Fannie Mae HomeStay the Answer to Recasting Rate Woes?
Fannie Mae’s CEO, Daniel H. Mudd testified before the House Committee on Financial Services today and unveiled a commitment to those subprime borrowers who need new options now that their earlier mortgage decisions are proving to be disastrous.
In typical “borrow from Peter to pay Paul” fashion, this new initiative involves refinancing out of the bad, old mortgage and into a new, better mortgage.
Good luck with that strategy! At least this new loan program has a cooler name if nothing else…
HomeStay…
What a great name! It conjures up safety and security. It seems to address what everyone wants: to fend off foreclosure and stay put.
So what’s wrong with that?
First, it’s always a bad idea to borrow your way out of your bad decisions. Take your medicine and learn from the mistake. This will improve your ability to make better decisions in the future.
Second, many of these troubled home owners simply won’t be able to use the program due to being “upside down” or “underwater” on their home.
But that’s not the worst thing about Mr. Mudd’s speech about this new loan program.
The worst thing is his hidden motives for testifying in the first place, the patronizing way he explained the need for such a program, and the self-aggrandizing explanation of how he and Fannie Mae will step in to save us from ourselves.
You and I know we are at the very front edge of a subprime loan meltdown that could very easily plunge the country into a decade long recession…and Mr. Mudd knows this too. But his motives for developing HomeStay have nothing to do with his desire to “help the subprime market through this turmoil” as he put it. He continued with,
“Today, our exposure remains relatively minimal — less than 2.5 percent of our book of business can be defined as subprime. While our disciplined approach to the subprime market has helped to protect our company, our lenders and our borrowers from the turmoil, it has also given us some room to support the market, as Congress intended us to do.
…Fannie Mae can and will do more than our part to help lenders to protect homeowners, stabilize the subprime segment of the mortgage market, and keep affordable mortgage credit flowing to families who need it most.”
He further blows smoke at the politicians explaining the 3 aspects of HomeStay:
- “First, we are working with our lender partners to help homeowners avoid immediate foreclosure.
- Second, we are working with our lender partners to help homeowners avoid payment shock, and transition to safer products.
- Third, we are working with our housing partners to help counsel future homeowners.”
These bullet points sound good and are exactly what politicians want to here right now…but there’s more…
This testimony on one level is simply Congressional butt-kissing.
Congress is currently entertaining legislature that would seriously hurt Fannie Mae’s operational freedom and profit advantage in the marketplace.
So schmoozing Congress is one of the “real” reasons for Mr. Mudd’s new program. Help them with issues that show just how concerned they are for the “little guy” and get something very valuable for yourself at the same time. That brings me to his “real-real” reason for rolling out HomeStay.
This other hidden reason is the one that really scares me!
Everyone inside the industry knows that Fannie Mae is hurting. The investigations, increased regulation, and portfolio curtailment has and will continue to hurt earnings. Fannie Mae is on tilt so badly stock market analysts commonly refer to it as “Fanron” due to their emulation of the failed Enron’s creative accounting practices. The moniker fits well because they are in dire need of a magic bullet to help them out of their cash flow woes…the magic bullet Enron sought but never found.
What loan product could possibly have enough profit to pull Fannie Mae’s fat out of the fire?
Tada…enter the subprime loan…uhm, HomeStay, I should say.
Subprime loans have huge profit margins and the corresponding huge risks. But given the right spin, Mr. Mudd is hoping Congress will see his entre into this lucrative side of the industry as “savior” not “profiteer”.
Politicians are smart enough to know a Fannie Mae bankruptcy is not in their (or our) best interest, but letting Fannie solve their financial problems on the wallets of folks already taken advantage of by their original subprime lender is unconscionable.
So with lots of media watching, they have Mr. Mudd come to Congress and give them ready made political cover so they can do what they’ve always done: Let Fannie Mae keep giving enormous campaign contributions, keep their company “house of cards” afloat, and keep inventing riskier ways to lend mortgage money.
Mr. Mudd’s phony, sanctimonious testimony is trenched in the same arrogance and duplicity “The Smartest Guys in the Room” showed at Enron right before the fall.
Trust me Mr. Mudd, you ain’t the smartest guy in room…just the most desperate!
Good Luck
Author: Rob K. Blake
Published October 3, 2007
Modified January 9, 2008
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Hybrid Adjustable Rate Mortgage Recasting Will Cripple The Housing Market
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I have a new inlaw who broke his foot, couldn’t work for several months, and needed to get a loan to see him through that period. All he really needed was a small second, possibly even a signature loan to get him through a rough period. Instead a mortgage broker led him to refinanced his home. Now he is in trouble.
I couldn’t believe the terms of his new mortgage. He had an initial interest rate of one percent, for one month. His mortgage allowed payments equal to half of his interest. I always thought those terms were teasers to get people in the door. Now, looking at his loan papers, it is clear the reasons for those terms are much more insidious. It allows the loan papers to be written in such a way that , even if a person carefully reads the one inch stack of loan docs, all the numbers typed into the loan docs, such as monthly payments, are based on the low interest rate that only lasts for one month.
The broker hit him from every side for fees. For a small amount of work, this broker made roughly 20k. The borrower is probably upside down now anyway, but would have been stuck with a prepayment penalty for the first 2 years on this bad loan.
BTW, the borrower had no lates and a middle credit score of 720.
This broker should be in jail, in my opinion. There needs to be laws limiting teaser rates to no less than 2 years, and requirements for mortgages to clearly indicate on the typed lines if those payments will change, what the minimum monthly payment would be to at least cover interest.
People have mentioned fiduciary responsibilities. Does anyone know if there are any class action lawsuits or other ways of recouping losses from the unethical behavior of this type of lender?
November 4th, 2007 at 12:43 pmFirst may I say I have enjoyed the recent posts. They have been very informational and have sparked thought…
As I sip my Saturday morning coffee, and read about my less then professional profession, I wonder how the “Homestay Program” can really work. Without knowing the basics of the program, I can’t help but think there will be cries of foul or discrimination as soon as a desperate home owner is denied.
Here is a completely different spin on the “Homestay Program”
When the “Powers” begin to implement their panacea program, a potential by-product will be the ability to identify Lenders (Bankers & Brokers) who participated in the fraudulent mortgage processes. Could this be a viable way for the “Powers” to defray some of their costs? Might they turn to the guilty parties for compensation?
I wonder if the “Powers” will utilize their new found information to chase down the culprits. I have read recently that BEAZER Homes and their mortgage entity NVR, are being questioned about questionable mortgage practices. RYAN Homes is taking a bit of heat as well. My guess would be D.R. HORTON is not far behind.
Imagine if this program does in fact spin-off a policing unit. This could be monumental going forward in our industry. What would stop the “Powers” from investigating the particulars behind any foreclosure in any market? Dare I say “The Mortgage Police
April 28th, 2007 at 7:58 amBravo Mr. Blake!!!
Very well Stated (Pardon the Pun)
April 27th, 2007 at 12:41 pmKM
As mortgage professional passing judgement is what we do!
But we certainly don’t do it on what kind of car a guy drives…you know better than that!
You seem to think putting “people in homes that otherwise never would have had the chance” is a good thing even if you commit fraud to get there?
That’s ridiculous. The stated income loans were designed to give self-employed people whose aggressive paper tax stratgies cost them loans to put that income back on the 1003. Not take a guy who makes 5K a month and say he makes 10K a month so he can buy a bigger house.
Which is exactly what was going on out there. Anothers misuse of the stated income allowed novice “fix and flip” speculator to buy and sell on false income…and when their ignorance got them in trouble, they walked.
It’s not the “fake VOD” guys that worry me. It’s the guys who “think” they are helping people with liar loans. They feel they have justification for their crimes…they don’t.
They need to ask the tough questions, like
You say you make X in your business is that gross or net?
What was your AGI on the two years of tax returns?
What do you actually bank per month from you business?
Why do think a stated income loan is the best alternative?
Do you know it’s a crime to “over-inflate” your income on a stated income loan?
Did your last lender tell you it was “ok” to do that?
We are allowed on a stated income loan to give credit for any “paper loss” you have in your business, but nothing more…what were your “paper losses” for the last 2 years?
Just telling them about a 4506 is totally insuffiecent.
You have to do the work, ask the right questions, and don’t be afraid of the answers.
If you don’t asked the questions, because you don’t want to know the answers, you are not a professional…you are a charlitan…and just as responsible for the rising foreclosure rates as lender who approved the loans.
April 27th, 2007 at 11:12 amIt’s not a question of integrity but you passing judgement based on your opinion on whether they can afford the loan. If a guy comes to you and says he makes “x” amount of dollars as a self employed person and has the credit and reserves but you feel he dosen’t qualify because you saw his car in the parking lot and it’s a junker that’s making a personal judgement. There is a form called a 4506 which you explain to the borrower that says if for some reason your file gets audited, the lender has the right to pull tax returns and what your telling me better be in line with whats on the 1003. If that helps you sleep that’s fine but there has been plenty of stated income “liar loans” who have put people in homes that otherwise never would have had the chance. These people far outweigh the ones who might be in foreclosure. If there were originators who committed fraud by using fake VOD’s or accountant letters those people were victims but also part of the problem. I love how those people now are playing dumb and saying they never realized what was going on.
April 27th, 2007 at 10:46 amKM,
A fiduciary has the legally responsiblilty to always act in clients best interests even if those interests are at odds to his own.
However, a fiduciary can’t break the law to that end.
A fiduciary would not being acting in the borrowers best interest to put them into a loan he knows is fraudulent. A stated income loan where the mortgage broker knows the income is not there is commiting loan fraud himself, but roping the client as well.
It’s not discrimination in the legal sense to evaluate a clients actual income and deny to take the loan down the fraud pathway.
I have told many a stated income buyer who truthfully didn’t have the income needed to qualify but thougth the stated income “liar loan” version was the solution,
“You can find dozens of mortgage brokers to do your “liar loan”, but I won’t do it. One because the rules are there to protect you from foreclosure. Continue down this path and that’s where you end up and as a mortgage broker who prides himself on consumer protection, I can’t be party to that. Even though I am not a fiduciary, I try to act like one, and here I’m protecting you from yourself. Take my advice or fire me. Those are you’re only choices.”
I’ve lost many a client with that speech. But I sleep better at night and the client I keep respect my advice and protection.
It’s obvious not everyone holds by view as mortgage professionals dealing directly with the public, we have an obligation to set (or in this example, reset) commonly held misunderstands on loan programs. To not simply, “take the order”, but craft the right program for the client even if it’s not what I they initially asked for. If that costs you loans, so be it.
Integrity comes first. That’s why I called my company “Integrity First Mortgage, Inc.” more than 10 years ago.
Thanks for the comments…keep’m coming.
April 27th, 2007 at 10:06 amIt is my understanding that “Stated Income” is for those who make an income but prefer (foe whatever reason) not to disclose.
As for the “firestorm” the quickest way to douse such would be a NO DOC or NO RATIO Loan. But who really wants to sell the higher rate? You could lose the deal because another Loan Source is willing to lie.
Lets face it…the STATED INCOME programs are a farce. If the STATED programs went away what would we do? I know…NO RATIOS & NO DOC’s (@ higher rates of course)
No firestorm here…
April 27th, 2007 at 9:54 amI never realized that my realtor and mortgage agents were not legally obligated to act on my behalf. Well, maybe that is too broad of a statement–better is their duties don’t rise to the level of fiduciary responsibility. The reason that I made that assumption is that I have conducted RE transactions where the Seller’s agent was also my buyer’s agent and they were forced to provide extensive disclosure documents that spelled out their legal obligations.
Stephen, I think that you touched on something here with regard to RE agents and Mortgage Brokers in comparison to stock brokers wanting long term customers (and/or referral business). First, there are about a million new ones that popped up the last five years when the money was easy. Just like every amateur that bought a self help finance book thought they were a “Real Estate Investor”, tons of people started selling RE or doing mortgages. Most of these folks are not worried about return clients and they did loans with the intention of getting theirs now without regard to their reputation or long term prospects. Because they didn’t have long term careers or reputations to begin with. Most professionals (doctors, dentists, brokers, lawyers) take years to build up their client list and build their businesses. These new RE agents and mortgage folks were able to jump into a business because the market was hot without any experience.
Sellers by nature are not concerned with overall market problems. They are worried about their isolated transactions… microeconomics as opposed to macro. I don’t want to place all of the issues at the feet of mortgage companies because there are lots of things to blame for the runup–novice investors running prices up, novice RE agents and mortgage folks, RE agents that participated in the run-up by perpetuating the bidding wars or even now by not knowing the market and overpricing homes, brokers that originated these loans, mortgage companies that lent money on these loans, low interest rates and tax laws that made real estate speculation preferable to security trading in terms of taxation.
But we are not talking about the home price runup and the reasons for it happening so much as we are talking about the home price decline, the subprime defaults, and the solution to the subprime problems. Now we have sellers that have no flexibility to drop prices because they are burried in their homes and have mortgages that are adjusting. Many of these people should not have gotten loans to begin with and now that the subprime lenders are gone, there is no one that will do a refi. If it were just stagnant or dropping prices of RE, that isn’t as bad as those conditions and rising rates on ARMS. The subprime mortgage industry did a major portion of the damage. All the sudden all of the artificial demand that they created by allowing all these new buyers to get financing that otherwise would have been renting or would have had to come up with cash down is gone. They simply default and let’s face it, these borrowers have a history of not paying their debt, not having positive net worths, or not meeting the income requirements or LTV requirements–hence why they were subprime to begin with. The demand decrease because of the situation that the subprime market created is going to take a major correction. And now, the subprime lenders and the brokers that cleaned up on them are all gone and out of the industry.
Last answer–I am compelled to ask your back ground in the Mortgage or Real Estate Industry:
Neither. Business and Finance major in college and small business owner. I have a background in business law and have done a lot of contract negotiation and work consulting for IBM. I worked as a consultant to Fortune 500 companies writing and negotiating contracts, which isn’t exactly RE or mortgage work, but that is my background. I have a major interest in the RE market (especially the commercial side due to my businesses) so I follow it very closely. I do commercial negotiations for my businesses so if I don’t know the market, finance, and contract negotiation, I am left holding the bag on my bad deals, unlike the Broker or Agent. BTW, commercial RE here in Phoenix has close to a 0% vacancy rate, especially in the newer areas. They can’t build it fast enough.
Plus like everyone else, about 3/4 of the people I know are “RE agents” or mortgage specialists. Which is a huge part of the problem. I know more than most of them because they think that they spent 40 hours in a RE school, pass an exam, and suddenly are “experts”. And now most of them are selling their H2’s because the easy money dried up. Most of them are also left holding properties that they bought on speculation so they get the double whammy of not having their easy income and also holding properties that have dropped in value.
April 27th, 2007 at 6:55 amWhen you say fiduciary responsiblity to your borrower about a stated income program are you saying if someone walked into your office and wanted to do a stated income loan and you told them flat out “I don’t believe you will be able to make these payments and am not going to write this loan” even though you meet all credit, reserve, etc requirments. Imagine the firestorm of attorneys waiting to sue for some sort of discrimination.
April 27th, 2007 at 5:31 amLet me jump in here guys…
Stephen - Your comment :
“The “HomeStay Program” may work…or it could easily end up like the “TIL” which is really a good idea that has gone bad…Nothing more then a continued source of confusion. I cannot imagine that this program will accomplish what is intended.”
Interesting observation about TIL and one I definitely agree with. HomeStay is just FNMA’s way of “kissing ***” to Congress. They know they’ll only be able to do a handful of these loans as property values drop turning most properties upside down.
To both Stephen and Justin -
The issue of the mortgage broker and real estate agent as having fiduciary responsibility to the buyer/borrower…it simply isn’t true.
Every state has the disclosure requirement of getting an “Originator Agreement” signed by the borrower. In it the exact nature of the relationship is spelled out. In Colorado, ours says:
“We are acting as an independent contractor and not as your agent.”
“We will enter into separate independent contractor agreements with various lenders.”
“While se seek to assist you in meeting your financial needs, we do not distribute the products of all lenders or investors in the market and cannot guarantee the lowest price or best terms available in the market.”
Every state requires such a disclosure and clearly states the mortgage broker is NOT an agent.
Therefore he has NO fiduciary obligations!
Not so good…
Is this on the books for a reason…?
In order to be a fiduciary, the broker would in deed have to represent ALL lenders, so he could provide the very “lowest price and best terms” and that my friends, is unreasonable, untenable, and why a mortgage broker can’t be a fiduciary to his clients.
Does that mean he can’t and should act in his client’s best interest…limited only by those lender/operational constraints…sure. But that’s not legally a fiduciary.
As to the real estate agent being a fiduciary, typically agents that work with buyers “make believe” they are the buyer’s fiduciary or agent, but they are NOT in legal point of fact.
Most agents who work with buyers are acting legally as “transaction brokers” meaning they legally do not “represent” either party…just the “transaction”.
This allows them to act in their own best interests without consideration to the buyer without fear of legal reprisals.
Now unlike the mortgage broker who can’t possibly enter into a lender agreement with every wholesale money source and is therefore operationally constrained from acting as a fiduciary, the real estate agent could as a fiduciary and some do. They are called “buyer brokers”, but are not really used all that much by buyers for some reason.
It’s funny, when given a chance to have a “fiduciary as a real estate agent”, Americans choose not to….weird.
When it comes to mortgage brokers or mortgage banks, it’s not even possible to get “originator as fiduciary”…it doesn’t exist.
Good comments guys…really getting the bottom of it all!!
PS: I’ve recieved a ton of spam posts and have gone to “moderation” of all comments. So if you’ve notice a time lag in the posting of your comments, that’s why.
April 27th, 2007 at 12:03 amJustin, I would like to respond to your comments as you threw a lot out…
The mortgage broker has a fiduciary responsibility to the borrower. The seller has no such obligation.
RESPONSE - I partially agree with this assertion. The mortgage broker or banker (for that matter) does have a fiduciary responsibility to their client. They are obligated to provide professional, accurate, and legal advice. As long as they have acted in this manor they have performed their fiduciary duties. (IE: complete explanation of yield spread premium , complete program explanation) However, I contend that “mortgage suitability” is more the issue. The problem becomes that having loan provider’s judge mortgage suitability would be like having the coach also serves as the referee. In fairness, loan providers have a personal financial interest in the outcome. Their business is selling loans. Judging that a loan is not suitable for a borrower would cost them money. Can you see the quandary here?
RESPONSE - As for the seller, again I agree with your statement. However, these sellers who made great profits may now be subject to Foreclosures in their own community. So while they smile on the way to the bank with their proceeds check in hand, the buyer they sold too could also be their new neighbor. So they really have limited room to complain if their home(s) lose value in today’s market. A vicious cycle huh???
Let’s change the situation and say that it is my stock broker. He has an opportunity to steer me from good investments into some scheme where he gets a kickback from the company he is investing in. Maybe the kickback is only 1-2-3%, but instead of looking out for my best interests, he steers me into what is in his best interest. And the investment later goes bad.
RESPONSE - Again, I think suitability is the issue here…What makes the suitability standard workable in the securities industry is that the short-term interest of brokers in selling unsuitable securities is usually over-ruled by their desire for long-term interest in building and maintaining a roster of satisfied clients. While transactions-oriented operators looking for the fast-buck do exist, some of them operating out of the proverbial boiler rooms (IE: Lending Tree in the mortgage biz), they will be diminished with more disclosure. (IE: Standardized yield spread premium disclosure)
Now, if you don’t think mortgage brokers have a fiduciary responsibility to borrowers simply because we live in a capitalistic society and if you think that mortgage brokers are equivalent to sellers, I am most certainly glad that you are in no way responsibible for my investments, finacial transactions, or money.
Mortgage brokers and real estate agents work for the buyer and are expected to represent and disclose to the buyer information that is in their best interest. These parties are compensated for representing the buyer in the transaction to the tune of 2-3% for the RE and another at least 1% to the mortgage broker. If they are receiving income from other parties in addition to the buyer and are not representing the buyer’s best interests, they are violating their fiduciary responsibility to the buyer. Plain and simple. If they are taking care of themselves, it ain’t right. That isn’t “ivory tower” thinking. That is business ethics. And it may touch on being illegal.
Now note that most ethical mortgage companies and brokers that didn’t make their killing off of preying on the weak, poor, and marginal buyers are still in business and the subprime scam artists aren’t. That is capitalism at work. But at the same time, the investors, borrowers, neighbors and our entire financial system is paying the price of these few a-holes pocketing their profits off of the subprime market.
RESPONSE - I am not really sure how to respond to the last couple of paragraphs. They kind of ramble and make some pretty broad assertions, and quite frankly limited sense. At this point I am compelled to ask your back ground in the Mortgage or Real Estate Industry.
You somehow intertwine several mutually exclusive issues and conclude that this “melt-down” is to be laid solely at the feet of the mortgage industry.
Needless to say this is your broadest stroke of all. Everybody has had a hand in this debacle. From the greedy mortgage companies (after-all they did offer these horrible programs) who made lending way too loose. To the Sellers who actually experienced bidding wars on their homes and were actually facilitated with massive profits, and too the Sellers who had needed no moral, ethical, civic or fiduciary responsibilities, but only need take the money and run. Too the Realtors who assisted in the run-up on the home sale prices, and also made a pretty good wage in doing so. These people are simply innocent bystanders who suffered at the hands of these mortgage crooks. You know after reading your post I am convinced that this entire situation has been caused by mortgage companies not executing their fiduciary obligations.
April 26th, 2007 at 8:04 pmStephen,
The mortgage broker has a fiduciary responsibility to the borrower. The seller has no such obligation.
Let’s change the situation and say that it is my stock broker. He has an opportunity to steer me from good investments into some scheme where he gets a kickback from the company he is investing in. Maybe the kickback is only 1-2-3%, but instead of looking out for my best interests, he steers me into what is in his best interest. And the investment later goes bad.
Now, if you don’t think mortgage brokers have a fiduciary responsibility to borrowers simply because we live in a capitalistic society and if you think that mortgage brokers are equivalent to sellers, I am most certainly glad that you are in no way responsibible for my investments, finacial transactions, or money.
Mortgage brokers and real estate agents work for the buyer and are expected to represent and disclose to the buyer information that is in their best interest. These parties are compensated for representing the buyer in the transaction to the tune of 2-3% for the RE and another at least 1% to the mortgage broker. If they are receiving income from other parties in addition to the buyer and are not representing the buyer’s best interests, they are violating their fiduciary responsibility to the buyer. Plain and simple. If they are taking care of themselves, it ain’t right. That isn’t “ivory tower” thinking. That is business ethics. And it may touch on being illegal.
Now note that most ethical mortgage companies and brokers that didn’t make their killing off of preying on the weak, poor, and marginal buyers are still in business and the subprime scam artists aren’t. That is capitalism at work. But at the same time, the investors, borrowers, neighbors and our entire financial system is paying the price of these few a-holes pocketing their profits off of the subprime market.
April 26th, 2007 at 9:56 amWow a lot to comment on here…
JUSTIN – Your opinions on the foreclosure issue are a bit “ivory towerish” Let me ask you this question…Do you think that the seller is partially at fault for this foreclosure rich environment?
I’ll ask it again another way…Did the Seller care that the buyer of their inflated Sale Priced property was a 560 credit score 100% Stated Income buyer? Did they refute the generous appraisal? Or in this capitalistic, maximum profit deserving society, with no care or civic concern for the community they are selling out, did the Seller just do what was most profitable for him or her?
Here’s a novel idea…How about the seller who made a great profit because of these so-called “scam programs” kick some cash in to help the needy. This idea is ludicrous huh???
EVEL – I can only speculate that you had other issues at hand when you refied into your Sub-prime ARM. The pending actions you will incur are really nothing more then a continuation of a prior catastrophic event in your life, or simply the end result of a history of bad decisions. You could have taken a Sub-prime 30yr note at the time of your last refi. I would imagine you deemed the rate to be “too high” and convinced yourself that you would resolve a life’s worth of issues in 24 months. For what it is worth, I insist that my Sub-prime clients take the 30yr. program.
KM – Very well articulated in both of your posts. I notice that your posts did not illicit any specific responses. The truth hurts huh…
Here are a couple of thoughts I managed while reading this article…
1) The “HomeStay Program” may work…or it could easily end up like the “TIL” which is really a good idea that has gone bad…Nothing more then a continued source of confusion. I cannot imagine that this program will accomplish what is intended.
2) Who knows, this “sky is falling” foreclosure mentality may change the way appraisals are addressed. I mean, if you have an otherwise stable community, and this neighborhood suffers a foreclosure or more, this does not necessarily mean that the balance of the community is devalued. After all, it is the person (homeowner) who has developed the viability issues, not the physical structure. This approach could greatly reduce the ever growing “upside down” issue.
April 25th, 2007 at 8:28 pmWell you maybe in luck with the HomeStay program. It will all depend on loan-to-value. In other words there is little anyone can do for you if your house has no equity.
If your house has enough equity to roll your costs into the loan and not exceed 100% of the appraised value and if can document your income (ie. paystubs, tax returns etc) then this new program could help.
The problem is that many folks in trouble like yourself don’t have any equity and may actually be “upside down”.
April 25th, 2007 at 10:55 amYou can only be charged what the current index is (most likley 6 month libor 5.359) and your margin. Add those two together and thats your rate. Do you know the margin. If you have lived in the home for sixteen years you must have a ton of equity. Did you take all of it out on the last refi. Why did you go into a 2 year arm. If you did pull all the equity out, do you have any cash in the bank left. Were you in a 30 year fixed prior to this loan.
April 25th, 2007 at 5:54 amI was one who took out an Adjustable Rate Mortgage. 2 year. I was give 8.5% starting out
April 24th, 2007 at 3:45 pm(no teaser rate Ha) 2 years is up now, payments were $1750.00 Going to 2150 in sept, then in March 2700, then in Sept when it hits the cap at 15% payments will be around $3200. I will not be able to make the payment. Even thou rates on the market are at 5.5%. I know this is my fault for not understanding the loan and adjustments. I figured if rates were 5.5% on the market, mine would never go to 15%. Wrong. No matter what, they jack up the rate till you can’t pay it and then they take your home. I have lived in my house 16 years and want to stay. I hope they do come up with a Fannie Mae /Fammine Mac to save my house. I can affort to pay. I just need a fixed rate 30 year or 40 year loan. My payments would be about $1500 a month and I would be fine.
It is surely a case by case basis, but the real issue is the people that are locked in Subprime mortgages at a variable rate and are upside down. If they are in a fixed and upside down, they can wait out the RE market or if they are in a variable and aren’t upside down, they can refi as long as they qualify. But now there aren’t nearly as many subprime lenders so for the folks that have imperfect credit, are close to 100% LTV, or have marginal ratios, even refinancing may not be an option.
The Subprime lenders created tons of people that are in variable rate mortgages that were close to 100% LTV to begin with and had Debt to Income ratios of 50% or more, or they did stated income mortgages to begin with and the broker told them to inflate their incomes to qualify. During the boom, lots of brokers (and the fraud investigations of mortgage brokers committing fraud are starting to come down now) did stated income loans and used shady appraisals to get people into loans they could not afford. Then, they did 3-1 ARMS to lock in at an artificially low rate the first three years in a subprime loan with people that should not have qualified.
You are right. There were foreclosures before all this happened. People get divorced. People lose jobs. People file BK. But the market is able to handle these issues. That is not what we are talking about. The folks that got involved with some dirtbag mortgage broker that did one of these subprime stated income loans at a high LTV and used a “generous” appraisal to get the person to qualify almost guaranteed that the homeowner is going to default. The normal folks defaulting is something that happens regardless of any of this, but these new subprime defaults are something the market is going to have a very difficult time handling.
April 24th, 2007 at 2:13 pmIs every person in the mortgage business a scam artist. How can you blame the mortgage broker for someone going into foreclosure when you don’t know everybodys situation that’s going into foreclosure. Maybe the lifestyle they chose to live is the cause, maybe illness, but everyone going into foreclosure is not a victim of fraud or a “scam artist”.
April 24th, 2007 at 12:24 pmJust because someone is upside down as far as equity goes does not mean they can’t make the mortgage payment. That stays the same no matter what the value of the property. Now, if there in an adjustable rate that moves upward it is still capped. This might mean a jump in a few hundred dollars per month. The solution might be working some nights or weekends but it is manageable. Everyone is so scared by the media they want to just abandon the home and hole up in a bunker somewhere.
April 24th, 2007 at 7:39 amThere are a lot worse implications for all lenders and for the country if the subprime market continues to tank and if borrowers continue to default on subprime mortgages.
I pulled comps on my house last week. My EXACT MODEL home built and sold a month before mine a block away sold last month at auction for $260k. I had mine appraised when I did my last refi in September for $420,000. I checked all the records and the previous owner had defaulted and it was a repo.
That is the only recent comp and the house sold for $85 a sq ft. Replacement cost is $125-130 a sq ft. But now, this comp that was $100k+ below market takes every single home in the neighborhood and knocks $30-50k off of the appraised value because there are no other recent sales so this is weighted fairly heavy.
Point of all of that is that now, my home that was financed at 80% LTV is now 90%+ meaning that if I did refi, I am on the hook for PMI and/or higher rates due to no longer having the equity. I can’t sell for $400k now because when the new buyer wants the place, the comps won’t come in for them either, so they will either need tons of cash down or end up with PMI.
The only real upside is that this home was bought by someone trying to flip it, so they should list it soon and try to sell if for $350k or so and pocket some handy cash. Foreclosures destroy everyone in the neighborhood’s equity and if lots of the other folks don’t have access to their equity and have liquidity problems it further stresses their own mortgages.
It makes sense to help people stay in their home if:
A. The can afford the home in the first place
B. They are not upside down
If they are upside down, they are going to default sooner or later and walk from the place if the market does not come back. These are subprime folks to begin with, so they have less to lose. Second, if they can’t pay for the place now and you jiggle things around to get them back current, they are just going to default later. Everyone involved is better off just having them take the hit now and let these folks that can’t afford the home they are in get out of it. Prolonging it only draws the problem out.
April 23rd, 2007 at 3:16 pmLeave a Comment