Pay Option Arm- A Time Bomb

An increasing number of our client that are upside down on their homes are Pay Option Arms. In Previous Blog Articles I have covered how those loans work. For those who need a refresher you can see the old posts here. While discussing the Mortgage Implosion on a sports message board another poster found an article that I thought I would share. We are at the VERY

Ticking time bomb

Aug 14th 2008
From The Economist print edition

A nasty mortgage product promises yet more misery

OPTIMISTS, look away now. Prices in America’s housing market may have slumped, but the pain for a significant subset of homeowners has barely begun. Even at Barclays Capital, which spotted some of the improvements mentioned in the previous story, there is still concern. The bank’s Nicholas Strand says that roughly 1.4m households, most of them in California, hold a particularly nasty type of adjustable-rate mortgage called the “option ARM”. Although the overall value of option ARMs is lower than that of subprime loans—some $500 billion, according to Mr Strand, compared with about $1 trillion in subprime loans—their sting is more venomous.

The option ARM allows borrowers to pay less interest than the formal rate for a limited period (the vast majority of customers choose this option). In return, the unpaid interest is added to the original loan, a process soothingly called “negative amortisation”. While house prices are rising, the product just about makes sense. If borrowers do get into trouble when they start paying off the loan in full, higher property values offer some wiggle-room. But when house prices are falling and refinancing is difficult, as is now the case, the option ARM is the financial equivalent of a bikini in winter. Homeowners end up owing more on a property that is worth less.

Delinquencies are already rising fast. Write-offs for option ARMs at Washington Mutual, a stumbling thrift, have zoomed from 0.49% in the last quarter of 2007 to 3.91% in the second quarter. But the real crunch will come when the mortgages “recast”, forcing borrowers to start making full payments. The loans recast after a set period (typically some five years after origination) or when the principal hits a predetermined ceiling. The biggest wave of recasts is due to happen in 2010 and 2011. By some estimates, borrowers’ monthly payments will then surge by 60-80% (see chart), at a time when property values may still be at, or close to, their trough.

Rating agencies were unusually alive to the dangers of option ARMs: they demanded more collateral to protect holders of securitised-mortgage bonds. Banks were slower to wake up to the danger. An option-ARM product called Pick-a-Pay (a name that gave fair warning it could lead to trouble) accounts for 45% of consumer lending at Wachovia, a large bank. Wachovia stopped originating loans that allow negative amortisation in June, and is setting aside heftier reserves to cope with expected losses. It has also waived prepayment penalties for existing product-holders and is marshalling its employees to help move these customers on to conventional mortgages. Such efforts are welcome. But they also signal just how protracted America’s housing woes are likely to be.

http://www.economist.com/finance/displaystory.cfm?story_id=11921871

More Details on the New FHA Bill Passed

Good Article from the Sun-Sentinel:

New housing law full of trapdoors for borrowers and lenders.

Took a hard look at the new federal housing law and I had trouble seeing past all the strings attached to its offers of help for troubled homeowners.

Such as: If you use its provisions to refinance your mortgage and then sell your home at a gain, you'll have to share that gain with the government.

And this new program won't help anyone who can't pay off a home equity loan, either.

But — and this isn't easy for many who are in mortgage trouble — if you're a qualified borrower and could have gotten a mortgage before the lenders went crazy and stopped checking anything, then there may be something in this law to help you.

For now, I'm only going to focus on the question of how to refinance a mortgage using the Hope for Homeowners Act of 2008, to take effect Oct. 1. The Congressional Budget Office has estimated this new program will help as many as 400,000 struggling homeowners to avoid foreclosure.

From what I see, they'll be the lucky few, if there are that many who succeed in saving their homes. Here's what I learned:

Who can refinance?

The Hope for Homeowners Act won't work for an investor. You can only refinance a mortgage on your primary residence, not an investment property.

So much of South Florida's property sales were to speculators, but the law is designed to prevent them from being bailed out.

It won't work for someone who has a second lien on their home, such as a home equity loan. That has to be satisfied before this refinancing can take place.

It will work for borrowers who are a bit more heavily in debt than lenders generally recommend. The homeowner must be spending 31 percent of gross monthly income on housing (usually the definition includes the monthly money set aside for property taxes and insurance, as well).

How Will refinancing work?

Lawmakers expect borrowers will essentially have to meet the same guidelines as for a Federal Housing Administration mortgage. If you bought more house than you could afford, then you won't qualify.

Borrowers' income will be verified, something that wasn't done for some of the strange lending practices during the housing boom.

The trouble is that people who couldn't qualify for a traditional loan during the boom may not qualify today.

"That's where a lot of borrowers are banging their heads against the wall," says Ritch Workman, a Melbourne mortgage broker who is president of the Florida Association of Mortgage Brokers.

The lender side of the deal is even trickier.

The lender has to agree to accept a payoff that is less than the full value of the current mortgage. This is a voluntary program.

The payoff, according to the House Financial Services Committee, will be 85 percent of the home's current value.

Who profits?

Banks are expected to save billions of dollars by reducing their mortgage loan losses.

Here's how it would work: If you had a $200,000 mortgage on a property that is now worth $100,000, the lender would have to agree to accept $85,000. The lender would be taking a huge cut, "but they would get out. If they let the house go into foreclosure, they'd be lucky to get 35 to 40 cents on the dollar," said Steven Adamske, a spokesman for Rep. Barney Frank, D-Mass., who is chairman of the Financial Services Committee. The borrower gets a new mortgage that is guaranteed by the FHA.

If the homeowner then quickly sells the refinanced home in the first year for more than $100,000, the homeowner has to pay 100 percent of that gain to the FHA. This equity-sharing arrangement continues, but the percentage going to the FHA goes down over the next few years. After five years, it is 50 percent, for the next 25 years.
http://www.sun-sentinel.com/business/sfl-flhlpharriet0810sbaug10,0,4273919.column

Ask UpsideDownFlorida- Can You Get a Loan Modification if I am behind?

Recently I came across this article and found it disturbing because it is NOT what we are experiencing at UpsideDownFlorida.com:

Q: I'm four months behind in my house payment. Can I still go to the lender and ask for a loan modification?

A: You certainly have the right to ask, but the odds are overwhelming that you will be foreclosed.

Like many borrowers you likely have an impossible situation. If you were current on your mortgage you would have no grounds to ask for a modification. Having missed four payments your credit may be so damaged that you no longer qualify for either a loan modification or a new loan with another lender.

Borrowers hit with rising payments or who cannot otherwise pay their mortgage should not wait for months to resolve the problem. Instead, try to refinance or modify the loan while you still have good credit, the time when you have the most leverage in the marketplace. The moment you see that a payment will be missed contact an attorney, legal clinic, your state attorney general or a community housing group and ask for help. Don't be embarrassed and don't delay.

As to national programs designed to "help" those with exploding ARMs and other toxic loan products, the odds are against you. As an example, in May HUD issued a news release that said that the "FHASecure product has helped 200,000 homeowners refinance their mortgages and avoid foreclosure." However, as of the end of April, HUD reported that only 2,276 delinquent conventional borrowers refinanced with an FHA loan. In other words, the sentence in the news release means that about 198,000 borrowers with good credit refinanced – and only about 2,300 borrowers were saved from foreclosure.

If you have a toxic loan, one which will surely lead to higher costs in a few months or in a year, think about refinancing now, before your credit is damaged. Gather your paperwork and be prepared to fully document your income, assets and debts. Also, be aware that many refinancing programs require little or no cash at closing - instead the new lender will pay the closing costs in exchange for a larger loan amount or a somewhat higher interest rate. This "higher" interest rate is not a problem if the new interest level is less than the rate you're now paying or will shortly pay.

A caution: Many toxic loans have stiff prepayment penalties that assure that borrowers must either pay higher monthly costs or face grossly unjustified penalties. Beat the system by planning ahead. Start saving now for higher payments -- and then refinance as soon as the prepayment penalty period ends.

http://www.nydailynews.com/real_estate/2008/07/08/2008-07-08_is_it_too_late_for_a_home_loan_modificat.html

I feel for all the people struggling with Mortgage problems that read this and give up.

Ask UpsideDownFlorida.com-What is a Short Sale?

Recently I have gotten several emails asking:

What is a Short Sale?

Now one of the most popular topics in real estate we at UpsideDownFlorida.com are happy to now have some of our videos on our main site to explain short sales. These videos give great information on all the advantages of a short sale over foreclosure. They also explore the effects of a short sale on your credit and how long a short sale takes.

After doing some research I came across this Blog entry on John Barker's Web blog. I found it very helpful and knowledgeable and wanted to share it with you:

Friday, June 01, 2007

What is a short sale?

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.

http://www.barkerblog.com/2007/06/what-is-short-sale.html


With the complexity of a short sale we STRONGLY suggest the use of a mitigation firm to assist you in negotiating with your lender. Like any negotiation there is no substitution for experience and having a professional negotiator on your side. Furthermore, a mitigation company can negotiate the terms of the short sale as to limit the effect on your credit, and pesuade the lender not to pursue a deficiency judgment after the short sale and to consider the account settled and PAID in FULL.