125% Loans = Too Much Too Late?

By
Mortgage and Lending NMLS #94045

Making Home Affordable 105% Loans were introduced just this spring and the program has simply not been meeting the public need. Will 125% be the magic bullet?

Homeowners seeking to refinance their Fannie Mae or Freddie Mac Mortgages quickly found that the new 105% loans were helping a minority of people teetering on the edge of collapse. While it may seem obvious to people in trouble, the limit was increased to 125% Loan to Value recently. But the new DU Refi as it is called is falling short! Here's why:

1. Many homeowners simply cannot meet the required 33% debt to income limits necessary to refinance their loans due primarily to a job loss or cutback or other change in their financial situation. You see, many people purchased or refinanced their homes with much higher housing ratios: in many cases over 45%. So unless your income went up, the chances of a lower ratio will be slim even with a fixed interest rate.

2. A careful look at the rates on the much touted 'DU Refinance' Programs our lenders are offering are just not so hot. Given you have to be in 'financial distress' to qualify; incredibly these products sport pricing adjustments (points) for lower credit scores and higher debt to income limits -- making them pretty pricey! NOT the great low rate you were hoping for. The interest rates, after all those adjustments may be no better than that 8%- to 10% rate your note is going to adjust to anyway! And since you clearly need a lower rate to afford to keep your home...well, what's the point?

3.The third, and possibly biggest reason for MHA failures to date is due to the lower property values all across the country. Homeowners seeking to refinance their Fannie Mae or Freddie Mac Mortgage are so underwater on their mortgage to home values, 105% has been deemed pretty irrelevant. In places where property values have dropped 10% (most of the country is worse off than this now) it's on the line. If you originally had a 100% mortgage (or 80/20% combo) and you haven't paid much principal down...you can see you can see how a 105% loan would not cover the 10% lower value. It's not rocket science!

Will 125% Loan help more people stay in their homes who are now in crisis?  Good question. The race to modification has overwhelmed most lenders who are unskilled in this arena. That's putting it mildly. In most cases, if your loan is already being modified (due to financial distress) your lender will first test your case to see if they can apply the new Stimulus 125% loan program so they get to make more money. Naturally this is in their interest!

In all cases, to qualify for this program, you must:

1. be in financial distress

2. demonstrate income to support the new mortgage, and

3. have a Fannie Mae or Freddie Mac Loan now. Your lender can verify that fact --just call the number on your bill and ask if you have a Fannie or a Freddie loan.

Now that this higher LTV (loan to value) is allowed, even if home value has gone down 25%, depending on how much you borrowed, you may still qualify to refinance up to 125% of the current value of your home within a new first mortgage. If you have a second mortgage now, it stays in place and must fall within that total of 125% loan to value. (Depends on Fannie or Freddie how they handle this) The second mortgage holder is being asked to 're-subordinate' their lien after the new first mortgage is recorded. These things, like modifications are taking time to accomplish. So patience is a very important aspect of working out a loan modification program, be it via this program or a straight modification.

Please bear in mind that if you borrowed more than you could afford to begin with, a higher loan amount certainly won't solve your problem. Homeowners who have lost that much of their home's equity are making some tough decisions. Unless you are really in love with your home, many homeowners are saying, hey--why get stuck with this high mortgage when we can buy a home for 30% less right now in our town? Yes, folks are still walking away from their homes in droves.

Home Owners BEWARE: the Stimulus Refinance program is ONLY GOOD FOR FIVE YEARS. If you are offered a Refinance, the fixed terms will only be for five years and after that --either the loan will adjust again (read the fine print of your offer) or you will have a balloon note that you may have to refinance again in five years if you intend to keep your home. While the average homeowner only stays in their home five to seven years this may work fine for a lot of people.

OK, admittedly we are promoting private modification over these quasi government programs. Why? (I won't say what I think of the bank's hired guns.) The process is frustrating and time consuming but we have witnessed very solid results on behalf of our clients. The private modification seeks to fix your rate for as long as 40 years (so far). We have seen some very flexible terms offered, allowing folks to negotiate what they can actually afford to pay now, while projecting their own financial recovery down the road.
Huh. Affordable mortgages...how novel?

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SUSAN TEMPLETON IS A LICENSED LOAN ADVISER IN WASHINGTON

NMLS# 94045

                 

 

Interest rates and products are subject to change without notice and may or may not be available at the time of loan commitment or lock-in. Borrowers must qualify at closing for all benefits. Loannetter is a private brand owned and copyrighted by Susan Templeton.

 

 © 2005-2015 susan templeton copyright

 

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Re-Blogged 1 time:

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  1. Charles Stallions 07/15/2009 12:59 PM
Topic:
ActiveRain Community
Location:
Washington Whatcom County Bellingham
Groups:
Mortgages
Investors
Posts to Localism
It's all about them (ThemThem)
Tags:
distressed homeowners
making home affordable

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Rainmaker
66,965
Susan Templeton
Bellingham, WA

Steve, Thanks for chiming in! On the mortgage front we have these new sheets of DU refiance programs on most of our lender's sites and they are just not working for us even though our values are in the 10% loss mode up here. Problem lately has been proliferation of short sales hitting prices hard again. Has anyone found the stimulus refis competitive? If your borrower is still alive they are more likely served by FHA. Investors are the worst hit.

Jul 16, 2009 08:14 AM #30
Rainmaker
66,965
Susan Templeton
Bellingham, WA

George, I agree: "government is acting like a seller with an overpriced listing". They are also chasing us (Fannie and Freddie) like fattened hogs dressed for dinner!

Jul 16, 2009 08:17 AM #31
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Hey Darrel, HAVE you seen this work? My side by side comparisons are not very promising. One guy in our advisor circle calle the program: "Hope, the Early Years". Sad but true. We have a long way to go and those who stay the course will need to be nimble and resouceful. Not counting on the gooberment (Michael's suggestion re: goobers) to solve our local issues.

Jul 16, 2009 08:19 AM #32
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Rick, too funny-- but not too far off!

Jul 16, 2009 08:19 AM #33
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Joe, They just love those big fat crowbars...only what's at the other end?!

Jul 16, 2009 08:31 AM #34
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Rick, Our lender/advisors sent out the notices. Just check in with your reps who are handling it!

Jul 16, 2009 08:35 AM #35
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Well, Paul I guess some lenders would rather have a live borrower paying some kind of mortgage than another package on the pile of debt mitigation...only there are only a few steps in between.

Jul 16, 2009 08:37 AM #36
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Mark, you hit the nail smack in the middle. How the heck can a homeowner make their way through this maze? They need us more than ever...and most realize that, thank goodness.

Jul 16, 2009 08:38 AM #37
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Michael, Agreed! The shortsighted aspect of the Stimulus programs is that they are only 5 year bandaids. Modifications handle privately allow make sense solutions. I have seen staggered fixed payments from 2 - 5.5% over an 8 year (stepped) period to keep a homeowner in 40 year loan. They will get their pound of flesh that way!

Jul 16, 2009 08:50 AM #38
Rainer
25,224
Scott White
Guarateed Rate, NMLS 2611 - Onalaska, WI
VP at Guaranteed Rate, NMLS 82835

Great discussion. I'm not sure they're going to find a solution for this one unless they actually figure out how the three criterium can jibe together. If you're in financial distress, im not sure how you'll be able to prove that your income can support the payment. I hate to say it, and its probably another topic for another day, but it seems these people need cash-out options more than a band-aid straight refi loan.

Jul 16, 2009 09:46 AM #39
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Hey Nick, We hear parts of Colorado are holding up well. Have you found any 105% loans worthwhile in your area? The loopholes certainly make pricing them a nightmare.

Jul 16, 2009 10:14 AM #40
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Gene, The first time buyer programs are tighter than 2 years ago but they are still pretty helpful for folks with little or no savings. I just try to instill a little 'live within your means' ethic...where I can!

Jul 16, 2009 10:16 AM #41
Rainmaker
66,965
Susan Templeton
Bellingham, WA

David, You bring up an important question: If we really are just exercising a PR campaign then why waste millions on a program that has no 'hope' of working? A stark example of why our government should butt out of the finance industry!

Jul 16, 2009 10:18 AM #42
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Scott, Yes bandaids just prolong the agony. When we see someone more than 5% under the market it's time to modify...meaning a make sense offer to their own lender. I've have one client who is negotiating for themselves (so far so good) and one commercial client get a good result with their private investor just by making an offer that served both parties. 3 years ago I suggested banks could choose to fix their ARMS rather than sacrifice their clients and people told me I was crazy then...which is exactly what is happening now. Cash out is just too tempting when you are in trouble...lenders see right through that and put their foot down unless they are paying down debt related to their housing.

Jul 16, 2009 10:29 AM #43
Rainmaker
612,964
Todd & Devona Garrigus
Garrigus Real Estate - Beaumont, CA
Broker / REALTORS®

This whole mess is going to take more than a while to pan out, for sure!

Jul 16, 2009 04:30 PM #44
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Todd and Devona..."to pan" as in for gold? Might pay to find a nice stream and sit tight !

Jul 16, 2009 04:34 PM #45
Rainmaker
1,589,540
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Wow Susan I did not realize that your loan mod would only be for 5 years. I guess it's better than nothing or no help. A small breather at least to figure out what you want to do with your home. I'm not sure that 125% is the magic bullet either but it's better than nothing.

Jul 17, 2009 03:37 AM #46
Rainmaker
347,854
Anja Kerstens
Coldwell Banker Residential Brokerage - Morgan Hill, CA
GRI, CDPE, CHS, ASP, Selling Silicon Valley Real

Knowing that the 105% loans didn't work because of the small number of qualified borrowers, I assumed that the 125% loans would be a godsend.  Thanks for the post and the discussion.  I am now much more educated about these kind of programs.  I am with you Lyn, I didn't realize that these loan modifications are only good for 5 years.  Shouldn't be too much of an impact if only a small number of people are qualified for this program and then a smaller of people survive or are "saved".

Jul 17, 2009 04:01 AM #47
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Lyn, The 5 year limit is for the official Home Affordable program but we have seen longer terms negotiated with lenders directly. A five year breather is what most ARMS were for in the first place...hoping we will have lower (or as low as now) rates in 5 years is highly unlikely! You know who this benefits in the long run...banks.

Jul 17, 2009 04:50 AM #48
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Anja, 125% helps people who can AFFORD to borrow more but the rates are not as attractive as standard refinancing due to the hits for being in distress. Still, if you did have credit impacts from job loss but have regained your income this could work. Very case by case. I predict another wave of distressed people in five years just like ARM resets from these "Hope Resets". Do you think our officials who dream up these things are planning to put people in worse shape in five years? It pays to look in the mouth of a gift horse!

Jul 17, 2009 04:53 AM #49
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