January 2010

Navigating the Turbulent
Mortgage Marketplace

What are the options if I owe more on my mortgage than the value
of my home?

Option 1

Continue making your payments on time and ride out the storm
Your lender cannot take your home away as long as you make your payments on time. Therefore, if
you want to keep your home and you can afford your payments, you should do whatever it takes to
continue making your payments on time. Although it is a hard pill to swallow, this is likely to be your
best option because it is the most responsible thing to do and it protects your credit rating.
Even if you are experiencing other financial difficulties and you are faced with declaring bankruptcy,
you are not required to include your home in the bankruptcy. For more information, check with an
attorney who is familiar with the laws of your state.

Option 2

Stop making your payments and go into foreclosure
This is probably the worst decision you could make, but depending on your circumstances, you may
have no other choice. Foreclosure laws vary from state to state, but here are a few things to keep in
Foreclosures reflect very negatively on your credit rating and could preclude you from
borrowing money through credit cards and car loans. In fact, if you become delinquent on your
mortgage, this will likely have an immediate negative impact on the interest rates and terms of
all your credit cards. Credit card companies typically have the right to increase your interest
rates, close your accounts and/or reduce your credit limit as soon as you default on any other
debt (including your mortgage).
Fannie Mae, which is very influential in setting the mortgage guidelines, has recently updated
their lending rules to state that individuals who have gone through foreclosure need to wait
anywhere from 3-5 years before qualifying for a new mortgage. This means that it will be very
difficult, if not impossible, for you to buy a home and qualify for a new mortgage for at least 3-5

Option 3

Try to modify the terms of your mortgage
Nearly everything in life is negotiable — this includes the current status of your mortgage. You could
either hire an attorney or try to call your lender yourself and renegotiate the terms of your loan. Keep in
mind that your chances of success are always better if you get an attorney involved. In that case,
make sure to get references from the law firm of clients they worked with resulting in successful
modifications. Remember, lenders would rather not have you go all the way through foreclosure if it
can be avoided. In fact, after regulators took over the failed IndyMac Bank, Sheila Bair who is the
Chairman of the Federal Deposit Insurance Corporation (FDIC) said, “We will very aggressively
pursue loan-modification strategies for unaffordable loans to make them affordable on a long-term,
sustainable basis.”

What exactly is the problem
today with banks, financial
institutions and the financial

How long will the turmoil last,
and is this still a good time to
buy a home?

Option 4

Try to sell the home on the open market as part of a “Short Sale”
A short sale is where a property owner sells property for less than what is owed on the mortgage. The mortgage lender is asked to approve the sale
and forgive the difference between the sales price of the property and the remaining balance of the mortgage. Consider this example:
$200,000 sales price
$250,000 mortgage balance
$50,000 difference that is forgiven by the mortgage lender
Understand the impact on your credit rating — a short sale has virtually the same negative impact on your credit rating as a foreclosure. Both short
sales and foreclosures are treated as “settled accounts.” In other words, the lender is settling with you and agreeing to be paid less than what they
are legally entitled to receive. Therefore, you are developing a reputation for paying back to your lenders less than what you originally agreed to pay
them, and this reflects negatively on your credit rating.
Understand the new Fannie Mae rules — depending on how your short sale is structured, beginning August 1, 2008, an individual who has sold a
home as part of a short sale may not be able to qualify for a new mortgage for another 2 years!
Understand the tax impact — depending on the type of mortgage and property you have, you may be subject to income taxes on the portion of the
mortgage that is being forgiven by the mortgage lender! If the forgiven mortgage debt is attached to your primary home and the mortgage balance
itself was originally used to buy, build or improve your home, income taxes would not apply. However, unless you are deemed to be “insolvent,”
forgiven mortgage debt on second homes and investment property is taxed, as well as all forgiven debt on your primary home where cash-out loan
proceeds were not used for home improvement.

Option 5

Consider a sale-leaseback or rent-to-own strategy
A sale-leaseback is where you sell your property to an investor (as part of either a short sale or traditional sale), and then you lease it back from the
investor. This allows you to remain in your home without the trauma of having to move away and find new housing. The thing to be cautious of is that
some variations of the sale-leaseback strategy are centerpieces in some of the so-called “foreclosure rescue” scams that prey on unsuspecting
home owners. Before engaging in sale-leasebacks, consider the laws of your state, and make sure the transaction is properly and ethically
structured to protect the interests of all the parties involved.
A rent-to-own strategy allows you to find a new home now and rent it from an investor with the option of buying the home at a pre-determined price at
some point over the next two to three years. You would do the house shopping and find a home where you would like to live. The investor then buys
the home, preferably getting a good deal by buying a home that is being sold short or through a foreclosure. You then sign two agreements with the
Lease agreement that spells out the terms of the rent payments
Option agreement that spells out the predetermined price and terms under which you can buy the home from the investor at some point within
two to three years

It is always advisable to consult with a Certified Mortgage Planning Specialist TM (CMPS®) when navigating today’s turbulent mortgage and real estate

As a CMPS® professional, I am committed, qualified and equipped to help you evaluate your options

Mortgage interest for the week held fairly close to the previous week’s rates, reports Freddie Mac.

Average interest on 30-year fixed loans slipped a notch to 4.98 percent from 4.99 percent and was down from 5.10 percent a year ago.

Here’s how other rates fared for the week:

  • 15-year fixed loans dropped down to 4.39 percent from 4.40 percent.
  • Five-year adjustable-rate mortgages dipped to 4.25 percent from 4.27 percent.
  • One-year ARMs came down to 4.29 percent from 4.32 percent.

While still higher than the historic lower of 4.71 percent established in early December, long-term mortgage rates have hovered around a very favorable 5 percent thanks to the Federal Reserve’s mortgage-backed securities program meant to keep rates low and make home buying more affordable.

The central bank’s policymaking committee confirmed on Jan. 27 that it will keep rates near those record lows in order to prop up the economy; but it still plans to terminate the program at the end of March.

Low rates also trigger more refinancing activity, according to Freddie Mac. In the 2009 fourth quarter, it said, about a third of borrowers who refinanced a home loan — the highest share since at least 1985 — opted to slash their principal balance rather than tap into their equity.

As a result, only around $11 billion in home equity — the smallest quarterly volume in about nine years — was tapped by consumers who refinanced a conventional, prime mortgage.

More Borrowers Lower Mortgages With Refis

In the fourth quarter of 2009, 33 percent of borrowers refinanced their loans and in the process, lowered the principal balance, Freddie Mac reported in its quarterly Refinance Report.

That’s the highest cash-in refinance share since Freddie Mac began tracking refinance transactions in 1985.

The share of borrowers who increased their loan balances by 5 percent or more during the fourth quarter was at a record low of 27 percent. From September of 2008 to November 2009, consumers cut $100 billion in revolving debt from their obligations, according to the Federal Reserve Board.

A new report from the Urban Land Institute predicts two major changes in the U.S. housing market as we began a new decade.

  • Home appreciation will slow considerably to about 1 percent to 2 percent annually.
  • The current U.S. homeownership rate, now at 67 percent (which is down from a record high of 69 percent), will fall further to about 62 percent.

4 Major Demographic Trends

The report also cites four major U.S. demographic trends that will have a major impact on housing.

1. Aging baby boomers (ages 55 to 64 years old): They will keep working, and many will be forced to stay in their suburban homes until values recover. Those who are able to move will choose mixed-age living environments that cater to active lifestyles. Walkable suburban town centers also will appeal to this group.

2. Younger baby boomers (46 to 54 years old): They are now entering their prime earning years but they will lack home equity and unlike the older members of their generation, they won’t be able to purchase second homes. This will likely curb the prospects for the second-home market.

3. Generation Y: They are larger than the baby boom generation (with a population of about 86 million). As they enter the housing market, they are less interested in homeownership than their parents were when they were young adults. “They will be renters by necessity or choice for years ahead,” says John K. McIlwain, author of the report.

4. Immigrants – both legal and illegal: They are nearly 40 million strong. They often prefer multi-generational households and if they can afford them, larger homes in neighborhoods with a strong sense of community.

Source: The Urban Land Institute (01/27/2010)

Markets don’t like uncertainty, and a little of that was removed yesterday as Federal Reserve Chairman Ben Bernanke was approved by the Senate for a second four-year term by a 70-30 vote. Supporters admitted that that the Federal Reserve under Bernanke had missed signs leading up to the recent economic crisis, but argued that under Bernanke’s leadership the Fed had helped steer the U.S. economy away from utter catastrophe. But no one wants to switch horses in midstream, even if there could be found a “new horse” that was qualified.

Overall, how have the programs designed to stop mass foreclosures been working? Not so well, and for a variety of reasons. Servicers often don’t have the ability to do renegotiations in bulk, and sometimes make more money by dragging their feet. Loans being placed into securities, which are then sliced and diced, make things more complicated, and borrowers usually are not even sure if they’re eligible. We should all keep in mind, according to a recent paper by the Boston Fed, that foreclosing is often more profitable than renegotiating. Almost a third of delinquent borrowers “self cure”. And of those who have their mortgages modified, more than a third end up defaulting eventually anyway.  So in both cases, modifications make the servicer worse off. The housing bubble was very expensive – it will be surprising if we can deal with its consequences on the cheap.

At least there is no ambiguity about what the Fed is doing in their mortgage purchase program. Last week the Fed purchased a net $12 billion in agency MBS, bringing its total net purchase to $1.161 trillion. But everyone has a pretty good sense of how this movie is going to end, right? Well, perhaps not. The odds are highly in favor of the Fed keeping overnight rates where they are through June. In fact, an article in the Wall Street Journal yesterday points out that there is a growing belief among investors that when the Fed’s mortgage security purchase program ends at the end of March, mortgage rates won’t soar. “They argue that investors, searching for higher-yielding securities, will find government-backed mortgage-backed securities a bargain relative to other investments, like corporate debt, that have rallied for much of the past year.”

I don’t think that anyone believes that the US government will suddenly leave the entire housing and mortgage market on its own. Those markets have had either implicit or explicit government backing for decades, which makes investors much more likely to buy mortgage-related securities. Lately production has dropped, as has the weekly amount of Fed purchases from $21 billion to $12 billion, yet mortgage rates are still relatively low. Yes, mortgage rates may move higher, and in fact rates in general may move higher, but at some point the yields look more attractive to investors, and as they buy these securities, the price goes up and rates move back down. Thus goes the argument against lenders saying, with regard to mortgage rates, “The end is near!” Now, if we could only get underwriting guidelines to loosen up!

Yesterday, only one day after the FOMC meeting (which had its first dissenter in over a year), the market started off slightly worse, but then came back later in the day. A weak stock market helped, as did a very good $32 billion 7-yr Note auction. Today we saw Gross Domestic Product for the 4th quarter, estimated to be 4.6% versus the 2.2% annual rate in the prior quarter. The 5.7% pace was certainly stronger than expected, and the highest pace in more than six years.

Growth was boosted a sharp slowdown in the pace of inventory liquidation, but even stripping out inventories the economy expanded at an annual rate of 2.2 percent. Later we’ll have the Chicago Purchasing Manager’s Survey and the University of Michigan Consumer Sentiment Survey. But the GDP number has pushed rates higher, and mortgage prices are worse by about .250 and the yield on the 10-yr is up to 3.68% again.

450,000 at risk in foreclosure-prevention program

NEW YORK (CNNMoney.com) — Hundreds of thousands of troubled homeowners who are making lower mortgage payments on a trial basis are at risk of being kicked out of President Obama’s foreclosure-prevention program.

Companies that service the mortgages have until Jan. 31 to review all trial modifications that have been underway for several months under the Home Affordable Modification Program (HAMP), according to a Treasury Department guideline issued late last month. The Treasury Dept. said it would issue new guidelines next week, but wouldn’t give details.

During the review period, servicers  must determine whether borrowers have made all their payments and have handed in all the necessary paperwork. Those who haven’t will get letters giving them 30 days to comply.

The goal is to clear up the backlog of borrowers stuck in trial modifications, in which a homeowner’s monthly payments are lowered to no more than 31% of pre-tax income.

Some homeowners have spent seven or eight months waiting to hear if they qualify for a permanent adjustment to their mortgages.

This directive, however, has some bank regulators concerned.

“About 450,000 homeowners currently have HAMP trial modifications and have demonstrated a willingness and ability to make timely payments for at least three months,” said Richard Neiman, superintendent of the New York State Banking Department.

“Now, unfortunately and very alarmingly, these same homeowners face the prospect of foreclosure strictly on account of documentation issues,” he said.

Paperwork has proved a major stumbling block for the president’s foreclosure-prevention program. Homeowners complain that their servicers continuously lose the documents they send in, while financial institutions argue that borrowers have not been sending in their paperwork.

Aware of the problem, Treasury officials said they plan to issue new guidance to servicers next week that will help expedite the conversion of borrowers in the trial period to permanent modification. It may also lighten the documentation requirements.

Converting to permanent modifications

Under fire for the low number of people receiving long-term help, the Treasury Department in late November ramped up pressure on servicers to convert borrowers to permanent modifications.

Some 66,500 people have received permanent adjustments, with another 787,200 homeowners in trial modifications.

Under the president’s plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork.

Once the modification becomes permanent, servicers, investors and homeowners are eligible to receive thousands of dollars in incentive payments.

Overall, about three-quarters of people are making their payments on time, according to the Treasury Department.

Treasury officials already lightened the documentation requirements in the fall in hopes of speeding up the conversion process. But more needs to be done, Neiman said.

For instance, Treasury should accelerate its implementation of a standardized documentation form and the creation of a Web portal that will allow homeowners to track the receipt of the paperwork, he said. Also, it should allow servicers more flexibility in accepting alternative documents.

If this isn’t done, a lot of homeowners could soon face foreclosure, he said.

“This is a real concern to borrowers, particularly borrowers who’ve continued to make payments for three, four, five, even seven months,” Neiman said. To top of page

Housing: Best recovery bets

The average home price is forecast to plummet over the next two years. But these 7 cities are predicted to post gains.

1 of 7


San Francisco

Median home price: $675,000
Value lost since 2006: 25.7%
Forecast gain by 2011*: 4.8%

The San Francisco metro area has seen its home values drop by a quarter, and the city still has some pain to work through. The city’s median home price is expected fall another 8.3% by June 2010.

After that, however, the market there may come roaring back: Fiserv predicts a 14.3% gain between June 2010 and June 2011. Averaged out, that means a 4.8% gain over the next two years.

One reason for the sharp comeback is that much of the area’s excess inventory will have been sold. It’s already dropped by nearly in half over the past year.

The recovery will be delayed, though, as the area — particularly Oakland and the East Bay — works through its foreclosure problems. During the first six months of 2009, one of every 52 homes had at least one foreclosure filing.

The good news, according to Mark Fleming, chief economist for First American CoreLogic, is that core city neighborhoods don’t have nearly as many foreclosures as those out on the fringe. The steady demand in those communities will serve as a base as other neighborhoods rebuild.

By Les Christie, CNNMoney.com staff writer

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