year fixed-rate mortgage.  Additional 2.5% fees would be tacked on for cash-out refinancing in such a case.

Condominium mortgages seem to have been hit the hardest.  Refinancing a condo loan might be affected by the presence of commercial tenants or investors in the entire condo project.  There is now a mandatory 0.75% fee on all condominium loans regardless of the borrower’s credit score, and other fees have been jacked up.  For example, someone with a credit score of 690 and LTV of 80% on a condominium with a 30 year fixed-rate mortgage with initial payments of interest only will now pay 3.25% in fees instead of 1.25% prior to April 1.

Some lenders are going further in imposing new restrictions.  For example, Wells Fargo now requires a minimum FICO credit score of 720 for loans with LTV greater than 80% instead of 620.  It has also reduced the maximum total debt-to-income ratio from 45% to 41%.

The cost of private mortgage insurance, or PMI, required when LTV is greater than 80%, is also going up for those with lower credit scores under the new “risk-based pricing” by mortgage insurance companies.

Appraisal Rule Changes

Under Fannie Mae and Freddie Mac’s new Home Valuation Code of Conduct, effective May 1, mortgage brokers can not order appraisals directly, and lenders can not select or communicate with appraisers.  Lenders must use third-party “appraisal management companies” to assign the job to appraisers in their networks.  If the appraisal comes lower, the loan may not go through.  As a consequence, borrowers will probably have to pay appraisal fees upfront whether the loan goes through or not.

Appraisers are also being required to include a “market condition” report providing statistical analyses of local sales and pricing trends.  It is expected to add to the cost of preparing an appraisal report, which is sure to be passed down to the borrower.

Each point in extra fees is equal to 1% of mortgage loan.  For an average $200,000 mortgage, each point in fees equals $2000.  An increase of three points in fees means additional fees of $6,000.  In the more expensive neighborhoods with higher home prices, the additional fees could amount to two to three times as much.

It would make sense to ask your lender or mortgage broker if your loan will be sold to or insured by Fannie Mae or Freddie Mac to see if you would be liable for these higher fees.  It could be worth a lot of money to compare  independently or with a mortgage broker, the interest rate and total fees charged on loans sold/insured by Fannie Mae/Freddie Mac as well as other lenders before selecting a loan package for your new home mortgage or refinance.

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As I had described, Treasury has a comprehensive self-assessment tool provided on this website to determine eligibility for the Making Home Affordable Refinance and Modification Programs.

Now, there is another option, thanks to Fair Isaac Company, the company that created and computes the FICO credit score significantly affecting the credit transactions for all consumers.  Fair Isaac has launched MortgageReliefOnline.com.

It is a free service designed to help you find out if you qualify for mortgage relief under the Government’s Making Home Affordable Program.  If you qualify, this site provides free access to HUD-approved certified professional counselors at Money Management International.  If you qualify for free mortgage counseling, Fair Isaac also gives applicants a free credit report and credit score.

To use the free service, you have to fill out a form on the web site.  A word of caution here — it is an educational web site.  It won’t actually refinance or modify your loan.  You will ultimately need to work with your mortgage servicer for loan refinancing or modification.

Lately, there has been a spate of complaints by homeowners trying to stave off foreclosures about delays and frustrations in dealing with lenders.  This site can help with determining eligibility for the Making Home Affordable Program.

Have you had to deal with your lender and/or mortgage servicer to refinance or modify your mortgage?  How satisfied have you been with your experience?  What did you learn that could help others going through the process, or help improve the process?

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Current Prices and Future Outlook

Median home prices dropped by up to 40% in select markets in the country in 2008 according to Kiplinger.com. 2008 saw the peak of interest rate resets for the subprime mortgages. However, resets for many other adjustable rate mortgages will continue until 2011. According to Mark Zandi of Moody’s economy.com potentially 12 million houses could go into foreclosure. As such the pressure on housing prices is likely to continue.

According to Kiplinger.com, Fiserv Lending Solutions forecasts that the median home price nationally will fall another 9% in 2009, bottoming out in the last half of ’09, and increase nearly 7% in 2010. However Kiplinger expects the market to fall another 10% in 2010 before regaining its footing in 2011.

Figure 1 below shows the change in home prices from 2000 to 2008 based on the Case-Shiller 20-City Home Price Index.

Fig. 1 Year-Over-Year Percent Change in the Home Price Index, 2000 to 2008

The December 22, 2008 issue of Fortune magazine has an article about the 2009 housing outlook for the top 100 markets in the country. According to its analysis, only two out of the hundred markets is going to show gains in 2009. However, 47 markets are expected to swing to gains in 2010. Here is a webpage showing the 10 worst performers in 2009 from the same data. Eight of these ten markets are in good old California. The top ten worst markets include Los Angeles, Stockton, Riverside, Miami-Miami Beach (Florida), Sacramento, Santa Ana-Anaheim, Fresno, San Diego, Bakersfield, and Washington, DC in order from the worst to the tenth worst.

Mortgage Rates

Thanks to the rate cuts by the Fed, mortgage interest rates are expected to stay low. The 10-year Treasury note yields are at historically low levels. But increased perception of risk by lenders is keeping the spread between the note yields and the 30-year fixed mortgage rates high, preventing the mortgage rates from reaching the target of 4.5%. Figure 2 below shows a forecast of thirty-year mortgage interest rates from Forecasts.org.

Fig. 2 Thirty-Year Conventional Mortgage Interest Rate—Past Trend and Projection, 2006 to 2009

Crisis and Opportunity

Every crisis also presents an opportunity. My heart goes out to those who got caught up in the frenzied go-go years of cheap and easy no-questions-asked mortgages and rising home prices, and are now faced with potential foreclosures and financial hardship.  But for many buyers, lower house prices make purchasing a house possible, affordable, and profitable as an investment. Is this, then, a good time to buy a house?

But first, we should consider the merits of the idea of buying a house. Buying a house at the right time and for a sufficiently long time can have many advantages over renting one. It can give you better control over your living quarters, stability, tax deductions of mortgage interest payments, and a chance to build equity. Historically, over a long period of time, say greater than 10 years, house prices generally appreciate by more than inflation when compared with the original purchase price.

Even if the house prices go down after the purchase in a downturn like today’s, the loss in house value is only an unrealized paper loss. The loss is realized only if you have to sell the house during the downturn because of a move or a loss of income. It is always a better idea to get a 30-year or 15-year fixed mortgage rather than an adjustable rate mortgage or any of the newfangled exotic mortgages. That way the mortgage payments stay predictable and affordable.

If you already own a house and have to move because of a job or you have been waiting to upgrade from your starter house to a bigger house or a house nearer to the job, it could be a good time to purchase that new house compared to when the prices are high. In an up market or a down market the prices on the old house (the one you are living in) and the new house (the bigger or the better located one) will move in tandem. So, if the new house price is going to be higher, so would be the old house price, and vice versa. However, the price differential between the houses will be smaller in a down market, making your new mortgage a smaller one.

Purchasing an additional house for investment depends on a number of factors including the price, investment time horizon, mortgage rates, and rental income from the new house. You can do a quick analysis to see if you have positive cash flow. In other words you can compare your annual payments for mortgage, upkeep, and taxes with the annual rental income. If you expect more income than expenses, then you are cash flow positive and you would not have to keep sinking additional funds into the house after the first purchase. If not, then the additional money you would have to spend every year will take away from the total returns from the house when you sell it later at an appreciated price. You can roughly calculate what would be the break even sale price given your purchase price and annual expenses. You can then compare that with expected sale price to see if you are getting a reasonable return on investment.

If you are considering buying a house for investment, all indications are that you could wait for some more time, say at least up to six months for house prices to fall some more.

What do you think?

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TED Spread

The TED spread is the difference between the interest rate banks charge each other on 3-month loans (3-month London Interbank Offered Rate or LIBOR) and the interest rate on 3-month U.S. Treasury bills. The interest rates that the banks charge each other are typically higher as compared to the interest rates on the Treasury bills backed by the full faith and credit of the federal government. When the banks are concerned about a higher risk of default on the loans to other banks, they charge higher interest rates increasing the difference between three month LIBOR and Treasury bill rates or the TED spread.

At its peak during the Wall Street crisis the TED spread shot up to 464 basis points on October 10 from around 100 basis points during the first week of July 2008. It has since come down to 265 basis points last Friday Oct 31 following months of federal and worldwide intervention. It is still high from a historical perspective although it signifies some easing of the credit squeeze.

LIBOR-OIS Spread

The LIBOR-OIS spread is the difference between the LIBOR and the overnight index swap (OIS) rate. The LIBOR-OIS spread is considered a better measure of interbank worries or pure counterparty risk because it does not involve the safe havens transactions of the U.S. Treasury. An increasing LIBOR-OIS spread indicates banks charging higher interest rates to offset the risk of higher loan default.

Former Fed Chairman Alan Greenspan said in June that the LIBOR-OIS spread should serve as a measure for determining when markets have returned to normal. Historically, before August/September 2007, the spread was of the order of 10 basis points after which it shot up to around 100 basis points. It shot up dramatically after September 15, 2008 following the collapse of Lehman Bank. On Friday it narrowed 12 basis points to 242 basis points, the least since September 30. That is still very high by historical standards signaling a continuation albeit some easing of the credit squeeze.

The data indicate that we are not out of the woods yet as far as the credit crunch goes, although we may be out of the worst phase of it.

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