QUESTION:
“Hi TED – Currently I have PMI insurance. My original loan was set up that once I got down to 20% equity I could stop paying PMI. Well now if I refi My numbers change. Example my house assessed for $245.000 I currently owe  $218.000. PMI would be dropped once I hit aprox $200.000. Now my house is worth $165.000.  I am with Fannie Mae and with the Harp 2 program how will my PMI work? Sadly to say I only have $18.000 to drop the  $150.00 of each month. With refi my interest is  currently 6.625% and if I get it lowered PMI could cost me a lot of money if I have to pay down past $165.000. Something isn’t right. Hopefully you can give me a answer and what about closing costs? What is the MAX I should be paying aprox. Thanks C”

ANSWER:
You will need to contact your lender to find out information about your PMI coverage.  Typically with HARP 2.0 loans, the PMI company will stay the same on the new loan.  If you’re underwater, you’ll have the PMI until you reach the 20% equity threshold.  Unfortunately, that may take many years to reach that level in a declining or flat market.

For now, I recommend getting started on refinancing your Fannie Mae mortgage through HARP because you’re looking at several thousand dollars in annual savings even with PMI.

My friends were still in the “shock and awe” phase of seeing a student loan debt load of $160,000 against a $40,000/yr salary.  I’ve seen this many times before and it’s not as bad as it may seem.  Trust me.

Federally backed student loans generally carry a very low interest rate, in between 3% to 4%.  They offer 20-30 year repayment periods.  And, the payments can be deferred pretty easily in a pinch.

The $40,000 starting salary is not permanent and will most likely increase over the coming years.   Inflation will make that $950/mo twenty year payment look like the equivalent of $475/mo way out in 2027.  (I realize there will be added expenses in the monthly budget coming from 2.3 children and all the costs of raising a family.  All prices will rise, but most likely, the income of a first year attorney switching from non-profit to private practice with ten years of experience will outpace inflation).

The saving grace is that the attorney married a non-attorney who earns $80,000/yr and isn’t in debt from college.

So the big question was, “Can they qualify for a $400,000 home?”

Yes, they can qualify for a $400,000 home.

It’s probably going to be tight, but they will be able to qualify for a $400,000 home with a $380,000 mortgage.

Here’s the options I’d look at for them:

Fannie/Freddie 95% Financing                                  

$380,000
4.00% 30 YR FIXED
$1,814/mo PI
$600/mo TI
$2,414/mo PITI
Up-front Mortgage Ins $5,700

Professionals 95% Purchase

$380,000
3.125%
$1,627/mo PI
$600/m TI
$2,227/mo PITI
No Mortgage Insurance

The Professionals Program, for Doctors, Attorneys, and CPAs, will have lower closing costs because the loan doesn’t require Mortgage Insurance (MI), whereas the Fannie/Freddie loan requires MI on any loan over 80% LTV.

With the Fannie/Freddie mortgage, I recommend buyers look into paying for MI up front rather than having MI attached to their monthly payment.  Reason being is that single premium MI typically costs 1.5% of the loan balance, or in this case $5,700.  Monthly MI could cost up to $350/mo, and would be required for a minimum of 60 payments ($21,000) or until the loan has reached 80% LTV, which could take 10 years ($42,000) if the market is flat.  MI companies also don’t seek out homeowners to let them know they’ve hit 80% LTV.

Despite having $160,000 in student loan debt from law school, interest rates are low right now and it’s very realistic to think that our friends will be buying a $400,000 home in Portland in the very near future.

Here are ten reasons for the low housing inventory:

1.       4.7 months inventory – lack of sellers and lack of shadow inventory being released onto the market.

2.       Potential sellers may not have enough equity to absorb closing costs (7-8% in normal market) and down payment on new home (5-7%) for a total of 12-15% equity needed to sell existing home and purchase a new home.

3.       HARP and Streamline (FHA/VA/USDA) refinance programs making it easier for people to stay in their existing home rather than selling (and absorbing closing costs).

4.       Potential sellers hope that prices will start rising and they can sell in a few years at a higher price and with a lower mortgage balance.

5.       Those who are underwater, may be taking the HARP/Streamline refinance options if they have a Government backed loan (Fannie, Freddie, FHA, VA, USDA) rather than bruising their credit with a short sale.

6.       Homeowners who are beyond hope of keeping their home – underwater, delinquent, distressed, and facing foreclosure – are riding out the foreclosure/short sale process before moving out.  And so is their mortgage servicer, who often drags out the distressed mortgage and real estate process much longer than necessary in order to extract more fees from the mortgage investor (Fannie, Freddie, Pension Fund, etc), which pads their revenue and keeps additional housing inventory off the market.

7.       Access to credit is still tight but is getting easier (FHA allowing 600 FICOs and high debt ratios), allowing more buyers to qualify.

8.       The economy is slowly improving and more buyers are out house hunting, pre-approved and ready to buy.

9.       Artificially low interest rates allowing buyers to pay higher prices for homes (remember, most buyers are payment buyers).  Thus, the bidding wars.  Bidding wars require increased down payment to overcome appraisal hurdles if there’s not enough comps to support the new sale price.  Most bidding war participants have the liquidity to play the bidding war games.

10.   Government intervention and propaganda goes a long way.  Remember, the US Government has trillions of dollars invested in the bailed out banks who still have massive impaired mortgage holdings on their books that they are marking at fictional levels rather than mark-to-market values.   The government is doing whatever it can to ensure these banks won’t fail (before they’re broken up?).  Therefore, record low interest rates and oligopoly powers almost guarantee the banks will earn massive profits to dig their way out of their massive losses they created for themselves.

“The Freddie Mac survey showed the 30-year FRM averaged 3.67% for the week ending Thursday — a new low — ticking down from the prior week’s record average of 3.75%. Last year at this time, the 30-year FRM averaged 4.49%.

The 15-year FRM, a popular refinancing choice, averaged 2.94% — also a new low — down from last week‘s record average of 2.97%. A year ago, the average rate for a 15-year FRM was 3.68%.”

Falling mortgage rates couldn’t be happening at a more opportunistic time for homeowners.

The FHA Refi boom has just about to begin on June 11th (see this article), where current FHA borrowers can take their existing 5.00%+ FHA loan and refinance down to a 3.875%, saving $100-$400/mo, even if they are severly underwater in their home.

Plus, Fannie Mae and Freddie Mac borrowers can refinance, using various programs including theHARP 2.0 program for underwater borrowers.

Enjoy these low mortgage rates while they last.   The more chaos in Europe and abroad, the better the interest rates get for American homeowners

Here’s the five biggest benefits to doing an FHA streamline refinance right now:

1. Cash back on an underwater home (refund from your escrow account – typically $2,000+).
2. Skip one payment.
3. $250/mo savings – $3,000/yr.
4. No out of pocket costs (there’s no appraisals on the FHA Streamline refi).
5. Interest Savings – Pay off your loan sooner by applying the $250/mo savings to the principal and you could shorten your payoff down to 20 years rather than 30 years.

Item #5 can be really big:

Let’s say you took out a $250,000 FHA loan in 2008 for $250,000 at 5.50% with a $1419/mo payment.  If you were to refinance that loan today, your new loan balance would be $235,000 @ 3.875% with a $1106/mo payment.  That comes out to a $313/mo savings.

If you kept making the $1419/mo payment, this new loan would be paid off in 237 months, resulting in a $136,038 savings, eliminating the last 10 years of mortgage payments.

If you find yourself hemming and hawing about saving $100,000+ on your mortgage (especially if you’re severly underwater), please contact me.  I can refer you to an excellent lobotomist to have your head examined.  Then, we’ll painlessly open and close an FHA Streamline refinance loan for you and send you back out into the world a new person.

In the Treasury’s May 2011 Making Home Affordable Program Performance Report, there’s valuable data and some interesting facts:

• 4,600,000   60+ days delinquent loans
• 2,636,033   delinquent loans eligible for HAMP
• 633,459      permanent HAMP mods
• 21,299        loans eligible to apply for the Principal Reduction Alternative (PRA)
• 4,911          completed PRA mods ($69,532 median principal reduction)
• 8,261          active trial and permanent HAMP mods in Oregon
• 15,160        active trial and permanent HAMP mods in Washington

The most important factor in predicting whether a loan will perform or default is the Debt-To-Income ratio (DTI).  DTI is the monthly debt payments against the gross monthly income expressed as a ratio. For example, a $2,000/mo mortgage payment (front end DTI) + $500/mo car payment (back end DTI) against a $10,000/mo gross monthly income would have a 20:25 DTI.

On page 5 of the Treasury’s report, there is a small, yet extremely significant graph regarding DTI.

When you first look at the graph, a savings of $525/mo and a 14% DTI reduction looks impressive.

However, when you reverse engineer the numbers, and factor in costs for a family of four, then you realize that HAMP is only delaying the inevitable.

$2688/mo Gross Income ($32,256 per year)
$2150/mo Net Income (20% taken out for taxes)

$833/mo  -   31.0%    Front End DTI
$1680/mo  – 62.5%  Back End DTI

The HAMP borrower has $470 left over for food, gas, insurance, utilities, auto repairs, child care, school activities, medical co-pays, and everything else that comes with providing for a family.  Saving for college or retirement is out of the question.

These permanent HAMP mods, with their sky-high DTI, will most likely re-default and become tomorrow’s distressed inventory.

HAMP clearly was not designed to keep homeowners in their homes as much as it was meant to slow down the losses and write downs on the books of the largest banks.  Banking analysts widely refer to this as a backdoor bank bailout, or an “extend and pretend” policy.  In this respect, HAMP can be considered a success for the banks, having delayed millions of homes from entering the distressed inventory, which slowed the 2008-2009 price free-fall, which kept banks from having to run back to the government for another politically suicidal second, third, or tenth TARP bailout.

For the HAMP borrower, however, it has placed them in a temporary no-man’s land.  With large debt burdens, and most likely deeply underwater, re-default appears inevitable.  At least when they do re-default, they’ll have 12-18 months without mortgage payments. And when that ends, they’ll receive a parting gift in the form of a $3,000 HAFA cash-for-keys check, thanking them for playing.

Sorry for the little jab at Fox, but it’s not quite the most “fair and balanced” news organization as their commentators profess (nor is MSNBC for that matter).  The mainstream media takes a little while to pick up on market developments, so I’m surprised Fox is out front of the official June 11th date.

So yes, the FHA Refi boom is about to start.

People who took out an FHA mortgage before May 31, 2009, are eligible to refinance their loan.

FHA has very simple requirements to get a loan – on-time payments the past year, no income documentation, and no appraisal.  FHA makes it easy for existing homeowners to refinance into a new loan and significantly reduce their payments for the life of their loan.

First – the basic requirements:

• FHA requires three years to pass (seasoning) since the short sale to provide financing for buyers.
• Fannie Mae & Freddie Mac require a minimum of two years seasoning for buyers with a 20% down payment.  Four years seasoning is required for a 10% down payment and seven years with less than 10% down payment.
• VA loans require two years seasoning.
• USDA loans require three years seasoning.

If a buyer is looking to buy before the 2-3 window because they had “extenuating circumstances” (death, divorce, disability, etc) that led to the short sale, they need to have an air-tight paper trail that an underwriter, playing the part of forensic detective, can verify in a logical and chronological process, matching court or insurance documents with financial records.  It’s a very rigorous process to prove extenuating circumstances and one that often ends in a loan denial.

There’s really two ways to get financing after a short sale and before the 2-3 year window is up:

1. Have more than the 20% down payment.  Cash is very important.  30% is preferred.
2. Forego conventional financing (Fannie, Freddie, FHA) and go with short-term private lending (aka Hard Money).

I work with a California private money lender that does 65% LTV loans at 8% Interest Only with a 3 year balloon, regardless of how long the short sale or foreclosure happened.  This is an excellent short-term loan for a buyer re-entering the housing market and needing mortgage financing after having a short sale.

HousingWire’s Jon Prior reported this afternoon:

When the Federal Housing Finance Agency expanded the program last fall to allow more underwater borrowers to refinance into a lower rate, it allowed the current servicer on the loan to avoid new representation and warranty risk as long as the borrower hadn’t missed a payment in six months and employment was verified.

If a borrower went to a new servicer, by contrast, more due diligence work would need to be done and the rep and warrant risk would still transfer.

Prior quotes Amherst Securities analyst Laurie Goodman, of the mortgage industry’s leading experts:

She said the larger lender profit margin can reach up to seven or eight points on the refinance — or $15,000 on a $200,000 loan — versus an average of one to two points, or $2,000 on the same refinance. Goodman raised the concerns in a March research report.

“We have long argued that the single most effective change that can be made to the HARP program is to encourage competition by allowing different servicers to refinance a borrower on the same terms as the current servicer is able to do,” Goodman said. “We believe this would create many more refinances for the targeted HARP-eligible population, and those refinances would be done at a considerably better rate to the borrower.”

That my friends is what’s known as a backdoor bank bailout.  And they’ve been going on since 2007.

Back then, The Fed started noticing skyrocketing default rates in the subprime mortgage market. So they quietly opened up the swap lines and took other measures to ensure survival of the biggest banks who couldn’t dump fraudulent subprime mortgages securities onto unsuspecting foreign investors in time and had to take the devastating losses (see Bear Stearns, Lehman Brothers, Merrill Lynch, et al).

Ever since 2008, fiscal and monetary policy has been dominated by saving the financial system and providing a platform for the biggest banks to earn their way out of their losses.  And to hell with the citizens and taxpayers who were left with the bailout bill.

Even when a program like HARP and HARP 2.0 comes along, it still favors the biggest banks who can earn nearly 10 times more than smaller banks.

If we were keeping score in a game being played by the Big Banks against the Taxpayers, it would be Banks 98.5, Taxpayers 1.5.  (0.5 points comes from the partial consumer victory in HARP 2.0 and 1 point for low interest rates on auto loans).  It’s like Harlem Globetrotters always defeating theWashington Generals.

As convenient as it may appear for a Fannie Mae or Freddie Mac borrower do the HARP 2.0 refinance with the big bank servicer, it may wind up costing the homeowner more money over the long haul.

HARP 2.0 allows existing Fannie Mae and Freddie Mac borrowers who are current on their mortgage the opportunity to refinance their loan into the record low interest rates of today, regardless of the equity they may or may not have in their home.  Many homeowners who took out mortgages in 2006-2008 are lowering their interest rate from the mid-6% range down into the mid-3% range.

Here are a few recent HARP 2.0 refinance loans I’ve worked on:

EXAMPLE 1:
Homeowners refinanced in late 2007 into a 30 year fixed at 6.50%, which had a 10 year interest-only option, of which, they were just making the I/O payment ever since the loan was taken out.
Original Loan
$300,000
6.50%
$1625/mo Interest-Only
$1896/mo Principal & Interest

HARP 2.0 Refinance
$300,000
4.00%
$1410/mo Principal & Interest
(lowered PI payment by $486/mo or $174,960 over the life of the loan.  Currently have 124% Loan To Value(LTV))
EXAMPLE 2:
Homeowners refinanced in April 2009 into a 30 year fixed at 4.50%, just before the HARP 2.0 deadline of May 31, 2009.  Converting from a 30 year to a 20 year term.
Original Loan
$305,000
4.50%
$1545/mo Principal & Interest

HARP 2.0 Refinance
$290,000
3.75%
$1719/mo PI
(payment increases $174/mo but they shave 7 years off the mortgage.  105% LTV)
EXAMPLE 3:
Homeowner took out a Fannie Mae high balance mortgage in early 2009 for the maximum $697,500, back when FNMA temporarily raised the conforming loan limit through to September 30, 2011.  The borrower brought in $118,750 to close (“CASH-IN Refi) because Fannie Mae lowered the high balance limit to $546,250.
Original Loan
$697,500
5.00%
$3774/mo PI

HARP 2.0 Refinance
$546,250
3.875%
$2568/mo
(A savings of $1205/mo after bringing in $118,750 to close the loan).

For any questions regarding HARP 2.0 refinancing, please contact me at 503-891-4205 ortspradlin@englending.com.