Government Likely to Drop the Level at which It will Back Home Mortgages

By Chris Moles
Brokerage Counsel
Intero Real Estate, Inc.

A New York Times article this week revealed that the federal government is set to drop the levels at which it will back home mortgages in September. The sobering news identified that mortgages in Monterey County will likely be slashed by a third and re-set at $483,000. Other California counties will see similar cuts. This could negatively affect the California market because buyers will have to increasingly depend on private loans to purchase in this region.

Current Policy
At present, government backed loans for most bay area counties cap around $729,750. This is substantially higher than the national average and it reflects the above average cost of land in the bay area. Government backed loans are insured by the Federal Housing Administration, so lenders are somewhat protected from default. Lenders face less risk when making these loans to borrowers and borrowers are able to purchase more expensive homes with a smaller down payment and at a lower interest rate then they might otherwise expect. Suffice it to say that many government backed loans are offered at terms that would not be available in a purely private transaction.

The New Proposal
Democrats and Republicans in Congress seem to agree that the federal taxpayer should no longer bear the risk on loans that far exceed the national average for home mortgages. On September 30th, the Congress is posed to cut the levels for government backed mortgages across the board. The new caps will be re-set from county to county with most bay area counties seeing a 15% or so decline. Some anticipate that Santa Clara County’s new government backed mortgage cap may be set at $625,500 – representing a potential loss of more than $100,000 in the purchasing power of the average south bay buyer.

Of course, this could pull prices down as many local buyers are pushed out of the market. California borrowers will likely start to depend more heavily on private mortgages, and this means borrowers will be subject to greater scrutiny about credit worthiness and finances before securing an adequate loan. This also means that buyers may have to settle for higher interest rates and less favorable terms.

Some listing prices will have to decrease to reflect the diminished purchasing power of the average buyer.

The National Association of Realtors Lobbyists
NAR is presently lobbying against these measures in Washington. While it is clear that the government must remake its affordable housing laws, many Realtors argue that an overly simplistic policy based on the national average for home mortgages will have a disparate impact on those living in pricier regions of the country.

However, elected officials have become increasingly blunt in light of political pressure to address the causes of the last housing bubble and the subsequent mortgage crises. The Times reported that, according to a recent White House position paper on government backed mortgages, “Larger loans for more expensive homes will once again be funded only through the private market.”

Assuming Congress does as expected in September, this summer may present the best opportunity to buy and sell for a while.

We hope you enjoy this post by guest blogger, Chris Moles. Thanks, Chris, for providing Intero agents with the most updated legal information in your weekly post.

Cleaning Up the Mortgage Industry

Several new laws were recently enacted to help clean up the mortgage industry. Gino explains them in this week's Intero Insider.

Loan Modification Information

There's lots of talk with homeowners around Gilroy who are upside down on their mortgages and trying to figure out what to do. HUD (U.S. Department of Housing and Urban Development) has a lot of information. Here's some information from Rick Soukoulis, the President of Intero Mortgage, which is a sister company to our borkerage, Intero Real Estate Services. You may find it interesting.

...Any company offering Loan Modification services must be DRE approved. A lot of supposed Note Mod companies are springing up overnight, many not licensed, and a fair number being run by shoddy and often unethical operators.

There needs to be a Modification officer/originator involved in the process, one who is trained in Loan Mods, and one who will take responsibility for moving your case forward in a timely manner.

Next, the Loan Loss Mitigation Officer needs to be experienced and must be trained, must understand what various lenders want, what they’ll accept and what they won’t accept.

And finally, there should be an Attorney working with the company who understands all the subtleties of Loan Modifications.

Having an Attorney or law firm involved in the process does not change the fact that anyone meeting with a consumer to help with a loan modification MUST be licensed by the DRE. These “Modification Originators” must follow all the same rule as any DRE licensee.

Let’s now go into some greater detail about modification themselves.

First, who qualifies? The simple answer here is that the more dire your circumstances, the more likely you are to qualify. The six commonly acceptable reasons are

1. High loan-to-value, higher than 90%
2. Bad credit due to late payments on credit cards, mortgage, medical bills, ect.
3. Adjustable rate loan has or will adjusted in the future
4. You have a negatively amortizing loan
5. Temporary or permanent financial hardship (i.e. job loss, medical emergency, divorce, income reduction ect.)
6. High debt to income ratio’s.

What kind of modifications can the borrower expect? It could be converting the loan from adjustable to fixed, lowering the rate, extending the term from 30 years to, say, 50 years, or actually reducing the amount owed to the point where there is some equity and the borrower can afford the payments.

There can be variations and there can be combinations of the above.

Interestingly, loans mods have been going on for over a year now, and the banks are finding that the most effective way is to forgive a part of the amount owed. The borrowers who get this tend to perform better than the others.

The next big question is what the heck are the banks trying to accomplish.

As for the banks, their overriding goal is to avoid foreclosing and taking any more real estate onto their books. They’re not being nice guys necessarily. It’s just that they’ve found that their losses on Loan Mods are significantly less than foreclosing and trying to sell the property.

If you or someone you know is having difficulties with their mortgage, it’s a great time to try for a modification. To repeat myself, just make certain you go to a company with trained and knowledgeable Modification Officers and are experienced in Loss Mitigation , one who has an attorney on staff, and one that increases your odds of getting what you want and what you need.

Team Patereau can help you connect with appropriately licensed and capable loan modification companies. Please give us a call to discuss your specific needs.

FICO Scores

We all know how important FICO scores are so here are some basics to enhance your FICO knowledge.

Good borrower credit scores help make it possible to qualify at better rates. This is how FICO Scores are weighted and structured:
35% by Payment History
30% by Balances Owed
15% by Length of Credit History
10% by New Credit
10% by Types of Credit in Use

And the overall calculated ranges:
720 - 850 Excellent, A-paper credit, the "good-guy" rates available
680 - 719 Good, not much of a compromise on rates
620 - 679 OK or Fair, clearly in range for FHA consideration
580 - 619 Low, bottom of the range for FHA consideration, "alternate credit" comes heavily into play
500 - 579 Poor, truly nothing can be done without credit rehabilitation

Just for your information, FICO stands for Fair Isaac Corporation, wtih Fair and Isaac being the last names of the two men who created the corporation as well as the scoring scenario.

If you would like to discuss your FICO score or other real estate mor mortgage questions, please contact us!