Let's twist again, like we did last summer!

In an effort to bolster the stalling economy, the Fed has decided to extend its “Operation Twist” program that it began last summer.  In a nutshell, the Fed will exchange its shorter-term debt for longer term-debt in an effort to further lower long-term interest debts like mortgages.

The Fed has said it will exchange up to $267 Billion in shorter term obligations for the same amount in longer-term obligations to spur the economy.

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Ben S. Bernanke said at a news conference in Washington following a two-day meeting of the Federal Open Market Committee. “Additional asset purchases would be among the things that we would certainly consider.”

If you are looking to purchase a new home, they haven’t been as affordable as they are right now in decades. And, if you are a homeowner looking to save some money, give me a call today to see if refinancing is right for you. I can be contacted at 708-473-7688 or BarkerLoans@gmail.com

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FHA Makes Changes to Credit Requirements

Mortgagee Letter 2012-3 make changes to how FHA handles collection accounts, judgments, and disputed accounts on a borrower’s credit report.

Collections:

As a condition of mortgage approval, a borrower must pay off all collections that are less than 2 years old.  Also, if the outstanding balance of all collections that are over $1,000, the borrower must pay off all collections in excess of $1,000 at or prior to closing.  Charge-offs are not included in the $1,000 limit.

An acceptable alternative to paying off the collections is to enter into a payment agreement with the creditor and show a minimum 3-month payment history.  These monthly payments must be added to the borrower’s liabilities and included in their debt to income ratios.

Judgments:

All court-ordered judgments must be paid off at or prior to closing.  An acceptable alternative to paying off the judgments is to enter into a payment agreement with the creditor and show a minimum 3-month payment history.  These monthly payments must be added to the borrower’s liabilities and included in their debt to income ratios.

Disputed Accounts on Credit Report:

Provided the mortgage application is approved by the automated underwriting system, the borrower’s application is no longer required to be referred to a DE underwriter for manual underwriting provided these accounts meet the following conditions:

·         The total outstanding balance of all disputed accounts are less than $1,000 and

·         Disputed accounts/collections are aged two years from last activity.

If the disputed accounts are greater than $1,000 or less than two years old they must be paid at or prior to closing.

Disputed accounts due to identity theft, credit card theft, or unauthorized use will be excluded from the $1,000 limit.  Borrower must provide proof that they filed and identity theft and/or police report to dispute the fraudulent charges

An acceptable alternative to paying off the disputed accounts/collections is to enter into a payment agreement with the creditor and show a minimum 3-month payment history.  These monthly payments must be added to the borrower’s liabilities and included in their debt to income ratios.

Note:  Paying “down” of balances on collections and disputed accounts/collections to reduce the balance to below $1,000 is NOT an acceptable resolution of accounts.

These changes take effect for all FHA case numbers assigned on or after April 1, 2012.

It is always a good idea to contact me as soon as you decide you are going to purchase a home.  We can check your credit report and see if there are any issues that can be taken care of ahead of time.  I can be contacted at 708-473-7688 or BarkerLoans@gmail.com.

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FHA Increasing Mortgage Insurance Premiums

In a step to bolster its reserves, and prevent the need for a taxpayer bailout, HUD is increasing the amount buyers pay for mortgage insurance beginning April 1, 2012. This move is expected to generate an additional $1.25 Billion through June 2013.

The Upfront Mortgage Insurance Premium (UFMIP) will see a 0.75% increase, from 1.0% to 1.75%. The UFMIP is financed into the mortgage and will not increase the amount of money borrowers will need for closing. The annual Mortgage Insurance Premium (MIP) will increase 0.10%, from 1.15% to 1.25% (MIP is paid monthly with the regular mortgage payment). Again, this will not add to the money needed at closing, but both of these increases will affect the monthly payment for FHA borrowers.

For example, assume a sales price of $200,000 and interest rate of 4.5%:

So, in the example above, the borrowers’ monthly payment on a $200,000 home purchase will increase by $23.41. This increase will not have a significant impact on the amount of a mortgage that home buyers can qualify for but will have a large impact on the insurance reserves of the FHA Program.

The reason the FHA mortgage insurance reserves have fallen to such low levels has to due with the mortgage crisis over the last several years. FHA mortgage accounted for only about 5% of all mortgages in the US in 2005 but has increased to about 40% of all mortgages with the tightening credit standards of conforming mortgages and the collapse of the subprime mortgage market. With a larger percentage of all mortgages being FHA, and the increase in defaults over the last several years, FHA has paid out more in insurance claims which has whittled away at their reserves.

Contrary to popular opinion, FHA is the only federal program that has NEVER used a dollar of taxpayer money. It has been self-supporting since it began in the wake of the Great Depression in 1940. In order to make sure FHA does not need a taxpayer bailout, the increase in these fees is necessary to keep FHA a viable option for the thousands of home buyers who need this valuable financing option.

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Short sales

Since I first published this article on short sales, they have become even more widespread and many of my clients have been seeking loans to purchase a "short sale." Many people are still not sure how they work, so I thought it a good idea to reprise the article.

With the continued downslide of the economy, 'short sales' are often the only way some homeowners can get out of a mortgage they can no longer afford without going into full foreclosure. 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.

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