Me: Hi Mary

I saw your ad in the (redacted) and wanted to know if any of your clients liquidate their property through the bk?

I purchase short sales and am able to get $900 of attorney fees approved on each HUD1 to be paid at settlement. 

I have an office in St Petersburg.  Let me know if we can talk.

Paul

—————–

BK Attorney: I usually don’t advise my clients to do short sales unless the creditor will throw them some money.

—————–

Me:  Hmmm…  The bankruptcy stops the reporting of the tradeline and discharges the debt, but the contractors for Equifax, Experian, and TU pick up the summary judgment and add it to the public records section of the credit report.  A completed short sale can keep the public records section clean of the foreclosure.

—————–

BK Attorney: Their credit is already shot and if we file b4 judgment, no loss.

—————–

Me: Only any negative reporting on the tradeline itself (after the bk case number is issued) is barred by the stay and later the discharge injunction.  The foreclosure is still being reported by Choicepoint to the bureaus in the public records section of the report for all those who experienced a completed foreclosure.  And if a short sale is completed after the judgment but prior to sale, the judgment is vacated and per the FCRA can’t appear on the report.

Anyways, I think I get that you don’t like short sales.  FWIW, you and I would probably get along pretty well.

Paul

—————–

BK Attorney: I like a straightforward person.

—————–

Me: I’m as straightforward as they come.  I turn away more business than I accept, by explaining the HAMP or other options that don’t make Paul any money.

—————–

Bk Attorney: If you can tell me how it helps my client, I would love to talk.

—————–

Me: If the borrower was living in the home and wanted to continue to occupy until the end and didn’t care one iota about the stigma of foreclosure then I’d say we’d pass on that one.  However, I don’t think that characterizes the majority of those debtors who own real estate and seek protection under the bankruptcy code.

As for the benefit – first off, it’s free – regardless of the outcome, it doesn’t cost them anything for me to buy the property as a short sale.  If they have an FHA loan then they can get $1,000 cash on the HUD1 at closing.  The cancellation of indebtedness income is covered by the bankruptcy exclusion to debt forgiveness (if they are smart and file prior to closing).  Fannie Mae requires a five year wait after a foreclosure and only two years for a short sale (although the bankruptcy would also have to be seasoned).  And as I mentioned earlier, the public records section of the report will show any future employer, insurance company, creditor, heck even some hospitals run credit reports prior to admittance.  There are also intangible costs/benefits (i.e. emotional, psychological, self esteem, etc) attached to experiencing an event like foreclosure.  

In sum, considering that bankruptcy is a means for a consumer to obtain a fresh start and gradually enter back into the world to get their life back, it is my belief that a short sale is consistent with this goal.  Of course, I do make money buying/selling short sales, so my opinions may be biased; nevertheless, everything I’ve typed is indisputable.

Mary, let me know when you’ll have 15 minutes to talk this week and I’ll give you a call or if you prefer, stop by to see you.  

Have a good night and thanks for the dialogue.

Paul

Would I qualify for an FHA loan? I lost my job and had to Short Sale my home, I received official release by letter of all liability in July 2007.

Is it a 2 year or 3 year waiting period?  Are short sales “officially” considered foreclosures as of today?  Most importantly, do you know of an underwrite who can help me with a loan???

Desperate here, rented for 2 years here in Henderson. I can’t afford a Conventional 10% down.

Love you website – I’d appreciate your help.

Jayne

———

Hi Jayne,

It sounds like you are already aware that you qualify for a Fannie Mae Conventional loan which would require 10% down.  Unlike Conventional, FHA doesn’t differentiate between a short sale and foreclosure per se; however, the FHA requirement is ‘a three-year wait from the date that the balance was zero’ and in the case of a foreclosure, the balance might never be zero.

Sounds like you’ve got another year to go if you want to buy with less than 10% down.

Thanks for the questions and hope this helps.

Paul

I’m in the process of attempting to get a FHA loan, however right at the end of the underwriting process I was denied b/c of a short sale reported toward the end of last year. 

I have steady W-2 income and 700+ credit score.  My payments on my previous property were current through the date of sale, but the bank reported to 1 out of 3 credit bureaus: “Account paid satisfactory for less than agreed”. 

This shows negative and apparently underwriting is proactively denying the loan in anticipation of a new FHA stipulation treating short sales same as foreclosures. 

Any advice on this?

Furby

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Hi Furby,

I would switch that from FHA to a FNMA Conventional loan.  At present, FHA requires a three-year wait for what you’ve described whereas FNMA would allow you to qualify immediately.

Read: Susy’s Short Sale

Thanks for the questions and inquire about a Fannie Mae loan.

Paul

Alex

——–

Hello Alex,

FHA requires that the homeowner/seller be on title for ninety-days for the new FHA buyer to obtain a loan insured by the Dept of HUD.  The land trust method of closing short sales is fraught with all kinds of problems too numerous to list in this post.  Stay away from anyone deeding the property into a land trust or for that matter into anything else until they’ve paid off the mortgage indebtedness in full. 

The option contract method of closing short sales is an awesome/successful way of closing short sales with full disclosure to the shorting lender and the originating lender.  I personally purchase short sale properties via option contracts.  Enough about me, back to your question – the ‘loss mitigation fee’ is not the issue on the transaction that you’ve described – what it sounds like the buyers are trying to do is to flip the property and that won’t work with an FHA buyer.  If the buyer is obtaining an FHA mortgage then the loss mitigation company can charge a fee for their services on either the seller’s side or the buyer’s side of the HUD1.  If the fee is on the seller’s side of the closing statement then it comes out of the shorting lender’s net and if on the buyer’s side then the buyer pays it. 

In sum, the ‘loss mitigation fee’ is not the problem.  The buyer is trying to flip a property to an FHA buyer and that ain’t happen’.  Now, VA, that’s a different story. 

Oh, and I’ve also got a secret on how to close FHA short sales with an option contract but I can’t post it here.  As much as I type on this blog, there’s still a few things that I have to keep secret.  Of course, any sellers, real estate agents, or buyers who work with me on their short sales will learn all the legal moves in Paul’s playbook. 

Which reminds me: sellers, real estate agents, and buyers, oh my!  Get it?  Lions, tigers, and bears.  You’ve really got to watch how these short sales are processed from beginning to end because when the process isn’t handled correctly, the lions, tigers, and bears are let loose and an otherwise workable deal dies.

Thanks for the questions and hope this helps.

Paul

“This ML supersedes in its entirety ML 1994-45, “HUD’s Nationwide Pre-Foreclosure Sale (PFS) Procedure”.  It also supersedes the section (pages 29-35) of ML 2000-05, “Loss Mitigation Program-Comprehensive Clarification of Policy and Notice of Procedural Changes” that describes Pre-Foreclosure Sale requirements.”

FHA Pre-Foreclosure Sale Procedures

Vicente

———-

Hello Vicente,

I think Brian Montgomery the Dept of HUD’s Federal Housing Commissioner said it best on September 19, 2008 with Mortgagee Letter 2008-25 which reads:

Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA’s ability to help new homeowners.

Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence.  This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace. 

Due to FHA’s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages.  Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter.   The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken.  This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated.  In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage.  Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.

Exceptions:

Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be considered in the underwriting analysis under the following circumstances:

• Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.  A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year’s duration after the loan is closed is required.  FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month’s rent was paid to the homeowner. 
• Sufficient Equity in Vacated Property:  The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property.  The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.

Thanks for the questions and hope this helps.

Paul

My mortgage payment is more than 31% of my salary and am in a position that I will no longer be able to afford as my student loans will be starting up.

I am currently under the 6 month mortgage modification program, trying to be proactive in this situation. Never been late, etc on my payments and hoping being proactive I can get a smaller interest rate without paying refinance loans, etc.

My credit is not the greatest and would be difficult to get a loan as I have tried, but since the housing market . values have dropped; I cnnot qualify, etc. What can I do?

Also, is there anything I can do as I think they over-appraised my home and fudged paperwork, etc to get me the loan. I feel thankful I got out of the adjustable rate, but at the same time feel ripped off that I am in home not worth anything anymore.

I am ready to throw in the towel and just rent the rest of my life. I need advice on where I can go, etc

Jim

———-

Hello Jim,

There are quite a few ideas thrown around in your question.  I’ll take these few paragraphs to discuss the new and improved ‘FHA short refinance’.  The 31% mortgage payment to income criterion you’ve cited above is a reference to the FHA Hope For Homeowners (H4H) program.  Specifically, the mortgagee letter from HUD reads:

As of March 1, 2008, the borrower’s aggregate total monthly mortgage payment debt-to-income ratio (DTI) on all existing mortgages must be greater than 31 percent of the borrower’s gross monthly income. The total monthly mortgage payment is defined as the fully-indexed and fully-amortized Principal, Interest, Taxes and Insurance (PITI) payment (this includes principal and interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens).

If HSBC agrees to permit an FHA short refinance through the Hope For Homeowners program (which is a big ‘IF’) then the HSBC loan will be written down to 90% of the appraised value.  You will have an instant 10% equity.  If you sell the property within the first year for the current appraised value then you will forfeit any right to the 10% equity to HUD.  This 10% equity is referred to as the ‘initial equity’ and the homeowner’s percentage of the initial equity grows according to HUD year after year assuming sale of the property as follows:

1. During Year 1, 100% of equity is paid to FHA
2. During Year 2, 90% of equity is paid to FHA
3. During Year 3, 80% of equity is paid to FHA
4. During Year 4, 70% of equity is paid to FHA
5. During Year 5, 60% of equity is paid to FHA
6. After Year 5, 50% of equity is paid to FHA

The above is HUD’s scale for ‘initial equity’ which is the difference between the FHA appraised value today and the new FHA loan amount.  Since the new FHA loan amount is at 90% LTV through the FHA Short Refinance program, that ‘initial equity’ is 10%.

Here’s an interesting piece of information.  If HSBC will participate in the FHA short refinance program through H4H (again a big ‘IF’) and accommodate you by writing the loan balance down to 90% of the FHA appraised value today, then your new mortgage amount will be based on that FHA appraised value (90% of FHA appraised value).  You mentioned that the appraisal was high on your last mortgage loan and you ended up with a high mortgage balance.  Now, if all goes well, and you refinance through the FHA short refinance H4H program, then you will have a low mortgage balance.  The pendulum has swung the other way.  As if that wasn’t enough helpful news, there is another facet to the H4H short refinance program with regards to your future sale of the property.  If you were to refinance today at 90% of the appraised value and you were to sell next month for a price higher than the FHA appraised value today, then you would keep 50% of the net difference between the future sales price and the current FHA appraised value.  FHA keeps the other 50%.  Not bad.

All in all, I like the H4H program; but bear in mind that it is a voluntary program and lenders aren’t usually willing to do anything voluntarily that reduces their profits.

Read: Hope For Homeowners or Loan Modification, TILA Rescission, and What Triggers TILA extended rescission?

Thanks for the questions and hope this helps.

Paul

I’ve been actively browsing your seller help buyer website. My business partner and I know that if we have the resources to do short- sale financing, we’d have a ton of work to do. It’d be great if you could let us know what lenders are good for this, or just any advice or suggestions.

Thanks!

JP

——————

Hello JP,

For the most part, financing a short sale is no different than financing a full sale.  Your current lender list will suffice.  Three caveats come to mind: (1) the condition of the property, (2) the owner of record, and (3) processing the short sale.

With regards to the property condition, it will have to pass inspection.  An FHA 203k may be a suitable solution for properties that need repairs.  The biggest discounts on short sales are for properties that need repairs and real estate investors love such properties.  This brings me to the second point: the owner of record.

Real estate investors whose goal is to flip properties are being squeezed out of the short sale market.  The ‘no money down’ put the property in a trust and simultaneously close with an end buyer in another room of the title company is going the way of the dinosaur.  In addition, shorting lenders are not willing to discount the properties to the degree that real estate investors require to make a profit.  This ultimately leaves more and more sellers dealing with real estate investors headed straight to foreclosure.  Obviously, that’s a problem for anyone that cares about the seller’s well being, which brings me to the third point: processing the short sale.

The market for short sales, and what is so desperately needed at this time, is for a mediator to intervene and process the short sale to a successful close.  At present, the market is dysfunctional.  It’s dysfunctional because real estate listing agents have been assigned the task of processing the short sale.  I see this as a serious problem and inefficiency in the real estate market.  This task should not be assigned to the real estate agent.  Real estate agents determine competitive prices, procure buyers, write contracts, etc.  Processors do administrative work.  Processing a short sale is administrative work.  Who is best suited to process a short sale?

Last month I went through the drive thru of a major bank where I hold a commercial account.  The teller asked me if I wanted a personal account. 

“There’s no fee,” assured the teller.

“OK” I said.

I received my first statement a couple weeks ago and the teller had opened a free checking account and a money market account that now had a negative $12.00 balance.

I sent a CMRRR letter stating that I did not and would not have authorized the opening of an account that involved a monthly fee.  They sent a letter back that the charges were reversed, but didn’t close the account.  I imagine I’ll be sending another CMRRR letter again when I receive the February statement.  Sorry for getting sidetracked, but there’s a point to all of this.

The point is that banks are hurting real bad.  Realtors, mortgage brokers, homeowners, everyone is hurting.  Meanwhile, there are buyers who desire to buy a home at a short-sale-discounted price.  The short sale permits the bank, homeowner, and homebuyer, to come together for a mutually satisfactory resolution. 

Mortgage brokers can dominate this space and regain the professional reputation that has been temporarily lost in the last several years by all the riffraff that has since left the industry.  I’m willing to take the lead here.  I’ve been writing about this stuff for the past two years on the Broken Credit Blog.  On Seller Helps Buyer we’ll share a how-to on issues of loss mitigation with our sponsoring lenders in their respective Counties.  I’ll publish my business plan and attorney opinion letters for Florida on the site.  It’ll be the framework for sponsoring loan officers to duplicate our success in their local County. 

So, in sum, that’s what we’re doing on Seller Helps Buyer; bringing healing back to the housing market.  Buyers can buy a home at a discounted price.  Sellers can get a full release of liability.  The bank takes the hit.  Somehow, though, I’m not as optimistic about any changes being made to the bank’s nickel and dime with $12 fees policy, but, hey, at least some of us know right from wrong.  I’ll work with those who want to do right.

Thanks for the questions and hope this helps.

Paul

As we are all aware, the housing and mortgage markets are working through a period of turmoil, as are other credit markets, as risk is being reassessed and re-priced. We expect that this turbulence will take some time to work through, and we expect some penalty on our short-term economic growth. The positive news is that we are confronting and managing these challenges against the backdrop of a strong global economy. And the U.S. economy remains fundamentally sound – core inflation is contained, continued job gains are providing a good foundation for household spending, corporate balance sheets remain healthy overall, and strong growth abroad is supporting U.S. exports. Our economy will continue to grow, but it is facing a number of challenges.

And as I have said before, the housing market downturn is the biggest challenge to our economy. When home foreclosures spike, the damage is not limited only to those who lose their homes. Homes in foreclosure can pose costs for whole neighborhoods, as crime goes up and property values decline.

Avoiding preventable foreclosures, then, is in the interest of all homeowners.

Mortgage market financial innovation has benefited the U.S. economy and U.S. homeowners; it has also introduced some of the challenges we face today. Financial innovation led to the creation of mortgage products that put homeownership within the reach of more people. At the same time, innovation also made riskier loans – with no down payments or minimal documentation – more widely available. Similarly, securitization has brought benefits and challenges – making more capital available for mortgages, but creating greater market complexity. As a result, we now have an array of different market participants, often with different interests.

Still, foreclosure is expensive for all participants – lenders and investors – and this expense is an incentive to avoid foreclosure when a homeowner has the financial wherewithal to own a home. An appropriate role for government is to bring the private sector together when innovation has greatly increased the complexity of achieving beneficial solutions for all parties involved. The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it.

And so, Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes. We began by convening a diverse group of market participants, who represent all segments of the mortgage industry. Based on what we have learned, we are implementing a three point plan to avoid preventable foreclosures and to minimize the impact of the housing downturn on the U.S. economy.

First, we are increasing efforts to reach able homeowners who are struggling with their mortgages. Second, we are working to increase the availability of affordable mortgage solutions for these borrowers. Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages. This morning, I will provide more detail on the three elements of this plan, an update on the private sector’s efforts, the government’s efforts, and the additional steps that are needed in each area.

Increase Efforts to Reach Struggling Homeowners

First, we must reach homeowners who are struggling, reach them early, and reach them with information and hope. The need for this effort became starkly clear when we learned that 50 percent of foreclosures occur without borrowers ever talking to their lender or a mortgage counselor. We knew that if we are to make a difference that number has to be reduced.

We learned that mortgage industry leaders had already stepped-up their efforts to reach delinquent borrowers, but many borrowers in trouble were afraid to speak to their lenders. Borrowers did respond more favorably to mortgage counselors, but the counselors didn’t know which borrowers most needed assistance. Treasury and HUD helped bring these two groups together in the HOPE NOW alliance – a coalition of mortgage servicers, counselors and investors that are working to avoid preventable foreclosures and to improve the functioning of the mortgage markets.

Since its formation less than two months ago, the HOPE NOW alliance has made significant progress. In the past, some servicers may not have contacted borrowers until after their loans were delinquent. Today, all HOPE NOW servicers are contacting borrowers 120-days in advance of their mortgage reset, to reach them early, before their mortgage problem becomes overwhelming. For those troubled borrowers that servicers haven’t been able to reach, HOPE NOW has launched a nationwide letter campaign. These simple, one-page letters, on HOPE NOW letterhead, provide a toll-free hotline which homeowners can call to explore options with their servicer that may help them keep their home.

Mortgage investors recognize that foreclosure is costly and often not in their interest. And they recognize that quality mortgage counseling can help prevent foreclosures. By bringing together counselors, servicers and investors, the HOPE NOW alliance has brought the resources of investors to bear to enable non-profit mortgage counselors to be more widely available. The Alliance is scaling up a national hotline that borrowers can call for mortgage counseling. And let me say to those listening out there – if you are worried about losing your home, call this number, 1-888-995-HOPE, to see if you are eligible for assistance. This hotline is available 24-hours a day to provide vital mortgage counseling in multiple languages. Nothing is worse than doing nothing.

The HOPE NOW effort to streamline refinancings and modifications is a positive step, but it is not a silver bullet. There is no single solution to address all of the issues currently affecting the housing and mortgage markets.

The government has a role to play, as well. First, we need to draw attention to these letters and urge borrowers who receive them to act on them. Secretary Jackson and I have been doing just that, recently we sent copies of these letters to all Members of Congress so they can alert their constituents. We are asking governors and mayors to do the same. We will also join HOPE NOW’s efforts to broaden its public service announcement campaign, to spread the word that hope is but a phone call away.

While increased industry funding is very important, we also need to do our part to support non-profit mortgage counseling organizations. For this public outreach campaign to be successful there must be enough trained mortgage counselors to answer the phone when homeowners call. The Administration requested funding for NeighborWorks America and other non-profit mortgage counseling operations in its budget. But the appropriations bill has yet to be finalized; Congress needs to get it done quickly.

Increase Availability of Affordable Mortgage Solutions

Of course, reaching homeowners is only part of the equation. The second part of our action plan is to make more mortgage products available for borrowers who have the financial wherewithal to own a home, but are struggling with the higher adjusted rate on their subprime mortgages. To help with this, the industry is looking at several innovative solutions – including both modifications and refinancings. State and local governments, especially in the hardest hit areas, are also developing solutions, including proposing funds that may help financially-able borrowers refinance out of expensive subprime loans.

Given the local nature of housing markets, state and local solutions can be particularly effective. Current law allows states and localities to issue tax-exempt bonds only to assist first time homebuyers or homebuyers in designated distressed areas. Some states’ housing agencies have initiated pilot programs, backed by taxable bonds, to help refinance struggling subprime borrowers into more affordable mortgages.

Today, we are proposing to allow state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancings; if enacted, this will reduce the cost of innovative mortgage programs and allow these programs to reach more struggling homeowners.

We in the federal government are also taking steps. This fall, HUD initiated “FHASecure” to give the FHA the flexibility to help more families stay in their homes, even those who have good credit but may not have made all of their mortgage payments on time. An estimated 240,000 families can avoid foreclosure by refinancing their mortgages under the FHASecure plan.

The Administration is taking action to help homeowners, and Congress must do the same before it leaves for the year. Since August, the President has been calling on Congress to pass his FHA modernization proposal which, by lowering the down payment requirement, increasing the loan limit and allowing risk-based pricing, will make affordable FHA loans more widely available. The Administration’s proposed bill would help refinance another estimated 200,000 families into FHA-insured loans.

Since August, the President has also called on Congress to provide tax relief for mortgage debt forgiven; homeowners who finally find relief shouldn’t get put back in financial straits because of the tax code. Additionally, Congress needs to complete its work and create a strong, independent regulator for Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac have an important role to play in making mortgages available and affordable, and appropriate regulatory oversight is critical to their ability to serve their public policy purpose.

Develop a Systematic Solution for Transition into Affordable Mortgages

The third element of our plan involves a pragmatic response to the reality that the number of homeowners struggling with their resetting subprime mortgage will increase throughout 2008. As volume increases, we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification. This third element does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners.

While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers. There are those who can afford their adjusted interest rate; these homeowners need no assistance. There are also a substantial number of homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again. A third category of homeowners might choose to refinance their mortgage – putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.

And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them.

However, given the diffuse nature of today’s mortgage market, the steps toward refinancing and modification can be more difficult than it would seem.

The company collecting your mortgage payment every month is most often doing that on behalf of those who own the mortgage, and they are limited in the decisions they can make on behalf of those ultimate owners, who are spread all over the world.

We are determined to bring this diverse group together, to develop a set of standards that will be implemented across the industry, from the largest mortgage servicers to the smaller specialty servicers. An industry-wide approach is critical to the effectiveness of this effort.

To speed up the modification process, Treasury is working through the HOPE NOW alliance with the American Securitization Forum to convene servicers and investors so they can develop categories of borrowers eligible for appropriate modifications and refinancings, and an industry-wide solution. This work takes time, as all parties seek to define categories of borrowers for streamlined refinance and modification where that is in the best interest of both the borrower and the mortgage investor. I am confident they will finalize these standards soon. And I expect all servicers will implement them quickly, and create benchmarks to measure their progress along the way. As a result, what was a fragmented, cumbersome process can be a coordinated effort which more quickly helps able homeowners.

Through continued, dedicated efforts by industry, non-profit organizations and the government, we can strike the necessary balance to mitigate the risk to our economy of the housing downturn. The issues are complex, and will take time. We are working aggressively and quickly, utilizing available tools and creating new ones, to help financially responsible but struggling homeowners. This, in turn, helps their neighbors, by preventing foreclosures and sales which can drive down property values and undermine the financial stability of families and communities; it also helps investors and lenders avoid unnecessary and costly foreclosures that are not in their interest.

We will continue these efforts, measuring progress and making adjustments when necessary, to ensure as many able homeowners as possible are reached and helped. The Administration and the private sector are taking action. Congress now needs to also act – to appropriate funds for mortgage counseling, to pass FHA modernization and GSE oversight legislation, to pass legislation to temporarily relieve tax liability for mortgage debt forgiven, and legislation to temporarily increase capacity and allow state and local governments new flexibility to use tax-exempt bonds for home mortgage refinancings. The U.S. economy and America’s communities deserve no less.

Remarks by Secretary Paulson
on Actions Taken and Actions Needed in U.S. Mortgage Markets
at the Office of Thrift Supervision National Housing Forum

December 3, 2007

I refinanced about 18 months ago. While originally I was just trying to get out of my expired ARM, my broker convinced me to take money out to pay down some debt, and do some home improvements.

Surprisingly the lenders appraiser came back with a value that was some 50% percent higher than my previous appraisal from 2 years ago.

So I took 85% LTV loan at a high interest rate because of my poor credit. I knew my monthly note would be a struggle, but me and my broker figured after paying down some debt, and make some much needed renovations to the house, that after a year I would be able to refi  into a lower interest rate and my homes value would increase as well. 

So I followed through paid off some debt did some major improvements to the house, and managed to pay my note on time by the skin of my teeth for a year. Running to a new broker to refi, (since my last broker’s office was out of business) I got qualified for a low interest 30 year FHA loan.

Everything was fine until my appraisal came back some 55% lower than my previous appraisal.

I was shocked and talked with one of the guys in underwriting as well as the appraiser; I even went as far as to send them a copy of my previous appraisal. The end result was they showed me where my current lenders appraiser used bad comps, and also used the wrong school district to get an inflated appraisal.

What are my options?

G-DUB

————————-

Hello G-DUB,

If you qualified for an FHA loan before and your present loan is an ARM, then it’s quite possible you still qualify for a low interest rate FHA loan.  The program that I’m describing is called FHASecure.  A stumbling block may or may not be the appraised value. 

On the FHASecure refinance, the new FHA loan amount is limited to 97% (or 97.75%) of the appraised value.  While this may only be sufficient to pay off roughly 50% of your loan balance, your servicing lender may accept 50% to satisfy the present mortgage lien and subordinate a second mortgage for the remaining balance. 

The CLTV (Combined Loan to Value) is the total of all mortgages against the property divided by the appraised value of the property.  Many programs limit the CLTV to 90% or 100%.  One advantage for FHASecure is that there is no CLTV limitation or restriction.  

Now, why would a servicing lender be willing to assist in restructuring your loan in this way? 

Because the property is upside down and presumably, the borrower is in imminent danger of default or “currently facing foreclosure!” as you have said.

G-DUB, if you don’t have an ARM then the FHASecure is not the program for you, but you sound like a candidate for a loan modification or short sale.

I encourage you to watch our free thirty-minute seminar on How To Avoid Foreclosure.

Thanks for the questions and hope this helps.

Paul