In an effort to help the struggling homeowner, the Housing and Economic Recovery Act of 2008 was signed by President Bush on July 30 to help certain homeowners stave off foreclosure.
Since the Housing and Economic Recovery Act of 2008 went into effect Oct. 1, I’d like to take a moment to talk about some of the finer points of the new law.
This new measure has been called the biggest housing reform bill to emerge since the Great Depression, and in a sense this is true. At 694 pages it can be an intimidating document — I had to skim through 300 pages before finding the Hope For Homeowners provisions.
After a thorough reading, I have come to the conclusion that it will require hope, mixed with tenacity, to benefit from the language of the bill. The reason? Lender participation is voluntary.
While Title IV — the Hope For Homeowners section of the act — defines who is eligible for refinancing, it does not compel a lender to participate.
If your mortgage was originated before January 2 of 2008, and your debt ratio is over 31 percent, technically you are eligible. But, the program is really intended to help folks who have had a rate adjustment on their loan, borrowers who are having a hard time making their payments and may be falling into delinquency.
Why is voluntary lender participation such a problem? The lender who holds the existing mortgage will only get 90 percent of the current market value of a home. If a borrower owes $330,000 on their mortgage, and the house is now worth $300,000, the lender must settle for $270,000 — 90 percent of $300,000.
In this scenario, the current lender must agree to take a $60,000 loss on their loan, plus the closing costs on the new mortgage. Further, if the old loan had prepayment penalties, or outstanding fees or penalties for delinquency, the existing lender may not collect on them.
If there was a second mortgage on the property, besides the $330,000 first mortgage, it has to go away, nothing is paid out on that loan. The lender holding that loan would also have to cooperate with the Hope for Homeowners refinance and agree to take nothing.
While the Housing and Economic Recovery Act offers to insure $300 billion in Federal Housing Administration refinance mortgages, folks should not expect a smooth and simple walk.
When seeking cooperation from your current lender, it is important to understand their view of the situation. For them, it is strictly a business matter. You may have been the victim of deceptive lending practices, experienced a job loss or a sudden jump in the size of your mortgage payment. Your financial trauma is of little concern to the lender if you are making your payments on time.
If you are delinquent, don’t expect more empathy. You may get some attention if you fall behind, but there will be long-term consequences to your credit, and that will impact your ability to obtain a loan in the future.
When a borrower falls behind in their payments, they are relegated to the lender’s loss mitigation department. This is not a happy place, there are too few people with too many files to process.
These folks are facing tough choices, trying to decide how to deal with each situation. “Is this borrower capable of making their payments? Is the house worth far less than what is owed? How much do we stand to lose?”
These assessments take time. Lenders end up with three choices on a loan that has gone sideways. “Do we work out a compromise, accept a short sale, or simply foreclose?” This is a tough decision, expect that it will have to go up the chain of command before the lender reaches a conclusion.
Should your lender agree to cooperate with a Hope for Homeowners refinance, be aware that they may report your old loan as paid for less than the amount owed.
There is nothing in the Housing and Economic Recovery Act that requires your old lender to give your credit score a clean slate. Also, if you have been paying on a loan with an artificially low interest rate, or paying less than the amount owed, your payments on a Hope for Homeowners refinance loan may not lower your monthly payments.
As a very rough calculation, every $10,000 you borrow will cost $75 to $80 per month based on current interest rates. This does not include property tax and insurance expenses. Be sure to add those items when computing your total monthly payment to the lender.
I can hear you clearly now. “Thanks Dave, you are such a party pooper!” Fair enough, this is not the quick and easy answer. If the process were simple, and the consequences few, the program would suffer tremendous abuse.
If you are a candidate for the refinancing provided by this new law, I encourage you to gird yourself in faith and determination. Be patient, be persistent, and don’t give up hope.
David Ryland is a licensed real estate broker with 29 years of experience as a lender in Placer County. He is the acknowledged dean of loan originators at Big Valley Mortgage in Roseville.
