Underwater borrowers – Non-FHA, -Fannie & -Freddie mortgages

Here we go again.

For three weeks now, I’ve been going over Federal programs designed to help underwater borrowers with their delinquent mortgages. The first installment covered Federal Housing Administration (FHA) loans – the ones supervised by the Department of Housing and Urban Development (HUD), which is an actual Federal agency.

The past two weeks were spent on programs run by the Federal National Mortgage Association (FNMA), commonly called Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac. You’ll recall that both Fannie and Freddie are U.S. government-sponsored enterprises (GSEs). Both have been bailed-out by the government which, for all practical purposes, makes both semi-official Federal agencies.

But there are plenty of mortgages out there that aren’t owned or guaranteed by FHA, Fannie, or Freddie. So, what about them?

As part of the overall plans to promote economic recovery and resurrection of the housing market, the Federal government came up with three programs to help struggling homeowners with their mortgages. One facilitates refinances, another modifications, and the third avoiding foreclosure (but still losing the home). Unsurprisingly, the three programs have acronyms: HARP (Home Affordable Refinance Program), HAMP (Home Affordable Modification Program), and HAFA (Home Affordable Foreclosure Alternatives) program. Let’s go over all three.

First, HARP. Unfortunately, HARP applies only to mortgage loans owned by Fannie and Freddie. Since we’re talking about non-Fannie and –Freddie mortgages, let’s scratch HARP right off the bat.

That brings us to HAMP.

HAMP is designed to help responsible homeowners who have been put in difficulty because of financial hardship, whether caused by loss of income or job, or an increase of the interest rate on an adjustable rate mortgage.

For starters, to qualify for HAMP, borrowers have to be able to document their hardship by proving income and expenses. They must also meet the following criteria: 1. be the owner-occupant of a one- to four-family home; 2. have an unpaid balance less than jumbo status ($729,750 for a one-family dwelling with higher balances allowed depending on the number of units); 3. have a first mortgage that was originated on or prior to January 1, 2009; 4. have a monthly mortgage payment (including principal, interest, property taxes, homeowners’ insurance, and homeowners’ association [HOA] dues) greater than 31% of gross monthly income; and 5. show that the mortgage payment can’t be made because of the financial hardship.

Still, there can be obstacles, such as junior liens (i.e. second mortgages, judgments, delinquent HOA dues). It may be that the only way to modify the current first mortgage is to cut the principal balance and base a modified loan on the reduced principal balance. If so, though, what happens to the reduction? Is it forgiven? Probably not. Instead, it may be lopped back in line as a junior lien, which is why an existing junior lien presents an issue. Borrowers need to be sure whether the reduced balance is actually being forgiven or rewritten, either as a junior lien or an unsecured note. Sometimes, these deferred notes may not bear interest for a few years – but they don’t vanish into thin air. Instead, they hang on, even after the home is sold later by the borrower. As always, borrowers need to read before they sign.

So if HAMP won’t work, only HAFA remains.

HAFA procedures help borrowers avoid foreclosure. But HAFA doesn’t keep borrowers in their homes. Instead, HAFA amounts to a way of getting borrowers off the hook of their unmanageable loans by letting them off-load their homes without going through foreclosure. Why should borrowers care? Because foreclosure carries a stigma and causes serious damage to credit, so avoiding it may be a minor benefit. How does HAFA do this? By offering inducements (money) to lenders, borrowers, and junior lien holders and by allowing real estate agents to be paid a commission up to 6%.

The two ways to dodge foreclosure are to convey the home back to the lender (deed in lieu of foreclosure) or to convey the home to someone else for less than is owed to the lender (short sale). Obviously, for either to happen lenders must be on board. To be on board, lenders have to be convinced borrowers don’t qualify under HAMP or have failed the trial modification that HAMP requires. Most likely, lenders will favor short sales over deeds in lieu because lenders won’t have to take back homes themselves if they’re sold to third parties through a short sale. Lenders’ regulators don’t like REOs (the term for real estate owned by lenders) on lenders’ books. Plus, in short sales lenders will know their losses up front. But if lenders take homes back through a deed in lieu, they will then have to list the homes and sell them – maybe for even less.

As with other topics when it comes to owning property and being underwater, be sure to hop on the Internet to check the latest program features. Programs tend to change and be tweaked.

- Morrie Erickson

Underwater borrowers – Freddie Mac mortgages

For the past two weeks, I’ve been going over Federal programs designed to help borrowers drowning on their mortgages. Two weeks ago I kicked off the topic with Federal Housing Administration (FHA) loans, which are supervised by the Department of Housing and Urban Development (HUD) – an actual Federal agency.

Last week we went over what I call a semi-official program run by the Federal National Mortgage Association (FNMA), dubbed Fannie Mae. Fannie was established in 1938 after the collapse of the housing market in the wake of the Great Depression (sound familiar?). You’ll recall that Fannie is “semi-official” because it’s a government-sponsored enterprise (GSE) instead of being an actual Federal agency, although because Fannie was bailed out by the Feds, it might as well be a Federal agency.

Fannie’s younger brother, the Federal Home Loan Mortgage Corporation (FHLMC), which was created in 1970 and is commonly called Freddie Mac, is also a GSE and a bailed-out, semi-official Federal agency.

Sometime in the next couple of years, Congress will have to decide what to do about Fannie and Freddie. Should the Federal government take them over and turn them into Federal agencies? Should they be privatized and run like large corporations? Or should they continue as GSEs with the implied promise of being rescued by the Federal government if they fall on hard times? Tough alternatives with far-reaching implications for the Federal government, taxpayers, and – especially – homeowners.

But those alternatives are for another day. Right now, let’s deal with Freddie.

As I’ve said before, when you talk about loan programs – whether or not you’re mentioning helping underwater borrowers in the same breath – each type of program is lender- or program-specific. In other words, because HUD runs FHA, HUD decides how FHA borrowers are helped. Same goes with Fannie and Freddie. Because Fannie and Freddie buy loans from lenders, each dictates how their respective loans are set up and – critically in today’s perilous economic climate – how their troubled loans are restructured or unwound.

Like Fannie, Freddie has three ways of helping borrowers: refinances, modifications, and short sales. As is pretty obvious, refinances and modifications are designed to keep borrowers in their homes. On the other hand, short sales allow borrowers to unload their property for less than what’s owed – a way of letting over-stretched borrowers off the hook and get on with their lives. Let’s talk about all three.

For borrowers suffering because of the kind of loan they have instead of because of the economic meltdown, Freddie has two options: refinancing through the Same Servicer program or the Open Access program. Both are explained on Freddie’s website: www.freddiemac.com. The concept is that if a borrower has an adjustable or variable interest rate that’s gone up, the payment may now be too high to handle. Refinancing to a fixed rate may solve the problem.

Freddie’s Same Servicer program has an expedited procedure for qualifying if the borrower refinances through the servicer the borrower is currently making payments to. On the other hand, Freddie’s Open Access method allows refinancing through any Freddie-approved servicer, but the qualification process is more involved. Of course, for borrowers who have taken pay cuts, a refinance won’t work if borrowers can’t afford even the revised payments. Keep in mind that the full balance of the loan is still owed; only the loan terms are changed. Ultimately, whether borrowers qualify or not depends on the Home Affordable Refinance Program (HARP), a Federal plan encouraging lenders to rework mortgage loans for qualified borrowers. The key word here is “qualified”.

Modifications work differently, although as with refis, borrowers have to prove they can make the new payment through a 3-month trial period. Usually though, modification borrowers are in more dire financial straits than borrowers seeking to refi. Borrowers’ pay cuts are the prime culprit. So if a loan can be restructured to take into account current income, things might be all right. Suppose a borrower could afford the loan if the principal balance were $30,000 less. A modification will lower the loan to the adjusted balance. Sounds good, but what happens to the $30,000? Usually, the borrower has to sign a new promise to pay it back (maybe interest-free for a few years) and it’s treated like a second mortgage. In other words, it will have to be paid off eventually. But as I mentioned last week in Fannie modifications, if there’s already a junior lien, such as a home equity mortgage, a modification won’t work unless the home equity mortgage moves into third position (behind the lowered first and the new $30,000 second).

So now we’re down to short sales.

To work out a short sale through Freddie, the underwater borrower must be unable to pay the loan long-term, must be in default or nearly so, and must have tried to sell the home “as is” for at least 90 days. Proving the attempt to sell requires pricing the house based on an “as is” broker price opinion (BPO), “broker” meaning a licensed real estate agent.

As with Fannie loans, Freddie borrowers can’t pay for repairs and can’t receive cash at closing. (In contrast, you’ll recall that FHA lets borrowers receive up to $1,000 at closing.) The short sale won’t be approved until Freddie approves the offer to purchase and a closing date has been set.

As pointed out last week with Fannie short sales, this process seems backwards. If I’m a potential buyer with a rate-lock and move-in date on my mind, I won’t want to waste time and energy hoping some far-off servicer will approve my deal. In fact, in our office we’ve found the approval process painfully slow (months!) and convoluted (“You talked to who before and were told what?”) for Fannie and Freddie. Not that it matters to underwater borrowers, potential buyers, and real estate agents, but the delays are largely because the short sale process has been dumped by Congress on servicers who are under-staffed and ill-equipped to handle the crush of business. Suffice it to say that programs that pre-approve a sale price make more sense.

As with Fannie, Freddie short sale brokers are allowed a 6% commission (3% if only one broker).

In all short sale transactions, though, beware of unauthorized flips. A flip occurs when a third party or so-called facilitator acquires the home being sold at a discount (with the seller-borrower’s lender taking the hit) then turns around and sells the home for a profit (which otherwise would have gone to the lender being shorted). If that situation presents itself, the parties must disclose all terms of the transaction(s). Over the first weekend in May, 2010, Freddie came out with guidelines for disclosures, making it clear that Freddie must be told all the facts surrounding the transaction so Freddie isn’t mislead. What the guidelines are saying is: would Freddie make the same decision if it knew all the facts instead of just some of them? Those who don’t fully disclose can expect to land in legal hot water, thanks to Freddie’s short sale fraud task force.

Regardless of whether borrowers are refinancing, modifying, or selling short, they need to know whether any shortfall is being forgiven or simply deferred. As with all other serious matters, especially in real estate, the key is to get it in writing.

Be sure to Google Freddie and other program providers regularly because programs are frequently tweaked. Once again, Freddie’s website is www.freddiemac.com. Plan to check it regularly to stay up to date.

- Morrie Erickson

Underwater borrowers – Fannie Mae mortgages

Borrowers of all kinds continue to be up to their necks, or worse, on their mortgages – a problem that isn’t going away. So, it’s worth coming to terms with borrowers’ options, which vary depending on the type of loan a borrower has. Last week I kicked off the topic with Federal Housing Administration (FHA) loans – the ones supervised by the Department of Housing and Urban Development (HUD).

This week, we’ll branch out from an official Federal government program (FHA) and tackle a semi-official program run by the Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae. I say “semi-official” because Fannie is a government-sponsored enterprise (GSE) instead of being an actual Federal agency, although thanks to Fannie’s bailout by the Feds, Fannie has become a Federal agency for all practical purposes.

Fannie’s younger brother (it was created later), the Federal Home Loan Mortgage Corporation (FHLMC), commonly called Freddie Mac, is also a GSE and a bailed-out, semi-official Federal agency. But Freddie will have its day next week.

For now, let’s talk about Fannie.

If you read last week’s segment, you know that because HUD runs FHA, HUD also makes the rules. Same goes with Fannie. Because Fannie buys loans from lenders, Fannie dictates how the loans are set up and – critically in today’s perilous economic climate – how troubled loans are restructured or unwound.

Fannie has three ways of helping underwater borrowers avoid foreclosure: refinances, modifications, and short sales. Refinances and modifications are designed to keep borrowers in their homes. Short sales are not. Let’s go over each in turn.

Some borrowers haven’t been hit especially hard by the economic meltdown but are suffering because of the kind of loan they have. For example, if borrowers have an adjustable or variable rate and their interest rate has gone up, their payment may now be so high they can’t handle it. Refinancing to a fixed rate may solve the problem. But for borrowers who have taken pay cuts, a refinance won’t necessarily work. Why? Because refi borrowers – like all borrowers these days – have to qualify for the refinanced loan. Borrowers with drastic pay cuts will be out of luck. But whether borrowers qualify or not depends on the Home Affordable Refinance Program (HARP), a Federal plan encouraging lenders to rework mortgage loans for qualified borrowers.

Before going on, a word here about how the secondary mortgage market works, because the first question most borrowers ask is: “Okay, I don’t make payments anymore to the lender where I got the loan, so who do I talk to?” Answer: the servicer. Who’s the servicer? The firm the borrower now makes payments to. Does the servicer own the loan? Probably not. Who does? Most likely, a whole lot of bondholders who have bought shares of a pool of mortgage loans which generate income as borrowers make their monthly payments of principal and interest. These are the infamous mortgage-backed securities (MBS) we’ve heard so much about. Infamous because, when borrowers begin to default on their mortgages – and borrowers have defaulted in spades – the servicers have to kick in the missed payment to the pool. Not a good deal for servicers unless somebody’s going to reimburse them. Which is what Fannie does in Fannie loans. Which, in turn, is why Fannie lost its shirt and needed a Federal bailout. Which is why we taxpayers are footing the bill.

So there it is: an underwater borrower who wants to refi needs to contact his or her servicer.

Same goes for borrowers who want to modify. But what’s the difference between a refi and a modification? In both, borrowers have to qualify to prove they can make the new payment. But the chief difference is that modification borrowers are in deeper water than borrowers seeking to refi. Most have taken hits in pay which means they can’t afford their monthly payment, even if they originally could. But if their loan could be restructured to meet their current income, things would be all right. Usually, that means knocking off some of the principal balance to a level borrowers can afford. But the amount knocked off isn’t forgiven. Instead it becomes a junior note behind the newly reduced loan, and it’s secured by a junior mortgage. In other words, ultimately it will have to be paid off. Problem is, if there’s already a junior lien, such as a home equity mortgage – and usually there is – a modification won’t work.

Which leads to short sales.

Clearly, short sales are less favored by Federal programs designed to keep people in their homes. On the other hand, they’re a practical way for unworkable mortgages to be wound down. In a nutshell, the lender agrees to accept less than is owed when the house is sold to a new owner. How much less depends on Fannie.

To take advantage of a short sale through Fannie, the underwater borrower must have a verifiable loss of income or increase in living expenses and must actually be delinquent on the mortgage loan. In addition, the property must qualify price-wise based on a broker price opinion (BPO) based on “as is” value. Borrowers can’t pay for repairs and, unlike FHA short sales, can’t receive cash at closing. The short sale won’t be approved without a closing date, which seems backwards because a potential buyer won’t want to put out much time, energy, and money unless it’s reasonably sure Fannie will approve. Programs that pre-approve a sale price make more sense.

The good news for brokers is they’re allowed a 6% commission (3% if only one broker). Because lenders tried to chisel down sales agents to receive more money themselves, Fannie cracked down on reducing commissions in its Servicing Guide, Part VII, Section 504.02, effective March 1, 2009. See Fannie’s Announcement 09-03 dated February 24, 2009 (you can Google it).

Also, see Fannie’s Announcement SEL-2010-05 dated April 14, 2010, which tweaked certain procedures. Be sure to Google Fannie and other programs regularly because they change often enough to be a moving target. Fannie’s website is www.efanniemae.com. It’s a good idea to check it frequently to stay up to date.

- Morrie Erickson

Underwater borrowers – FHA mortgages

Two weeks ago, my blog post covered an overview of options for underwater borrowers. The alternatives ranged from foreclosures to short sales, with deeds in lieu of foreclosure and modifications in between.

I mentioned Federal programs such as HARP (for refinances), HAMP (for modifications), and HAFA (for short sales) and that not all struggling borrowers are eligible for all programs because applicability depends on the kind of loan the borrower has. This is because different types of loans are supervised by different Federal agencies.

Today’s topic is underwater borrowers who have FHA loans.

Because FHA (Federal Housing Administration) loans are supervised by HUD (Department of Housing and Urban Development), it stands to reason that HUD also controls how FHA loans are implemented, modified, terminated, or otherwise unwound. Keep in mind that FHA doesn’t make loans, it insures them, which is a way of inducing banks and other lenders to make loans to borrowers who have little equity.

In response to the housing crisis and economic meltdown, HUD issued a series of letters to their mortgagees (participating lenders) outlining policies and procedures. Bear with me now while I list a few citations, but if you check these out you’ll get loads of specifics, so I’ll mention a few for your reading pleasure. Mortgagee Letter 2008-43 dated December 24, 2008, outlines procedures for short sales. A second letter – this one called Mortgagee Letter 2009-23 – was issued July 30, 2009, and announced a HAMP program for FHA (appropriately called “FHA – HAMP”) addressing loan modifications. (FHA loans weren’t covered by the original HAMP.) In a follow-up on September 23, 2009, Mortgagee Letter 2009-35 clarified modification procedures. Yet another Mortgagee Letter (this one 2009-52) came out December 16, 2009, and discussed the impact of selling short. All these letters are public and available online. All you have to do is Google them and take a look.

Like all Federal agencies, HUD publishes regulations. For those who like to hear it (or in this case, read it) from the horse’s mouth, check out 24 CFR 203.355 for FHA lenders’ options on default. For short sale procedures see 24 CFR 203.370 and, for modifications, 24 CFR 203.616. Google these and you’ll get plenty of hits.

In a nutshell, here’s what you’ll find. To be eligible for an FHA modification, the borrower must be at least 4 months but not more than 12 months delinquent. If the money situation improves (but not too much), the borrower may resume making payments but must be unable to catch up the shortage or payments missed. In other words, the borrower must be suffering from changed circumstances (changed, that is, from the time the borrower originally got the FHA loan).

If the borrower qualifies and a modified loan is put in place, the arrearage isn’t forgiven. Instead, the borrower is required to sign a junior promissory note and mortgage for the arrearage which gives taxpayers hope the loan will be paid in full. This junior note and lien requirement is a problem if the borrower already has a HELOC (home equity line of credit) in place, but with most FHA borrowers putting only 3% down at date of acquisition, there shouldn’t be a HELOC. But if there is, a modification is probably out.

That’s when a short sale enters the picture.

To be eligible for a short sale, the borrower must be in default and have negative equity, but the property can’t be in foreclosure yet. The borrower also must be the owner-occupant (not an investor, although there are a few hardship exceptions) and have been actively trying to sell the property for 3 months. So, timing is critical.

Generally, for a short sale to be considered, the property must be listed for sale at its “as is” appraised value as determined by an FHA appraiser. A real estate commission up to 6% is allowed, assuming more than one sales agent is involved. Otherwise, the maximum commission is 3%. The seller may not make repairs as a seller concession (with some exceptions), the goal being to maximize the sale price and minimize the shortage to the lender (and, in turn, the cost to FHA and taxpayers).

The actual sale price allowed (compared to the loan balance) depends on a tiered pricing structure, based in part on how long the house has been on the market. As an incentive to underwater borrowers, FHA allows the seller/borrower to receive $750-$1,000 cash at closing (for first and last month’s rent since the seller/borrower won’t be buying another house). Incentives up to $1,250 go to outgoing FHA lenders too, with another $250 thrown in for title searches and recording fees. There’s more. Despite senior lenders’ not liking to pay junior liens when they’re not being paid in full themselves, FHA will allow up to $2,500 of the sale price to make junior lienholders go away. And, up to 1% of the new buyer’s loan may be used for seller’s closing costs if the buyer is obtaining a new FHA loan.

So, the FHA programs are in place, with short sales likely trumping modifications in most cases. To answer your questions – or at least to get a strong start – read Mortgagee Letter 2008-43. It contains loads of details.

- Morrie Erickson

So, you want to close at month-end?

It’s a request we get month in, month out. And there are good reasons for it…sometimes. But month-end closings can present problems. So, like most choices in life, balance is critical: the upside has to outweigh the down.

First things first. Why are month-end closings so popular?

For buyers getting new mortgages, the nearer to the end of the month a settlement takes place means less interest paid up front. For example, if closing occurs on March 30, the borrower’s first mortgage payment won’t be until May 1 (which includes interest for April). Consequently, at closing the borrower will have to prepay interest for only two days (March 30 & 31). That’s a good thing.

But suppose closing occurs on April 2. The borrower will have to prepay interest for 29 days (April 2-30). Whoa! That’s a lot more than a measly two days. But consider this: the first mortgage payment won’t be until June 1. So, which is better? Coughing up 29 days interest in advance and putting off your first payment for almost a month more or paying less at closing but starting your mortgage payments a month earlier?

For borrowers squeezed for cash, closing late in the month makes sense. But if cash at closing is not an issue, why jockey for a closing date when title companies and lenders are busiest? It’s no secret that the end of the month is when title companies’ closing schedules get hectic. Which means closings are stacked up hour after hour. In turn, efficiency suffers and the chances of mistakes go up. In fact, if problems do occur, the closing may have to be delayed until the following month. Meaning more up-front money. Not a good thing for borrowers who can’t afford it.

These days, end-of-month (and Friday) closings have another issue to deal with: wire transfers. In Indiana, all funds of $10,000 or more (per person, per lender, etc.) must be sent to the title company by electronic transfer. Often, lenders don’t send funds until all closing requirements are met – in other words, at the closing table. Given that many banks cut off sending wires at 2:00 p.m., afternoon closings probably won’t be funded until the next business day. Sometimes, the next business day is the following Monday – or Tuesday if Monday’s a holiday. And it all goes downhill from there, because if sellers haven’t received their money (and they won’t until funding occurs), most sellers won’t let buyers move in. So, if the buyer has a moving van waiting to unload, the movers will have to cool their heels until funding. Definitely not a good thing.

What do month-end closings mean for sellers? As just mentioned, there’s the downside of waiting for their funds, which can create a domino effect. If the seller intends to use the money from the sale to buy another home later that day, the seller’s purchase will have to be delayed. You don’t even want to think about the consequences if it’s the seller’s last day to close or the seller’s (soon to be buyer’s) new mortgage rate-lock expires. Late funding also means the seller’s outgoing mortgage won’t be paid off as early because the title company can’t wire the payoff until the sale has officially closed, adding extra days of interest and possibly late fees. Worse, if the seller has an FHA mortgage, the cash outlay racks up even faster because FHA charges interest for the whole month regardless of when payment is made. So if the closing is pushed back from the end of March until the first of April, the seller will have to pay all April’s interest (even if closing is on April 1^st). Most sellers won’t be pleased. Some April Fool!

With the first-time homebuyer tax credit deadline looming (June 30, 2010), savvy sellers, buyers, and their brokers won’t want to risk a late June closing. The consequence of losing the tax credit because something went wrong at the last minute would be devastating. This deadline is written in stone, unlike a rate-lock that might be able to be extended. But Uncle Sam doesn’t extend. Either the closing occurs on or before June 30, or the tax credit goes down the drain.

The word to the wise, first-time homebuyer or not, is to plan ahead – and conservatively. Shoot for early or mid-month. Don’t take a chance on saving money and getting the deal closed. And remember, not only will title companies be pulling their hair out end of month, so will lenders. Just as title companies can close only so many sales within a certain period of time (only so many hours in the day), same goes for lenders who can process only so many loans. Because most lenders will be pulling out all the stops, mistakes can be made which may cause delays.

So get your deal closed early and rest easy while the ones who didn’t plan ahead break into a sweat.

- Morrie Erickson