bubbleinfo.com

I represented the seller, a blog reader:

The last sentence here should be a deterent, hopefully, but the standards are a bit vague:

WASHINGTON (Dow Jones)–Legislation to overhaul U.S. mortgage lending passed the House Thursday as lawmakers sought to rein in practices blamed for the foreclosure crisis.   The legislation is a tougher version of a bill that passed the House in 2007 but later stalled. The current bill would establish national minimum underwriting standards for home mortgages and require originators to retain a portion of the credit risk of mortgages they sell to third parties.   The legislation passed the House on a 300-114 vote.  

Under the measure, mortgage lenders would be required to offer home purchase mortgages that a borrower has a “reasonable ability to repay.” For refinancings, the lender has to believe the transaction provides a “net tangible benefit” to the borrower.   A lender violating these rules would be required within 90 days to modify or refinance the loan at no cost to make sure it meets the standards.
(Dow Jones Newswires 04:25 PM ET 05/07/2009)

The C.A.R. has put the lenders and their modification plans together in one place:

http://www.car.org/legal/mortgage-workout-programs/?view=Standard

If it wasn’t obvious that they are just throwing these plans together, seeing them in one place will clinch it.  Not that they need to all use the same criteria, but it sure would be helpful for the consumers to identify clearly whether or not they qualify.  Instead, they’ll be inclined to hire a “consultant” and pay for help they probably wouldn’t need if it were a clear, concise, one-size-fits-all modification plan for all lenders to use.

Here is the summary of the differences in plans:

Hope for Homeowners

• Primary residence, can’t own other properties
• Made at least six payments
• Not able to make payment now without help
• Loan modified to 31% housing debt-to-income ratio, as of March, 2008
• Share new equity with FHA created by modification
• 4.5% funding fee to FHA
• Existing lender must participate
• Homeowner has not been convicted of fraud in the last ten years, and did not knowingly or willingly provide false information to obtain existing mortgage.

Countrywide

• Primary residence only, subprime or option-arm only
• More than 60 days late on payments
• Current on payments, but “reasonably likely” to become 60 days late as a result of rate reset or payment recast.
• 34% housing debt-to-income ratio to figure new loan amount

Citigroup

• Primary residence only, must be current on payments.
• 35% housing debt-to-income ratio on new loan
• Program runs Nov 11 – May, 2009

JPMorgan Chase (WaMu)

• Primary residence only
• Program starts 1/31/09, goes for two years
• Goal is to “achieve sustainable payments” at 31% to 40% housing debt-to-income ratio

IndyMac (FDIC)

• Primary residence only
• Adjustable-rate loans, including subprime and neg-am
• Borrower must already be ‘seriously delinquent’, or at risk of default due to payment resets
• Loan modification based on 38% housing debt-to-income ratio

FHFA (Fannie/Freddie, FHA, WFB)

• Primary residence only
• Starts Dec 15th
• Must have missed three payments, and not declared bankruptcy
• Modified to 38% housing debt-to-income ratio

The lower the DTI, the better for the borrower when calculating the new loan amount. 

Here are some examples, based on 6.25% fixed-rate on new loan, and 34% DTI:

$400,000 old loan

$80,000 gross annual income

$1,500 consumer debt monthly (car pmts., credit cards, etc.)

$295,000 new mortgage

$1,816 PITI + $1,500 = 50% DTI ratio

********************************************************

$500,000 old loan

$100,000 gross annual income ($8,333/mo.)

$2,000/month in consumer debt

$365,000 new mortgage

$2,247 + $2,000 = 51% DTI ratio

********************************************************

$600,000 old loan

$150,000 gross annual income ($12,500/mo.)

$3,000/month in consumer debt

$575,000 new mortgage

$3,540 + $3,000 = 52% DTI ratio

I just changed the data above (12:41pm Monday) to correct the loan amounts – the lenders are going to re-calculate the new loans based on housing debt-to-income only.  If they are going to disregard the consumer debts of the borrower, I’m not sure how much good it will do in the long run.  Still no mention about what happens to the second mortgages, I guess they have to be willing to go away too.

Having ‘back-end’ ratios that exceed 50% is dangerous territory in a state where the combined fed and state income taxes are 25% to 40% – what money is left to eat with, let alone put in savings?

While we’re talking about FHA, check out Business Week’s article:

http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm?chan=magazine+channel_top+stories

The former subprime-mortgage brokers are now selling FHA loans in much the same fashion.  Unlike the subprime loans, borrowers have to qualify for FHA financing, so hopefully only the worthy will get a loan.

But when you look at the characters, you may have some doubts…..from the article:

The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country’s largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded top salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.

But Premier didn’t just close down. Since it declared bankruptcy, federal records show, it has issued more than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by law. In late October, an FHA spokesman admitted it was unaware of Premier’s situation and welcomed any information Business Week could provide.

You’d think the government would have had Premier on a watch list. According to data compiled by the FHA’s parent, the U.S. Housing & Urban Development Dept. (HUD), the firm’s borrowers have a 9.2% default rate, the second highest among large-volume FHA lenders nationally.

Now, members of the Cugno family have started a brand new company called Paramount Mortgage Funding. It operates a floor below Premier’s headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, only weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. “I am the only person in the country who really understands FHA,” Cugno says with characteristic bravado.

Are the government officials going to take the time to monitor the incoming loans for quality?  Or are they in such a hurry to spend the money that they’ll worry about future defaults later?

I agree with the buy-and-bail premise, that it’s not right to go buy a new house and then let your old house be foreclosed.  But the new Fannie/Freddie rules (and VA) makes it tough on those who would like to build a portfolio of real estate by keeping their old house for a rental. 

The three requirements:

• 30% equity in the residence you’re leaving
• 6 months’ worth of PITI payments of both houses in the bank at closing
• Must qualify to buy new one without using rental income on the old one

FHA is easier.

FHA requires that you have 25% equity in your old house, but they base your equity position on THE ORIGINAL PURCHASE PRICE, not today’s value.  While that doesn’t help those who have owned their old house for years, it’s a real break for people who bought at the peak.

FHA sticks with their regular guideline - NO RESERVES REQUIRED at all.

If you have trouble qualifying for both houses without the rental income on the old one, FHA allows for you to move into a third residence (in with parents, rent an apartment, etc.) for six months.  They’ll call the old house an investment property, and use the rental income towards qualifying.

DO NOT BUY-AND-BAIL!  But if you would like to legitimately keep your old home as a rental and can find a new home that’ll be in the FHA range, it can work.

If the government has a game plan, it would be to push more buyers towards FHA financing.  Beginning next year, the FHA will be collecting at least 1.75% on every loan (up from 1.50%).  It’s their self-insurance, and hopefully the extra bump in 2009 will be enough.  They also add a monthly MI (see below)

But they haven’t tightened up much – here are FHA benefits:

• No minimum credit scores required (a history of cell-phone-bill payments will work)
• Down payment to be 3.5% in 2009 (up from 3%).
• Buyer’s entire cash needed can be gifted from family, employer, etc. (but no more DAP)
• Sellers can pay up to 6% towards closing costs and repairs
• No reserves required
• No cap on debt ratios – compensating factors considered (55% is about as high as they go)
• No impact from declining-market conditions
• Loans are assumable
• Not limited to first-time homebuyers
• Sellers are no longer required to make most repairs (before they had to repair anything the appraiser found unacceptable)

The FHA loan amount has been $697,000, but it is expected to match Fannie/Freddie’s new San Diego amount, $546,250.  Here’s a sample qualification:

$565,000   sales price

$  19,775   down payment

$545,225   loan amount at 6%

$3,268.90  P & I

$   565.00  Prop. Tax

$     75.00  Fire Ins.

$   249.89  Mortgage Insurance

$4,158.75  Total Housing Cost

$    600.00  Car Payments (guess)

$4,758.75    Total debt (divide by 55%) = $103,824 annual gross income to qualify

You can keep adding non-occupying related people until you qualify.  As long as your parents aren’t maxed out on credit cards, they can co-sign and their income and expenses are added to the qualification, even though they won’t be living there. 

VA

It used to be that VA loans were 100% LTV up to $417,000, and 25% of everything higher than that.

But now VA is financing 100%, up to $729,000!

There is also plans to raise the max loan amount to $1,050,000 with no down payment.