New alternatives to foreclosure unveiled
Government offers Home Affordable Modification Program
Homeowners who can't afford their mortgage payments may want to take a look at the federal government's new alternative to foreclosure: the Home Affordable Foreclosure Alternative program, or HAFA, which intended to encourage lenders to facilitate short sales and deeds-in-lieu, or DIL, as alternatives to foreclosure.
The program, which is a part of the Home Affordable Modification Program, or HAMP, may help some homeowners escape a bad situation, but the rules are complicated and they won't be able to keep their homes.
U.S. Treasury Assistant Secretary Herbert Allison explained the concept in congressional testimony.
"HAMP does not, nor was it ever intended to, address every delinquent loan," he said. "In these instances, the borrower may benefit from an alternative that helps the borrower transition to more affordable housing and avoid the substantial costs of foreclosure."
Here are some details from the government's 43-page directive for loan servicers:
A short sale allows the homeowner to sell the home and use the proceeds to satisfy the first mortgage even if the sale price is less than the loan balance.
A DIL allows the homeowner to voluntarily give up the home to satisfy the first mortgage even if the home is worth less than the loan balance.
The homeowner can get pre-approval for a short sale at a specific minimum price or net proceeds before the home is put on the market.
The homeowner can receive $1,500 for relocation expenses at closing. This sum may be reported to the Internal Revenue Service as income.
The home must be the homeowners principal residence.
The mortgage must be delinquent, or default must be reasonably foreseeable.
The unpaid loan balance must be less than $729,750 for a single house or condominium. Higher limits are allowed for two- to four-unit residential properties.
The homeowners monthly mortgage payment must be more than 31 percent of his or her gross income.
The homeowner must transfer clear title. The lender will allow up to three percent of each second loan or lien, up to $3,000 in total, to help the homeowner satisfy these obligations.
The government's directive excludes loans that are owned or guaranteed by Fannie Mae or Freddie Mac. However, the two government-run mortgage corporations are expected to release their own guidelines.
Homeowners can use the Loan Look Up Tool on the Making Home Affordable Web site to find out whether they have a Fannie Mae or Freddie Mac loan.
The lender cannot require a cash contribution or promissory note, cannot pursue a deficiency judgment and must release the homeowner from all future liability for the debt.
The loan servicer can use the financial information and hardship letter that the homeowner submitted for a loan modification, or request updated information to evaluate the homeowners eligibility.
The loan servicer must assess the current value of the home. If the short sale or DIL isn't completed, the servicer can add the cost of this assessment (e.g., an appraisal) to the loan balance.
The homeowner must sign a Short Sale Agreement or DIL Agreement on or before Dec. 31, 2012.
The home must be listed for sale with a licensed local-area real estate professional. (This requirement doesn't apply to DIL.)
The homeowner must cooperate with the real estate professionals efforts to sell the home and maintain the interior and exterior of the home.
The servicer and homeowner must meet a number of time frames.
The lender may require the homeowner to make full or partial payments on the mortgage, up to 31 percent of the homeowners income, subject to the lender's written policies.
The homeowner cannot have a close business or personal relationship with the real estate agent or buyer and cannot have an expectation of buying back or renting the home after the short sale or DIL closes.
The lender can initiate or continue, but not complete a foreclosure sale while the homeowner is involved in the program.
Homeowners should discuss the income tax consequences of debt forgiveness with a qualified tax professional.
The servicer will report the short sale or DIL to the credit bureaus. That will hurt the homeowners credit score, although not as severely as a foreclosure.
The buyer in a short sale can't resell the home within 90 days of the purchase.
The program launched April 5 and is scheduled to sunset on Dec. 31, 2012. Servicers may elect to implement the program sooner than the official effective date.
Homeowners are encouraged to contact their loan servicers to find out whether they are eligible for the program or call the HOPE hot line at (888) 995-4673 to speak to a government-certified mortgage counselor. More than 100 servicers have signed up for the program.
These servicers are required to participate and write their own policies subject to investor guidelines.
Going up
Mortgage rates jumped for the second straight week.
The average 30-year fixed-rate mortgage rose 12 basis points, to 5.35 percent. A basis point is one-hundredth of a percentage point. Rates have risen 24 basis points in two weeks and are now at their highest point since Nov. 4, 2009.
Meanwhile, this week's average 15-year fixed-rate — a popular option for refinancing — leapt 16 basis points, to 4.69 percent.
The average jumbo 30-year fixed rose 6 basis points, to 5.98 percent.
Adjustable-rate mortgages split this week. The one-year adjustable-rate mortgage remained unchanged, at 4.74 percent. Meanwhile, the popular 5/1 ARM rose 4 basis points, to 4.55 percent.
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Sunday, April 18, 2010
Second mortgages may haunt borrowers in foreclosure
Just when owners think their mortgage nightmare has ended with the loss of their home through foreclosure, the next round of bad news knocks at the door: the bank holding their second trust deed demands repayment of the loan.
Despite heavy political pressure to write off so-called "junior"- or second-lien, mortgages to help struggling owners keep their homes, banks aren't always willing to follow that script. Why? Because those loans amounted to $1 trillion in the U.S. at the end of last year, according to the Federal Reserve, and many banks hold a lot of that paper. A second trust deed is a loan in a subordinate position to a first trust deed loan secured by the same collateral.
Although owners and many banks are trying to strike deals to reduce the payments on homeowners' first mortgages, the main sticking point to consummating those transactions is that lenders holding the first liens often will not accept a deal unless the banks holding the second mortgages take a hit too. But those banks, which are trying to get their assets back in the positive column, don't always want to write off the junior liens.
It's not unusual for second liens -- typically loans taken out after the house was purchased -- to lack collateral backing today because of the steep drop in home values; sometimes a second mortgage is below the amount owed on the first mortgage alone. That's why some politicians are urging banks to write off those "worthless" second liens. Many homeowners who are in default on their first mortgages, however, still are making monthly payments on the second liens, so banks don't want to kiss those loans off. The ability for banks to collect on second liens varies by state.
How pervasive is the problem?
"I see it all the time," says accountant Earl Salter, an enrolled agent with Norwalk Business Service in Norwalk, Calif. Financially shaky owners who have lost their homes to foreclosure and face second-lien lenders demanding repayment "have two choices: file bankruptcy or try to strike a deal with the holder of the second to accept 10 or 15 cents on the dollar" owed, he said.
If lenders and borrowers don't strike a deal, lenders may garnish the borrowers' wages and other assets, if the owners have some income or the potential for income. In some cases, banks sell the junior-lien loans to collection agencies, which take over recovery of the debt.
While many banks are making decisions about repayment of second-lien loans on a case-by-case basis, lawmakers are seeking solutions for borrowers unable to repay junior-lien debts. One U.S. Treasury program requires the reduction of payments on junior-lien mortgages by participating lenders if they're allowing reductions on first mortgages.
Of one thing you can be sure: we haven't heard the last of this issue yet. Other programs already are on the table.
Diane Wedner
Despite heavy political pressure to write off so-called "junior"- or second-lien, mortgages to help struggling owners keep their homes, banks aren't always willing to follow that script. Why? Because those loans amounted to $1 trillion in the U.S. at the end of last year, according to the Federal Reserve, and many banks hold a lot of that paper. A second trust deed is a loan in a subordinate position to a first trust deed loan secured by the same collateral.
Although owners and many banks are trying to strike deals to reduce the payments on homeowners' first mortgages, the main sticking point to consummating those transactions is that lenders holding the first liens often will not accept a deal unless the banks holding the second mortgages take a hit too. But those banks, which are trying to get their assets back in the positive column, don't always want to write off the junior liens.
It's not unusual for second liens -- typically loans taken out after the house was purchased -- to lack collateral backing today because of the steep drop in home values; sometimes a second mortgage is below the amount owed on the first mortgage alone. That's why some politicians are urging banks to write off those "worthless" second liens. Many homeowners who are in default on their first mortgages, however, still are making monthly payments on the second liens, so banks don't want to kiss those loans off. The ability for banks to collect on second liens varies by state.
How pervasive is the problem?
"I see it all the time," says accountant Earl Salter, an enrolled agent with Norwalk Business Service in Norwalk, Calif. Financially shaky owners who have lost their homes to foreclosure and face second-lien lenders demanding repayment "have two choices: file bankruptcy or try to strike a deal with the holder of the second to accept 10 or 15 cents on the dollar" owed, he said.
If lenders and borrowers don't strike a deal, lenders may garnish the borrowers' wages and other assets, if the owners have some income or the potential for income. In some cases, banks sell the junior-lien loans to collection agencies, which take over recovery of the debt.
While many banks are making decisions about repayment of second-lien loans on a case-by-case basis, lawmakers are seeking solutions for borrowers unable to repay junior-lien debts. One U.S. Treasury program requires the reduction of payments on junior-lien mortgages by participating lenders if they're allowing reductions on first mortgages.
Of one thing you can be sure: we haven't heard the last of this issue yet. Other programs already are on the table.
Diane Wedner
Thursday, April 8, 2010
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