Back in a late October post, I said “Once prices roll back to January 2005 levels, we will be “at bottom
October King County Home Prices at 10/2005 Level
352
HUD Passes RESPA Reform, New GFE Coming in 2010
Now I know that true miracles happen. We have all been waiting for RESPA reform for as long as I’ve been in the industry, which has been over 25 years. Here’s what the new Good Faith Estimate will look like. Everyone has all of 2009 to get their systems ready because the new form won’t go into effect until Jan of 2010. The winds of change are blowing in favor of more consumer protection and more duties owed to the consumer by retail mortgage lenders. Didn’t I just say this was going to happen? From HUD:
Brian Montgomery, HUD’s Assistant Secretary of Housing, Federal Housing Commissioner, said, “We have carefully considered the concerns expressed from every corner of the mortgage market in developing this rule. I am convinced that we successfully balanced the needs of consumers with those in the business of homeownership. None of us can lose sight of the fact that millions of Americans simply don’t understand all the fine print of their mortgages and this, in many respects, is at the heart of today’s mortgage crisis.”
Since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD’s final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home.
What I like about the new three page Good Faith Estimate (GFE):
Page 1:
Important Dates: “your interest rate may change” notice
Loan Summmary: Easy, plain language, Yes or No explanations
Page 2:
Understanding Estimate Charges: explains credits better than most verbal explanations I’ve heard over the past year.
Breaks down other charges that the homeowner can shop for, in order to receive a lower fee
Page 3:
Further explains pages one and two and makes it crystal clear what charges can and cannot change at closing.
What I do not like about the new GFE:
Where’s the Yield Spread Premium (YSP)?
Some state laws may not comport with this new federal law and will have to be revised, hence the year waiting period before we begin using the new form.
Links
Housing Wire HUD Revises RESPA Rules
HUD Press Release
Fannie and Freddie to Announce Mass Loan Modification Program
From the Wall Street Journal:
Fannie Mae, Freddie Mac and U.S. officials are expected to announce plans Tuesday to speed up the modification of hundreds of thousands of loans held by the housing finance giants, marking the latest effort to try and prevent more foreclosures, people familiar with the matter said.
The announcement could mark the government’s most assertive use of Fannie Mae and Freddie Mac to help homeowners since the companies were taken over in September.
The streamlined effort will target certain loans that are 90 days or more past due, these people said. The program will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt, these people said.
Borrowers would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. It would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy. The homes must be owner-occupied and escrows for real estate taxes and insurance must already be set up.
U.S. government officials plan to encourage big banks that hold loans in their portfolios to take similar streamlined modification measures.
The announcement is expected to come at a press conference at 2 p.m. at the Federal Housing Finance Agency, which temporarily has Fannie Mae and Freddie Mac in conservatorship because of their shaky financial condition.
Spokespeople for the companies, the Treasury Department and the Federal Housing Finance Agency weren’t immediately available for comment.
Servicers are expected to be paid $800 for a successful modification and loan investors are expected to reimburse servicers for certain fees associated with the modification. There will be a 90-day trial period, and if borrowers successfully make payments for those 90 days the modification will be formally approved.
This is the beginning of massive government intervention to try and slow foreclosures. On a positive side, Fannie and Freddie could provide a template for servicers to follow which may help homeowners receive a “yes” or “no” answer faster. On the down side, this may also slow the recover of the housing market, prolonging the decline of home prices. Currently 40% of loan modifications re-default. This may also further erode investor confidence in residential mortgage backed securities, the impact being even tighter underwriting guidelines than what we’re now experiencing.
I’d like to see provisions in there regarding proof that the homeowner did not commit fraud when receiving the original loan, and proof that the homeowner has the ability to re-pay the modified loan. But these things take time to ascertain.
Update from Calculated Risk:
Here is the press release from the FHFA. Note that this does not include principal reduction as a solution to create an affordable payment, and is limited to: “extending the term, reducing the interest rate, and forbearing interest”.
This is intended to help “thousands” (a drop in the bucket unless it is several hundred thousand), and seems to encourage homeowners to stop making payments until they are 90 days late.
Don't Pay Off Bad Credit
Step three in the “Should I Buy a House Now” series is somewhat of a sidetrack. In Step 1 people learned the difference in calculating your current gross income, especially if any part of your income is not guaranteed “salary”. In Step 2 you were sent off on a long project of accounting for your past practices of spending that gross income. By finding the money you wasted, and taking steps to waste less of your earnings, you were able to find additional monies to put towards housing payments.
Step 3) Start Improving Your Credit Rating This can take a long time, as does Step 2. I am suggesting you do these simultaneously. Don’t think that because you pay your bills on time, that you have good credit. Paying your bills on time only accounts for 30% to 35% of your credit standing.
Get all copies of your credit history. Generally there are three sources (or more) and you don’t want to get your credit score, you want full copies of your credit report. Go through the reports and make sure the history pertains to you. The more comon your name, the more likely you will have something of someone else’s on your report. If you are divorced, you want to remove things that you are no longer legally responsible for by divorce decree, even if the item has a high rating.
Let’s assume you have at least one item that you didn’t pay well. Don’t pay it off! This is the biggest mistake I see people making. You need to turn bad credit into good credit. Paying it off does not remove it from your credit history, so paying it off simply locks in a bad credit item. You want to “pay it as agreed”. Sometimes you do that by agreeing to a new payment schedule and then paying the new payments on time for a year. Sometimes you pay off the balance, but leave the card open, and charge one small item every month and pay that item off every month. I’m not a credit expert for sure, but this issue goes back long before scoring was used. All too often people pay off the balance on a bad credit item thinking they made it good. No. You locked in the bad long term.
Here’s a story from back when I was 25ish. My Mom needed me to co-sign on a house. I had a bad charge card at a department store that was charging me 3% of the balance due until it reached near the max, and then wanted 20% of the now higher balance each month. There was no way on my income that I could pay 20% of the balance, so it got behind. It was a ding that was potentially going to cause my Mom to not get the house and everyone panicked.
I went to the store with the full balance due in my hand, and after a lengthy conversation with the credit manager, I was very angry and said I hated the store and would never buy anything there again. The Manager said to me, “You can’t hate us. In fact you have to buy from us. You can’t just pay off the balance to restore your credit. If you never buy from us again, that bad rating will sit on your report for years. The only way for you to improve your credit is to buy more from us and pay off that more well.” That made me angrier and I started to leave when a lightbulb went on. I turned around and said, “Are you telling me that I can go downstairs right now and buy something on this card? He said absolutely, please do. I said can you give me a letter to that effect. He said sure. I took that letter to the mortgage company and said how can you deny my Mom a mortgage based on a bad credit item, when the bad credit item doesn’t think it’s so bad, in fact they invite me to continue shopping there on credit. I handed them the letter from the Credit Manager on the store letterhead, they agreed and my Mom got the house.
Lesson learned: Turning Bad credit into Good credit involves not simply paying off balances, but continuing to charge and pay as agreed until the credit rating for that item improves. Then you can close it after it has a good rating.
I have to meet someone at a house shortly, so I’m going to end here though this post could be a 20 page short story, if I highlighted all the ways to good credit. The point is EARLY in the process, here at Step 3, know your credit score, review your credit history from 3 credit bureaus, and improve as needed. Even if your score is high, go through the detail and make sure you correct anything that needs correcting. It takes a long time for the credit bureaus to reflect change…so don’t wait until the last minute to work on this step in the series.
2009 FHA Loan Limits for Seattle-Bellevue and Beyond
King, Snohomish and Pierce Counties loan limits effective January 1, 2009 are:
- Single Family: $506,000
- Two Family: $647,750
- Three Family: $783,000
- Four Family: $973,100
The new loan limit is lower than the current FHA Jumbo limit of $567,500 and is happens to be the same as the jumbo-conforming (aka high-balance) loan limits for our area for 2009.
U.S. % Change in Home Prices
This chart reminds me of the crash in real estate prices in the late sixties when REIT (real estate investment trust) stock prices dropped to pretty much worthless. I was still in high school, but the Courts got involved in the loss of value in trust portfolios, so I was looking at those in 1974 in my accounts. I would think that today’s national drop in home prices emulate the drop in the late sixties to some degree.
I do recall in recent years warning people not to buy into REITs, but must admit I felt a bit “old-fashioned” at the time. Once you see those losses, you don’t forgive or forget, somewhat like people who lived through the Depression.
This post is supplemental to last night’s post and as a result of the comments that follow in that post. The source of this info is at the end of last night’s post for those who want to look at the detail.
U.S. YOY % Home Price Changes
Sunday Night Stats – 5 Year Hold
Many people are asking, “What do you think will happen if I buy now and hold for five years?”
You may be surprised to see that this “bubble” is not nearly as big as the 3 five year periods from 1973 to 1988. 1973 to 1978 is the highest appreciation period. The lowest appreciation period is the five years that followed those dramatic increases for 15 years, and still not showing a loss for any five year period going back from third quarter 2008.
Five Year Price Changes based on U.S. 3rd Quarter average prices of homes sold.
Sold in 2008 at $283,400; bought in 2003 for $248,100 – UP 14.2%
Sold in 2003 at $248,199; bought in 1998 for $184,300 – UP 34.6%
Sold in 1998 at $184,300; bought in 1993 for $148,000 – UP 24.5%
Sold in 1993 at $148,000; bought in 1988 for $141,500 – UP 4.6%
Sold in 1988 at $141,500; bought in 1983 for $ 92,500 – UP 52.9%
Sold in 1983 at $ 92,500; bought in 1978 for $ 63,500 – UP 45.6%
Sold in 1978 at $ 63,500; bought in 1973 for $ 35,900 – UP 76.8%
Sold in 1973 at $ 35,900; bought in 1968 for $ 26,600 – UP 34.9%
Sold in 1968 at $ 26,600; bought in 1963 for $ 19,200 – UP 38.5%
Note: U.S. Peak Price to date 1st Quarter of 2007
Sold 1Q 2007 at $322,100; bought 1Q 2002 for $227,600 – UP 41.5%
Data Source
Short Sales – Another "Buyer Beware" Aspect
How does a seller price a short sale listing?
An email from Trulia pointing to a post titled Short Sale Saga, reminded me to write a post on the topic of how a buyer’s offer can be “used” to determine the list price of a short sale property. Back in December of 2007 when I wrote the post “Should You Buy a Short Sale?” , I didn’t touch on this aspect of the various “difficulties” you might expect to encounter, as the buyer of a short sale property. Today, the likelihood that the seller may be USING your offer to determine a list price, would be more commonplace than it was back in December of 2007. While this may seem inappropriate from the buyer’s perspective, let’s look at the facts.
Say a seller has his home on market at $625,000 and owes $580,000. The seller doesn’t have to show it as a short sale at that price, as he needs an offer at $575,000 to “clear the table”. After 90 days on market with no offers, the owner wants to reduce his price, but would have to show it as a short sale. Does he reduce it to $549,950 or $499,950 or what? The seller has no idea what the bank is willing to take, and the bank won’t tell the seller until there is an offer on the table to look at.
The minute the seller is forced to say “short sale” of even “possible short sale”, the seller is going to get a lower offer than if he did not have to disclose this information. The asking price has to be low enough to get an offer, and the price may be “false advertising”, leading the buyer to believe the seller has any info as to what the lender will take. If the seller reduces the price to current market value, and the buyer offers full price, the buyer will feel duped (as in the Short Sale Saga) into thinking that a full price cash offer should be acceptable.
If a buyer submits an offer of 80% under market value, the seller should accept it. Why? Because that offer becomes the means by which the owner learns what the bank is willing to accept. In the above case, let’s say the seller decides to list the house at $549,950 and the buyer makes a cash offer of $100,000. The seller should accept it, leave the property on market, submit the $100,000 offer and get an answer from the bank. The bank rejects the offer and says they will not accept an offer of less than $430,000. The seller has learned, via the buyer’s offer, that he can list his house at $450,000. The seller used the buyer’s offer to determine the list price that matches what the lender is willing to accept.
Here’s what I think. I think all short sales should be listed for $1.00. By doing so, the seller is making a clear statement that he has no idea what the acceptable offer price will be, and the buyer is on notice that the seller can’t provide that information. Until that time, the only short sales I have seen where the owner and seller’s agent are making any commitment to the asking price, are the ones who used a buyer’s offer to get a price from the bank.
Using the buyer’s offer to determine list price, under the current system, seems to be the only way for the seller to proceed. Many buyers being disappointed by the current system is not acceptable. Offering the property at $1.00, and letting the buyers decide what to offer (vs. full price of a “fake” list price) seems to be a better alternative to the way we do it now.
Loan Modifications
This is Part Three of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.
Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral. Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.
Loan modifications are becoming quite fashionable at the moment. With underwriting guidelines continuing to tighten, some folks facing financial distress and possibly foreclosure may not qualify for a refinance at the retail level, meaning, going back to the bank, credit union, or mortage broker that helped the first time around.
At the present time, loan modification salespeople are completely unregulated. This means a person can be working at Taco Time in the morning and selling loan modifications in the afternoon. This is similar to the situation with unregulated loan originators during the real estate bubble run-up. Advertisements that say, “Earn Six Figures. No Experience Necessary” are now making the rounds in the mortgage lending community. (Don’t believe me? Go to craigslist jobs and do a search under “loan modifications.” Current ads are saying: Make $15,000/month and Make $5,000/day). For the consumer, this means you are once again in the one-down position and it brings me great unhappiness to tell you that at this time you cannot and should not trust your loan modification salesperson. This problem stems from the unfortunate situation LOs face as their six figure income dried up during the subprime meltdown but their desire for a six figure lifestyle is still around. This is a systemic problem that our government regulators seems uninterested in addressing at this time. I’m predicting mass government intervention in foreclosures anyways. Perhaps the government is not worried about loan mod salesmen because they’re going to whack them with a big ugly stick quite soon.
In the meantime, we’re stuck with loan modification salesmen. The author of this blog post is of the opinion that consumers should be extremely wary of salemen asking for an upfront fee, even if they are claiming that all or most will be refunded if the modification should fail to be approved.
A loan modification is a good choice for a consumer whose financial distress is such that they are currently unable to pay their mortgage, prefer to stay in the home and not sell (I’m assuming owner occupied property), WILL be able to pay if the loan were modified at a lower interest rate or longer term, and the homeowner is able to fully document income and assets. The idea here is that it’s in everybody’s best interest to keep the homeowner paying the mortgage, even if it means lower bank earnings. (For other options, see part 2 of this series.)
Terms
Common loan modification terms include fixing the interest rate at a lower amount for a short period of time. 3 years, 5 years, 3 years with a gradual, stepped-up interest rate after the third year, longer amortization times such as amortizing the loan over 40 years instead of 30, are very common. Voluntary, principal balance haircuts offered by your bank are not common at this time, unless you are working with an attorney or an aggressive, pit-bull non-profit housing counseling agency. Before you think that a loan mod is the answer, take a long time to consider how much interest you’ll be paying over the life of that 40 year loan. If you’re thinking “I can just refinance later” there are many people who now have a foreclosure in their recent past, who were given that same sales pitch in 2006.
Past Predatory Lending
If you were a victim of predatory lending, your attorney can use the evidence to extract better terms for your loan modification. FIND YOUR ORIGINAL LOAN DOCUMENTS from the last time you refinanced or purchased the home: The original disclosures and then the final disclosures you recieved when you signed papers during escrow. If you cannot find them, call any local title insurance company. Give them your address. Ask them to pull the last deed recorded against your property. On that deed, the title company’s order number will be hand-written in the margin. Call that title company, ask them to pull your file, and to tell you who the escrow company was that handled your file. If your escrow company went out of business, your state department of financial institutions will have information on where those files are now.
State or Federal Law Violations
If your loan originator violated any state or federal laws when originating your loan, an attorney will be able to spot this information, which becomes extremely valuable when hammering on your lender to offer you the best loan mod terms, or to even bring action that will slow down the foreclosure process, buying you more time.
Process
Loan modification salesmen do nothing except collect a finders fee for finding and delivering you to the people who really do the work. The loan mod company will ask you to assemble a wide variety of documents similar to when you applied for the mortgage loan. Unless you went “stated income” the first time around. This time it will be different. Common documentation required includes two years of tax returns, two to six months worth of bank statements, 2 years of w-2s, paystubs for the last 4 months, a list of assets and liabilities, and a household budget showing the amount of money you CAN afford to pay on a monthly basis. The most important things lenders must analyze are 1) determining that the homeowner has zero assets/money in the bank and; 2) the homeowner’s ability to pay the modified payment. There will be a worksheet to complete in which you will lay out your monthly budget. This is the tricky part. You’ll have to prove that you cannot qualify to repay your current mortgage but that there is enough income coming in to qualify for a modified loan.
Legal Counsel
All loan modification candidates should retain their own, LOCAL legal counsel. Loan Mod salesmen will tell you that attorneys will cost thousands and thousands of dollars. In one letter, the salesman is saying that attorneys will charge tens of thousands of dollars. Wow. I’m scared now. I’m so scared that I polled a handful of local attorneys and found that loan modification charges range anywhere from $1500 to $2500 depending on how many liens there are against the home. In contrast, loan mod salesmen are charging anywhere from $3500 to $5000 UP FRONT and they use “a pool of attorneys” in god-knows what state. If you can’t do the math on that, then it’s time for you to think about renting.
Questions to ask a loan modification salesmen
1) What is your fee and how is it split between you, the loan mod company, and the attorney?
Failure to answer this question in a swift and forthright fashion is a big giant red flag.
2) What will YOU be doing for the fee you earn?
Listen to the answer very carefully.
3) What will the loan modification company be doing for their portion of the fee?
This question will typically be answered like this “They process the paperwork.” Now repeat question 2.
4) May I talk directly with the attorney?
If the answer is no, find a local attorney.
Finding a local attorney
Use your favorite search engine to find your local state or county Bar Association. Look for their “Attorney Referral Service” and seek out a real estate attorney or a consumer protection attorney. Make an appointment with a local attorney that you can talk to face to face. Trust me on this. Interview at least two if not three local attorneys. All may have a varying range of fees. Compare them with the loan mod salesmen’s fee.
Selecting a licensed loan originator to help you
In some states, it is not even possible for a loan originator or a Realtor to collect a fee for loan modification services. In Washington State and elsewhere, loan originators who work for a mortgage broker owe fiduciary duties to their clients. They are able to charge a fee-for-service (provided the fee is disclosed prior to the work being performed.) Loan originators who are still left in the business as of this writing, are generally likely to be somewhat more competent than Taco Time/Loan Mod salesman. But I am making an overgeneralization. A licensed LO has at the very least a nominal background in computing debt-to-income ratios and gathering documents. At this time, there are approximately zero loan orignators who have accumulated some experience performing loan modifications. This is because nobody needed one up until about the year 2008…..the industry just refinanced you over and over again. If you select an LO who owes you higher duties, you are more likely to select someone who is conscientious of these higher duties because if you are not well-served, the LO now holds higher liability. Fiduciary duties means that LO MUST put their client’s interests above their own interest in making a buck. They must set aside self-interest and work on behalf of you. Hiring a loan originator to do the paperwork-gathering seems reasonable. The loan originator MUST hand off your file at some point to an attorney. Consumers, please demand that the attorney be local. A fiduciary may not engage in secret fee-splitting deals. The fiduciary owes the highest degree of honesty and good faith to the consumer. The LO/fiduciary has a duty to answer you honestly about how much of the fee goes to the LO and how much will go to the attorney. A good scenario is to hire the LO/fiduciary to do the nominal processing work, for which you would pay a nominal “paperwork processing” fee and then pay your local attorney separately.
Working with Non-Profits
A HUD-Approved Housing Counseling Agency can help homeowners obtain a loan modification at no cost.
DIY
Lenders charge zero to perform a loan modification. If you’re an adventerous type that does not need hand-holding, call your lender direct in order to begin your loan modification. I still advise hiring a local attorney to review the lender’s loan mod paperwork with you.
Currently, 40 to 50 percent of all loan modifications are re-defaulting. This is astronomically high and will translate into higher bank losses and lost time for the homeowner to begin rebuilding his or her credit rating. This means some folks may simply need to re-enter the housing market as a renter. In part 4 of this series, we will discuss what it means to start rebuilding after foreclosure and in part five we’ll tackle what is surely ahead: massive government intervention.
Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding
Credit Scores for the Ages
It’s funny how sometimes a post will take on a life of it’s own within the comments…such is the case with my recent interview of Jillayne Schlicke. My intentions were to call out to Washington State LOs to make sure they’re up to speed with the new year approaching…the comments have turned into a discussion of credit scores. Most likely because of Jillayne’s prediction:
“I expect that underwriting guidelines will continue to go up as banks and conforming paper sold to Fannie and Freddie will raise minimum credit score requirements to 800 and require 20% down. Everyone else will be pushed to FHA.”
Ardell offered stats from 2005 on credit scores and age so I thought I’d share credit score information from credit reports I’ve provided since the start of 2008. Not all of the subjects obtained a mortgage loan.
- Age 18 – 29: average credit score = 697. Don’t let age fool ya, this group had a high score of 807 and a low of 513. (This group = 12% of the demographic).
- Age 30 – 39: average credit score = 735. High score of 811 and the low at 614. (36% of demographic).
- Age 40 – 49: average credit score = 739. High score of 819 and a low of 592. (31% of demographic).
- Age 50 – 59: average credit score = 759. High score of 820 and the low at 680. (15% of the demographic).
- Age 60 – 69: average credit score = 714. High score of 813 and a low at 589. (4% of the demographic).
- Age 70 plus: average credit score = 805. High and low score: 805. (1% of the demographic).
The average mid scores, year to date credit reports I’ve ran is 732 for the borrower and 720 for the co-borrower. This means that if they are considering locking, the rate would be based on the lower of the two mid scores. I’m also pleased to see that the credit score criteria that I use (credit scores from 720-739) seems to be appropriate for when I’m post.
From the same interview with Jillayne post, Ardell asks:
“What good is it to say interest rates are at 5.875%, if only people 70 plus can get that rate? False advertising…no? If the average person buying a home can only get a rate of 6.5%, then we have to stop encouraging people to think their rate is going to be something that is unlikely”
Using the credit score data above, it’s very likely that the younger group would be FHA candidates. Not just because of having an average credit score of 697, most are still working on building their savings and do not have 20% down payment. Combine a 697 mid score with a 90% loan to value and (now costly) private mortgage insurance and FHA may be the better option. The key is to investigate all available options if someone decides they should buy a home at this stage of their life.
The next two groups, 30-49 year olds, would fit the rates that I quote at RCG since the credit score criteria I use is based on 720-739. Based on Friday’s rates, their rate would be 5.875% at 1 point (total shown in lines 801, 802 and 808 of the Good Faith Estimate or HUD). This combined group is 67% of the applications with credit reports that I have worked with year to date.
Credit scores 740 and above qualify for a slightly better rate. Based on Friday’s scenario, they would have 0.25% improvement to fee–so 5.875% would be at 0.75% points (using the above example). Or depending on how rates were, they could possibly obtain an 0.125% better rate.
The slight dip in average credit score to 714 for ages 60-69 I think just reflects that “life happens”. Maybe something medical has taken place or you were on vacation and thought you paid that credit card or you’re helping your kids with college or you have an unknown parking ticket or an overdue library book turned into a collection. I’ve seen many surprised people over the years where they had no idea their credit score dropped. This is in no way a reflection on this age group, it’s just how the stats came in for this report based on my data.
FHA credit scores (where the credit report was ran and FHA was the identified loan program, the loan may be closed or just prequalified) averaged 680. FHA is not as credit score sensitive as Fannie/Freddie. FHA is looking for clean credit (no lates) in the past 12 months.
This data is hardly scientific and is really just a reflection of the people I work with which is really pretty diverse. I don’t advertise or do cold calling or try to “specialize” in a niche market…so I’d like to think that this group is a good “norm”.