Many borrowers pay a premium to refinance

It is unusual to have a refinance boom in the middle of a foreclosure crisis. In the 1930s, which was the last time we had a foreclosure crisis comparable in magnitude to this one, lenders were so spooked by the foreclosures that there was almost no refinancing. That changed only after the creation of the Home Owners Loan Corp. in 1933, which refinanced many borrowers at the government's risk.

The refinance boom today is also fueled by government. With few exceptions, refinanced loans are either being sold to Fannie Mae or Freddie Mac, or insured by FHA. The requirements of those agencies largely dictate who can and cannot profit from a refinance.

The refinance decision involves a comparison of what a borrower has with what he can get. If he is paying 5 percent and can refinance at 4.5 percent and no fees, he will profit from the refinance. If he is paying 7 percent but the best he can get in the current market is 7.5 percent, he can't.

Borrowers with fixed-rate mortgages usually know what they have, but borrowers with adjustable-rate mortgages, or ARMs, often don't. I have received letters from borrowers in a state of high anxiety because their ARM faced a rate reset and they felt they had to refinance before that happened. In some cases, a close look revealed that their rate was probably going to drop sharply, making it unnecessary to refinance quickly - if ever.

Readers who ask me whether they should refinance usually tell me what they have but seldom tell me what they can get. They expect me to know that, but I don't because it depends on so many factors specific to them that they haven't told me about.

Borrowers in the best position to refinance profitably have loan balances of $417,000 or less secured by a single-family house in which they reside, have a credit score of 800 or more, and have equity in their property of 20 percent or more. The interest-rate premiums associated with deviations from this standard are larger today than I have ever seen them. Note: The premiums reported below are those being quoted by large wholesale lenders on 30-year fixed-rate mortgages, and are reflected in the retail rates quoted by mortgage brokers and many if not most lenders. They may not apply to smaller credit unions or community banks.

Loan size: Borrowers with loan balances above $417,000 up to $625,500, who live in higher-cost areas where Fannie and Freddie are authorized to buy loans up to $625,500, will pay a rate premium of about 1 percent. These are "conforming jumbo," meaning they can be purchased by the agencies but are priced higher than non-jumbo loans.

Borrowers with balances in excess of $417,000 who do not live in a high-cost area, or who have balances in excess of $625,500, will pay a premium closer to 2 percent. These are "nonconforming jumbos" that cannot be purchased by the agencies.

• Type of property: On loans secured by condominiums, figure on paying a rate premium of 0.75 percent, and on 2- to 4-family homes the premium can be twice that large.
  
• Loan purpose: If a loan is secured by an investment property, figure on paying a rate premium of about 1.375 percent. Those refinancing who borrow more than their loan balance will pay a premium of about 0.25 percent. However, they can finance settlement costs without it being considered "cash-out."
  
• Credit score: Shortfalls from excellent credit, defined as a FICO score of 800, have become very expensive. Even a score of 780 can cost a rate premium of 0.125 percent. The premium on a score of 700 is about 1.125 percent, and on a score of 600 it can be a prohibitive 2.625 percent.
  
• Equity: If a borrower has equity of less than 20 percent - meaning that the loan balance exceeds 80 percent of current property value - he will pay a mortgage insurance premium. This can make refinance a loser for borrowers whose recently purchased homes have declined in value. For example, if Jones borrowed $160,000 to purchase a home for $200,000 in 2005, still owes $158,000 and the house is now worth only $180,000, a refinance will require mortgage insurance where the original loan did not. If the house is worth only $150,000, the loan can't be refinanced at any price.
  
• Approval: On loans that will be sold to Fannie and Freddie, increased risk premiums have been accompanied by tougher approval standards. In particular, documentation of income, which had grown lax and sloppy during the go-go years, is now rigorously enforced. Approval is also dependent on a satisfactory combination of all the risk factors discussed above. For example, a FICO of 650 might be approvable if all other factors are favorable, but a 650 score on an investment property with only 5 percent equity will be rejected.
  

Loans that won't be approved by the agencies might past muster with FHA, whose requirements are more liberal, but FHA loans carry higher rates and insurance premiums. I will have an article on who should take an FHA in the near future.

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Duncan Grilled About Obama’s Student Loan Proposals

Education Secretary Arne Duncan ran into some pointed questions on Capitol Hill Thursday about much of President Obama’s higher education agenda.

Obama’s budget blueprint proposes eliminating subsidies to private lenders who make federally guaranteed student loans. Instead, the government would make such loans directly, with banks and other financial companies merely servicing the loans.

Both Democrats and Republicans on the House Budget Committee questioned whether the Education Department has the capacity to originate all federally backed student loans. Ranking Republican Paul D. Ryan of Wisconsin denounced what he called a “government takeover” of the lending system. Under the president’s proposal, the government would stop providing subsidies to private lenders in mid-2010.

Thomas P. Skelly, director of the Education Department’s budget service, said the department could handle a significant increase in the direct lending program, in part because it still would use private lenders to service those loans.

“The main difference is with direct, the interest borrowers repay comes back to the government,” he said. Under the subsidized private system, “interest stays with the banks. The programs are really very similar.”

Ryan and other Republicans also objected to Obama’s proposal to transform Pell grants for low-income college students into an entitlement, so the funding would not fluctuate according to the annual congressional appropriations process.

Ryan objected to Obama’s plans to make Pell grants another “autopilot entitlement immune from congressional oversight.”

The president proposes increasing the maximum Pell grant to $5,550, indexing the grant to account for inflation and making the spending mandatory, not discretionary — all at a cost of $116.8 billion over the next 10 years.

Duncan said that increases in Pell grant maximums, combined with other higher education initiatives in the budget and the economic stimulus package, would amount to the “biggest boost in higher education funding since the GI bill.”

http://www.cqpolitics.com

Details are vital in president’s mortgage relief proposal

Last week we talked about the apparent winners and losers in the president’s plan to help

homeowners. Now we have the details we’ve been waiting for — information on who gets what and how lenders will be encouraged to participate.

One of the early surprises was the scope of the refinancing plan. In case you haven’t been paying

• Attention, this part of the program is aimed at responsible homeowners who would like to refinance to today’s low interest rates but are prevented from doing so due to falling home values.
  

We had originally been told that only “conforming” loans would qualify for this departure from conventional “loan to value” guidelines. In other words, the benefit would only be available to borrowers whose loan balance was less than the Fannie Mae maximum loan amount of $417,000.

I was particularly pleased to see that the details of the plan allow refinancing up to a current balance of $729,750. This part of the plan makes good sense, and here’s why:

• The program is only available to owner-occupants who are current on their existing loans. Borrowers in this group are statistically least likely to default.
  
• The program is only available for loans which are owned or guaranteed by Fannie Mae or Freddie Mac. Since the government is already on the hook for these loans, it makes sense to make them affordable, thus slowing down the foreclosure rate.
  

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Who qualifies for Obama’s mortgage refinance plan?

Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

Q. I have been reading about Obama’s new housing bailout, and they say that homeowners who are “underwater” will still be able to refinance if their home loan was backed by Fannie Mae or Freddie Mac. 

Immediately, I started thinking, “do I qualify?” I’ve asked friends and have searched the Internet and have found varied responses to the one question I have — how do you find out if your loan is backed by Fannie Mae or Freddie Mac? 

We write our (whopping) mortgage check to Wells Fargo every month, and it’s not like the bank teller has that information readily available. I can’t find a straight answer anywhere. And if I do find out my loan is backed by Fannie or Freddie, what do I do next?”

A. Regarding not being able to get a straight answer, don’t feel like the Lone Ranger. But I do have good news for you. 

• If your loan servicer won’t or can’t tell you, you can still find out. To see if Fannie Mae owns it, go to www.fanniemae.com/homeaffordable. For Freddie Mac the website is www.freddiemac.com/avoidforeclosure/.Fill out their forms. Make sure your name and address are exactly the same as on your loan coupon. Just for fun I filled out the forms at each Website to see which one owns my loan. I am still awaiting a response.

1. If the loan is owned by either Fannie or Freddie, then you would qualify for the recent initiative for reducing the rate on loans that are between 80 to 105 percent loan-to-value (LTV) without mortgage insurance (PMI). 
2. If the loan required PMI initially, the lender can use the existing PMI contract.
   

The catch on this for Orange County owners is that any home bought in the last few years has likely dropped 20 to 30 percent, maybe more, and would be over 105 percent LTV. However, people who bought in the early 2000s might still be in that bracket and certainly can benefit.

• REALITY: this program has just been announced and it is highly likely that servicers have not yet developed their own policies and procedures and have not yet trained the staff on how to respond to inquiries. 
  

Danny in Corona asks:

Q. I purchased a condo in Oct. 2005 and financed both first and second mortgages at Chase. The first mortgage is a deed of trust (fixed rate) and the second mortgage is a California close-end deed of trust (a balloon note, but fixed rate). 

I have been unemployed since Oct. 2007 and all of my savings and emergency funds have been exhausted. I’m two months behind on both mortgages and approaching three months behind. I listed my condo for sale for over a year. Unfortunately, I had no luck. I also consulted with real estate brokers about doing a short-sale. However, they didn’t want to take it. 

I have no clue why. Anyway, if I successfully negotiate with Chase to have deed-in-lieu of foreclosure on my property or if Chase forecloses on my property, may Chase seek delinquent judgment on the second mortgage (closed-end deed of trust)? I have not refinanced since I purchased my condo.

A. First, I’m am sorry to hear about your situation and you have my prayers and good thoughts for a better outcome. You really need to ask a lawyer because technically that is a legal question. I think you will feel better informed if you look at a Website www.foreclosure.com/statelaw_CA.html, which summarizes current law. Frankly, I think that lenders have their hands full today and that they rarely go after defaulting borrowers, so I wouldn’t worry. Best of luck to you.

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If you deduct mortgage interest, be careful -- IRS may be ramping up audits

Recently a business owner asked TaxMama to review his personal tax return for 2007, which included income from several businesses. The return had just been targeted for audit. Despite several business-related red flags on the return, that wasn't what triggered the audit. The auditor said the return was pulled for audit specifically due to the high mortgage interest deduction. This taxpayer is not alone.

Did you know there are limits to the mortgage interest that you can take? Most people don't realize they may be deducting more than they're entitled to use.

Reports from tax professionals indicate that they are starting to see audits on tax returns with high mortgage interest deductions, specifically Schedule As with mortgage interest deductions of over $50,000. The IRS has not yet had time to respond to our specific questions about this audit program.

If your interest deduction is less than $50,000, can you breathe easy? Well, not exactly. If you're audited for any other reason, IRS will look at your mortgage interest deduction, too. So be sure to heed the rules.

Rules of the mortgage-deduction road

We're only going to talk about laws in effect right now. We're not getting into laws that might take effect later, such as President Obama's proposal to reduce the value of the mortgage deduction for those earning $250,000 or more.

The overall limit on the mortgage interest deduction is the interest paid on mortgages of up to $1 million used to buy or fix up the house, plus another $100,000 of debt used for any other purpose. In other words, the maximum limit is interest on up to $1,100,000 of mortgage debt. Your mortgage balance is higher than these numbers? Too bad.

• There is one exception. If your loan was originated before October 14, 1987 and it's higher than $1 million dollars, you can deduct all the interest. So, if you've never refinanced, be sure you have proof of the original note.
  
• If you have refinanced that loan, you may still deduct the interest on the balance of the original debt at the time of the refinance. In other words, let's say you had a pre-October 14, 1987 loan with a balance of $3,500,000 and you refinanced it in 2007 for $4 million and a lower interest rate. You may still fully deduct the interest on the $3,500,000 balance. In other words, you'll be able to deduct 87.5% of the interest (3.5 divided by 4 = 0.875).
  

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Bad Credit Mortgage Refinance

If you are sick with your finances, scared to deal with your bad credit situation and would like to somehow get out of this and start all over again keeping your credit score perfect, then there is one easy way to go about it. The simplest thing for you to do would be to go for a bad credit mortgage refinance. Now you might wonder who is going to refinance your mortgage when you have only very bad credit records to show. In this article you will find information on why it is possible for you to get refinance and also how you will have to approach lenders to get it done.

Bad credit mortgage refinance is not a big deal these days. Bad credit itself is not something to be ashamed of but simply a financial phase which anyone can overcome as there are any numbers of loans you can have to deal with it. The competition in the lending market is so high that financiers, banks, credit unions etc are coming up with new and new schemes designed to meet any financial problems you may have. There are lenders who have solution for just any financial problems or situation.

The first thing you have got to do to get a refinance for your mortgage would be to analyze your financial situation. Get to know where you stand with your credit records, how bad is it, what is the amount required to keep your credits clean, how much is your debt etc. This way you will have a better understanding of your finances and will let you look for refinancing which will cover all this, and still have amount left to let you get on with life.

Now you will have to do some home work to find lenders perfect for your situation. The best place to start will be to go online and look for lenders who provide bad credit mortgage refinance. Then do some comparison shopping by getting quotes from some of the lenders you would prefer aligning to. Weigh all the pros and cons to know which lender will be most beneficial to you. Remember to consider the interest rate, fees, cost, other charges etc while calculating the final amount.

Best way to go about it would be to look for a bad credit mortgage refinance plan for which the monthly payment would come within your monthly budget. You may use a mortgage calculator to easily get the various possibilities with your refinance plan. This will help to also decide on the term or period to choose for your loan. The longer the period of loan the lower your monthly payment will be but you will end up paying more for your loan than shorter term loans. All these factors considered do not expect to get a bad credit mortgage refinance with as low an interest as for good credit holders. The higher cost on your refinance is what you will have to pay as penalty for letting yourself into a bad credit situation.

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Govt introduces ailing commercial project support bill

The Federal Government has introduced a bill to Parliament to set up a special fund to help commercial property projects struggling to refinance their loans.

The $4 billion partnership between the Government and the four major banks aims to help projects with liquidity, if foreign banks will not refinance loans.

But Opposition Leader Malcolm Turnbull says the draft legislation is much more expansive than the Government led everyone to believe.

"It can refinance any commercial property syndicate and, I might add, it's not limited to commercial property," he said.

"It can extend to any other form of commercial finance that the banks and the Government agree.

"So what Mr Rudd has done has gone way beyond what was originally announced."

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Mortgage Investors Call for Changes in Rescue Plan

Investors who hold billions of dollars of residential mortgage-backed securities are pressing the Obama administration to make changes in its housing rescue plan.

Participation by these investors will help determine the success of President Barack Obama's $75 billion plan to reduce foreclosures and help stabilize the housing market. But many investors are critical of features of the program and have been meeting with Treasury officials in an effort to influence parts of the plan, such as how it treats second mortgages.

Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.

"Investors are given rights through the contracts in the securities, and we expect those rights to be honored," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.

Many of the four million borrowers the administration hopes to help through its loan-modification program have mortgages that were packaged into securities and sold to investors world-wide. Roughly $1.9 trillion of mortgage loans outstanding as of Dec. 31 had been packaged into securities that don't carry government backing, according to Inside Mortgage Finance. Thus far, servicers have been more reluctant to modify those loans than mortgages they own.

Administration officials say they are trying to address the concerns of investors and others as they work out details of the program. The range of investors in mortgage-backed securities includes hedge funds, insurance companies and pension funds.

Some investors say they are willing to work with the administration. Mr. Grundlach says the program would be more palatable to investors if, for instance, modifications weren't given to borrowers who lied when they took out their initial mortgage.

Treasury Department officials say they believe that servicers will be able to modify the vast majority of investor-owned loans based on their current contracts. They also point out that the plan includes financial incentives to encourage investor participation in loan modifications, but doesn't mandate that investor loans are reworked.

Home-equity loans and other second mortgages are an issue because such debt is junior to first mortgages. Some investors and analysts say that mortgage servicers may find it in their own financial interest to modify the first mortgage and not touch the related home-equity loan or line of credit.

Roughly half of delinquent subprime borrowers also have a second mortgage, according to Credit Suisse Group.

Mortgage investors say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. Modifying the first loan can help the holder of the second mortgage, because it increases the chances the loan will be repaid, they say. But fixing both loans is a better strategy, they add, because it will produce a more affordable payment and reduce the chances that borrowers owe more than their homes are worth.

Investors say the Obama plan results in a conflict of interest, because many loans are serviced by big banks that also hold second mortgages -- and as a result have a financial interest in how these loans are handled.

Government officials say they are working on a plan that would provide incentives for servicers to extinguish these second mortgages.

Investors are also calling on the administration to strengthen the federal government's Hope for Homeowners program. Under it, some delinquent borrowers can refinance and get a more affordable, government-backed loan, provided the investor who currently holds the mortgage agrees to a principal write-down. So far, the program has fallen far short of initial expectations that it would help as many as 400,000 homeowners.

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Foreclosure rescue scams on the rise as economic crisis deepens

As if going into foreclosure isn’t bad enough, homeowners in distress now have something else to worry about: foreclosure rescue scams.  These scams are on the rise as the economy worsens and they target anyone in foreclosure.

“They have a subscription to a foreclosure filing list at the Daly Center and they know every day when a foreclosure has been filed and they mail out letters to anyone who has been foreclosed on,” said Michael Van Zalingen, director of Homeownership Services in Chicago.  “They don’t really care demographically who the person is,” he added.

Victims of these scams typically do not know what they are signing and more often than not end up losing ownership of their homes.  Attorneys in Chicago have seen a rise in clients in this situation.

“The most common is the refinance loan – that what they thought was a refinance loan was actually deeding away their property,” said Shabnam Faruki, an attorney at the Legal Assistance Foundation in Chicago.  “They think they are making monthly payments to a lender, so they are mortgage payments, but what they are actually paying are just rent payments,” she said.

Last year, the Illinois Attorney General’s office received a little more than 2,400 complaints related to residential lending fraud, including predatory loans, or loans made at very high interest rates, and mortgage rescue scams.

“There were really almost no actions a year ago,” Van Zalingen said.

In the past six months, the Illinois Attorney General filed suit against 11 different companies, but Faruki says these cases are not always easy to win.

“It’s often an uphill battle to convince a judge that there was fraud that took places because there are written documents or what looks like a document that two people have signed,” Faruki said.

That puts the onus on distressed homeowners to recognize these scams.  

Experts advise troubled homeowners never to respond to solicitation in the mail and be wary of companies that charge up-front service fees.  

We’ve all heard it a million times, but homeowners would do well to remember that if an offer sounds too good to be true, it probably is.

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U.S. MBA’s Mortgage Applications Index Increased 11% Last Week

March 11 (Bloomberg) -- Mortgage applications in the U.S. increased last week, led by a rebound in refinancing as borrowing costs dropped.The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan rose 11 percent to 723.4 in the week ended March 6, from 649.7 the prior week.

 The group’s refinancing gauge jumped 13 percent and its purchase index gained 7.1 percent.Homeowners are seizing on the opportunity to lower monthly mortgage payments as the jobless rate climbs and financial markets slump. Still, record foreclosures are adding to the glut of properties on the market and depressingproperty values, indicating sales are likely to slow further as prospective buyers wait for cheaper home prices.“We’re not seeing any underlying pickup in demand for homes,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. 

Government efforts to stem foreclosures “may help cushion the housing slump, but they won’t yet spur a recovery.”The mortgage bankers’ purchase index increased to 253.3 last week from 236.4 a week earlier. The index reached an eight-year low of 235.9 in the first week of February. The refinancing gauge rose to 3470.7 from 3063.4.The average rate on a 30-year fixed-rate loan slid to 4.96 percent from 5.14 percent the prior week, the report showed. It reached a record-low 4.89 percent in early January.Lower PaymentsAt the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be about $534, or $89 less than the same week a year earlier, when the rate was 6.36 percent.

Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 4.54 percent from 4.73 percent the prior week, while the rate on a one-year adjustable mortgage increased to 6.21 percent from 6.13 percent.The share of applicants seeking to refinance loans jumped to 67.9 percent of total applications last week, from 66.9 percent.

President Barack Obama’s administration has pledged $275 billion to keep as many as 9 million borrowers in their homes. Steps include a tax break of up to $8,000 for first-time homebuyers that wouldn’t require repayment.Builders continue to struggle.

 Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, yesterday reported its 10th consecutive quarterly loss as joblessness grew and prospective buyers waited for bargains.The Washington-based Mortgage Bankers Association’s loan survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.

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