Making Home Affordable 105% Loans were introduced just this spring and the program has simply not been meeting the public need.
Homeowners seeking to refinance their Fannie Mae or Freddie Mac Mortgages quickly found that the new 105% loans were helping a minority of people teetering on the edge of collapse. While it may seem obvious to people in trouble, here is why the limit was increased to 125% last week.
Many homeowners simply cannot meet the required 33% debt to income limits necessary to refinance their loans due primarily to a job loss or cutback or other change in their financial situation. You see, many people purchased or refinanced their homes with much higher housing ratios: in many cases over 45%. So unless your income went up, the chances of a lower ratio will be slim even with a fixed interest rate.
A careful look at the rates on the much touted 'DU Refinance' Programs our lenders are offering are just not so hot. Given you have to be in 'financial distress' to qualify; incredibly the pricing adjustments for lower credit scores and higher debt to income limits on these loans are making them pretty pricey. NOT the great low rate you were hoping for. The interest rates, after all those adjustments may be no better than that 8%- to 10% rate your note is going to adjust to anyway! And since you clearly need a lower rate to afford to keep your home...well, what's the point?
The third, and possibly biggest reason for MHA failures to date is due to the lower property values all across the country. Homeowners seeking to refinance their Fannie Mae or Freddie Mac Mortgage are so underwater on their mortgage to home values, 105% has been deemed pretty irrelevant. In places where property values have dropped 10% (most of the country is worse off than this now). If you originally had a 100% mortgage or combination of 80/20%, you can see you can see how 105% would be less than what you owe now unless you have paid down your principal. It's not rocket science!
Thankfully, the higher loan limit of 125% of Making Home Affordable loans should help more people stay in their homes. In most cases, if your loan is already being modified (due to financial distress) your lender will first test your case to see if they can apply the new Stimulus 125% loan program so they get to make more money. Naturally this is in their interest!
In all cases, to qualify for this program, you must
1. be in financial distress
2. demonstrate income to support the new mortgage, and
3. have a Fannie Mae or Freddie Mac Loan now. Your lender can verify that fact --just call the number on your bill and ask if you have a Fannie or a Freddie loan.
Now that this higher LTV (loan to value) is allowed, even if home value has gone down 25%, depending on how much you borrowed, you may still qualify to refinance up to 125% of the current value of your home within a new first mortgage. If you have a second mortgage now, it stays in place and must fall within that total of 125% loan to value. (Depends on Fannie or Freddie how they handle this) The second mortgage holder is being asked to 're-subordinate' their lien after the new first mortgage is recorded. These things, like modifications are taking time to accomplish. So patience is a very important aspect of working out a loan modification program, be it via this program or a straight modification.
Please bear in mind that if you borrowed more than you could afford to begin with, a higher loan amount certainly won't solve your problem. Homeowners who have lost that much of their home's equity are making some tough decisions. Unless you are really in love with your home, many homeowners are saying, hey--why get stuck with this high mortgage when we can buy a home for 30% less right now in our town? Yes, folks are still walking away from their homes in droves.
And by the way, anyone in financial distress is likely to be leaning on their credit cards, which causes your credit score to drop. The 'price adjustments' for FICO scores under 620 is 4 points. No kidding. So if you want to fund that 4 points because, being distressed, you don't have 4% lying around now do you--your new interest rate just hit the roof!
Another thing home owners don't realize: the Stimulus Refinance program is ONLY GOOD FOR FIVE YEARS. If you are offered a Refinance, the fixed terms will only be for five years and after that --either the loan will adjust again (read the fine print of your offer) or you will have a balloon note that you may have to refinance again in five years if you intend to keep your home. While the average homeowner only stays in their home five to seven years this may work fine for a lot of people.
OK, admittedly we are promoting private modification over these quasi government programs. Why? (I won't say what I think of the bank's hired guns.) The process is frustrating and time consuming but we have witnessed very solid results on behalf of our clients. The private modification seeks to fix your rate for as long as 40 years (so far). We have seen some very flexible terms offered, allowing folks to negotiate what they can actually afford to pay now, while projecting their own financial recovery down the road.
Huh. Affordable mortgages...how novel?
© 2009 susan templeton
Susan Templeton is not a loan modification advocate