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â€śWhy should a stranger be able to buy a home at a price the current homeowner can afford?â€ť
So many times I am sitting at a closing table of a homeowner losing their home to short sale or foreclosure and their home is being sold at market value or even less. They see a stranger sitting across from them buying their home at a price they can afford if only they were offered the chance. All because they could not receive a loan modification or some program to help them stay in their home.
On behalf of many Americans who have lost the dream of homeownership, we need a plan to keep the homeowner in their home.
My entire career has been in various financial positions in the corporate and the personal financial arenas. Currently, as owner of a mortgage company for the past 9 years, a registered representative with my series 6, 63 and 65 licenses with a NASD firm, and an instructor for the Rhode Island Association of Realtors, I have met with many consumers. Some I have been able to save from losing their homes, but the number I have not been able to help increases daily. Listening to the many extremely sad stories of families needing to leave their homes empowered me to come up with a viable solution.
The best plan is one which is developed after 1) the problem is identified 2) the goals are established to solve the problem. ALL the goals must be met for the plan to succeed.
The problem is obvious: homeowners are losing their homes, resulting in an economic crisis. The goals must be:
* Homeowners must stay in their home
* Lender losses must be minimized
* The number of homes on the market must be reduced
* The ultimate plan will meet ALL 3 of the above goals and result in minimal negatives.
Some current plans have met with some success:
The Loan Modification: A loan modification may lengthen the term of the loan, lower the interest rate, forgive a portion of the debt (rare), forbear a portion of the debt (rare) or a combination of these options. So many homeowners have tried to save their home with their current lender by pursuing loan modifications. Some have made it through the â€śtorture chamberâ€ť alive and have been able to modify their loan, others have not made it out of the chamber and have either succumbed to a short sale or a foreclosure. This plan has not proved successful.
The Short Refinance: The current lender forgives the portion of debt owed over 95% of the current value if a new lender can be found to refinance the remaining debt. Very few lenders will forgive debt.
The Bankruptcy Plan: some states are allowing homeowners to go to the bankruptcy court to request a loan reduction. The lender appears in court to arrive at an agreement. Lenders are unwilling to forgive debt, since this results in large lender losses.
The DU Refi Plus Program: homeowners can refinance their home up to 105% LTV (loan-to value) of the current value IF they own a FNMA or Freddie Mac loan. Some lenders (few) offer 125% LTV IF they currently own the loan.
BANKRUPTCY PLAN with FORBEARANCE OF DEBT (soft/silent 2nd: proposed plan)
Securitization of loans on Wall Street makes it difficult to write-off any portion of mortgages. The idea of a â€śsoft 2ndâ€ť (otherwise understood as â€śforbearanceâ€ť of a portion of the debt), can be instituted as part of the bankruptcy court proceedings. Instead of a loan mod, the portion of the debt on the home which is in excess of the value can be placed in forbearance until such time:
1) home is sold
2) change in circumstance of the homeowner. Annually, the lender will review the homeownerâ€™s financial situation to determine if the forbearance portion of the debt can now be financially managed by the borrower and, thus, included in the amortization of the loan. This is similar to commercial lenders who place clauses in their mortgages which allow for annual review.
Forbearance of debt is the best financial option to meet all 3 goals. Reduction/elimination of debt is not the best option due to the following negatives:
Lender losses: resulting in possible bank collapse
Investor losses who securitized the debt
Opens the door to many who will seek reduction
COMMON SENSE UN-DERWRITING
Borrowers who have 2nd and even 3rd liens are attempting to refinance. The subordinate liens are not allowing a re-subordination due to deteriorating market values. This totally makes zero sense since the lien already exists. The borrower would realize significant monthly savings if the subordination is allowed. Even with no cash out on the 1st mortgage, 2nd lien holders are often saying â€śNOâ€ť to re-subordination. When this happens, many borrowers â€śgive upâ€ť since they cannot afford the two or three mortgage payments. They then ask for loan modifications (or worse, they go into foreclosure or short sale) and, subsequently, the 2nd and 3rd lien lenders will suffer significant losses.
Let me provide one real life example: client has 3 liens: 1 to a local bank: $131,000; a 2nd lien to Bank of America: $143,000; and a 3rd lien of $17,000 also to Bank of America (BOA). I was able to approve this homeowner for a $274,000 1st mortgage: paying off their current 1st and 2nd lien. I was going to save them $1000 per month. All we needed was a re-subordination from BOA for the $17,000. They simply needed to agree to move from 3rd to 2nd position behind the new 1st lien of $274,000. Guess what they said? NO! Why? They stated the home was no longer valued high enough for their maximum allowable LTV of 80%. The combined LTV was now 90%. I stated to them they already have the loan outstanding AND we are paying off their 2nd lien AND we will be able to save the homeowner $1000/month. We even offered to pay them the $1000 savings each month to eliminate their $17,000 debt in less than 17 months! They still said NO. WHERE IS THE COMMON SENSE?
We need â€śCommon Sense Underwritingâ€ť guidelines-/department instituted at the lender level. There needs to be a guideline which states â€śif there is no cash out on the refinance, the 2nd lien must subordinateâ€ť. If common sense does not prevail , mortgage insurance can be placed on that 2nd lien in case of any default. In this way, the 2nd lien holder will feel more comfortable and will allow the subordination. This will result in the borrower staying in their home, realizing the monthly savings and we avoid another home on the market.
A government â€ścommon senseâ€ť department can also be created for consumers to go to if the lenders refuse to employ common sense.
STREAMLINE REFINANCES FOR ALL
Currently, streamline refinances are allowed for FHA borrowers with NO required appraisal for rate and term refinances (cash out not allowed, unless an appraisal is completed). FNMA and FHLMC (conventional loans) have a program called: DU Refi Plus. DU Refi Plus requires an appraisal in all cases.
Under the DU Refi Plus program most lenders only allow 105% LTV; unless the loan is currently being serviced by this same lender, in which case they may allow 125% LTV. In all cases, the loan must be owned by FNMA or Freddie Mac. This program has proved to be helpful, but it is not enough. Many homeowners have loans which are ineligible since they fall into the following categories:
NOT owned by Fannie Mae or Freddie Mac
Are significantly underwater: more than 5%
They do not qualify due to late payments on mortgages and other credit: many homeowners were told to be late to qualify for a loan modification
They do not meet the credit and income guidelines
The proposal is to allow for rate and term streamline refinances for the above ineligible loans through the FHA program. Pros:
Meets all 3 goals: a) homeowners stay in their home b) minimizes lender losses c) reduces number of homes on the market
Equality for all. Everyone can be eligible. There are many consumers AGAINST helping others who either:
* Spent over their financial means OR
* Signed mortgage documents without first reviewing them AND understanding their implication on their financial future.
Mortgage insurance reserves will be replenished faster (all streamlines will have PMI)
* Homeowners can better afford their homes
* Credit scores will increase
* Consumer spending will increase: creating job growth
* Avoid bankruptcy/foreclosure/credit card losses
Cons of rate and term streamlines:
* Lenders will receive less interest, BUT better performing loans.
* Will require PMI (private mortgage insurance), but the positive to this is the PMI carriers will recover some of their losses and the lender is insured of not incurring large losses in case of default. It is better to use TARP funds to support the Mortgage Insurance carriers, than it is to bail out banks, since the mortgage insurance will PREVENT large lender losses. This proposal includes using PMI for every streamline.
RE-ENTRY OF THE HOMEOWNER PLAN
In 2010, it is estimated 1 million homes will be either foreclosed on or will fall victim to short sale. To-date there has been over 2 million homes which experienced foreclosure or short sale. What happens to these former American homeowners now?
There are NO loans to help them re-enter the lending arena until three years have passed from their foreclosure/short sale. With the abundance of homes on the market, there are SIGNIFICANTLY LESS qualified buyers. Many of these former homeowners could have purchased their own homes at the price their homes were sold. A stranger bought their home at a price they could afford. These former homeowners must now wait the three required years, per current lending guidelines, to purchase another home OR fall victim to hard money lenders at exorbitant interest rates. The exception to the three year rule applies to those former homeowners who were current on their former mortgage at the time of the short sale: this is very few of the short sale victims. How can any market recover when there are 10-15% less buyers in the market, while supply increases?
I propose FHA allow for re-entry of these former homeowners into the purchase market after they demonstrate the following:
Document the life changing event which caused the foreclosure/short sale is now cured. Document the cause and the cure.
Show one (or two) years of clean credit since the â€ścureâ€ť of the life-changing event.
Adjust FICO approval criteria: allow for manual underwriting: using COMMON SENSE underwriting.
Lower the DTI (debt to income) ratios for the former homeowner to help ensure payments can be met
Home buying counseling required for re-entry into the purchase market.
In summary, I propose implementing new common sense underwriting guidelines for loans which are eligible for refinance, but the subordinating lender refuses to subordinate; or for any reason a refinance makes â€ścommon senseâ€ť but the lender says â€śnoâ€ť. In cases where â€ścommon senseâ€ť underwriting does not prevail, mortgage insurance is placed on the subordinate lien to make the 2nd lien holder feel comfortable to agree to the subordination.
* Forbearance of debt (not elimination) for the amount of the mortgage in excess of 95% of current market value for those borrowers which can demonstrate a hardship.
* Allowing a streamline rate & term refinance for anyone. The FHA streamline rate & term program would be used. This program includes placing mortgage insurance on the new loan. For those who do not qualify due to poor credit as a result of applying for a loan modification or for any hardship reason, they too should be allowed to rate & term streamline refinance through the FHA program with mortgage insurance.
* Allowing a re-entry into home ownership for those borrowers who fell victim to the mortgage crisis and were not allowed any of these remedies. Specific guidelines would be developed for these re-entry homeowners.
By using all the above four proposals together, the American dream can be brought back and the economy will recover by accomplishing the goals: keeping the homeowner in their home , minimizing lender losses and reducing the number of homes on the market for sale.
â€śLetâ€™s stop strangers buying homes at prices the current homeowner can afford themselves.â€ť
Ann M. Sabbagh is the
President of Seacoast Mortgage Corporation, a
Registered Representative, Capital Choice Financial Services