Refinancing vs. Loan Modification

In the housing boom of recent years, many borrowers received excellent interest rates that were set to adjust three or five years later. At the time, there was very little risk; home prices were going up and borrowers had excellent credit. Since the bust of the housing boom, home values have fallen and many people have a lower credit score. Here’s the problem: these low adjustable rates are adjusting causing payments to rise and borrowers are unable to afford those payments. The borrower is left with four choices:

Sell the Home
This is difficult for some in the current real estate market because many homes are worth less than what homeowners owe. In some regions of the country, even the most conservative borrowers who took out mortgages at 60% of the value of their home owe more than the home is currently worth. If you do owe less on your loan than you can sell your home for, selling your home is an option.

If a homeowner does not mind ruining their credit in order to get rid of the home, they can always “mail the keys” back to the bank. Though not quite as simple as mailing back keys, many homeowners are choosing to stop paying their mortgage, allowing the bank to foreclose on the property. This is not an attractive solution for many homeowners for obvious reasons.

By refinancing a loan that has adjusted, you may be able to lower your payments and stay in the home. However, the same issues regarding home values and amounts owed typically cause this option to fail.

Loan Modification
Most mortgage lenders have established departments to work with homeowners to modify the terms of their existing loan to allow them to afford to stay in the home. Every mortgage company has a slightly different method of managing and processing these modifications. Some mortgage companies will dramatically reduce interest rates. Others will extend amoritizations (reducing minimum payment amounts) and some will even lower the principal balance owed. These mortgage companies have many people in various stages of foreclosure, therefore dealing with them can be frustrating and intimidating. If you are well versed in real estate law and terminology, this is a fairly straightforward process. Many individuals may find this process very difficult and frustrating. For people looking for help with loan modification negotiation, apply for assistance negotiating a lower payment >



Low Prices, 100% Financing and Rehab Loans in Today’s Market

Stop the time machine. I want to get off…and buy a new home. A quick browse through the ARMLS is more like a taking a trip back to 1995 than shopping for a home in the 21st century. Several three and four bedroom single family homes recently built in the Queen Creek area are currently listed for less than $70K, with dozens of similar homes in this suburban Phoenix area listed at under $100K. For buyers that were priced out of the market a few years ago, these listings are a dream come true. Even in today’s lending market, 100% financing may be available as long as both the buyer and the property qualify for the program, so many first time home buyers are able to take advantage of low prices in this bizarre market with little to no cash out of pocket.

Another recent shift in the lending market is an increased awareness of the FHA 203K program, which allows for financing of repairs, upgrades and remodeling along with the purchase or refinance of a home. Homeowners can use the program to refinance into a fixed rate FHA loan, and at the same time fund an addition, new energy efficient appliances, a new roof or HVAC system, or even minor repairs to the home. Home buyers find the program attractive for purchasing bank-owned fixer uppers that may need some cosmetic changes, rehab or repairs. Buyers are able to pick up a home with a mortgage that may be less than they’re currently paying in rent and make any necessary upgrades or repairs with a one-time closing, FHA loan

For more information on these and other home loans and financing programs, please visit

Mortgage Bailout; Why the Government is Using Taxpayer Funds to Bail Out Fannie Mae, Freddie Mac

Why is the real estate market “broken?” The symptoms are obvious. Every homeowner feels the pressures of plummeting home prices caving in around them. But what really caused this economic disaster, and what will it take to fix it?

The overriding cause of the bursting of the bubble was the strident insistence that there was a bubble. The bubble burst because buyers of all sorts, both for the real estate as well as the underlying securities, left the market due to a feeling of uncertainty, fear, panic, or insecurity. This initial bursting of the bubble led to a series of dominoes falling. As each domino fell, recovery was pushed further and further away. Though there were a few steps between the initial burst and the topic of this article, this article will address the primary reason that recovery will take a terribly long time and intervention is a necessity.

The prime mover in any market is capital. Without capital, no one has the ability to buy anything. Capital for the real estate market is primarily obtained through mortgages. The banks and investment houses who provided the mortgages to buyers of real estate obtain their capital from investors. Mortgage Backed Securities (MBS) are the primary vehicle for investing and providing capital to lenders. MBS come in many shapes and sizes with various levels of risk and return for an investor. The riskiest tend to be sub-prime MBS and the safest were considered to be Mortgage Backed Securities underwritten and guaranteed by Fannie Mae (FNMA) and Freddie Mac (FHLMC).

The primary marketplace for the trade of non-Fannie/Freddie Mortgage Backed Securities was a periodic auction held by the investment houses that assembled the MBS. In February of this year, the investment houses closed down this auction due to a lack of buyers. As a result, these Mortgage Backed Securities became illiquid and impossible to value. Many of the institutional investors sought recourse against these investment houses. The SEC has since settled the claims with these investment houses by requiring them to buy back these MBS at the purchase price paid.

Illiquidity and regulatory action make it highly unlikely that any mortgages backed by this capital structure will return to the market anytime soon. This functionally removes all sub-prime and alt-A loans from the market. The removal of these mortgage products effectively removes a significant portion of buyers from the real estate market as well. These mortgages funded many first time homebuyers, self-employed buyers, and jumbo loans (any loan greater than $417,000). If you do not have 20-30% down, excellent credit, and fully documented income and assets, you likely will not qualify for a loan in today’s market.

Since markets are driven by capital and the lending market has now removed a large portion of buyers’ ability to obtain capital, there are fewer buyers for homes that are for sale. As anyone with a basic understanding of economics knows, a greater supply with a decreased demand leads to rapidly falling prices. This puts many private sellers in a position of being unable to sell their home for the amount they owe on the property. This consequently leads to short sales and foreclosures. As more and more homes are foreclosed upon by the banks, private sellers and banks continually cut prices to unload unwanted real estate. This race to the bottom perpetuates the problem by continually devaluing all real estate that acts as security for all mortgages.

This ultimately leads to a significant amount of residential real estate being owned by lenders. In fact, in the metro-Las Vegas area, statistics indicate that 60% of residential real estate is owned by banks and lending institutions. The lack of buyers for even the deeply discounted real estate makes assessing the damage very difficult. Most mortgages have a series of insurance products and guarantees attached to them to indemnify the lender or investor from loss. These guarantees made mortgages “safe” and liquid investments for large institutions, pension funds, and others looking for a reasonable return. In order for a guarantee to be paid out, there needs to be a quantifiable loss. Until the real estate is sold, it is impossible to determine the amount of the loss.

Fannie Mae and Freddie Mac are two of the largest guarantors of mortgages in the world. Combined, they hold or back more than $5 trillion dollars worth of mortgages. Their combined total liquid assets amount to only approximately $60 billion dollars. If a $200,000 home that had a $160,000 Fannie/Freddie mortgage has declined in value by 40%, it is now worth $120,000, or $40,000 less than the mortgage amount. In this example, Fannie/Freddie would be liable for $40,000, or 25% of the insured loan amount. If every home were to be foreclosed upon and lost a similar percentage, Fannie/Freddie would have $1.25 trillion in losses. Since the banks that own foreclosed real estate have not yet sold the properties, none of those losses are on Fannie/Freddie’s books. Fannie and Freddie only have capital sufficient to absorb a 1.2% loss. This realization led to the government take-over and taxpayer bail-out of both institutions.

The question many are asking is, “Why?” Allowing Fannie/Freddie to fail would, in effect, destroy the US economy. Fannie/Freddie funds or guarantees 75% of the mortgages currently being issued. If there were suddenly no mortgages available, home values would continue to fall drastically, sending the entire economy into downward spiral.

There is a misconception among many that by bailing out Fannie Mae and Freddie Mac, we are bailing out investors that funded high-risk loans for buyers that purchased multi-million dollar properties beyond their means. This is not the case, as mortgages backed by Fannie/Freddie follow some of the most stringent guidelines with larger downpayments required, fully documented income, good credit scores, and loan amounts up to only $417,000.

As illustrated above, the structures that provided the capital that drives the real estate market are “broken,” and repairing them will take significant time. No amount of government regulation will repair the market. The market will only be repaired by a return of investor and homebuyer confidence in the value of real estate and entrepreneurial institutions and individuals creating new and innovative structures for capital deployment. Those individuals and institutions that successfully develop this model will make significant profits as the market turns back around and buyers that aren’t currently able to obtain mortgage funds return to the home buying market. In the meantime, a Fannie/Freddie bailout prevents a few more dominoes from falling and brings us one step closer to a rebound.

Getting Home Loans After a Bankruptcy

The lending market has tightened restrictions, making it more difficult to get home loans with bad credit. Financing a new home loan after bankruptcy is not as simple as it used to be. The good news is, there are a few steps you can take to improve your credit score after filing bankruptcy. If you establish good credit following a bankruptcy, creditors will be more likely to lend money for home loans in the future. Here are a few steps you can take to make it easier to get a home loan after filing bankruptcy:

1. After your bankruptcy has been discharged, make sure you make all of your payments on time. This includes any house payments, mortgages, car loan payments and credit cards. Make sure that any debt that reports on your credit report is paid on time so you don’t have any new delinquent debts reporting. By showing a pattern of paying your debts on time after bankruptcy, it is more likely that you will also pay a new mortgage payment on time.

2. Open a line of credit, or a credit card, even if it’s pre-paid. Use it to pay for gas or groceries, and pay it off each month. This also helps to establish a pattern of good credit management which can bring up a bad credit score.

3. Purchase a copy of your credit report online and make sure everything is reporting correctly. Sometimes debts that were included in your bankruptcy will still be listed as an open delinquent account which hurts your credit score. By disputing any items that are not reporting correctly, the credit reporting agencies will be able to convert the debts to report correctly as discharged in bankruptcy so they will no longer be bringing down your score. Get an Equifax 3-in-1 Credit Report Now >

4. Consult with a loan officer that specializes in sub-prime loans. An experienced loan officer can review your credit, job history, bankruptcy information and financial status and give recommendations as to additional steps you can take to obtain a home loan after your bankruptcy. Be patient as it may take several months to repair bad credit and boost your score high enough to  qualify for a home loan after bankruptcy.


Bankruptcy vs. Foreclosure

Some parts of the United States are seeing a rebound from the housing crisis. However, other areas are only just seeing the beginning which is leaving cash-swapped consumers with some serious decisions. One of the decisions that these consumers face is whether to allow their house to be foreclosed on or instead filing for bankruptcy protection.

When making this decision, the consumer must first decide if they would like to keep the house. This is a particularly emotional issue when a family is involved. When children are in the picture, families are often willing to make sacrifices to prevent uprooting them. If this is your situation, or you have other reasons for wanting to keep the house, then foreclosure is obviously not an option.
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Are Option ARMs an Option?

The Options Adjustable Rate Mortgage is an Adjustable Rate Mortgage (ARM) and like most ARMs it consists of taking an index, most commonly the MTA (12 month Treasury Average), CODI (Cost of Deposit Index), and COSI (Cost of Savings Index), then adding a margin to total the final interest rate.

Unlike other traditional mortgages, where the payment is calculated from the total of the index and margin, the Options ARM offers 4 monthly payment options every month, giving you the opportunity to choose which payment to make. This monthly payment option is where the Options ARM derives its name. The typical four payment choices are:

THE MINIMUM PAYMENT OPTION – This allows you to make a small monthly payment usually equivalent to a 30 year mortgage at 1% interest, or about half of your interest cost for the month. This unpaid interest expense increases the principle balance of the mortgage.

INTEREST ONLY PAYMENT – This covers all of the cost of the interest for the month. Choosing this keeps the mortgage balance from increasing or decreasing.

30-YEAR PAYMENT – Standard principle and interest payment that will pay the loan off in 30 years

15-YEAR PAYMENT – Standard principle and interest payment that will pay the loan off in 15 years

Now that we have define the Option ARM, we need to answer the questions, “Is it an option (pun intended) for me?” As with most things in life, there are positives and negatives.
Lets start with the good news. Option ARMs exist because there is market for them. They do some things better than other mortgage types. For example:

Low payment – there is no mortgage option that give a lower payment on a given principle balance. If you choose the lowest monthly payment you are not even required to cover the cost of the money. Clearly, the downside of this will be discussed later, but if, for a variety of reasons, you need a low, low payment, an option ARM cannot be beat.

Automatic payment adjustment – Though not unique to option ARMs, having the payment automatically decrease with a principle payment can come in handy. For example, you finally sold your old house and want to use that equity to lower the amount of money you owe on your new house. When you make that large principle payment, your monthly payment will automatically drop accordingly. You do not need to refinance and pay loan and title fees to take advantage of your new lower balance.

High loan amounts available – In our current credit climate, many of the ALT-A products that used to exist are gone. The lenders that offer the option ARMs tend to be some of the few remaining sources that will give higher loan amounts, higher LTVs, and lower required documentation for their loans. If the traditional mortgage cannot get approved—-and you really need the loan—the option ARM may work.
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