For years, FHA has allowed existing homeowners with FHA insured loans to refinance to new rates without an appraisal. Similar to HARP, FHA streamline refinances have traditionally allowed homeowners to take advantage of lower rates with relaxed guidelines on home value. Without any new stimulus bills, speeches from the president, or elaborate media buzz, FHA streamline refinances have been helping millions of homeowners qualify for lower rates.

Unfortunately, some recent changes to the FHA guidelines have eliminated many homeowners from qualifying for a lower rate refinance. With politicians spending countless hours improving upon HARP, how could this key group of homeowners have been forgotten?

In 2006, FHA represented less than 4% of all home purchase loans. By 2010, FHA was being used for almost 20% of all purchases. This sudden spike in FHA loan origination instigated a series of changes to the program that included higher costs in the form of expensive mortgage insurance. This was a necessary change to help the funding of FHA loans.

The higher costs for newly originated loans are probably justified, but existing FHA borrowers refinancing to take advantage of new low rates are in for an unfortunate surprise. Here’s an example: if a homeowner had a $200,000 5% FHA 30-year fixed originated in 2009, they would have a payment of $1,165.31 with FHA mortgage insurance (a mortgage insurance rate of .55% annually at the time). If the same homeowner applied for an FHA streamline refinance in 2011 at 4%, their payment would only reduce to $1,146.50 (the current FHA mortgage insurance rate is 1.15%). Is it reasonable to spend thousands of dollars in closing costs to save less than $20 per month? Probably not.

One other interesting thing is that FHA is losing revenue by operating this way. FHA charges an upfront fee called an Upfront Mortgage Insurance Premium. On a streamline refinance the fee is reduced, but represents real income for FHA. Ultimately, millions of homeowners are not participating in the program, and are unnecessarily paying higher rates.

THE SOLUTION

In my mind the solution is simple. While it may be necessary for FHA to increase its costs, there is no real reason to charge more to existing homeowners with FHA loans. If FHA allows existing homeowners to keep their current monthly mortgage insurance costs, a homeowner can lower their rate and payment similarly to HARP. FHA can charge the homeowner a new upfront cost which most homeowners are happy to pay to benefit from a lower rate.

A colleague I spoke with indicated that FHA streamline refinances have a higher rate of default, which may be the reason FHA is imposing the higher costs. I can believe that this is true, and it is probably related to the loose FHA streamline guidelines. For example, they is no appraisal requirement, nor is there a debt-to-income ratio standard. (Note: Debt-to-income ratio is a calculation lenders use to identify whether a homeowner can afford a given monthly payment).

It is not clear to me why the FHA cannot change the guidelines to require a debt-to-income ratio calculation. As it stands now, a lender will allow homeowners to refinance on a FHA streamline loan without checking to see if they can afford the payment. For example, a homeowner could have a pay cut immediately after becoming over-extended with credit card debt. Under current FHA guidelines, this homeowner would qualify for an FHA streamline refinance. We can easily imagine how helpful a reduced payment could be for the homeowner, but clearly this is not the intent of the program. I would argue that the program could have a much larger impact were it to focus on the earlier group I spoke about.

One out of every six homes purchased since 2009 was closed using an FHA loan. Since 2009, values have declined further and many of the homeowners who purchased are now underwater without any refinance options to lower their payment. Spending time to improve HARP is a great thing, but there are millions of folks with FHA loans in the predicament described above. I talk with approximately one per day. If the government is serious about helping homeowners refinance their underwater mortgages, it’s time they undo the price hikes on FHA streamline refinances.

Sound familiar?  It should because the Making Home Affordable movement has two refinance programs and a modification program.  So what will make this one different?

We haven’t seen any details on this new “broad” refinance program but there’s a good chance that it will be modified versions of existing programs.  Some of the programs released were a success while others were a huge failure.  Let’s summarize the government’s previous attempts.

FHA Secure (2007-2008)

This program was implemented by the Bush administration.  It was designed to help homeowners who were late on their mortgage due to an adjustable rate mortgage refinance to a FHA fixed rate loan

Success or Failure?

-FAILURE-

One of the program requirements were that the homeowner must be late following a rate adjustment.  When I’ve talked to homeowners, they’ve expressed the importance of getting help before they’re in trouble, not after.  Responsible consumers see their credit as the biggest reason they search for help. Asking them to request help after they’re late is like asking someone to reach for help after their head is under quick sand.  Homeowners want help before their late, not after.  In addition, lenders were more reluctant to participate in a program that required a homeowner to be in default.

HARP- Home Affordable Refinance Program (2009 to current)

This program was part of the 2009 Economic Stimulus package signed by Obama.  The program is designed to help homeowners with conventional loans backed by Fannie Mae or Freddie Mac refinance to new terms with less equity than what is traditionally required for a conventional refinance.  This program has different versions including programs the existing servicer can do and programs that other Fannie Mae/Freddie Mac lenders can do.

Success or Failure?

-SUCCESS-

This program was originally launched with mild lender participation.  They added some features to boost participation, including higher loan-to-values and adjustments to improve rates. Hurdles along the way include 2nd mortgage companies blocking homeowners from refinancing their first mortgage (called a subordination), misinformation about the program (The Making Home Affordable website stated it was only for a primary residence home which is not true) and strict lender overlays.  Lenders began loosening their guidelines and approximately 810,000 homeowners have successfully refinanced under HARP.  Many homeowners are still having troubles refinancing if their loan has private mortgage insurance or if they have a 2nd mortgage where the creditor is unwilling to subordinate.  The program has been extended a second time until June of 2012.  Other than PMI insured loans, the biggest hurdle this program faces is loan-to-value.  Even though they’ve expanded the program to allow 125% financing, few lenders will lend above 105%.  With values continuing to decline, this program is quickly becoming an option that homeowners discover too late.

HAMP- Home Affordable Modification Program (2009-current)

This program was launched the same time as HARP.  The purpose of this program is to help homeowners with loans if the homeowner is facing hardship and does not qualify for a traditional or HARP refinance

Success or Failure?

-FAILURE-

This program has seen some success but not the success that was expected.  One of the largest problems facing this program is that the participating lenders did not have existing professionals in place to service the consumers. As institutions did their best to implement the program, newly hired staff had to stumble their way through a new program they were not familiar with.  Many homeowners have seen some success but there have been too many failures with this program.  One of the biggest problems with this program is the lenders misinformation given to customers.  Many lenders told their clients that they had to be in default to qualify.  Some lenders told their customers they could try a “trial payment” period while they determined eligibility.  Many of these homeowners didn’t understand that this process made their mortgage late.  Lenders also didn’t properly qualify the customers on which program best suited their situation, sending well qualified HARP customers to a HAMP specialist .  These customers unknowingly started a HAMP modification and later find out they not only were turned down, but the “trial payments” disqualified them for HARP.  Improper training and implementing a new type of program has been the largest factors associated with HAMP’s failure.

FHA Short Payoff Refinance (2010-Current)

This program is designed to help homeowners refinance to a FHA loan and reduce their principal balance.  Although the program is still in existence, talks of ending this program have already begun

Success or Failure?

-FAILURE-

Successful refinances on this program are few.  The underlying lenders did not have the infrastructure in place to deal with “negotiations” to take a reduced principal payoff during a refinance.  In addition, there was limited participation from FHA lenders.  The biggest problem with this program is that it removed a viable refinance program for homeowners that already existed. Prior to the implementation of the FHA short refinance, FHA allowed any homeowner to refinance their first mortgage up to 97.15-97.75% of their value with a second mortgage with no limit to value.  Homeowners who had subprime 80/20 mortgages (loans where they financed 100% of their purchase with two loans) could refinanced their underwater house by converting their first mortgage to a FHA fixed rate loan and keep the existing 2nd mortgage if it exceeded their value.  When FHA implemented the short refinance program, they discontinued allowing homeowners to refinance and keep their 2nd mortgage with no limitations.  A regular FHA loan was a great solution for homeowners with subprime or Alt-A 80/20 loans that was removed due this program, causing more harm than good.

THE PLAN

As a professional in the mortgage industry, I understand how difficult it is to make new programs with different investors involved.  We cannot make one, simple program to help everybody because every loan is backed by a different entity.  A quick, simple adjustment to all existing loan programs will help most homeowners.

Watching different programs come and go, I’ve found some consistencies in the successes and failures of these programs.

I found that programs that required lenders to create a whole new staff to support were slow in implementation due to training and funding for startup, where programs that relied on existing staff worked well.  Teaching an experienced loan underwriter a “modified” version of a conventional refinance is easy, as is training the loan officers.  Training a person to originate or underwrite a program that has never existed takes time, patience and more funding.

I also found that programs that were designed to help homeowners BEFORE they were in trouble succeeded.  This is one of the reasons HARP has seen a higher level of success than other programs.

In addition, programs designed to be profitable for banks to participate and minimize additional liability were implemented faster by institutions.  It’s not hard for a company to train staff to work on programs that help the company make money.

Lastly, programs that didn’t require any “exceptions” from the underlying lender also have been easier.  From my experience, the biggest problem with the FHA short refinance was the participation of the lenders being paid off, not the lenders funding the new loan.  This also has shown true with HARP when lenders requested subordinations from a second lien holder.  In a related topic, this holds true with PMI HARP loans where the PMI companies may not be willing to issue a new policy on the new loan being funded.  The more entities who need to say “yes”, the less likely the transaction will close.

Here are some ideas:

LOANS BACKED BY FANNIE MAE AND FREDDIE MAC

HARP has seen a substantial amount of success but there are still a few major hurdles to overcome.  As mentioned above, we need to deal with loans with PMI and loans loans over 105% of the home’s value.  Lenders are not willing to lend above 105% even though the program allows it because the lenders share the liability.  Another problem is less lenders are participating in the Freddie Mac HARP program for lenders who do not service the loan.  This has reduced lender participation and homeowners with Freddie Mac backed loans are losing their options to refinance.

Solution

The government should remove any additional liabilities related to funding loans up to 125% of the home value.  They should also increase the eligibility of a homeowner closing these loans without an appraisal.  Some loans are eligible for a HARP refinance without an appraisal but not all of them.  If the guidelines allowed more appraisal-waiver loans and less risk for loans over 105%, more lenders would participate.  To help reduce liability, keep these new, expanded guidelines to homeowners with higher credit and stronger compensating factors.  I’ve found that many homeowners will simply never default on their loan and are extremely responsible, but do not have any options. Allowing them to refinance to a lower rate will help more money enter our marketplace without adding any unneeded risk.  In addition, Freddie Mac should model their HARP program more similarly to Fannie Mae and allow more appraisal waivers and loosen restrictions to participating lenders.

ADDED 9/12/2011

It would also help if Freddie Mac removed their limit on properties financed.  Freddie Mac currently has a limit that keeps homeowners from refinancing if they have more than 4 properties with a loan.  Why would they stick to this guideline when the loan is already owned by them?  Fannie Mae figured this out and removed any limitations related to the number of financed properties when a borrower is applying for a HARP loan.  Freddie Mac should follow the same.

In a press release on Friday, The Federal Housing Finance Agency responded to the press release from President Obama.  The announcement mentioned a “reevaluation” of the existing HARP program.  You can read the announcement here:

http://www.fhfa.gov/webfiles/22607/HARPSTMT9911.pdf 

LOANS BACKED BY FHA

FHA has already had a good solution by allowing homeowners with FHA insured loans to refinance without an appraisal.  However, FHA has recently increased their mortgage insurance premiums making it harder for homeowners to refinance to a lower rate and save money.

Solution

I understand that FHA needs to increase their premiums since more homeowners have begun using FHA loans, but why charge existing FHA homeowners more?  These homeowners are already paying FHA premiums and by not allowing them to refinance, we remove the ability for a homeowner to save money.  If we can allow homeowners to refinance to a new FHA loan without increasing their mortgage insurance premiums, FHA will continue to receive the same premium while putting more money in the homeowners pockets.

LOANS BACKED BY VA

The VA already allows veterans with VA insured home loans to refinance with no appraisal (called a VA Interest Rate Reduction Refinance Loan or IRRRL) but there’s a new problem.  The VA has been too loose on their guidelines allowing veterans to wrap expensive loan costs into the loan without an appraisal, increasing the risk to the new lender.  This has resulted in VA lenders requiring an appraisal on a refinance program that doesn’t require one.  Very few lenders still participate in this program without an appraisal and many of the ones that do charge high fees.  Others only offer versions of VA loans like adjustable rate mortgages, limiting a veteran’s option to refinance.

Solution

The VA should increase the insurance on IRRRL loans so lenders are more comfortable lending.  They should also limit the new loan to be near or the same principal balance as the old loan so the lenders do not increase their risk.  Lastly, they should REQUIRE any lender who wishes to participate in VA insured home loans to offer IRRRL loans.  If a lender is not increasing the risk and the loans have more insurance to protect them, the VA has every right to request the lender to offer these loans without the request of an appraisal.  It’s ridiculous that our veterans who are underwater are told by the VA that they qualify for a refinance only to find a handful of options of lenders and programs to choose from.

LOANS BACKED BY THE USDA

These loans require the homeowner to be qualified for a 1% rate reduction, which is a little strict.

Solution

Many homeowners can reduce their rate by .5-.75% while paying almost no fees on other programs.  If the USDA implements the same policy as FHA, which requires the payment to drop 5% from the previous payment, this will help more homeowners in reducing their interest rate.

LOANS NOT BACKED BY ANY OF THE ABOVE AGENCIES

There are many home loans not backed by the agencies above.  Homeowners who seek payment relief and find their loan is not supported by these programs are left with few options.

Solution

This is a tougher problem to fix, but one of the first ways of solving this is by changing the FHA guidelines back to where homeowners can take a FHA loan with a second mortgage behind it without value limitations on the second mortgage.  If we change FHA guidelines to allow second mortgages to exceed the value of the home, we can then implement a government loan program that provides a second mortgage covering the underwater portion of the mortgage.  The loan should probably be limited in size depending on the area and only be offered to very well-qualified homeowners who clearly have an intention of paying their loans back.  A higher credit score requirement for the second mortgage and a balance limited to $50k-100k depending on the area would likely work.  The second mortgages can be controlled and funded by Local Public Housing Agencies (Also known as PHA’s).  These agencies are already in place and fund FHA approved 2nd mortgages for home purchases.  They have the staff and experience to regulate these loans.  Most states, cities or local municipalities has their own local authority that manages down payment assistance programs.  If the government gives them funding to staff the program and cover the cost of funding these programs, we can release a program to help homeowners underwater regardless of who owns their home loan.

It’ll be interesting to find out what Obama’s plan looks like.  Stay tuned for updated information.

The largest impact will be directly to mortgage loans that are being contracted to close during the shutdown. Many new applications will sit stagnant while we wait for congress to come to a resolution. How badly this will affect the housing market will depend heavily on how long the shutdown is. For all the work the government has done to avoid a double-dip housing recession with bailouts and government programs (such as the Making Home Affordable programs) their inability to resolve budget disputes may be the direct cause of another drop in house values. 

WHAT FEDERAL AGENCIES WILL BE AFFECTED AND HOW WILL IT IMPACT THE MARKET?

FHA

Specifically, FHA is getting a lot of attention and rightfully so. FHA has been a savior to the mortgage industry since 2008 at the beginning of the recession providing affordable loans with reasonable credit guidelines. From 2005 through 2007, FHA never represented more than 4.25% of all the home loans originated. In 2010, FHA represented over 19% of all home loans and a whopping 30% of new home sales. These statistics have been published directly by the Department of Urban and Housing Development. FHA will not insure home loans during the shutdown. Lenders may choose in their own discretion to fund the loan and request insurance after the shutdown is over.

VA

As of right now, most reports show that the Department of Veterans Affairs will not be impacted. This is good news for veterans who are currently looking to buy a home.

USDA

The USDA (US Department of Agriculture) insures affordable home loans for rural areas. The USDA will not insure new home loans and I’ve received reports that their automated underwriting engine (Guaranteed Underwriting System) will not operate. This not only halts the funding of some USDA loans, but will prevent lenders from pre-approving buyers for this program. Although USDA represents a much smaller percentage of loans than FHA, this program is hit the hardest of the three. Lenders can still manually underwrite the files but most will require the assurance of USDA’s program to approve a client. This is unfortunate after the government spent months working on a budget to fund the USDA after they ran out of loan funds for a portion of 2010. It does sound like USDA lenders will be able to close loans with a conditional commitment up to 90 days of the commitment, but new applications will not be processed and new prospective buyers won’t be able to get pre-approved. Like FHA, lenders may choose to close the loan and wait for the shutdown to end before sending the loan to the USDA at their own discretion.

IRS

Now, let’s talk about the big entity nobody is talking about when talking mortgages, the IRS (Internal Revenue Services).

Many of you are wondering, “How does the IRS have an effect on the mortgage industry?” There’s many ways the IRS can affect home loans since we use tax documents to verify income, but not in the most obvious way.

Mortgage lenders rely heavily on tax documents to calculate and verify a homebuyer’s income. Most homeowners will have their tax documents on hand, but the mortgage industry needs more than a copy of the documents.

Prior to the mortgage meltdown, mortgage lenders trusted their consumers that the tax documents they received were accurate and complete. Lender guidelines have since changed. To avoid fraud and also catch amended tax returns, mortgage guidelines require verification from the IRS that the tax documents the lender has reviewed were accurate and complete. These verifications are done by tax transcripts ordered by the lender to the IRS. You can read more about why transcripts are required here.

Lenders are now requiring transcripts on virtually all loans being processed. Specifically, Fannie Mae and Freddie Mac require transcripts for every loan file. I’ve found some reports that state Fannie Mae and Freddie Mac will remain operational, indicating that consumers can obtain a Fannie Mae or Freddie Mac conventional home loans with no issues. That is only partially true. If the government were to shut down, any consumer who’s applying for a Fannie Mae or Freddie Mac loan will not be able to close on a loan unless the lender had already verified the tax transcripts with the IRS. Any Fannie Mae or Freddie Mac loan not including transcripts cannot be closed.

This is an issue that appears to be overlooked and will have a larger impact than many have considered. Yes, FHA will have a huge impact, but adding Fannie and Freddie to the mix is a whole different story. According to Fannie Mae, they are the largest issuer of mortgage related securities in the second market representing 44% of the marketplace in 2010.

Fannie Mae and Freddie Mac represent more than 60% of the home loans originated today, plus FHA represents over 15%. Not including USDA loans, those three entities already represent more than 75% of all home loan issued today. If gone unnoticed, this government shutdown will have a much larger impact than many are expecting.

Do I think this will destroy the housing market? Honestly, I don’t. At one point, the government will realize the size of this impact and implement some type of action plan. I just hope this is noticed before there’s a government shutdown, not after.

TIPS FOR HOMEOWNERS:

Here are a list of items I would recommend be completed based on the type of loan you’re looking to close.

ALL LOANS

· Order your tax transcripts immediately.

· I haven’t been able to find exact details, but I would order any outstanding flood certifications if you haven’t determined if the property is in a flood zone.

FHA

· FHA Connection will still be up to order case numbers but CAIVRS (a program that does a background check on all parties involved in the transaction)will be down, so have your lender order your CAIVRS Reports right away.

USDA

· USDA will only insure loan commitments already issued (90 day expiration). If you still have time, try to get your commitment approved prior to the shutdown.

· GUS will not be operational, so all buyers looking to get pre-approved on USDA should process their pre-approval right away and new loans should be ran through GUS if they haven’t been done yet.

For someone who’s personally tried to assist a client in qualifying for this, I tend to agree with this movement.  The concept of the program is good and it may be true that principal reduction is required to prevent some foreclosures, but we’ve learned from HARP that the key to a successful program is to design a program that is beneficial to both client and lender AND must also have an existing infrastructure for lenders to implement the program easily.

HAMP and other programs have had failures because prior to the recession, lenders did not staff professionals experienced in loan modifications.  The time it takes to train people is lost time for a slippery housing market.  HARP has received its 2nd extension and represented a whopping 10% of all the refinance activity in 2010.  Why has the program been more successful than its counterparts?  Easy, the program is nothing more than a loan with different guidelines.  Loan officers, processors and underwriters only had to learn a few guidelines to add this program to their menu of loan options.  Lenders already staffed loan officers and the operation staff to support the program.  Even with this program was easy to implement, we’ve still needed time for lender participation and customer awareness to become effective. 

The FHA short refinance program had the staff to support the program like HARP but there were two elements that made this program too difficult.  One, most FHA lenders didn’t employ the staff to negotiate a short-payoff with an existing lender.  Two, there weren’t enough lenders who were willing to take a short-payoff on a loan that was underwater.  The program had incentives in place for the lenders if they accepted a short-payoff but details of the incentives were too vague and lender participation on both sides of the transaction have been minimal.

If anything, the introduction of the FHA short refinance program hurt the housing market.  Prior to the release of this program, FHA allowed homeowners to refinance to a FHA loan up to 97.75% of their home value and no limit on a second mortgage.  This gave homeowners an option to refinance if only their second mortgage was underwater and they didn’t have a Fannie Mae or Freddie Mac eligible first mortgage (a requirement for HARP).  When FHA released the short refinance program, the option to refinance above the value of the home without a short refinance was removed.  All homeowners who didn’t have a HARP eligible first mortgage lost their only option unless their current lender was willing to take less than the balance due, which rarely took place.

If congress is successful in killing the short refinance program, I hope they convince FHA to change to their old guidelines where FHA allowed second mortgages above the home value.

The new FHA program includes new FHA guidelines that no longer allow an unlimited Combined-Loan-To-Value on FHA loans.  This is a HUGE problem.  Let me explain.

In the past, FHA didn’t cap how much a homeowner owed on their house if the homeowner wanted to refinance the first mortgage as long as the new loan was within the 97.15%-97.75% of the home value.  For instance, let’s assume a home buyer bought a $200k home with 20% down and ended with a $160k mortgage.  The house appreciated to a value of $220k and the homeowner took a home equity loan of $50k for home improvements, making their new combined loan amounts $210k.  Then the market declined and the new value is $170k, making the homeowner underwater on their home loans by $40k.

FHA would still allow this homeowner to refinance the first mortgage even though the second mortgage brought the home value to over 100% since paying off the $160k still had was within the 97.75% FHA limit.

$170k appraised value x 97.75% FHA LTV limit= $166,175…enough to pay off the $160k first mortgage owed.

The homeowner would still have their equity loan but this gives them an option to refinance their first mortgage, which may have a high rate or may be an adjustable rate mortgage set to adjust soon.  The new FHA guidelines will not allow the value of the two loans exceed 100% UNLESS the 2nd mortgage company is willing to write down the balance.

Short payoff refinances  sound good, but lenders often don’t want to take less than what’s owed.  The old FHA guidelines actually helps more homeowners because more homeowners have 2nd mortgages where a short payoffs wouldn’t be considered.  In fact, current FHA guidelines DO NOT PROHIBIT SHORT PAYOFFS so the new guidelines are only stricter than the old guides!  How is this supposed to HELP homeowners?  The guidelines are tigher and it’s now a part of the Making Home Affordable program?  I’m still scratching my head on this one.

To stay on track, there is a VERY important message I need to get sent to every homeowner in America with a second mortgage.  APPLY FOR A FHA LOAN AND GET A CASE NUMBER ORDERED NOW!  Why?  FHA will allow you to close under old or new guidelines if your case # was ordered before the deadline for the guideline changes.  Right now, that date is September 7th, 2010, less than one week away!  Even if you don’t qualify for a loan right now, credit is too low, equity is less than 97.75% right now, STILL GET YOUR CASE #.  By ordering it now, you can always revisit this option in case your credit is improved or equity position has improved down the road.  FHA doesn’t cancel case #’s and consumers who have a case # ordered are grandfathered into the old guidelines.  This allows above 100% combined loan-to-value and still allows you to explore the short payoff options that are available. 

If you talk to the right lender, you should be able to get this done in one day and for free.  Again, all homeowners who have 2nd mortgages and may consider refinancing at some point, please get a FHA case # ordered in the next couple of days.  Details can be read on this announcement letter from FHA:

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-23ml.pdf

I find that most consumers who are concerned with their credit feel that a credit blemish from years ago will keep them from homeownership forever.  That couldn’t be farther from the truth.  Loan guidelines for a federally backed FHA mortgage only requires 3 years from a foreclosure, 2 years from a chapter 7 bankruptcy and 1 day on a chapter 13 bankruptcy discharge!  What does that mean?   It means that regardless of your credit past, you can probably qualify for a home loan in just a few years.  Often consumers will qualify and not even know it. 

The key to building your credit after a financial catastrophe is creating credit activity immediately.  The most common mistake I see people make is they never re-establish credit following their financial fallout.  If your credit was horrible after a bankruptcy and you never opened a new credit account, it will remain horrible.  Most consumers think that there is no way to build credit because they will not qualify for a loan, which makes sense.  However, there is a way.

Here are some basic ways to build credit when your credit score is low:

• Open a Secured Credit Card-
  • You can open a $100 credit limit card if you deposit $100 to the lender.  You can often get these from any bank or credit union.  The lender is willing to issue the card regardless of your credit because it’s secured by your cash deposit. 
• Open an Unsecured Credit Card or Installment loan
  • After you’ve had a secured credit card for 6-12 months, you should establish enough credit to open an unsecured card.  The rates you’ll be offered will be fairly high, so try to pay the balances off during the grace period.  Avoid cards with annual fees if possible.  You can also then apply for an auto loan if you need one.
• Keep Your Credit Cards in Good Standing and Avoid Paying Unnecessary Finance Charges
  • Keeping your credit card in good standing includes paying your bills on time.  It also requires you to keep your balances low.  Never let your balances exceed 25% of your limit.  That may seem low, but keep it there and your score will remain high.  As your score builds, you can request higher limits.  You can then lend up to 25% of your new balance.  Also try to pay the balances off during the grace period to avoid interest charges.  I often tell clients to treat the new card like a debit card.  When you make a purchase, use your receipt and transfer that much money from your checking account immediately. 
• Monitor Your Credit and Dispute Incorrect Items
  • Most credit reports are inaccurate.  The last thing you need pulling down your credit is an account that doesn’t even belong to you.  Check your credit regularly with a monitoring system and dispute items that are incorrect.  You can also pull a free credit report on www.annualcreditreport.com.  This is very important for people who have gone through  a bankruptcy because creditors often do not update account information following a bankruptcy. 
• Pay Your Collections Early
  • When a collection has been on your credit for too long, it sometimes temporarily LOWERS your score when you pay a collection off.  Eventually, it will benefit your credit to have it paid, so pay the collection as soon as possible.  If you’re thinking of paying off a collection and are near qualifying, look to see when the last time that collection agency reported the debt.  If they haven’t reported any updates for a year or longer, you will likely want to hold off on paying that account in case.  It’s best to pay the collections before they report on credit.  If you’re score is far too low to qualify, pay them all.  Letting the collection balance linger can be bad juju.  The collection agency can sell the debt to another.  You can end up having multiple collections on your report for the same debt.  Not good.

Not all mortgage lenders are the same, but most follow the same minimum credit guidelines.  If you want to buy a home, shoot to achieve these goals on your credit:

• Try to achieve a minimum 620 credit score or 640 credit score for two of your three credit scores.  These are the industry standards for obtaining a FHA loan, which only requires 3.5% down.
• Pay off all liens and judgments immediately.  You will not be able to buy a house if you have outstanding judgments or liens.
• Keep at least 3 credit accounts open at all times.  If a credit card company ever makes you mad, DO NOT CLOSE IT!  Just cut up the card and pretend it doesn’t exist.  Closing accounts is bad for your credit.  Mortgage lenders may also require at least 3 open credit accounts to qualify for a home loan.
• If you’re had a bankruptcy or foreclosure, it’s very important that you show you can pay your bills on time following the event.  Many lenders will turn you down for a home loan if you’ve had late payments following a bankruptcy or foreclosure.

If it’s possible, look for a loan officer who’s goal is to help you obtain homeownership regardless of where you stand now.  I tell all my clients that if they’re serious about buying a home, they will eventually get there if they follow the right advice.  Find someone who’s educated enough to give you the advice needed and is willing to work with you along the way.

Here are the required waiting periods to qualify for a home loan following a hardship:

SHORTSALE

FHA- 3 years.  Circumstances allow less than 3 years if the homeowner wasn’t late during the shortsale or circumstances were outside the homeowners control. 

Conventional- 2 years (check on PMI company requirements if you’re putting less than 20% down)

BANKRUPTCY

FHA- 2 years for Chapter 7.  None for Chapter 13.

Conventional- 4 years for chapter 7.  2 years from discharge or 4 years from dismassal for Chapter 13.

FORECLOSURE

FHA- 3 years

Conventional- 7 years

The changes to seller concessions will have a large impact. Concessions include what the seller is contributing to the buyer in the transaction. A common concession is a credit from the seller to cover the buyer’s closing costs. A 3% limit on seller concessions is enough to cover closing costs on a purchase of around $250,000, but with a purchase price of anything less than $250,000 the buyer will be forced to pay some closing costs out-of-pocket. This will be a pain-point for many FHA borrowers in the months to come.

The change in concessions will also impact new construction transactions. Upgrades on a new home will be considered a seller concession if the purchase and sale clearly states that there was an increase in price for these upgrades. For example, supposing a buyer plans to purchase a new home at $295,000. In this transaction, the builder/seller is offering to pay the buyer’s closing costs up to $9,000, and the buyer is putting $20,000 down. The buyer’s loan officer arranges a loan with closing costs of approximately $8,000 for a $275,000 loan. In this instance, $275,000 x 3%= $8,250 — the buyer is okay.

However, as this is new construction and the buyer is purchasing from the builder, the buyer negotiates upgrades valued at $5,000. In this instance, the Purchase and Sale contract itemizes: upgraded flooring valued at $3000.00, and upgraded counter tops valued at $2000.00. In the underwriting process, the underwriter will likely consider these upgrades seller concessions. This additional $5,000 will be counted against the 3% limit. After a down payment of $20,000, your loan amount would be $280,000.  If you’ve been following the math, you will note that 3% x $280,000 = $8,400. The original $8,000 in closing costs, plus the $5,000 in upgrades will exceed the 3% limit. The loan no longer qualifies under FHA guidelines.

Another example of how this could affect a transaction?  Let’s suppose a buyer is shopping for a condo.  The seller is offering to pay for all the closing costs and Homeowner Association Dues for 1-year.  Both are considered a seller concession, so if the two figures total to over 3%, this purchase also would not qualify under FHA guidelines

If the seller is paying for something in behalf of the buyer, it is likely a “concession.”  Home buyers should be careful of any potential concessions offered if they’re planning on using FHA financing.

Why is HUD doing this?  The answer is simple, to protect home values.  Since buyers often need sellers to pay for their closing costs, HUD is trying to protect sales prices from being inflated to include these concessions.  Though a valiant cause, it doesn’t make sense to squeeze the little guy out.  FHA is now a perfect loan program for buyers in the higher income range and a small down payment.  This is not what FHA was intended for.  Here is an excerpt from HUD’s mission statement:

The Department of Housing and Urban Development (HUD) is committed to helping communities across America identify and overcome regulatory barriers that impede the availability of affordable housing. READ ENTIRE MISSION STATEMENT

Keep reading to learn more about the other changes mortgage guidelines and new rules as they come about.

UPDATE 6/9/2010

A colleague of mine (Ann Liberato, founding partner at Cobalt Mortgage) told me she spoke with someone at HUD and they confirmed the change is still happening but will likely take place in the fall of this year (2010).  We’re not sure why HUD is delaying the change but I hope that it is modified to allow higher concessions for smaller sized transactions.

I spoke with Ken Harney from the Washington Post a couple of weeks ago on this topic.  Ken also wrote an article about the changes to seller concessions for FHA financing:

One of the key attractions of FHA mortgage financing is going, going — but not quite gone. Sellers and buyers who move fast can still make the most of it.

Sometime this summer, the Federal Housing Administration plans to slash maximum “seller concessions” from 6 percent of the home price to 3 percent. Seller concession rules allow buyers to look to the property seller to pay for some services and taxes connected with the transaction — loan origination and local transfer fees, appraisals, inspections, closing and escrow costs, among others — though not the down payment.  READ MORE

I hope the national attention will persuade HUD to allow higher concessions on smaller transactions.

UPDATE JULY 28TH, 2010

 HUD is closer to changing their concessions from 6% to 3% but is open to hearing comments, according to an article on Mortgage News Daily.  I will be sure to let my voice be heard.  If you would like to have your voice heard as well, please follow the instructions as given from this article.

1. Visit http://www.regulations.gov
2. Scroll down about 1/3rd of the page and you will see a link for “What’s Hot –Most Visited Regulations”
3. Click on that link and you will see a list of pending regulation. Select the notice:  “Federal Housing Administration Risk Management Initiatives:  Reduction of Seller Concessions…”
4. That will take you to a page where the document outlining these changes is available for review.  Towards the top right-hand of the page, you will see a link in light-blue ink that reads “Submit Comment”…click on that link and fill-in your information, and type-in your comment.
5. Hit “submit” and let your voice be heard.

CLICK HERE TO READ MORE

UPDATE MARCH 17TH, 2011

So far, FHA guidelines have remained at 6% which I think is a good move.  Most transactions under $250,000 have more than 3% in total closing costs and prepaids and the sellers are more than happy to pay them.

HUD (The Department of Housing and Urban Development) just released updated guidelines on the very topic on December 16th, 2009 in their Mortgagee Letter 09-52.  This mortgagee letter specifically covers FHA guidelines for buyers who have sold their property for less than what they owed.

The new FHA guidelines say a buyer cannot buy for 3 years if they were delinquent on their previous loan leading up to the short sale.  This timeline is identical to FHA guidelines on a foreclosure.

The guidelines do say a homebuyer can buy immediately following a short sale IF they were current on their mortgage and other installment debt payments at the time of their short sale and if the proceeds from the short sale were accepted as a payment in full.  In other words, if you were not late and the bank accepted your sale, you can buy again.

HUD does say that you cannot buy using a FHA loan if the purpose of the short sale and new purchase were done to take advantage of declining market conditions or to purchase a similar or superior property at a reduced price.  In other words, don’t abuse the guidelines to get a better deal.

To sum up the guidelines, you can buy immediately after a short sale but you cannot have been late on your loan and you can’t buy if your short sale was done to benefit from current market conditions.  Which scenarios would this apply to?  Here’s a few that would fit the requirements:

• You are forced to move do to a new job and location.  You have to sell your home and you owe more than it’s worth.
• You cannot afford to keep your home, such as losing your job, and were able to sell your home before becoming late on the home loan payments.  You then buy again when you have a new job and can afford the payments
• You have a balloon payment due and cannot afford the payment.  You sell for less than what you owe due to market conditions and later buy.

This seems like the right time to give homeowners an extensive guide to HARP, including who it best benefits, how to give homeowners the best shot of getting approved as well as other options to low-equity refinancing.

To clarify one fact about HARP that many homeowners do not know, YOU DO NOT NEED TO USE YOUR CURRENT LENDER TO GET A HARP LOAN.  Shop your HARP loan like any other refinance.  The only exception to that rule is if your current loan has PMI, which can only be refinanced through your current lender at the moment.  Even then, a very small handful of lenders will do a HARP loan with PMI.  Also, HARP is not limited to homeowners only.  You can use HARP on 2nd homes and investment properties as long as the loans are owned by Fannie Mae or Freddie Mac.  In fact, they are actually perfect for investment properties.  You can read more on this topic here.  This contradicts the Making Home Affordable website, which states you may be eligible for HARP if “Own a one- to four-unit home that is your primary residence.”  I can tell you from first hand experience that you can use HARP on 2nd homes and rental properties.

From my experience, the loan pricing offered from current servicers is often higher than from a new HARP lender.   However, there are times the current servicer can offer a version of HARP that no other lender can.  This can include no income verification or appraisal, which can be very helpful for some homeowners who feel they’ll have issues qualifying.  Remember that other HARP lenders can loan on underwater mortgages, but if you think your home will appraise for less than what’s needed for HARP, using your existing servicer may be worth it even if they are charging a premium for the loan.  If you think you’ll fit within income and equity requirements for the HARP lender you’re talking to, shop your loan like a regular mortgage.

One unfortunate fact is some loan servicers do not originate new loans.  If your loan was sold to a company like Cenlar or Seterus (added 10/25/2011), then the special HARP options (such as PMI HARP loans) will be unavailable to you unless you find a specialized lender who participates in PMI HARP Loans.  This is because companies like Cenlar do not originate new loans, they only service the payments.  Email me if you want a referral.

Large banks also only offer HARP loans for the loans they service.  If you bank with Bank of America and have a Cenlar serviced loan, Bank of America can’t help you.  Look for a Fannie Mae or Freddie Mac lender who does HARP loans in your area.

The HARP program was designed to help homeowners who are looking to refinance but have lost some to all of their equity in their home.  It only applies to homeowners who currently have a Fannie Mae or Freddie Mac owned loan, but that does not mean HARP is a homeowners only choice.  In fact, there’s surprisingly several opti0ns available to homeowners that may not have considered, nor did their lender give as an option.  In this post, I will cover who qualifies for a HARP refinance, who best benefits from HARP guidelines, which customers do not qualify for HARP and some alternatives to consider.  One EXTREMELY important detail to note is you cannot refinance under HARP if you have already applied for a modification (HAMP-Home Affordable Modification Program.  If you haven’t decided which is better for you, apply for a HARP refinance first.  If your HARP refinance application is turned down, you can proceed with a modification application.  Attempting to modify your loan first will disqualify you from a HARP refinance.

WHO IS FANNIE MAE AND FREDDIE MAC, AND HOW DO I FIND OUT IF THEY OWN MY MORTGAGE?

One topic that is very confusing for homeowners is finding out who really owns their loan.  You think it would be as simple as looking at the name on your mortgage statement, right?  Not so.  In fact, it’s very rare for a loan to be truly owned by the company you make your payments to.  Lenders usually sell their loans to another entity.  They also will collect payments in behalf  of that entity which is called “Servicing.”

Let’s suppose you buy your house using Wells Fargo as your lender.  Wells Fargo then sells your loan to Freddie Mac.  Wells Fargo still collects your payments and passes the payments back to Freddie Mac while collecting a small fee for the service.  In this scenario, your loan is owned by Freddie Mac but Wells Fargo is your servicer.

There are several steps you can take to find out if Fannie Mae or Freddie Mac owns your loan.  It’s vital to try all options before you give up because not all methods work the first time.

The first place to check to see if either Fannie Mae or Freddie Mac owns your mortgage is an online property lookup tool

Fannie Mae’s lookup tool:

http://loanlookup.fanniemae.com/loanlookup/

Freddie Mac’s lookup tool:

https://ww3.freddiemac.com/corporate/

If your property does not show up on either of the property lookup tools, you should still call Fannie Mae or Freddie Mac to see if they own your mortgage.  Fannie Mae and Freddie Mac do not always have the exact address saved correctly.  This is why it’s important to call.

Fannie Mae’s phone number:

1-800-732-6643 or 1-800-7-FANNIE

Freddie  Mac’s phone number:

1-800-373-3343 or 1-800-Freddie

If you don’t have luck there, contact your current servicer and see if they know if you have a Fannie Mae or Freddie Mac loan.  Lastly, you can have the mortgage company you’re applying a HARP loan from run an automated approval through Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector software and it may indicate if the property qualifies for a HARP loan.

MY LOAN IS A FANNIE MAE OR FREDDIE MAC LOAN. NOW WHAT?

First, find out if your current loan has mortgage insurance.  As it stands now, HARP guidelines require that you work only with your current servicer if your loan has mortgage insurance.  However I have not heard of one servicer who will do this loan.  This topic was covered in my blog post, “Another Flaw With the HARP Program.”

HARP guidelines say a homeowner can finance up to 125% of their home value.  Most lenders are still following the original guidelines of 105% but a couple of lenders are beginning to finance up to 125%.  Both of these limits are for a first mortgage.  Currently, HARP guidelines do not have a limit to how high your combined-loan-to-value (CLTV) is which means if you have more than one loan, the total amount you owe against your house is not considered in the qualifications of a HARP loan as long as the first mortgage is in the 125% allowable range.

UPDATE 10/25/2011

The Federal Housing Finance Agency released new changes coming to HARP which include loans over 125% and extending the program until the end of 2013.  They are also removing some lender warranties, which will encourage more lenders to participate in riskier HARP loans such as PMI insured HARP loans and loans with higher loan-to-values.  You can read more about these changes on a new blog post I wrote here.

Even though Fannie Mae and Freddie Mac both allow above 100% financing, please note that the loan pricing is more expensive.  HARP loan pricing is best suited for 95% combined-loan-to-value or less meaning you’ll get your best rates and fees if you have at least 5% equity between all loans owed against the house.  Pricing is increased between 95.01-97% and increased again for anything above 97.01%.  This means you’ll want to be very careful of how much you borrower on your house if your loan amount is near the value of your home.   If your current Fannie Mae or Freddie Mac loan does not have mortgage insurance, you will not be required to get mortgage insurance on your new HARP loan.  This is one of the major benefits of doing a HARP refinance.

These programs are also very credit score driven.  Best pricing is for homeowners with a 720 credit score or higher. You can answer a quick 4 question eligibility test on the HARP website here.

Here is a quick summary of the HARP loan requirements:

• your loan will need to be owned by Fannie Mae or Freddie Mac
• your current loan should not have mortgage insurance (you can contact your current servicer per guidelines but I have not heard of one servicer who will do this yet).
• you can go as high as 105% of your home value with most HARP lenders and 125% with a few lenders but preferably be at 95% or lower for best pricing.

UPDATED May 29th, 2010-

There have been two major hurdles on HARP loans that appears to be much easier to overcome.  One, many HARP lenders are now implementing price caps.  What does that mean?  Simply this…it doesn’t matter how bad your refinance situation looks, you’ll never pay more than “X” over the best interest rate that lender has to offer.  Lower credit, condo, investment property or second home, you will not have to pay the huge premiums that HARP loans had last year.  Not all lenders implement a price cap, so it’s important to shop your loan.  Remember when I said you do NOT HAVE TO USE YOUR CURRENT LENDER?  I can’t stress this enough.  Most of the rates/fees I’m seeing from current lenders are much higher.  I have a feeling that most of these lenders know that their current customers check with them first, so they build large premiums in their pricing.  Dont’ pay too much for your loan…be sure to shop it around!

Two, if you once applied for a HARP loan and was denied because you have a second mortgage that would not allow you to refinance your first mortgage (called a subordination agreement), many lenders have worked with the government and are now allowing subordination.  Below is a list of lenders who I’ve been able to get the subordinations approved with relative ease even though the loan amounts exceeded 100% of the home value:

• Bank of America
• Wells Fargo
• Chase
• GMAC
• Citibank
• Flagstar
• Everbank
• Key Bank

UPDATED June 17th, 2010-

It’s important to know that HARP is only eligible for loans that were purchased by Fannie Mae by March 1st, 2009 and May 31st, 2009 for Freddie Mac according to a source.  A colleague of mine (Rhonda Porter at Mortgage Master Services) recently worked with a client who originated a loan LONG before March 1st, 2009 but Fannie Mae did not securitize (or purchase) the loan from the lender until after this date.  This made the loan ineligible for a HARP refinance.  Here is an excerpt of her blog post here:

We also need to eliminate the securitization factors of when Fannie or Freddie bought the existing mortgage for it to be eligible for a HARP refi.  I recently had a client where it showed on Fannie Mae’s site that he indeed has a mortgage owned by Fannie Mae–it was not until we received an error message trying to underwrite it through DU (the automated underwriting system) that we called Fannie Mae to discover that the loan had been securitized (purchased by Fannie Mae) one day too late to qualify (March 1, 2009).  This person’s loan closed in December 2008, was sold the the bank and then took months for Fannie Mae to purchase.  This means this upside-down home owner does not qualify to reduce his payment by $250 per month.  Imagine what the $250 a month would do for him and/or the economy.  It gives him some probably needed monthly financial wiggle room and he just might spend a little more which helps our economy too.

To read more, CLICK HERE

 

UPDATED 7/16/2011

If your lender says your loan is backed by Fannie Mae but you’re not eligible for HARP, here’s the instructions to see if your loan was purchased by Fannie Mae during the eligible time frame for HARP.

1. Tell your lender who’s applying for the HARP loan for you to have their Fannie Mae seller ID, Desktop Underwriter findings, case number and Desktop ID number.  You may not know what this is but your lender should.
2. Have them call 877-722-6757
3. Ask the representative to “verify the address in the servicing database” to ensure the address is correct and ask if the loan is eligible for a DU Refi Plus

WHAT IF MY LOAN HAS PMI?

HARP guidelines state you can refinance if your loan has PMI but that’s rarely true.  Only direct lenders who service your loan can do these and even then, very few will.  I referred a very close family friend back to Bank of America hoping they could help him with his PMI loan serviced by BOA, but no luck.  I wrote about this event HERE.

I started a small list of lenders who do refinance HARP loans with PMI.  You can find that list HERE.

I NEED OTHER OPTIONS.  WHAT ELSE IS OUT THERE?

Surprisingly, there are some great options available if you do not qualify for a HARP loan or you don’t like the pricing.

A great alternative for the general public is FHA.  FHA allows up to 97.15-97.75%(depending on your area) of the home to be financed.  What makes FHA special is they do not have a limit for combined loans AND there are no negative pricing adjustments if the 2nd mortgage exceeds 100% like HARP loans.  Let’s suppose you have one loan at 95% of the home value and a second mortgage equal to 15% of the home value.  The two loans together equal 110% of the home value.  You then can pay off just the first mortgage with a FHA loan and keep the second mortgage above 100% of your value.  More importantly, FHA has much lower credit score requirements, the previous loan does not need to be a Fannie Mae or Freddie Mac loan and it doesn’t matter if the loan being paid off has mortgage insurance.  The only caveat is that all FHA 30 year loans require mortgage insurance.

My favorite option using FHA  is their 15 year mortgage.  FHA allows a homeowner to finance up to 90% of their home on a FHA 15 year loan with NO MORTGAGE INSURANCE.  The same guidelines regarding combined value and credit apply as above.

Let’s say I have a homeowner who is interested in a 15 year fixed loan and no equity.  They have a loan equal to 85% of their home value and a second mortgage equal to 25% of their home value for a total value of 110%.  They can refinance on a FHA 15 year loan and payoff the first mortgage and keep the remaining second mortgage.  They do not pay mortgage insurance on the first mortgage and there are no pricing adjustments for the 2nd mortgage exceeding 100%.  Yes, 15 year loans have a higher payment since the pay off is faster, but between the lower rate of a 15 year loan and the removal of mortgage insurance, much of the payment increase is covered.  Plus this loan will pay down the borrower’s balance faster helping the homeowner gain their lost equity back.

Second, military veteran’s should find out if they can finance their new refinance with a VA(Veteran’s Affairs) loan. In October of 2008, the department of Veterans Affairs opened up the guidelines for veteran’s to allow them to refinance higher loan amounts and up to 100% of their home value when paying off an existing non-VA loan. This is a huge improvement to previous guidelines which only allowed up to 90% of the home value with a maximum loan amount of $144,000. However, the VA does not allow the loans to exceed 100% of the value under any circumstances. If you have two loans and they equal above the value of your home, you cannot do a VA loan.

To recap, here is a summary of when you would want to consider government loan programs:

• For veteran’s who owe up to 100% but not over 100% of their value, VA is a great loan option
• Homeowners who owe up to 97% of their first mortgage and have a second mortgage above 97% should consider a FHA loan.  If the homeowner’s first mortgage is not a Fannie Mae or Freddie Mac loan, FHA will likely be their only option.
• Any homeowner who has little equity and does not have a loan owned by Fannie Mae or Freddie Mac should consider a FHA loan.
• FHA 15 year loans do not require mortgage insurance as long as the FHA loan is at 90% of the home value or less REGARDLESS of the 2nd mortgage balance and combined loan-to-value.

UPDATE 9-1-2010

New FHA guidelines will no longer allow financing with second mortgages exceeding 100% of the home value.  All FHA applications dated after September 7th, 2010 will be subject to these new guidelines.  Read more about how this affects homeowners who are applying for a refinance with a second mortgage here:

http://www.keaneloans.com/2010/09/01/problem-with-new-fha-short-refinancpayoff-program/

MORE OPTIONS?

For the most part, homeowners are limited to the loan products above.  However, that does not mean they do not have other options.  Whether a homeowner needs a little more equity to qualify for any of the loan options above or to improve their loan pricing, they may consider getting another loan somewhere else to cover the cost.

One suggestion I’ve given clients that has helped is getting a 401k loan.  401k loans are loans taken against a  person’s retirement plan.  It’s not a withdrawal of retirement funds, so the person does not pay tax or penalty costs for the loan.  In many cases, the interest the person pays on a 401k loan is actually used to fund their retirement account which means they’re paying interest to themselves.

On a Fannie Mae HARP refinance (DU Refi Plus), the additional cost from a 95% loan-to-value loan to a 97.01+% loan is a 1.75% fee.  This means if your appraisal shows you have 2.99% equity or less, you have to pay a 1.75% fee or higher rate compared to someone that had 5% equity.  If you could get a small 401k loan to cover the difference, it may be worth your while.  On a $200,000 loan amount, a 1.75% fee is $3,500!  Borrowing $4,000 (2%) more in equity that you will pay yourself back to save a $3,500 fee you will never get back is a great money-saving solution.

UPDATE

If you are looking to do a HARP refinance and currently have a fixed mortgage through Freddie Mac, you cannot do an Open Access Freddie Mac HARP refinance to an adjustable rate.  You can only refinance to another fixed loan.

UPDATE

The HARP program was set to expire on June 10th, 2010.  The program was extended and now is set to expire on June 30th, 2011, approximately one year later.  News of this extension can be found here.

FHA REFINANCE FOR UNDERWATER MORTGAGES-

FHA just announced that they will be rolling out a new program to help underwater homeowners.  This was announced along with some updates to the HAMP program.

UPDATE AUG. 6TH, 2010

HUD released a press release regarding this program:

FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS
Effort designed to encourage principal write-downs for responsible borrowers

WASHINGTON – In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

CLICK HERE TO READ MORE

The actual guidelines for FHA were also released on HUD’s Mortgagee Letter 2010-23.  Lender use mortgagee lenders as their guideline to originate FHA loans, which means that lenders should be approving these mortgages now.  What I found that was interesting is that existing FHA guidelines technically already allowed these types of refinances.  The limit on the second lien mortgage is actually a cap that used to not exist on FHA financing.

The mortgagee letter does begin to illustrate the benefit the second lien holders will receive for taking reduced payoffs.  The letter indicates each servicer will receive $500 and incentives based on combined-loan-to-value.

Existing second mortgage lien servicers will be entitled to a one time incentive of $500 for each successful closing. Existing second mortgage lien investors will be entitled to an incentive based on the combined loan to value of the existing lien and all senior liens associated with the mortgage. The actual incentive pay-out schedule and more information on this program will be available at www.hmpadmin.com.

 

 

The announcement states that the program will begin September 7th.

I’ve studied the material for this new program and surprisingly, it’s not that different than a regular FHA loan.  The difference is the government is giving incentives to the homeowners existing lenders to write down their loan balances, thus allowing the borrower to qualify for a new FHA loan.  Here are the requirements:

• The new FHA loan can be as high as 97.75% of the homes value
• The homeowners existing loans cannot be a FHA loan
• For the existing lender to qualify for government incentives, the first mortgage must require at least a 10% write-down from the original balance of the first mortgage
• The government is also giving incentives to second lien lenders as well.  They will give them incentives to write-down their balances so the combined value of the first and second mortgage do not exceed115% of the home value.  As you’ve seen from my original posting regarding FHA loans, FHA allows second mortgage companies to have an infinite value over the value of the home as long as the FHA first mortgage is at 97.75% or less.  This is one difference between this program versus a regular FHA loan.
• The refinance is voluntary, so both the homeowner must agree to the refinance terms and the existing lenders must agree to the write-down of their loan balance.
• The homeowner cannot be late on their mortgage payments
• The homeowner must occupy the property
• The minimum credit score for this program is 500 (Though I doubt lenders will fund new FHA loans with a score this low)
• The total house payment, including the payment of a second mortgage, must be no greater than approximately 31% of the homeowners gross income.  Further, the total household debt cannot exceed approximately 50%.  (I love how they use “Approximately” in the definition).

They key to this program is that the government is INCENTIVIZING lenders to write-down their loans.  What does this really mean?  The lender writes off the balance of the loan exceeding 97.75% of the homes value and the government will give them money to help recoup the losses.  It’s for homeowners who have paid their mortgage on time, so it’s right in-line with HARP clients.  There are two major differences.  When a homeowner refinances on this program, they will owe less on their house thanks to Uncle Sam.  Also, they can refinance to a low 30-year fixed rate regardless of what kind of loan they have.   This may end up being the solution for homeowners who have loans with mortgage insurance.

There are many details that still need to be answered.  FHA currently has loan limits depending on the county.  Will these loan limits remain?  My guess is they will, so be sure to check your local FHA loan limit here.  They have not said who can originate these loans yet either.  I hope that they have learned from their mistakes with HARP and allow any lender to originate the new loan.  HARP loans with mortgage insurance required homeowners to work with their existing lender, yet none of the major banks who participated in HARP have begun refinancing homes with mortgage insurance.

If this program is available to all FHA lenders, this has the potential to be a big success.  However, there are many obstacles to overcome.  First, every lender will need ample time to service the write-down requests and the origination of the new loans.  At the time of this update, HARP has available for approximately a year, yet many lenders are still giving homeowners difficulty.  If this program has an expiration date of anything less than 2 years, it will have little impact on our housing market.  Except, of course, if the government extends it (that tends to be norm these days).

This brings up two questions.  When will lenders start offering this program and what incentives are given to the lender from the government?  The “Frequently Asked Questions”of this program state the program will be rolled out immediately and will hopefully be in affect this fall.  I will be researching to find out what the incentives are for the lender.  If the incentves are minimal, this program will fail.  If the incentives are too large, it raises the question, “Who’s paying for this?”  I believe all of us can answer that question.

For lenders, it sounds like we’ll be wearing two hats.  Originating a new FHA loan and negotiating a principal balance write-down with the current lenders.  I’m interested in seeing how this plays out.

Be sure to revisit this blog post for any updates.

FHA REFINANCE UPDATE 6/9/2010

I confirmed with HUD (The Department of Urban and Housing Development) that FHA will insure these refinances regardless of the new lender.  This means consumers can competitively shop a FHA refinance for a reduced balance payoff.  The program is fairly straight forward and easy enough that we should see some success.  That said, HARP is a very straight forward program but I hear horror stories almost daily, so like HARP, I don’t expect all lenders to execute these well.

The unique twist to these refinances that will hold up many refinances from closing is the negotiations with the existing lenders.  Lenders and loan officers are having a hard enough time closing the loans.  Negotiating an existing lender to take a lesser amount opens up the chance for increased liability and error.  I believe the most successful lenders will likely be working with attorneys who will handle these negotiations similar to loan modifications and short sales.  I’ve already begun speaking with attorneys who specialize in these services to see what they’re opinion is of this program.  Stay tuned for updates.

Although FHA guidelines allow for these refinances, many lenders will not close these loans.  If you’re looking for a refinance of this type, be sure to find a lender who can do this loan first, then see if there’s a loan officer at the firm who has experience with these transactions.  They’re new, so don’t expect great results if you’re an early adopter.  I will provide updates of my experiences and post lists of lenders and loan types I’ve had success with.  Follow this post in the future for these updates.

For FHA to insure a refinance with a short payoff, the borrower must prove

• There is insufficient equity in the home based on it’s current appraised value AND/OR
• The borrower has experienced a reduction in income and does not have the capacity to repay the existing indebtedness against the property.

Unlike short sales and loan modifications, the borrower will not be asked to slow pay their mortgage  to qualify.  FHA allows a couple of late payments but nothing more than 2x 30-day late payments in the last year and the loan cannot currently be late.

UPDATE:

The deadline for HARP loans has been extended until June 30th, 2012 (1-year).

http://www.keaneloans.com/2011/03/11/harp-extended-until-june-30th-2012/

This means the current loan limits set to expire this year will continue through next year.  This will help keep the real estate market on track for recovery.  According to a related blog on Zillow, the bill only needs President Obama’s signature which should happen in the next few days.  No word as to whether the VA plans on extending their high-balance loan limits through 2010.  This is typical for the VA as their guidelines usually change shortly after changes have been made to conforming and FHA loans.

Here are the links to search for your loan limits by area:

Conforming loan limits (Fannie Mae)

FHA loan limits

VA loan limits (only through 2009)