FHASecure and your Adjustable Rate Mortgage, perfect together?
FHA Secure is being touted as the solution to the maddening mortgage adjustable rate mortgage crisis. It remains to be seen if a government loan will really solve the mortgage crisis or if the crisis was really a spend like there’s no tomorrow attitude.
A new federal loan program designed to help borrowers cope with rising payments on adjustable-rate mortgages is kicking into gear.
An estimated 80,000 borrowers nationally are expected to take advantage of the FHASecure loan program, said Ben Johnson, director of the Denver Homeownership Center with the Federal Housing Administration.
Another 160,000 or so are expected to use other FHA loans to escape their unaffordable mortgages.
The first Colorado borrowers in the program should start receiving their new loans in early November.
Critics say the program doesn’t go far enough to help homeowners.
FHASecure loans, unveiled by President Bush in August, are designed to shift borrowers who can’t afford higher payments on their ARMs into more traditional FHA-backed loans.
But they aren’t a shoo-in. Borrowers facing a reset must have stayed current on their payments for at least six months, although those who have fallen behind because of a reset to a higher interest rate are eligible.
Loans are underwritten to FHA standards, which limits how much can be financed. In Denver-Aurora, the FHA cap is $308,370.
The FHA will insure a mortgage for up to 97 percent of a home’s appraised value. If the borrower can’t come up with the down payment or the loan is worth more than the home, the current mortgage provider must be willing to accept a second mortgage for the difference, including any prepayment penalties or other fees.
Borrowers must also demonstrate an employment history and that they can afford the payments on the new loan, based on an interest rate that will come in somewhere between the initial rate offered on the ARM and the higher adjusted rate.
Critics charge that FHASecure and other administration efforts represent a Band-Aid on an open wound. There were 223,538 foreclosure filings in the U.S. in September, according to RealtyTrac.
“Unfortunately, the bottom is falling out of our housing market much more quickly than the administration is willing to stem the tide of foreclosures,” Sen. Charles Schumer, D-N.Y., said Wednesday.
Schumer was responding to an announcement Wednesday by Treasury Secretary Henry Paulson Jr. of a new alliance with mortgage servicers, housing counselors and government agencies to help an estimated 2 million borrowers who face higher payments on their ARMs – not all of whom would qualify for FHASecure loans.
“A combination of stagnant or falling house prices, low- down-payment mortgages and resetting adjustable-rate mortgage rates are creating real challenges for many American homeowners,” Paulson said in a statement.
The Hope Now program will work to establish best practices in housing counseling and launch a mass-mail marketing campaign next month to reach struggling borrowers before they fall off a cliff.
As it reaches out to help borrowers, the FHA also has cracked down on seller-financed assistance programs.
The programs, which claimed to be charities, inflated home sales prices, allowing the minimal 2 percent to 3 percent down payments to be wrapped back into the FHA loans and increasing the risk to buyers and the government.
Source: Denver Post
To merge or not to merge
PRIVATE MORTGAGE INSURANCE: If your down payment is less than 20% of the purchase price of the home, mortgage lenders require that you take out Private Mortgage Insurance (PMI). This insurance protects the lender in the event you default on your mortgage. PMI has fallen out of favor in recent years due to the 80/10/10 (80% first mortgage, 10% second mortgage, 10% down payment), 80/15/5 (80% first mortgage, 15% second mortgage, 5% down payment), and 80/20 (80% first mortgage, 20% second mortgage, 0% down payment).
On the heels of the mortgage credit crisis comes word that the two bigger players in the mortgage industry may merge. However, after further deliberation, they decided against a merger.
MGIC drops bid for rival Radian
The mortgage insurers agree to end the deal and focus on how to survive in the industry.
By Emily Fredrix The Associated PressMilwaukee – Mortgage insurer MGIC Investment Corp. abandoned its $5 billion bid to buy rival Radian Group Inc. on Wednesday, saying it was in each other’s best interest to concentrate on surviving in the faltering mortgage industry.
Radian had vowed to see the deal through when MGIC announced in August it wanted to back out. But chief executive S.A. Ibrahim said Wednesday that Radian didn’t want to fight and instead needed to weather what he called “an industrywide scramble to survive.”
Investors seemed hopeful for both companies after news of the agreement.
Though Radian’s shares tumbled as much as 9 percent after the market opened Wednesday, they closed up 16 cents at $18.27. MGIC shares fell 29 cents to end at $30.05.
MGIC, based in Milwaukee, had agreed in February to pay about $5 billion in stock for Radian, valuing its shares at $60.78. Shares of MGIC closed the day the deal was announced at $70.09.
As problems mounted in the mortgage market, both companies saw their shares tumble and the deal’s value sink.
MGIC said it did not believe it had to complete its purchase of Philadelphia-based Radian because their joint interest in subprime-mortgage investor C-Bass LLC could be worthless.
The decision to end the deal was mutual, both companies said.
Neither party paid the other to get out of the agreement, according to a news release. The original agreement said there would be no breakup fee if a decision was mutual.
Both companies’ shareholders had already approved the deal, which MGIC had said would close in early October.
But woes felt throughout the mortgage industry made the deal difficult to finish, said Michael Zimmerman, MGIC’s vice president of investor relations.
While this is akin to splitting up, it remains to be seen what this means to the borrower. There aren’t too many PMI companies left and when the two biggest PMI companies are more concerned about surviving, especially when in 2007 PMI is tax deductible, this can’t be a good sign.
JD POWER Awards: Mortgage Companies
Here are some rankings from JD POWER with respect to mortgage companies:
Home Mortgage Service Satisfaction Ratings: USAA FEDERAL SAVINGS BANK
Mortgage Servicers are companies that receive your mortgage payments. They may or may not have originated the loan.
Primary Mortgage Origination Ratings: SUNTRUST MORTGAGE
Mortgage Originators are companies that initially bought the loan from either a mortgage broker or correspondent lender. They may or may not service the loan.
Home Equity Line/Loan Origination Ratings: WACHOVIA
Home Equity Lines are typically the variable rate second mortgages tied to the prime rate. Loan origination companies may or may not service the loan.
Something is rotten in the state of Denmark
During my senior year in college, I took a high level English class devoted entirely to Shakespeare’s plays. We studied several including Hamlet. While everyone always remembers the classic line “To be or not to be,” I always liked “Something is rotten in the state of Denmark.”
I didn’t think the line was useful until now…
Recently I came across an article entitled A look at how home mortgages operate around the globe. According to the article the Danish has a similar system as ours. If their mortgage system is anything like ours then something is rotten in the state of Denmark.
Their (the Danish) mortgage system, like ours, relies heavily on the capital markets. Consequently, it is the only country to have home loans with most of the key features of those found in the United States. But there are limitations.
For one thing, lending criteria are extremely rigid, much more so than in the U.S. For another, Danish borrowers must come up with far larger down payments. In the United States, borrowers who make a 20% down payment tend to get the best terms available. But in Denmark, to achieve an 80% loan-to-value ratio, borrowers must take out a variable-rate second mortgage to cover the difference.
Danish mortgages are also “portable,” meaning that when owners sell their homes, they can carry their mortgages over to the new house.
Let’s hope that Danish mortgages aren’t brokered by dirty “rotten” scoundrels.
Countries covered in the article include the aforementioned Denmark, Great Britain, Italy, Japan, Germany, and our neighbor’s to the north, Canada. The general consensus among these countries is to require substantial down payments.
FAQ: How do I get the best rate?
From time to time I’ll be addressing client questions that are frequently asked and some questions that are quite obscure. Some questions are mortgage related, some are real estate related, and some are Denver related. My answers won’t be the canned answers you see on most mortgage sites.
Q: “How do I get the best rate?”
A: Let’s assume the following:
- you’re asking about a mortgage on a single family house that’s considered your primary residence
- you’re asking about a first mortgage without a second mortgage
- you have either 20% equity (refinance) or you’re putting a 20% down payment (purchase)
- you have credit scores over 720
- you don’t have any late payments of any kind
- you have assets i.e. money in a checking account, savings account, 401k, mutual funds and/or stocks at established financial institution(s)
- you have statements from the aforementioned financial institution(s)
- you’ve been in the same line of work for quite some time for the same company
- you have a limited amount of debt
- your debt to income ratio is far below the 40% threshold
If you fit this profile you’ll get the best rates because mortgage institutions view this profile as little to no risk. These loans are typically run through an automated underwriting program i.e. computer software that runs an algorerithm (software geek joke) and gives you a loan approval in seconds. Even if you don’t fit this profile 100%, the automated underwriting program may still grant you an approval in seconds. Your history of paying debt (credit score), capacity to pay the loan (income/assets), and the collateral backing the debt (property) all plays a role in getting the best rate.
When banks won’t compete, where do you go?
Everyone has heard the line, ‘When banks compete, you win!” Well, not really when it comes to a second mortgage or home equity loan. These loans rely on credit score and equity. If you have bad credit, you better have equity. If you have no equity, you better have good credit to get a 115% or 125% loan. If you have bad credit and no equity, sayonara.
So where do you go when banks won’t compete. Enter person to person lending at www.prosper.com. Featured in Inc, Newsweek, Business Week, Entrepreneur, et. al. prosper has grown exponentially.
The premise is simple: People who need money request it, and other people bid for the privilege of lending it to them. Prosper makes sure everything is safe, fair and easy. You can borrow anywhere from $50 to $25,000. Seems like an interesting lending alternative when no else is willing.
Mortgage Refinance
A mortgage refinance is done by applying and qualifying for a new mortgage loan and then using the proceeds from the new home loan to pay off the old home mortgage loan. You can refinance for many reasons: to take cash out of the equity in your home, to lower your interest rate, to lower your mortgage payment, to simply switch mortgage companies because you are not pleased with your current mortgage company, to consolidate debt, to pay off high rate credit cards, to lower the term of your mortgage, to increase the term of your mortgage, to combine a first and a second mortgage, to switch from a fixed rate to an adjustable rate, or to switch from an adjustable rate to a fixed rate, and for many, many other reasons
When refinancing in order to payoff credit card debt, keep in mind that credit cards are unsecured debts. When you refinance, you are transferring unsecured debt into debt secured by your home. Make sure you are financially savvy enough not to continue the patterns that resulted in the credit card debt or your could be putting your home at risk.
One of the most popular reasons for doing a mortgage refinance would be to obtain funds for improvements on the home. Since the money spend on such improvements often directly increases the value of the home, it is a very sensible way to obtain such funds. Some of the most popular improvements include new kitchens and bathrooms, new windows, landscaping and swimming pools.
125% Financing
A 125% financing allows you to purchase a home with no money down, and allows you to receive cash, up to 25% over the purchase price of the home. The extra cash received at closing can be used for home repairs, debt consolidation, or anything else that you may wish.
These are a good idea if the 25% overage is going to be used to increase the value in your home!
You may not be able to deduct the interest paid on the portion of your loan which is greater than the value of your home. Consult your tax specialist for more information.
It is more common to have a second mortgage or Home Equity Line of Credit (HELOC) that is equal to 125% of your home value.
If you are in a hot market were your home is appreciating at a rapid pace then this loan would not put you in as much risk than if you were in an area or economy where the appreciation was moving slowly.
You can expect to receive a higher interest rate for these loans, because of the high risk to the lender.
125% LTV loans are only for borrowers who believe that their home will be worth at least 25% more when it comes time to sell it, unless they have other means to cover the difference.
When you’re rehabbing or remodeling your existing home, the 125% loan makes sense because you’re tapping the future equity of your home.
Not many investors offer this program anymore. It was a popular loan in the late 90’s until about 3 years ago. However, it is still available with select lenders. You need to have excellent credit to qualify for this program since the risk to the lender is high.
80/15/5
80/15/5 – two mortgages with the loan amounts of the first being 80% of the property value, the second being 15% and a 5% down payment. This loan structure is often used when the borrower needs to borrower more than 80% and wants to avoid buying Private Mortgage Insurance. Depend on the borrowers financial situation, a loan officer can structure an 80/10/10, 80/20, or any combination thereof.
Another alternative is talk to us about loans which do not require PMI mortgage insurance even above 80% which may be available in your county.
A mortgage with no PMI may have a higher interest rate than a mortgage with PMI. It is good to compare the two payments to see which one will benefit you.
These so-called piggyback loans typically require good credit and fairly low non-mortgage debt in order to qualify for the second mortgage.
Other sites: Broker Outpost | New Credit Card Minimum Payments | Conforming Loans | Mortgage Broker vs. Your Local Bank| Pay Option Arm Calculator
80/20 mortgage
Editors Note: Due to the mortgage and credit crunch, 100% or 80/20 loans are no longer be available. If you’re in need of a Denver financing contact us to discuss your mortgage options.
80/20 mortgages are also called zero down loans and/or no money down loans. These types of loans are increasingly popular throughout the nation. An 80/20 loan is actually 2 mortgage loans, a 1st mortgage (at 80% of the value of the home) and a 2nd mortgage (at 20% of the value of the home.) Theses loans eliminate the need to pay Private Mortgage Insurance (also known as PMI) and also generally provide considerably lower rates than other types of 100% financing. This type of financing helps to keep your payments low and gives you the freedom of not having to put any money down. Example of how this works: You want to buy a $300,000 home on a 30 year mortgage with 80/20 option 240,000 1st mortgage: 6.25% rate = $1477.72 Principal ampersand interest payment 60,000 2nd mg: 7.75% rate = $ 429.85 Principal ampersand interest payment
An 80/20 can also be accomplished by way of a seller carry back for 20% of the purchase price. This helps borrowers who otherwise might not be able to qualify for the 20% of the purchase price normally finance with a traditional loan, by a traditional bank.
This mortgage program is designed to allow customers not to put money down on the purchase price. This is where the term zero down comes from, you however need to be aware that there are closing costs associated with the purchase of your home. An easy way of utilizing the 80/20 loan program to its fullest would be to have the sellers pay closing costs. This will get you the entire purchase price and closing costs without having to pay money at the closing.
80/20 mortgages allow you to purchase with no down payment. As you build equity in your home, you can refinance the 20% second mortgage to get cash out. Or once you’re the balance on your two mortgages is equal to 80% or less of the value of your home, you can refinance and pay off both with 1 single mortgage, usually at a significantly better rate.
Other sites: Broker Outpost | Investor Loans | Selling your home with a real estate agent| Pay Option Arm Calculator
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