After FHA Secure, The Five years rate freeze and Hope Now all designed to assist subprime borrowers gacing rates reset, the industry giants came up today with Life Line. Unlike previous government-led efforts, the plan will apply to all borrowers, not just those with subprime mortgages.
The participants — Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo pledged to contact qualifying borrowers with further information through the mail. People who are 90 days late are also eligible but they must qualify for the new program. Borrowers are given a delay of 30 days from foreclosure. During that period they can try to work out a salvage program.
Not Mandatory:
All these rescue programs are not mandatory, the lenders have complete control on eligibility, there are no performance guidelines and not outside monitoring. How will anyone assess the success or failure of this effort remains a mystery. This is the first time that non subprime borrowers are included in a rescue effort, an indication that the whole economy is in trouble.
Troubling Questions:
How can someone who has been unable to pay his mortgage three months in a row suddenly acquires the means to meet his obligations? What happens after 30 days? How about those who lost their homes 30 days ago, can they get their homes back?
The Bare Facts:
In certain areas, property values have declined significantly to the point where refinancing is impossible. One other thing that all these programs have in common in addition to the fact that they are not mandatory is that they ignore the loss of equity. They freeze the loan amounts to their book value even as that value is no longer there. If you purchased a home for $500,000.00 with a 100% financing and the current comparable are $450,000.00 you will continue to carry a $500,000.00 mortgage!
Low interest rates do not seem to really help some people refinance because of the double whammy of tightened lending guidelines and low appraised values. Conventional lenders have raised the credit scores in the neighborhood of 700, and there are pricing adjustments for lower scores. This results in costlier loans which in turn discourage refinancing because the savings do not justify the cost.
Waiting For FHA.
A bill to be signed by the President tomorrow will raise the loan limits that Fha can insure and give Fannie Mae and Freddie Mac a temporary authority to purchase junbo loans. Once enacted into law, these measures, at least those that concern FHA will have a more beneficial impact than all the previous ones combined.
FHA insures mortgages issued by lenders for a nominal fee (1.5% of loan amount). There is no set credit score requirement but it allows refinancing if a full year of on time payments has been achieved. In addition the debt-to-income and loan-to-value are higher: a borrower can qualify with 43% debt-to-income versus 38% for conventional mortgages. Purchases only require 3% down payment versus 5% for conventional loans. )excluding some affordabilty programs that allow 0% down). For cash-out refinancing, the maximum loan-to-value is 95% versus 80% to 90% for conventional. Fha insures 1 to 4 units and is only available to owner occupants; investors are excluded. The program requires full documentation. Stated income, bank statements or other creative financing are not acceptable.
Once again our government appears to make some efforts to help strapped home owners but all the efforts can be considered marginal at best. The changes included in the stimulus package offer the best attempt so far. Raising the FHA insured loans limit is the only viable attempt because it is mandatory.
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