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January 12, 2012November 11, 2012

Buying a home after a foreclosure or shortsale

by Dan Krell
© 2012
DanKrell.com

If you’ve been through tough financial times, you know that it feels as if your financial picture may never improve. But for most people, experiencing a financial challenge turns out to be just a blip in time; they eventually move on with their life. Given that notion, mortgage lenders know that people endure temporary financial problems through their lives- underwriting guidelines may allow for a past foreclosure, short-sale, or even bankruptcy.

In the old days (prior to desktop underwriting), underwriting was “manual,” meaning that a loan’s approval or denial was decided by a human who reviewed your file. If you were lucky enough to borrow from the local small neighborhood lender, there was a very good chance they knew you, your family, and your financial circumstances (much like the Bailey Building and Loan from “It’s a Wonderful Life”); you had a chance to provide explanations and compensating factors to increase your chance of being approved.

Today, mortgage underwriting is mostly accomplished through automated systems, such as “Desktop Underwriter” and “Loan Prospector.” The automated systems make decisions based on algorithms and do not have the ability to weigh circumstances for negative reports on a credit history. Some lenders may still provide manual underwriting, but borrower requirements have become increasingly strict (including higher minimum credit scores).

Take heart; you still may be able to get a mortgage after a foreclosure, short-sale, or bankruptcy.

For conventional mortgages underwritten with Fannie Mae guidelines, you’ll have to wait at least seven years after a foreclosure. Likewise, you’ll have to wait seven years after a short-sale- unless you can muster a large downpayment (you may be able to qualify: after two years with a 20% downpayment; and four years with a 10% downpayment)! You’ll have to wait four years after a chapter 7 bankruptcy is discharged; and two years after a chapter 13 is discharged (but four years if the chapter 13 is dismissed).

For FHA mortgages, you’ll have to wait at least three years after a foreclosure, two years after a chapter 7 bankruptcy discharge, and one year current on a chapter 13 payment plan (with court approval). A short-sale is differentiated depending if the loan was in default: if the loan was not in default at the time of the short-sale and your previous 12 months payments were timely, you may be eligible for a FHA mortgage; however if the loan was in default prior to short-sale, you will have to wait at least three years before you can qualify.

If you are eligible for VA financing, you will have to wait two years after a foreclosure, short-sale, and chapter 7 bankruptcy (one year into a chapter 13 payment plan with court approval). However, if your foreclosure or short-sale was on a VA mortgage, then your eligibility may be reduced.

If you’re financial issues were caused by circumstances beyond your control, you may be able to get an exception that could shorten the waiting periods. However, you’ll have to provide documentation for the underwriter to review, and not all lenders grant such exemptions.

There are many different mortgage programs, and underwriting guidelines vary. The timelines and requirements posted here are as of time of article; it’s very possible that these guidelines will or have changed. It’s important to talk to a licensed loan officer to know what you need to qualify, as well as which mortgage program will be best for your particular circumstances.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 9, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

July 2, 2011July 28, 2019

Expensive mortgages on the horizon

Owning a home takes work. Soon, it will cost more too. In response to a crippling financial crisis, sweeping changes were established in the mortgage industry to not only stabilize the crippled financial sector of the housing market, but to also to temporarily provide access to credit in an all but frozen credit market. Now that the temporary stop gaps are coming to an end, will private investors make home mortgages more expensive or will Congress bow to housing trade groups to extend current interventions?

Since the increase of FHA mortgage down payments to 3.5% a few years ago, there has been talk of increasing it further to 5%. The move comes at a time when mortgage assistance programs are winding down and reliance on FHA mortgages to refinance underwater home owners is diminishing. Concerns over FHA reserves prompted higher annual FHA mortgage insurance premiums and, of course, also elicited calls to increase FHA mortgage down payments to 5%.

Of course, while some look for a solid FHA mortgage down payment increase, some look to future decreases. H.R. 1977: FHA Reform Act of 2011 (introduced May 24th which has been currently referred to committee) creates the position of “Deputy Assistant Secretary of FHA for Risk Management and Regulatory Affairs,” whose job would be, among other things, to review down payment requirements.

Besides the push for increased FHA down payments, the FHA maximum loan amount is set to decrease in October of this year. Temporarily increased to $729,750, FHA loan limits will revert to those set by the Housing and Economic Recovery Act of 2008 (HERA). Unless Congress acts on maintaining the current FHA loan limits, HUD states that 669 of the 3,334 counties or county equivalents that are eligible for FHA insured mortgages will be affected. In “high cost” areas, such as Montgomery County, the maximum FHA loan limit will be reduced to $625,500 (“Potential Changes to FHA Single-Family Loan Limits…A Market Analysis Brief; hud.gov).

In addition to changes in FHA mortgages, conforming loans (mortgages that conform to Fannie Mae and Freddie Mac guidelines) will also change. October 2011 is also when the maximum conforming loan limits will revert to those established by HERA, as stated in a May 26th release from the Federal Housing Finance Agency (FHFA is the oversight agency for Fannie Mae, Freddie Mac, and Federal Home Loan Banks). Although the new loan limit will not differ from the current amount in a majority of regions, FHFA estimates that 250 counties or county equivalents will be affected. The maximum conforming loan limit for “high cost” areas, such as Montgomery County, will also be reduced to $625,500.

Although the current FHA and conforming loan limits were temporary, housing trade associations have warned about possible effects of reverting to lower mortgage limits on an unstable real estate market. Both the National Association of Realtors and National Association of Home Builders have commented on the imminent changes and have called on Congress to make the temporary changes permanent.http://www.blogger.com/img/blank.gif

Recent government interventions in the housing market may have been necessary but they were intended to be temporary. Continued intervention may continue to allow “lower cost” mortgages for some home buyers, but some have warned against maintaining the temporary stop gaps because it hinders private investors from entering the housing market as well as the possibility of artificially inflating housing prices.

by Dan Krell
©2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

September 10, 2008October 5, 2019

FHFA takes Fannie and Freddie: Government begins restructuring troubled mortgage giants

by Dan Krell

If you haven’t yet heard, the newly created Federal Housing Finance Agency (FHFA) wasted little time in pursuing its regulatory authority over Fannie Mae and Freddie Mac by taking over as conservator. The agency was established as the new regulatory agency for Government Sponsored Enterprises (GSE) when President Bush signed the Housing and Economic Recovery Act of 2008 on July 30th. The takeover is a coordinated effort between the FHFA, the United States Treasury Department and the Federal Reserve.

In a statement made on Sunday, FHFA secretary James Lockhart outlined the reasons for the takeover of Fannie Mae and Freddie Mac as well as the goals of the conservatorship. (The Secretary’s statement can be found at: www.ofheo.gov/media/statements). Secretary Lockhart stressed the importance of Fannie Mae’s and Freddie Mac’s role in the housing industry. However, the FHFA felt it was necessary to take action because of Fannie and Freddie’s ongoing capitalization problems, poor financial performance and deteriorated market conditions.

Treasury Secretary Henry Paulson also underscored the importance of Fannie and Freddie’s survival (the Secretary’s statement can be seen at www.treas.gov/press/releases). Secretary Paulson stated that the failure of Fannie Mae and Freddie Mac would cause great turmoil in local and global markets. The turmoil would in turn negatively impact everyone personally, reducing savings and restricting credit (all forms of credit would be affected).

Due to the fragility and uncertainty of Fannie and Freddie in recent weeks, Treasury Secretary Paulson stated that the risk of funneling money to these institutions “in their current form” was not in the best interest of the tax payers. As the FHFA takes over operations in Fannie and Freddie, the role of the U.S. Treasury will be to ensure that Fannie and Freddie maintain a positive net worth through preferred stock purchases. By maintaining a positive net worth, Fannie and Freddie dodge the bullet of receivership (which could trigger a global financial meltdown).

The Treasury’s second role will be to purchase mortgage backed securities (MBS) from Fannie and Freddie. Although the MBS purchases will be temporary, it is anticipated that the special MBS purchases will increase mortgage availability and affordability.

Additionally, special credit facilities will be made available to the FHFA entities (which include Fannie Mae and Freddie as well as the twelve Federal Home Loan Banks) to sustain their liquidity. Secretary Lockhart stated that the Federal Home Loan Banks will most likely not use the recently made available facilities as they have “preformed well over the last year.”

The conservatorship is intended to be temporary; there is no timeline for transition. However, as Fannie and Freddie are required to reduce their mortgage portfolios starting in 2010, it is anticipated the new model will allow for a more streamlined and profitable organization at both Fannie Mae and Freddie Mac.

Although many agree that the takeover will positively affect interest rates temporarily, modestly lowered interest rates will not be enough to fix the real estate problem. The real story (that will evolve in ensuing months) will be Fannie and Freddie’s encouragement and support of banks to modify delinquent loans rather than foreclosing, which will play a role in the stabilization of home values and ultimately the real estate market.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 8, 2008. Copyright © 2008 Dan Krell.

January 28, 2008October 5, 2019

Will mortgage loan-limits increase?

by Dan Krell

Are you planning to buy a home this year? If you are planning to purchase a home that is priced more than $417,000, you could get a lower interest rate-if Congress raises conforming loan limits.

First, a very basic primer in mortgage jargon: “Conforming” refers to mortgages that correspond to Government Sponsored Enterprises (GSE) guidelines. GSE refers to those quasi-government enterprises that include (among others) Fannie Mae and Freddie Mac. Conforming guidelines include underwriting criteria that lenders use so they can sell the loans to Fannie Mae and Freddie Mac. The guidelines have strict borrower criteria as well as loan limits. The loan limit is set annually as a reflection of changes to the national average single family home price as determined by the Federal Housing Finance Board’s Monthly Interest Rate Survey. A “jumbo loan” is a mortgage that exceeds conforming loan limits; and usually has higher interest rates because of the higher risk involved.

Two large associations advocating for higher loan limits include the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB). Both the NAR and NAHB argue that increasing conforming loan limits would solve liquidity problems in the jumbo loan market, which would make lending for loans up to $625,000 easier for home buyers who are looking to purchase a home over the current loan limit of $417,000. The NAHB suggest that loan limits be raised temporarily while secondary markets normalize, and be re-evaluated after a two year increase. The NAR cites the need for stimulation of the housing market and the lowering of interest payments to those obtaining loans over the $417,000 limit.

The issue of raising GSE loan limits is not as simple as stimulating a sluggish housing market; as Federal Reserve Board Chairman, Ben Bernanke, made clear to Congress in September 2007. His statement to Congress implied that any increase in loan limits could provide false security to investors on the secondary market – increasing risk to those investors, their companies, and the government. Additionally, Dr. Bernanke implied that if Congress is inclined to increase the loan limits that it should be done quickly, temporarily, and ensures that any increase will function as intended.

What’s the risk? A recent report from the Office of Federal Housing Enterprise Oversight (OFHEO.gov) (the government entity whose mission is to ensure the safety and soundness of Fannie Mae and Freddie Mac) entitled “Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas” reports that any loan limit increase would only help those in high cost areas as most jumbo loans tend to be geographically centered (California had almost forty-nine percent of the jumbo loans originated in 2007). One unintended consequence from raising loan limits to lower mortgage interest payments may be that home prices will increase to make high-cost areas actually cost more. Additionally, anticipated savings benefit may not be achieved as Fannie Mae and Freddie Mac have to charge for taking any increased risk.

As for now, it appears that loan limits for 2008 will remain the same as 2007. It is clear that although there are benefits, there may also be too many questions left unanswered before Congress can act quickly to raise GSE loan limits.

October 19, 2007November 23, 2021

Hard Money Lessons

by Dan Krell © 2007
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The Federal Reserve System (the Fed) has offered advice about mortgage lending for many years. Just last week, the Fed met to discuss ways to address abusive lending practices. The Fed wants to get busy and try to create restrictions to change the sub-prime industry through what one board member called its “rule making authority” under the Home Ownership and Equity Protection Act of 1994 (HOEPA).

The Fed’s most recent action was initiated to thwart poor lending practices that have created a crisis in the housing industry due to the unusually high foreclosure rate. Although the Fed is on the right track, their authority with the HOEPA may have limited impact on the current crisis because many current foreclosures are due to purchase money mortgages rather than refinancing.

HOEPA was enacted in 1994 to address unfair and deceptive practices in mortgage lending. According to the Federal Trade Commission (FTC.gov), HOEPA does not cover mortgages to purchase or build a home, reverse mortgages, or home equities line of credit that are revolving (not closed ended).

When HOEPA was enacted, the mortgage industry was being abused by unscrupulous characters that made their fortunes by equity stripping. By targeting homeowners who had considerable equity in their home, the equity strippers would give the homeowner the cash they needed for home improvements, debt consolidation, or anything else they needed. The money did not come cheap, however, as the mortgages were usually high cost with rates that adjusted in two or three years.

Not only did these loan officers charge heavily for their service; they would come back every month or so to refinance the homeowner to a better rate. This was done until there was no equity left in the home.

The recent abuses in the mortgage industry that the Fed is reacting to are again one of deception and fraud, not for refinancing but in purchasing a home. In the fast paced buy at any cost recent “sellers’ market,” many home buyers were put into precarious mortgage situations with assurances and promises of low interest refinancing and rapid equity.

A lesson learned from “hard money” lenders. Hard money loans are typically private loans that are made against the property’s value, and sometimes do not take account for the borrower’s credit or income. To limit their risk, hard money lenders usually charge very high interest rates and limit the loan to about 60% to 70% of the value of the home. Additionally, the terms are kept short and usually have a final balloon payment. Each loan is “underwritten” based on the merits of the deal; basically if it makes sense the loan is approved.

Hard money is commonly used in commercial transactions, but is also used in residential lending. Many home buyers use hard money loans when traditional lenders will not lend, such as in purchasing a unique home or if the home buyer has very poor credit.

The mortgage industry is under pressure to make rapid changes while licking its wounds from recent foreclosure losses. Change needs to take place where the abuse is occurring. Rather than shaping a loan package to have the appearance of fitting the underwriting guidelines, why not have the loan originators take more responsibility in determining if the loan makes sense in the first place.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 2, 2007. Copyright (c) 2007 Dan Krell.