September 17th, 2010 6:07 AM by Richard T. Cirelli
What’s Wrong with the Government’s Mortgage Stimulus Programs?
Given the failure of the various stimulus programs introduced by the Government, it’s going to be difficult to keep this article short but I’ll try…..
I read an article last weekend about how homeowners are now suing their loan servicers, particularly Bank of America, for not making their loan modifications permanent even though the borrowers made good on their promise to pay during the Loan Mod trial period. This is a story that I think will gain lots of attention.
Here’s the problem with the loan mod program but read on for what’s wrong with some of the other programs too…..
In order to qualify for a loan mod, a borrower has to demonstrate that they can no longer afford the payments on their loan. If their debt-to-income ratio falls within a certain range (31% to 38%) they may be eligible for a trial period of 3 months and if they keep up their payments during this time, the loan modification can become long-term. Usually, the interest rate is reduced to a level that makes the payment affordable for the borrower. The Lender/Servicer can also reduce the principal balance or lengthen the term of the loan but typically they just reduce the rate.
Very few loan mods have been granted relative to the number that have applied. Why?
· Even though the Banks are being paid a commission by the Federal Government for granting loan mods, the amount is so small that it’s really no incentive at all.
· The banks take so long to make a decision that even though the borrower was current in their payments when they applied, by the time the Bank approves their mod they have racked up too much credit card debt in order to stay current on their bills and they no longer qualify
· The debt-to-income ratios are harder to qualify for a loan mod than they were when the original loan was made. Any new borrower can get approved with Debt-to-Income ratios up to 50% and the limits were even higher when these borrowers got their loans. Why should the criteria be more strict now that the borrower is possibly making less money? And why should it be more strict when the loan mod reduces their Debt-to-Income ratio thereby enabling them to start paying down their credit card balances with the money saved by the loan mod?
Here’s a link to the article that got me thinking about this:
Now let’s talk about the Home Affordable Mortgage Program
This is the program that allows a borrower to refinance up to 125% of their home value if their mortgage is currently owned by Fannie Mae or Freddie Mac. Sounds like it should help a lot of homeowners since Fannie and Freddie own so many loans. (Don’t be confused by who services these loans. The big banks service many loans but almost always the loan to Fannie, Freddie or other investors).
Here’s the first problem…Even though Fannie and Freddie allow the borrower to refinance the loan up to 125% of today value, none of the lenders will refinance it beyond 105%. So even though a typical homeowner will benefit by reducing their rate form say 6% down to 4.5%, the Lenders refuse to make the loan even though it puts the borrower at a lower risk of future default.
Here’s the second problem…. If the current loan has Mortgage Insurance, the new refinance up to 105% or any amount over 80% must have mortgage insurance too. That’s all fine but here’s the rub – the Mortgage Insurance companies refuse to re-insure it even if the borrower qualifies. Once again, a lower rate reduces the borrowers chances against future default thereby improving their portfolio of insured loans. But, they still won’t re-insure the better loan.
So, the bottom line is that the Banks and Mortgage Insurance companies are telling the Government “no thanks” to their programs. It’s the banks and the MI companies that are running the show - not the U.S. Government. And, I don’t see anything being done about it.
New FHA Short Refi Program:
If you think this new program announced this month will be a big help- don’t.
The FHA is allowing borrowers with negative equity and non-FHA loans to refinance into a new FHA loan up to 115% of the home’s value. You would think that a homeowner with a loan owned by Fannie or Freddie could benefit from this but Fannie and Freddie already said they won’t participate. So if you take away all the people that have an FHA loan and all the people that have a loan owned by Fannie Mae or Freddie Mac, who is left to qualify for this program? It will be the minority whose loan is owned by private investors and do you think they will allow their loans to be written down? I wouldn’t count on it.
I welcome your feedback.
Mortgage Rate Update:
After a few months of slowly falling rates, the tide has changed. We’ve experienced rate increases for the last three weeks now. While rates are still at near-historic lows, they are a little above the low point hit a few weeks ago. Volatility is back too. I’m seeing days with lenders re-pricing 2 or 3 times throughout the day as MBS prices bounce around. The economic data of late certainly hasn’t been great news, but taken in perspective of the negative news we had been getting – or comparing it to the news we have feared getting – the data coming out has been given a very warm welcome by the Stock market, and causing problems for the Bond markets. And today’s Initial Jobless Claims number is no exception with unemployment claims coming in lower than expected.
As always, I monitor the pricing of Mortgage-Backed Securities all day long and try to capture the best times to lock in my clients’ rates.