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April 23, 2008

New "Jumbo Light" Loans: Not Much Help to Borrowers

Homebuyers, homeowners, real estate agents, and mortgage brokers have all been awaiting, with high expectation, details on the new "jumbo light" loan limits and lending standards. Everyone had hoped these new loans, authorized by the Economic Stimulus Act of 2008, would provide lower interest rates for folks trying to buy or refinance homes in high-cost markets.

Well, the lending limits and standards are finally here, and (drumroll please) it looks like these new loans will do... nothing. That's right. Due to heavy restrictions on the loans, most people won't qualify for one. And even if they do, the interest rates are still much higher than those for traditional conforming loans.

What does this mean? For starters, people living in high-cost real estate markets that are having trouble meeting their mortgage obligations, or are already behind in payments, won't get relief from a jumbo light loan. Those folks will (1) continue to struggle, or (2) join the large ranks of those in foreclosure. And those trying to buy a home in a high-cost market won't get help from jumbo light loans either. So much for economic stimulus.

Here are the details of how all this works:

What Are Jumbo Light Loans? In the past, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) could guarantee real estate loans up to $417,000. In a nutshell, the guarantee meant lower interest rates for those loans-which in turn made them more affordable. Loans above $417,000 (called "jumbo loans") carried higher interest rates, due to a perceived greater risk.In its Economic Stimulus Act of 2008, Congress authorized Fannie Mae, Freddie Mac, and the FHA to guarantee (until December 1, 2008) mortgages as large as $729,750 in some high-cost markets.

This creates three types of loans: (1) Traditional loans under $417,000 (called conforming loans). (2) "Jumbo conforming loans" or "jumbo lights" (between $417,000 and up to $729,750). The upper lending limit depends on where you live. To find out what the limit is in your area, check the HUD FHA Mortgage Limits.

(3) Jumbo loans (loans over $729,750 - or less in lower-cost markets). These loans carry the highest interest rates.The hope was that the new category of jumbo light loans would carry lower interest rates, so that people in high-cost real estate markets could more easily buy a home or refinance an existing mortgage. Alas, according to mortgage brokers, the qualifying guidelines for jumbo light loans are so difficult to meet that many people cannot get one.

Restrictive Qualification Rules. Some examples of these restrictive guidelines are:

  • The Debt-to-Income Ratio must be no more than 45%. This means that your total monthly housing expenses (mortgage, home insurance, taxes, and other home related expenses) divided by your gross monthly income is less than 45%. In high-cost housing markets, where people have to spend a large portion of their income on housing, these limits may be tough to meet. Yet these high-cost housing markets are precisely where the need for jumbo light loans is greatest.

  • Buyers must submit full documentation of income and assets (which can be difficult for self-employed people, since the typical self-employed person can deduct a variety of expenses and show very little income at the end of the year.

  • Buyers must have a credit score of at least 700 if their LTV is greater than 80% or at least 680 if their LTV is less than 80%. This factor alone eliminates a lot of would be borrowers.

  • Borrowers cannot have made a late mortgage payment within the last 12 months. Oh well.

In addition, those who are refinancing cannot wrap a second mortgage into the new jumbo light loan. Because second mortgage holders are skittish in the present-day market, borrowers may have to repay a substantial percentage of their second mortgage in order to refinance the first.

Not Much Relief in Interest Rates. In addition to these restrictions, the hoped-for favorable interest rates of jumbo light loans haven't yet materialized. Currently, the interest rates for jumbo lights range from 7% to upwards of 7.5%, not much better than rates for the regular jumbo. In contrast, the interest rates for traditional conforming loans are less than 6%.

Jumbo Light Loans May Improve in the Future. Some experts believe that it will take jumbo light loans a while to hit their stride, and once they do, interest rates may dip a bit. Some predict that for this reason, Congress may extend the planned December 31, 2008 expiration date.

March 3, 2008

Government Should Let Property Values Sink Lower to Close the Affordability Gap

Many blogs and articles dealing with the foreclosure crisis advocate that the government should act to prevent a further decline in property values. To the contrary, I think the government should let property values continue their decline so that nonprofit community housing organizations such as Habitat can afford to purchase foreclosed properties, and provide the community housing organizations with grants or low-interest loans to purchase the properties and convert them to affordable housing, whether that be in the form of condos, apartments, or multi-family houses. Robert Shiller, Yale finance professor and author of Irrational Exuberance, a book about asset bubbles, appears to share this viewpoint. In a February 19, 2008 article by Karen Jacobs in Reuters entitled "Habitat says affordability gap persists", Professor Shiller is quoted as saying: "Most of us care about our children and grandchildren, and these people have to buy houses, so why would we want high home prices? We want economic growth, we don't want high home prices."

From the perspective of youth and millions of poor and lower-middle-class families, home prices soared far beyond the affordability level. Home ownership for these people could only be achieved through a number of gimmicks, including co-signers, no income documentation, no down payment, interest-only loans, and so on. Even as home prices continue to sink, homes and apartments in many parts of the country are still unaffordable for the majority of the local population .

As real estate values increased during the boom, so too did rents. Rental housing has long been a cottage industry for small investors, giving them a steady income and a means to retire. But to produce income for the investor, rents must at least cover the ownership costs, and the higher the mortgage, the higher the rents. So, in addition to not being able to afford a house, many people have been priced out of the rental market as well. The stories about people not being able to live close enough to their jobs to commute are legion.

Somewhat paradoxically, plummeting real estate prices are forcing rents higher because of the pressure on the rental market caused by folks leaving their foreclosed houses. And because refinancing has become so difficult, investor/landlords have not been able to reduce their mortgages to the value of their properties -- so they could lower the rents they charge.

There are many suggestions floating around for how the government and housing finance industry should react to the foreclosure crisis. These suggestions range from 1) adjusting the bankruptcy laws to allow modifications of mortgage debt, 2) preventing foreclosures by providing people or communities with low-interest loans, and 3) helping homeowners modify their payments to deal with their arrearages.

For obvious reasons -- tax receipts and profits among them -- local governments and the housing finance industry want to prop up real estate values by any means necessary. And this, of course, is fine with existing homeowners. The higher the real estate values, the better their bottom line will be. As you know from my opening lines, however, I believe prices ought to go in the opposite direction. While I'm all for preventing foreclosures, they are going to happen anyway, in large numbers. Why not take advantage of this opportunity to increase the stock of affordable housing?

Letting property values slide and shoveling money to nonprofit community housing groups will help to reduce the imbalance in affordable housing that the boom in property values caused to happen in the first place. As an important side effect, a policy that will encourage the creation of affordable housing will help prevent the blight caused by thousands of vacant houses resulting from the foreclosure crisis. Finally, a massive conversion of single-family dwellings into affordable dwelling units will stimulate employment opportunities for the thousands of contractors who now are suffering right along with the rest of the real estate industry.

February 19, 2008

Project Lifeline: Too Little Too Late

On February 12, 2008, a consortium of mortgage lenders trotted out a voluntary program purportedly designed to help prevent foreclosures. Under this program, termed Project Lifeline, lenders will give homeowners who are still in their homes some additional time to work things out before foreclosure proceedings are initiated.

Here's how it works. If you are 90 or more days delinquent on your payments, and foreclosure or bankruptcy proceedings haven't yet been started, the lender will give you a 30-day written notice prior to initiating foreclosure proceedings. The notice will invite you to contact the company servicing the mortgage for a possible resolution. If agreement isn't reached within that 30-day period, the foreclosure can begin.

On the surface, this looks like a good thing. Homeowners who fall behind sometimes get fatalistic and don't bother to attempt a resolution. This 30-day notice may stimulate you to give it one more try. It also gives you an extra month without paying if you are ultimately going to lose the home. Every month you can live in a home "rent free" is an opportunity to put some money aside for moving expenses and other costs associated with finding new shelter.

The downside of this new plan? If you are busy negotiating with the lender and the negotiations don't produce anything useful, you may have foregone a more appropriate action for your individual circumstances, such as filing for bankruptcy, passing up an opportunity for new shelter, or even hunting for refinancing on your own.

Don't let time run out. Although the major lenders may say they want to work things out with their borrowers, the truth is that many homeowners have been forced into a kind of rope-a-dope (a la Muhammad Ali) where the lender implied that relief was just around the corner, only to deliver a knockout punch by cutting off communications on the eve of the foreclosure sale. This 30-day notice appears to be more of the same, rather than a new policy that might substantially cut down on foreclosures.

Project Lifeline assumes you can trust the folks throwing the rope, even thought they're the same folks who put you into the water in the first place.

When negotiating with a bank or other entity to avoid foreclosure, it's important to remember that you're most likely not negotiating with the decision-maker -- the owner of the mortgage. An important component of the housing bubble is that mortgages were packaged for easy sale on Wall Street and in international markets. To give you true relief with a substantially reduced interest rate or adding your missed payments to the end of the mortgage, the mortgage owner has to give permission. An investor in China or Germany may not be as accommodating as their American counterparts would like them to be, and while it may make sense for a lender to avoid foreclosing, the relationship between the lender and its investors may favor the foreclosure.

So, if you get one of the 30-day notices, feel free to explore possible workouts, but keep an eye on the clock, and if you are in one of the many states that provides very little advance notice for a foreclosure, have a solid Plan B ready and waiting.

November 16, 2007

You Can Fight Your Foreclosure and Win

On November 15, 2007, an article in the New York Times, written by Gretchen Morgenson, reported that an Ohio Federal District Court refused to approve of 14 foreclosures because the company filing the cases couldn't prove that they were the owners of the mortgage. Since the federal courts won't hear cases brought by parties that have no interest in the case, the court dismissed the case without prejudice, meaning the company seeking the foreclosures could take their case to state court.

Mortgages today: Often no papertrail. The reason the company bringing the case couldn't prove ownership arises out of how mortgages are treated these days. After the mortgagor (the borrower) signs the paperwork, the mortgage is frequently sold (assigned) over the computer to a wall street investment firm --which proceeds to divide the mortgage into different "packages" which are resold as "securitized debt" investments. All of these sales and resales occur electronically. As a result, there isn't any papertrail.

Mortgage servicers often cannot prove the right to foreclosure. When the time comes to foreclose on a property, the foreclosure is brought by a "servicing company" (for instance, Countrywide). In roughly 40% of foreclosures, the servicing company is unable to produce a paper trail that ties it to the original mortgage owner. And without an adequate paper trail, the servicing company cannot prove that it has a right to pursue the foreclosure.

What the judge said. In the district court case, the judge pointed out that foreclosures typically go unchallenged. Here are the judge's words (in footnote 3) in response to the argument that the foreclosures should be allowed to continue:

"Plaintiff's, 'Judge, you just don't understand how things work,' argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled and still control, the foreclosure process. Typically, the homeowner who finds himself/herself in financial straits, fails to make the required mortgage payments and faces a foreclosure suit, and is not interested in testing state or federal jurisdictional requirements, either pro se or through counsel."

Judicial foreclosures: Consider an "inadequate paperwork" challenge. In about half the states (mostly in the Eastern half of the U.S.), foreclosures must proceed through a state court (unlike this district court case, which is unusual). In those state court foreclosures (called "judicial foreclosures"), the homeowner should consider challenging the foreclosure on the basis of inadequate paperwork. Although challenges of this type will benefit from legal representation, it is also possible to assert your rights as a self-represented person and ask the judge to rule on the adequecy of the paperwork.

Non-judicial foreclosures: Tougher to challenge. In the other states--mostly in the West and including California -- foreclosures proceed outside of court ("non-judicial foreclosures"). In these cases, your only option for stopping the foreclosure is to proactively seek an injunction in state court. This typically involves filing a complaint, a motion for a preliminary and permanent injunction, and a temporary restraining order. This is difficult to do without a lawyer unless you can find the requisite forms online or in a law library, and you have the grit to take the law into your own jaw.

Whether you are dealing with a judicial (court) or non-judicial (outside of court) foreclosure, a good place to start if you plan to fight the foreclosure is Represent Yourself in Court, by Paul Bergman and Sara J. Berman-Barrett (Nolo).