Who Will Be Aided By New Government Mortgage Program?
Most Troubled Homeowners Targeted
The recent government proposals say that Mortgage giants Fannie Mae or Freddie Mac may back 30 million mortgages. But that doesn't mean that the new foreclosure prevention program announced by the Bush administration will rescue every troubled borrower on their books.
This newest plan was designed by the Federal Housing Finance Agency (FHFA), which took control of Fannie and Freddie in September, together with Hope Now, the coalition of lenders, servicers, investors and community groups, and is targeted at the most at-risk homeowners.
Under the new plan, which begins on Dec. 15, borrowers with loans owned or backed by Fannie and Freddie who are at least 90 behind with their mortgage payments may qualify. But in reality, qualifying for the program will probably be a lot more complicated than meeting these two requirements. In the end, it's probable that only a relatively narrow swath of people will benefit from the initiative.
Current estimations say that about 1.22% of Freddie's 12 million loans are 90 days or more late, while 1.7% of Fannie's 18 million loans are that far past due. That's a total of more than 450,000 borrowers, however it's unlikely that all or even most of them will get help.
"Some people may be technically eligible but not practically eligible," due to factors like an extremely low income, according to Keith Gumbinger, of mortgage research firm HSH Associates. "I wish someone would get a clear handle on how many people it could actually help," he said.
Fannie and Freddie are only targeting homeowners who are more than three months past due on their loans in order to ensure that the most troubled borrowers get help immediately.
Beyond that, borrowers will have to write what's a "hardship letter" to illustrate that they fell behind for a good reason - whether it's a job loss, divorce or a medical problem. If they can't show that, they don't get a fix.
In addition, borrowers cannot have too much equity in their homes. If their home's current market value exceeds their mortgage balance by more than 10%, they're considered too well off to participate. Instead, these borrowers have the option to tap that home equity, either by refinancing or taking out a home equity loan, to get current with their payments.
And some borrowers are simply too far gone to help according to Brad German, a spokesman for Freddie Mac. Those with a mountain of debt and little income may need a much more drastic modification than any lender would be prepared to issue.
"Borrowers have to have some income," said Faith Schwartz, director of Hope Now. "The property has to [provide] cash flow somehow for the lender."
But Schwartz cautions that even borrowers in very bad shape should contact their lenders. They may not qualify for a loan workout, but a bank may be willing to do a short sale or a deed in lieu of foreclosure. In a short sale the lender agrees to let the borrower sell the property for less than what the mortgage is worth and forgive the difference. In a deed in lieu of foreclosure the borrower essentially gives the house back to the bank.
Either of these options will do a lot less damage to a borrower's credit score.
Finally, not everyone who could benefit from the program will chose to participate. Surprisingly, many borrowers who are in trouble just don't do anything; they don't contact their banks and they ignore their lender's phone calls and letters.
Although the program may not have a massive impact, according to Schwartz it's still a welcome supplement for the many other plans - FHA Secure, Hope for Homeowners and programs from individual lenders - already in place.
And officials hope that it will provide an easy-to-apply template for other modification programs.
Lenders will look at their portfolios for borrowers who qualify, and then send out letters informing them that help is available and asking the borrowers for financial information, such as pay stubs and bills, as well as hardship letters.
Then the banks will use that information to determine if they can keep a borrower in their home by reducing their monthly payment to no more than 38% of their gross income. To do that, they can lower interest rates to as little as 3%, extend the length of the loan or defer some of the loan principal.
"The big thing is reaching the agreed-upon affordability target [of 38% of income]," said Schwartz. "However you have to get there to solve the mortgage delinquency by hitting that benchmark, that's what you do.
After borrowers complete their work out and make three payments at the lower level, the fix becomes permanent.
Now is the time to act if you are falling behind on mortgage payments or in a situation where you are current but sit with negative equity or another position that may ultimately cause you a hardship. Not all homeowners will qualify for the loan modification, but there are alternative options available. Contact a trusted source such as Strategic Mortgage to see what options are available to you as a homeowner today. As additional information and programs become available, be sure to keep up to date by reading these articles.
For more information on what loan modifications may be available to you as a homeowner, please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing info@strategicmtgaz.com or online at: www.strategicmtgaz.com
Fannie & Freddie Modification Program
This week saw the announcement of the federal government's plan to streamline modifications of troubled loans held by Fannie Mae and Freddie Mac. However, the new plan won't help the majority of people threatened with foreclosure, experts said.
The new plan that was unveiled Tuesday, targets homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.
The interest rate could be lowered to as little as 3% for five years. After that, it would increase by 1 percentage point a year until it hits either the market rate or the original interest rate, whichever is lower, officials said.
Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.
Also, officials hope the new program, which could help more than 400,000 homeowners, will convince servicers who handle loans held by private investors to follow suit.
While experts and some government officials called the plan a positive step forward, they said much more needs to be done to address the mortgage crisis. The program does not address the heart of the problem -- troubled loans held by private investors.
Though Fannie and Freddie own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.
"This is a step in the right direction but falls short of what is needed to achieve wide scale modifications of distressed mortgages, particularly those held in private securitization trusts," said Federal Deposit Insurance Corp. chairman Sheila Bair, who has proposed an alternate plan addressing securitized loans. "As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans."
Problems in the mortgage market remain concentrated in the subprime sector, which are mainly held by investors who have resisted modifying the loan terms.
"Most foreclosures are happening on subprime loans that Fannie and Freddie don't control," said Eric Stein, senior vice president at the Center for Responsible Lending, which has long pressed the federal government to help delinquent borrowers. "More is still needed to address foreclosures on these mortgages. To date, voluntary modifications haven't been sufficient. That's why we still have a foreclosure crisis."
To broaden existing foreclosure fixes, Bair supports using up to $50 billion of the $700 billion financial sector rescue plan to guarantee modified loans. This would give servicers an incentive to adjust the loan terms and could help up to 3 million homeowners, though the number is not firm.
Meanwhile, the FDIC has already adopted a streamlined process to modify troubled loans owned or serviced by the failed IndyMac Bank, which the agency took over in mid-July. Some 3,500 borrowers have accepted the workouts, which also aim to keep payments at no more than 38% of gross income.
Several major servicers -- including Bank of America, JPMorgan Chase and Citigroup -- have recently announced expansions of their foreclosure prevention efforts, which could aid nearly a million more borrowers.
The programs will also seek to make payments more affordable by cutting interest rates or stretching out loan terms, but some homeowners can also get their mortgage principal reduced depending on their servicer and financial situation.
Reducing principal is key to keeping some borrowers -- especially those whose house values have fallen below their mortgage balances -- in their homes, experts said. It makes both the loan more affordable and gives homeowners more incentive not to walk away.
In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.
"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."
However, to make payments affordable, servicers may choose to defer part of the payment -- with no interest -- until the end of the loan, officials said. For borrowers whose homes are worth less than their mortgages, servicers might defer the difference.
Here's how it would work: Let's say a homeowner has a $200,000 mortgage on a house now worth $150,000. The servicer may defer payment on $50,000 of principal. If the home recovers its value and the borrower sells it, he or she would have to pay back the deferred amount at that time. If it doesn't recover, the borrower would have to work out a deal with the servicer, likely a short sale, in which the bank forgives the difference between the sale price and the mortgage balance.
If the borrower stays in the home, he or she would have to pay the deferred amount within 30 days of the last payment, likely 30 or 40 years from now. Homeowners could take out a new mortgage to cover that balloon payment.
Officials hope that Fannie and Freddie's influence in the mortgage market will prompt servicers working with private investors to use this streamlined procedure in their own modifications. Often, investors defer to the mortgage finance agencies to set the methodology.
As these programs continue to come to the forefront, we will continue to provide updates. As homeowners throughout the country continue to struggle with their current mortgages, it is evident that something must be done to solve the problem many Americans face. The current economy has further exacerbated the issues at hand and it seems more and more that loan modifications will be the best route for many homeowners. We will continue to provide more information on these programs as they become available and other lenders announce programs as well. Please feel free to contact us in the mean time for additional information on loan modifications and your ability to qualify for one with your current lender.
For more information on what loan modifications may be available to you as a homeowner, please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com
Citi Says New Program Could Reach 130,000 Borrowers
Citigroup has announced that it will expand its foreclosure prevention efforts and try to keep 130,000 troubled borrowers with $20 billion in mortgages in their homes.
This latest program announcement news follows similar initiatives announced earlier this year by IndyMac Bank, which was seized by the Federal Deposit Insurance Corp. last summer, as well as Bank of America and JPMorgan Chase each of which heralded enhanced housing rescue efforts.
It is becoming increasingly evident that banks are undoubtedly feeling pressured to be more aggressive in aiding home owners, given how many billions of taxpayer dollars have poured into the industry to stem the credit crisis.
The Citi effort, dubbed the Citi Homeownership Assistance Program, targets 500,000 Citi borrowers. CitiMortgages CEO Sanjiv Das said he expects that more than a quarter of these people, with mortgages worth about $20 billion, will take advantage of the program over the next six months.
"We're reaching out to borrowers in areas of steeper-than-usual falling prices and higher-than-average unemployment," said Das, including California, Michigan, Florida, Nevada, Ohio and Arizona. "These areas are where the concentration of at-risk mortgages are the highest."
The new initiative differs from Citi's existing mortgage mitigation efforts in that it's a much more proactive plan, said Eric Eve, Senior Vice President, Global Community Relations for Citi.
The company will determine where the need for mortgage modification is greatest, based on economic conditions, and send out letters to its borrowers in these areas to tell them that help is available should they need it.
This new initiative is open only to borrowers who are still current on their loans but are at risk of defaulting - particularly those borrowers who owe more on their mortgages than their homes are currently worth. Additionally, their loans must be owned by the bank, rather than sold off to investors.
Citi already has a program in place to work with borrowers who are delinquent, reducing interest rates to as low as 1% for as long as two years for borrowers who are judged capable of keeping up with lower payments. The bank says that its ongoing mortgage mitigation efforts have produced about 370,000 work outs since the beginning of 2007.
For borrowers who have yet to default, Citi will now aim to reduce their monthly mortgage payment, including property taxes and insurance, to 40% or less of their income. To do that, it will freeze or reduce interest rates, extend the lifetime of the loan or even reduce the loan principal.
Das said the new plan will be implemented immediately and the workouts will be handled in a very fast, streamlined fashion to aid as many homeowners as quickly as possible.
Each of these new foreclosure prevention efforts, from Citi, IndyMac, Bank of America and JPMorgan, represent a significant step forward in resolving the housing crisis, according to Jared Bernstein, senior economist with the Economic Policy Institute. But, he adds, the problem remains overwhelming.
"These programs are helping but the help is marginal - in the hundreds of thousands of homeowners," he said. "But help is needed by millions."
Even after taking these new bank programs into account, Mark Zandi, chief economist for Moody's Economy.com, estimates that 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale. Some 1.9 million are projected to lose their homes in 2009.
It's certainly doubtful that the banks' housing relief programs will be as successful as they hope.
For example, IndyMac's program was launched in late August, and slated to help as many as 40,000 borrowers. But in late October, FDIC chief Sheila Bair told a congressional committee that the bank had only completed 3,500 work outs.
So Bank of America's claim that it will help 400,000 homeowners, and JPMorgan Chase's goal of rescuing another 400,000 borrowers should probably be taken with a grain of salt.
Still, Bernstein welcomes every effort. "Let a thousand flowers bloom," he said. "It's like an experiment and, if we're smart, we'll see what plans work and what doesn't." Then, the best aspects of the various plans could be applied to as many at-risk mortgages as possible.
But the bottom line is that the bank programs won't be nearly as effective as any massive foreclosure prevention effort that may yet be implemented by the U.S. government, according to Bernstein.
And there is a possibility that such a program may yet emerge. As there is talk of a new $50 billion plan that could bail out as many as 3 million homeowners.
"We can keep the number below a million [homes lost] next year with an effective government effort," said Zandi. "It would be very doable but also very costly."
The single best thing about the bank programs, according to Bernstein, is that they don't cost the taxpayers anything.
"You have to be happy about that," he said
As homeowners throughout the country continue to struggle with their current mortgages, it is evident that something must be done to solve the problem many Americans face. The current economy has further exacerbated the issues at hand and it seems more and more that loan modifications will be the best route for many homeowners. We will continue to provide more information on these programs as they become available and other lenders announce programs as well. Please feel free to contact us in the mean time for additional information on loan modifications and your ability to qualify for one with your current lender.
For more information on what loan modifications may be available to you as a homeowner, please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com
JP Morgan Chase To Review $70 Billion In Mortgages, Including WAMU & EMC
In an effort to expand its program to modify mortgage, JPMorgan Chase & Co. announced is expanding its program in an effort to avoid foreclosures on up to $70 billion in loans.
Details of the new enhanced program will include the opening of 24 regional counseling centers, the hiring of 300 additional loan counselors, new financing alternatives, reaching out to borrowers with pre-qualified modification terms and a new process to independently review each loan before it is moved into foreclosure.
Chase said the changes are expected to be implemented in the next 90 days, and until those changes can be made, it will not put any loans into foreclosure.
In addition, the loan modification program will also be offered to customers with loans held by Washington Mutual Inc. and EMC. JPMorgan acquired Washington Mutual last month after the bank became the largest in the nation's history to fail. EMC was a mortgage unit of Bear Stearns Cos., which JPMorgan acquired in February.
When JPMorgan acquired Washington Mutual and EMC, it also acquired portfolios of mortgages that included option adjustable-rate mortgages. Option ARMs allow customers to choose from multiple payment options each month, including paying less than the interest owed on the loan, thereby increasing the balance on the loan. JPMorgan said modifications for those loans would eliminate the monthly options and not allow for the minimum payments.
Option ARMs have been among the worst performing loans since the middle of 2007 as mortgage defaults have skyrocketed and the housing market has deteriorated rapidly.
The modification program applies only to owner-occupied properties with mortgages owned by JPMorgan, Washington Mutual or EMC, with investor approval.
JP Morgan Chase is the latest major lender to enact a program to further evaluate loan modifications, following in the FDIC plans with Indymac and Bank Of America's plan for certain Countrywide mortgage holdings. The effect and the reach of all of these programs is still up in the air however.
As homeowners throughout the country continue to struggle with their current mortgages, it is evident that something must be done to solve the problem many Americans face. The current economy has further exacerbated the issues at hand and it seems more and more that loan modifications will be the best route for many homeowners. We will continue to provide more information on these programs as they become available and other lenders announce programs as well. Please feel free to contact us in the mean time for additional information on loan modifications and your ability to qualify for one with your current lender.
FOR MORE INFORMATION ON WHAT LOAN MODIFICATIONS MAY BE AVAILABLE TO YOU AS A HOMEOWNER, PLEASE CONTACT BILL KAMBOUKOS AND CARLOS FELIX OF STRATEGIC MORTGAGE AT (480) 219-3682 OR BY EMAILING STRATEGIC MORTGAGE AT: BILL KAMBOUKOS AND CARLOS FELIX OF STRATEGIC MORTGAGE AT (480) 219-3682 OR BY EMAILING: INFO@STRATEGICMTGAZ.COM
Initiative To Modify Loans & Back Up Lenders Close
It appears that the government may soon announce soon that it will devote up to $50 billion to directly address the source of the financial crisis: bad mortgages and millions of homeowners at risk of foreclosure. Building upon a topic that we discussed this past week.
Tony Fratto, a White House spokesman said that "no decisions" have been made on "a number of housing proposals" that the administration has been reviewing "for some time."
However, three administration officials have indicated that the new program would be designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of each loan to backstop lenders if borrowers re-default on modified mortgages.
The plan could help up to 3 million homeowners, although that number is not firm, according to the administration sources.
If it comes to fruition, the government's new loan program could trump the efforts of the Hope for Homeowners program put into place on Oct. 1 by the Federal Housing Administration.
Lawmakers spent months fighting over the legislation that created the FHA program before enacting it in July. Lenders may be more likely to participate in the latest government plan if it imposes less stringent requirements.
The Hope for Homeowners program offers full government backing for lenders that agree to write down a mortgage to 90% of a home's appraised value. But the loss to lenders can be greater than 10% because many troubled homeowners are also "under water" because of falling home prices - meaning they owe more on their home than its current market value. So to participate in Hope for Homeowners, lenders in many cases would have to lock in a sizeable loss.
The plan being considered likely would not require such a strict write-down. Instead, it might require that the new payment for the borrower be affordable.
Monthly payments can be made affordable by, among other ways, reducing the interest rate for a period of time or extending the term of the loan. Typically one way to determine affordability is to consider a delinquent borrower's debt-to-income ratio. At IndyMac, which was taken over by the FDIC this summer, loans are being modified so that borrowers' new mortgage payment - including insurance and taxes - does not exceed 38% of their pre-tax income.
Funding for the potential initiative would come from the $700 billion financial rescue package passed by lawmakers in early October. To date, most of the money from that package has been devoted to getting the credit markets going again.
Details of the plan are still being worked out between the Treasury, the White House and the FDIC, which is expected to run the new program under the leadership of FDIC Chairman Sheila Bair.
A year ago, Bair called for lenders to systematically modify troubled loans in order to prevent further deterioration in the housing market and the broader economy.
Howard Glaser, a mortgage consultant for Fannie Mae and Freddie Mac and former counselor to the Department of Housing and Urban Development during the Clinton administration, said the potential government plan may not be adequate.
"The Bush administration's reliance on a 'pretty please' approach to foreclosure relief - asking banks to undertake voluntary efforts to renegotiate troubled loans - has delayed recovery of the housing markets and raised the costs to the next president of addressing the crisis," Glaser said.
Recently, during a Senate Banking Committee hearing, Bair had said that the government and lenders are behind where they should be in terms of preventing avoidable foreclosures. And that while voluntary programs have been helpful, she said going forward "there needs to be a package of carrot-and-stick incentives."
This past week the majority of Senate Democrats on the Banking Committee sent a letter to President Bush urging him to use the powers granted under the financial rescue package "decisively, aggressively, and swiftly to reduce foreclosures."
"The fact remains that the administration has not dedicated the time, attention or resources needed to address the cause of the crisis - the historic levels of foreclosure," the letter states.
For more information on how these proposals and changes can affect you as a home owner, please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com
Strategic Mortgage is a mortgage brokerage based in Tempe, Arizona. The company is run by owners Carlos Felix and Bill Kamboukos to help home owners receive honest advice in a changing marketplace.
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