Bill McCord's Blog

The Federal government wants to reduce the number of empty and deteriorating foreclosed houses and, at the same time increase the number of rentals available, thereby lowering the currently excessive rents being asked in many areas.

One of the biggest problems in dealing with the large numberof foreclosed homes is that they exist in large clusters in the worst hit cities. This pushes values in many areas into a downward spiral. Empty unmaintained properties depress values in many neighborhoods. This causes values to drop further for those owners left, causing still more underwater properties. In turn this leads to more short sales and foreclosures and a serious problem for cities and Counties dealing with increased crime and vandalism.

Federal officials hope to launch a pilot program soon to convert government-owned foreclosures (FANNIE MAY and FREDDY MAC) owned properties into privaely owned rental homes.

The plan is to package large numbers of such properties into a single bulk purchase at prices which will draw large investors in. A condition of the deal would be that these properties would remain as rentals for a pre-determined time before they can be sold. If successful such a program could help in 4 ways:

1. Get these properties back into productive use.

2. Stabilize blighted neighborhoods.

3. Expand the supply of rental properties in such areas to accommodate the surge of new tenants resulting from the loss of their homes.

4. Reduce the number of empty, deteriorating homes owned by the government.

 If support is forthcoming from our politicians this could be useful step forward to a final resolution of the worst foreclosure crisis since the early 1990’s. I refer to the S&L Scandal which ran from 1989 through 1992 and cost every single person in the country approx $50,000.

A large increase in Mortgage loan applications for Buyers is another strong sign that the market is getting back to normal in many parts of the Country. Overall the number of applications for mid February to mid March was  22% greater then for the same period last year.

When added to the recent large increase in the number of Pending sales contracts this bodes well for a much stronger market overall.

President Obama is urging Congress to pass a bank tax, funneling the money over to the Federal Housing Administration which will then refinance non-GSE borrowers who are under water on their loans.

Wednesday morning the White House released certain details of its latest refi plan, opening up the initiative to borrowers with a minimum credit score of 580 and loan-to-value ratio of up to 140%. But there is one catch: these mortgagors must be current on their existing loan.

For loans with LTVs above 140%, lenders would have to write down the principal before refinancing, according to a White House fact sheet released to the media.

This plan will “help millions of responsible homeowners who make their payments on time but find themselves trapped under falling values or wrapped in red tape,” President Obama said at a rally in Falls Church, Va., Wednesday morning.

The White House estimates FHA will need $5 billion to $10 billion to fund this new refi program for private mortgages and create a separate mortgage insurance fund.

“This will help the FHA better track and manage the risk involved and ensure that it has no effect on the operation of the existing [FHA] Mutual Mortgage Insurance Fund,” a White House fact sheet says.

To get the program off the ground, Congress will have to pass legislation that authorizes FHA to refinance higher LTV loans along with the proposed bank tax to fund the program.

The President calls the tax the “Financial Crisis Responsibility Fee,” noting that it will be imposed on the “largest institutions based on their size and the riskiness of their activities.”

Washington insiders consider the bank tax a “non-starter” in the Republican-controlled House of Representatives.

Mortgage servicers continue to modify 25,000 loans a month under the government’s HAMP program, but that pace could pick up later this summer as new changes to the effort kick in.

To date, servicers have completed roughly 930,000 modifications under the Home Affordable Modification Program with 760,000 homeowners still current on those loans.

Recently unveiled changes could open the door for 1.5 million struggling homeowners (and real estate investors) to be eligible for a HAMP modification, according to analysts at Keefe, Bruyette & Woods.

The Treasury is working on guidance to allow modifications of single-family loans on rental properties for the first time.

The new guidance will relax HAMP’s debt-to-income cutoff, reflecting borrower obligations to make payments on second liens and medical bills. HAMP currently excludes borrowers with mortgage payments that are less than 31% of their income.

Treasury also is increasing incentive payments to investors, including Fannie Mae and Freddie Mac — when they agree to reduce the principal amount on a delinquent loans.

KBW managing director Bose George is skeptical the GSE regulator will allow principal reductions on Fannie/Freddie loans. However, principal reductions would make more underwater borrowers eligible for a HAMP modification.

Treasury wants to issue the new HAMP guidelines this month, but stronger modification results might not be seen until August or September.

“Treasury expects that homeowners may be evaluated under the new program beginning in May for trials starting June 1,” the department said in releasing its December report on HAMP activities Monday.

The new HAMP report shows 79,300 borrowers are currently in payment trials. In December, 23,300 borrowers completed the three-month trials and were granted a permanent modification. In November, servicers completed 26,900 permanent HAMP modifications

Until recently the only hope of buying again after losing you house through default was with FHA, and for many that will still be the best voice.

 However, a new option is now possible.

The much maligned Fannie Mae is now allowing some people who avoided Foreclosure through either a Short Sale or a Deed in lieu of Foreclosure to get a regular Conventional Mortgage again.

The good news is that Fannie Mae will buy those loans from Banks that make them. It does not mean that all Banks will offer them.

Banks that do offer these loans will typically apply tougher standards than normal to offset what they might consider an increased risk.

To qualify you must have had good credit before and since the Short Sale / Deed in Lieu of Foreclosure.

If you can meet this requirement here are the times after which you will have a good chance to buy your own home again (at vastly lower prices and interest rates than you had before).

TWO (2) Years up to Maximum 80% Loan to Value | 20% Down Payment

FOUR (4) Years up to Maximum 90% Loan to Value | 10% Down Payment – Subject to Private Mortgage Insurance underwriting guidelines.

SEVEN (7) Years above 90% Loan to Value | with less than 10% Down Payment – Subject to Private Mortgage Insurance underwriting guidelines.

If you don’t want the lowest interest rate for as long as you own your home don’t bother reading this.

Everyone (except me) is telling you to just take a 30 year fixed mortgage.

 I’m saying that may be true for a lot of people, but is not true for the majority.

Q1. Are interest rates on 30 year fixed mortgages at all time lows? YES

Does this mean that everyone buying or refinancing should get a 30 year fixed mortgage? NO

Q2. Are interest rates on 5 and 7 year fixed rate ARM’s also at all time lows?  YES

Q3. Is the interest rate the same on all types’ of loans? NO

The rates on both 5 and 7 year ARM’s are substantially lower than the 30 year.

Q4. Is the difference worth bothering about? YES

Take a $300,000 30 year fixed mortgage at 4.0%. Payment is $1,432/m

Take a $300,000 7 year fixed ARM at 3.75%. Payment is $1,389/m. Savings after 7 years $3,162.

Take a $300,000 5 year fixed ARM at 3.5%. Payment is $1,347/m. Savings after 5 years $5,100.

Q5. If Bob and Alice are buying their first home and plan to start a family after 3 years is, it likely that the nice little 2 bed, 2 storey townhouse they get will suit them for the next 30 years? NO

Q6. Would it be smart for them to take a 5 or 7 year ARM and save thousands of dollars which will be useful when they inevitable move up to the detached house with a garden when the children come along. YES

The golden rule of mortgage selection is that one size does not fit all.

Your mortgage should be the one best suited for you at this time in your life and considering your future plans and expectations.

IF YOUR LOAN AGENT DOES NOT ASK YOU HOW LONG YOU EXPECT TO BE LIVING IN THE PROPERTY THEN THEY CANNOT ADVISE YOU WHAT WILL BE THE BEST LOAN FOR YOU.

TURNING 26 YEARS INTO 30 YEARS.

It’s not always a good idea to refinance a mortgage simply to lower the Monthly Payment.

Before you refinance a 30 year mortgage which has 26 years to go, and take a new 30 year loan, you must compare the total amount which will be paid over the life of each loan before deciding whether it makes economic sense.

The smartest way to take advantage of lower interest rates would be to calculate the amount you would have to pay each month in order to have the new loan paid off in 26 years, and then make an extra payment each month to achieve that highly desirable result.

If the new lower payment plus the extra to make it a 26 year loan is less than the amount you are currently paying then go for it. If not then you should reconsider other options before proceeding.

I cannot go into details regarding other options within a simple post such as this, but I can assure you they do exist. However the regular Loan Officer is not going to bring them to your attention. 

What’s the purpose of Credit Scores (FICO)?

To provide a Lender with an independent opinion on the probability that a possible Borrower will pay a Loan as agreed.

How is the score determined?

By looking at the history of payments on previous debts and developing a numerical SCORE which reflects that history. For example:

A score of 800 or more is EXCELLENT. Lenders compete for your business.

A score between 700 and 799 is GOOD. No major problem getting a Loan.

A score between 640 and 699 is POOR. Will pay higher interest rate for a loan.

A score below 640 is BAD. Very difficult to get a Mortgage at an acceptable rate.

NOTE. These examples relate to Mortgages. Other types of Lenders will have different score standards

What exactly is FICO?

The Credit scoring system developed by the Fair Isaac Co and used by the 3 major Credit Bureaus, EXPERIAN, EQUIFAX, and TRANS UNION. Each of these interprets the data slightly differently so produces a slightly different score.

What is MOST important in producing the score?

35% is Payment History. (Do you pay on-time, any Bankruptcies, foreclosures, debt Judgments etc?)

30% is Amount Owed. (Total amount owed as a percentage of credit available.)

15% is Length of Credit History. (Old debts are better than new debts.)

10% is New Credit. (Too much is a Negative.)

10% is Type of Credit. (Credit Cards, Store Cards, Mortgages etc.)

Where can I learn more?

www.MyFico.com is the Public information site for the Fair Isaac Company.

BEWARE of Credit Repair/fixing SCAMS. Anyone who wants money up front should is probably a SCAM.

Many strange things have happened these past few years but here’s one of the most interesting.

John Doe, his wife, and 4 children live in a small city North of San Francisco and had rented till around 2006 when they bought a nice house with more space than they had ever had. All was well till John lost his job in 2009, and 10 months later lost his house to Foreclosure.

He now lives in that same house as a Renter paying $1,800/month rent versus the $2,500/month and mortgage he previously paid as its owner.

This is the result of new type of Real Estate Investor buying multiple Bay Area foreclosed homes to be rented both for short term profit, and long term Capital Gains.

In this case the Investor is McKinley Capital Partners who have joined with a New York hedge fund who have so far bought about 300 homes and plan to add up to 500 more.

Some very basic research has shown me that this process is replicated in many other markets where the values have stabilized and an upward trend is very likely in the near future.

Zillow is one of several Web sites which provide a wide range of Real Estate information useful to the general public. For this I salute it. However, to a great extent it has also created an image of being a free souce of accurate information on the value of individual properties.For this I condem it.

If you want a reasonably accurate valuation of your property there will be 50 local real Estate Agents willing to provide a “free” Comparative Market Analysis (CMA)in the hope that if you are selling you will consider hiring them.

If you need a detailed estimate you can pay a profesional Appraiser between $200-$300 for it. In both cases you will get a valuation based on local knowledge of the house, it’s condition, and the circumstances of the comparable sales i.e. Short Sale, Foreclosure, Probate etc.
Now consider whether a computer program having non of this highly relevant data might be able to provide a more accurate result.
I’m a great believer in the old saying that we get what we pay for. Zillow is a perfect example of that.