Are we feeling better
OK, new home sales are up by 11 percent over last month. The stodgey Standard & Poor’s/Case Shiller home price indexesshowed its first home-price apprciation in almost three years.
Is this time to hoot and hollar? Well, it’s worth a little hurrah.
I’ve always thought that perception is reality. Get a little good news going and it is going to have some effect on the people’s perception of where this economy is heading. Are Baltimore homeowners out of the woods. Hardly. But a little push in the right direction can go a long ways in making homeowners feel a little better about the direction of the housing market.
The index of 20 metropolitan areas in the Case-Shiller index rose 0.5 percent in May from April.
“To put it in perspective, this is the first time we have seen broad increases in home prices in 34 months,” David M. Blitzer, chairman of the index committee at S&P, said in a statement. “This could be an indication that home price declines are finally stabilizing.”
The recovery has to start somewhere and when home values start to inch — slightly inch — upward, that’s good news for everyone.
Modifying a loan: Ask and you shall recieve
Many homeowners in the Baltimore metro area may be under the impression that their lender may only want to modify the terms of their existing loan if they are behind in payments. For the most part, that is probably true. But here is a real-life case of a lender that was willing to modify a loan when there was really no specific need to take action.
The tale begins with a borrower who was in the fifth year of a seven-year adjustable rate mortgage.
As the story goes, the borrower received a call one evening in June from a “portfolio manager” at Impac Funding, a California-based lender that specializes in non-conforming, reduced documentation loans that Fannie Mae or Freddie Mac had no appetite for.
This borrower, being skeptical, couldn’t understand why he was getting a call from someone at Impac Funding about his mortgage. The portfolio manager explained that although Countrywide was the company that serviced the mortgage by taking payments and paying taxes and insurance on behalf of the account, Impac actually held the note and was in charge of that loan. The call was being made to ensure that the homeowners were aware that Countywide was now Bank of America Home Loans and that payment would continue to be made to the servicing arm of Bank of America Home Loans.
He said that Impac had noticed that some borrowers whose notes they held were not making that connection and were going 30 or even 60 days late on payments. That was not the case with this borrower, so again, why the call? The Impac portfolio manager confirmed that payments were on time but added the company was just being proactive in making sure that everyone was aware of the change.
The conversation then turned to what else he did for Impac, and that started a discussion on loan modifications, since he was a portfolio manager for the company. He said that the company was very aggressive in modifying loans for homeowners who were late in payments, and even on occasion would modify loans for customers who were current but could demonstrate that hardship may be on the way.
That caught my borrower’s attention.
He asked if Impac would consider him. He was nearing the end of his current adjustable rate mortgage and was unsure if in the remaining two years he would be eligible to refinance.
The portfolio manager said that a modification was possible — it doesn’t hurt to ask. The terms of the modification would be a five-year modification with a rate of 3.625 percent, and, if the borrower wanted, it could remain an interest-only payment. When the five years was complete, the modification would end and the rate would be calculated based on the terms of his current adjustable rate mortgage.
The cost to handle the modification, if approved, would be $1,995 and paid after receiving confirmation documents. The modification seemed to be the right move. It would lower his monthly payment, remove any adjustment concerns for the next five years and cover enough time to — hopefully — see both the economy and home values in his neighborhood recover.
He applied, and the modification was approved within 72 hours. As part of the modification, the borrower could defer his July and August payments, with those payments added to the new principal balance. A successful modification was performed.
The moral of the story is that there are lenders willing to do modifications to existing loans if the circumstances are just right. That is not saying that all react as liberally and quickly as Impac, but the lesson is nothing ventured, nothing gained.
A borrower has to understand that when a mortgage gets sold, it is possible that the servicing side can be sold and then the actual note can be sold as well. This borrower thought that Countywide held the note as well as the servicing. As he later learned, that was not the case. So that means, if a homeowner wants to start a modification process, he must learn who owns the note, because ultimately it is that entity that will decided to modify, or not.
The question a borrower has to ask the company that he is making the mortgage payments to is, “Who holds the note on my property.” It would not be unusual for the front-line customer service person to not understand the question, let alone be able to answer it. So the best course of action is to immediately ask for a supervisor and ask the question again.
Once you find out who holds the note, seek out that institution to start the process. It is very possible that homeowners who are current on their mortgage will be told that there’s no reason to modify because they haven’t gone late. However, if you can show impending hardship, you may get somewhere.
Homeowners also need to be aware of scams that are taking place. If someone offers to negotiate a modification for you or to negotiate a delay in a foreclosure for an upfront fee, stop right there. A homeowner can accomplish the same by just keeping in touch with the lender or the servicer. Do not allow a third-party to take over the payment of your mortgage with the promise that they will help with a modification or stop a foreclosure.
If you need help you can find a counselor by contacting the U.S. Department of Housing and Urban Development at 800-569-4287 or 877-483-1515.
For this borrower, the modification worked out and it showed once again that these are extraordinary times in the lending industry and it proves one thing: If you don’t ask, you don’t get.
Stating the case for stated-income loans
First published in The Daily Record, July 13, 2009
Let me state my case for bringing back the stated-income loan.
OK, I hear the incredulous screams of: “You’ve got to be kidding me. That why we’re in the mess in the first place.”
To a certain extent, that’s true. The misuse and loosened guidelines for stated-income loans prior to August 2007 was widespread throughout the industry. What became known as “Liar Loans,” because income was just stated and never validated, has virtually vanished from the lending community. But the question is: “Has the pendulum swung too far in the other direction?” I think it has.
First, let’s get to the core of why stated-income loans were introduced. The primary use for stated-income loans was to allow those borrowers who were self-employed and did not receive a weekly or bi-weekly paycheck to state their income.
I used to tell self-employed borrowers that they probably had a wonderful accountant or CPA whose main job was to shield their income as much as possible from the IRS. Their job was to show the federal government that my borrower had very little taxable income. And when they showed their tax returns, that was the case.
I, on the other hand, am in the business of showing my underwriters that my borrower makes a significant income that qualifies him for a loan. Basically, the accountant and I are on opposite sides of the spectrum. These were borrowers whose income fluctuated from month to month or season to season.
For example, take a landscaper, whose makes most of his money during the spring and summer and sees his income tail off in the fall and winter. During part of the year, this borrower may be cash rich, but how do you document his or her income. In reality, the individual’s income could support the loan for the home the borrower would want to purchase, but it was nearly impossible to document the real income. The individual got paid in cash and personal checks. The adjusted gross income on that person’s tax returns would show he or she was dirt poor — even though that may not be the case because the individual had very healthy bank accounts. Therefore, if the borrower had the proper credit scores and assets, this would be the perfect stated-income borrower.
Since there was more risk involved with originating this particular kind of loan, the borrower would pay a slightly higher interest rate than the fully documented borrower.
Those kinds of loans seemed to be working out, so now investors and Wall Street got the bright idea that stated-income loans should be opened up to salaried workers as well. Why? If you have an engineer making a weekly paycheck, why do you need stated income? It was just a way to expand the pool of borrowers, and now we see that was a critical mistake.
So when the mortgage meltdown happened and stories came out about ill-qualified borrowers getting homes that they never could afford by virtue of a stated-income loan, that was that. No more stated-income loans for anyone. It was like being in that junior high classroom where a few of the kids were caught goofing off and all of a sudden the entire class gets detention.
The outlawing of these loans has made it almost impossible for many self-employed or “1099 employees” to qualify for mortgages even though in reality they generate a substantial income. In fact, Maryland has basically made it illegal to originate a stated-income loan.
So what to do? How do you resuscitate them? First, these loans must only be used for the kind of borrower that they were originally intended for — self-employed workers and business owners. Next, ensure that the self-employed borrower also has exceptional credit, with a credit score of at least 720. Finally, increase the number of months of bank reserves (money left over after settlement to pay the monthly mortgage) a stated-income loan borrower must show. At least six months would be good.
These people are the victims of unintended consequences. Yes, stated-income loans were abused, and that abuse caused much harm in the industry and to neighborhoods, but at some point common sense must return to the marketplace. It’s time for the pendulum to start swinging back — at least a little bit.
